MEDICAL RESOURCES INC /DE/, S-1/A, 1998-07-23

MEDICAL RESOURCES INC /DE/
S-1/A, 1998-07-23
MEDICAL LABORATORIES

Previous: IAI INVESTMENT FUNDS VIII INC, 485BPOS, 1998-07-23

Next: GATEWAY INDUSTRIES INC /DE/, 10KSB/A, 1998-07-23

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-24865
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-3
ON
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
MEDICAL RESOURCES, INC.

DELAWARE 13-3584552
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)
IDENTIFICATION NUMBER)
155 STATE STREET HACKENSACK, NEW DUANE C. MONTOPOLI PRESIDENT AND CHIEF
JERSEY 07601 (201) 488-6230 EXECUTIVE OFFICER 155 STATE STREET
(ADDRESS, INCLUDING ZIP CODE AND HACKENSACK, NEW JERSEY 07601
TELEPHONE NUMBER, INCLUDING AREA CODE, (201) 488-6230
OF REGISTRANT'S PRINCIPAL EXECUTIVE (ADDRESS, INCLUDING ZIP CODE AND
OFFICES) TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

--------------
COPIES OF COMMUNICATIONS TO:
CHRISTOPHER J. JOYCE, ESQ.
SENIOR VICE PRESIDENT-LEGAL AFFAIRS AND ADMINISTRATION
MEDICAL RESOURCES, INC.
155 STATE STREET
HACKENSACK, NJ 07601
(201) 488-6230

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
Pursuant to Rule 429 under the Securities Act, the form of Prospectus
included herein also relates to the securities registered under the
Registrant's Registration Statement on Form S-2 (file No. 333-4056) declared
effective on April 29, 1996, is intended for use therewith, and constitutes a
post-effective amendment thereto.
--------------
CALCULATION OF REGISTRATION FEE
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH PROPOSED PROPOSED AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(4)(5)(6)(8) PRICE PER UNIT(2) OFFERING PRICE(2) FEE(2)
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par 1,455,520 shares(1) $10.63 $15,472,177 $5,335(1)
value................. 7,003,087 shares(3) $9.3125 $65,216,248 $19,763(1)
7,668,725 shares(7) $2.97 $22,776,113 $6,719
</TABLE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(1) These amounts have been previously paid.
(Footnotes continued on next page)
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<PAGE>

(footnotes continued from previous page)
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act.
(3) A total of 7,003,087 shares of Common Stock were added to this
Registration Statement by Amendment No. 3 hereto and, therefore, are shown
separately in this table.
(4) The shares of Common Stock which may be offered pursuant to this
Registration Statement include 10,947,026 shares of Common Stock issuable
upon conversion or otherwise issued in respect of 18,000 shares of the
Company's Series C Convertible Preferred Stock, including 1,167,000 shares
of Common Stock issuable pursuant to the exercise of warrants issued or
issuable to the holder of such Preferred Stock and other shares of Common
Stock which may be issuable to the holder of such Preferred Stock pursuant
to agreements with the holders of the Preferred Stock. For purposes of
estimating the number of shares of Common Stock to be included in this
Registration Statement, the Company calculated 200% of the number of
shares of Common Stock issuable in connection with the conversion of the
Company's outstanding Series C Convertible Preferred Stock (based on a
conversion price of $3.69 which is 100% of the average of the daily
closing bid prices of the Common Stock reported on the Nasdaq National
Market for the five consecutive trading days ending on the fifth trading
day preceding July 17, 1998). In addition to the shares set forth in the
table, the amount to be registered includes an indeterminate number of
shares issuable upon conversion of or in respect of the Series C
Convertible Preferred Stock, as such number may be adjusted as a result of
stock splits, stock dividends and antidilution provisions (including
floating rate conversion prices) in accordance with Rule 416 under the
Securities Act.
(5) The shares of Common Stock which may be offered pursuant to this
Registration Statement also include 1,984,686 shares of Common Stock
issuable upon conversion of an aggregate of $6,723,125 of convertible
promissory notes issued by the Company in connection with acquisitions.
For purpose of estimating the number of shares of Common Stock to be
included in this Registration Statement, the Company calculated the number
of shares issuable upon conversion of such notes as of July 17, 1998
(based on a conversion price of $3.39 which is 100% of the average of the
daily closing prices of the Common Stock reported on the Nasdaq National
Market for the five consecutive trading days preceding July 17, 1998). In
addition to the shares set forth in the table, the amount to be registered
includes an indeterminate amount of shares issuable upon conversion of
such promissory notes, as such number may be adjusted as a result of stock
splits, stock dividends and antidilution provisions (including floating
rate conversion prices) in accordance with Rule 416 under the Securities
Act.
(6) The shares of Common Stock which may be offered pursuant to this
Registration Statement also include 1,228,474 shares of Common Stock which
may be issuable pursuant to the potential exercise of certain purchase
price protection remedies included in certain acquisition agreements
entered into by the Company. For purpose of estimating the number of
shares of Common Stock to be included in this Registration Statement, the
Company calculated 125% of the number of shares issuable upon the exercise
of such remedies as of July 17, 1998 (based upon a market price of $3.39
which is 100% of the average of the daily closing prices of the Common
Stock reported on the Nasdaq National Market for the five consecutive
trading days preceding July 17, 1998).
(7) A total of 7,668,725 shares of Common Stock are being added to this
Registration Statement by this Amendment No. 4 and, therefore, are shown
separately in this table.
(8) On July 23, 1998, the Company's stockholders approved a reverse stock
split of the Common Stock at the Company's 1998 Annual Meeting of
Stockholders. The Company's Board of Directors has not yet authorized the
effectiveness of any reverse stock split. Therefore, the information in
this Registration Statement does not give effect to any reverse stock
split.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION DATED JULY 23, 1998

PROSPECTUS

16,127,332 SHARES

MEDICAL RESOURCES, INC.

COMMON STOCK
($.01 PAR VALUE)

-----------

The shares offered hereby (the "Shares") consist of up to 16,127,332 shares
of common stock, par value $.01 per share (the "Common Stock"), of Medical
Resources, Inc., a Delaware corporation (the "Company"). The Shares may be
offered from time to time by certain stockholders (the "Selling Stockholders")
identified herein. See "Selling Stockholders." The Company will not receive any
part of the proceeds from the sales of the Shares. All expenses of registration
incurred in connection herewith are being borne by the Company, but all selling
and other expenses incurred by the Selling Stockholders will be borne by the
Selling Stockholders.

The Selling Stockholders have not advised the Company of any specific plans
for the distribution of the Shares covered by this Prospectus, but it is
anticipated that the Shares will be sold from time to time primarily in
transactions (which may include block transactions) on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") System at the market price
then prevailing or at prices related to prevailing prices, although sales may
also be made in negotiated transactions at negotiated prices or otherwise. See
"Plan of Distribution."

The Company's Common Stock is traded and quoted on the Nasdaq National Market
under the symbol MRII. On July 16, 1998, the closing sale price of the Common
Stock was $3 1/8 per share.

-----------

THE PURCHASE OF THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-15.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

-----------

THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>

No dealer, salesperson or other person has been authorized to give any
information or to make any representations, other than those contained or
incorporated by reference in this Prospectus, in connection with the offering
contained herein and, if given or made, such information must not be relied
upon as having been authorized by the Company or the Selling Stockholders.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company.......................................................... 3
Risk Factors......................................................... 5
Use of Proceeds...................................................... 16
Price Range of Common Stock and Dividend Policy...................... 16
Selected Consolidated Financial Data................................. 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 19
Business............................................................. 32
Management........................................................... 49
Security Ownership Of Certain Beneficial Owners and Management....... 57
Certain Relationships and Related Transactions....................... 59
Description of Capital Stock......................................... 64
Selling Stockholders................................................. 65
Plan of Distribution................................................. 69
Legal Matters........................................................ 69
Experts.............................................................. 70
Available Information................................................ 70
Index to Financial Statements........................................ F-1
</TABLE>

2
<PAGE>

THE COMPANY

The Company specializes in the operation and management of fixed site
outpatient medical diagnostic imaging centers. The Company currently operates
98 outpatient diagnostic imaging centers located in the Northeast (58),
Southeast (24), the Midwest (11) and California (5), and provides network
management services to managed care organizations. The Company has grown
rapidly and has increased the number of diagnostic imaging centers it operates
from 39 at December 31, 1996 to 98 at June 1, 1998. The Company, through its
wholly-owned subsidiary, Dalcon Technologies, Inc. ("Dalcon"), also develops
and markets software products and systems for the diagnostic imaging industry.

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. (NASDAQ-RHBC) for $33 million (the "StarMed Sale"). Closing of the
StarMed Sale, which is subject to the satisfaction of customary conditions and
approval by the Company's Senior Note holders, is expected to occur in late
July or in August of this year. Due to the pending StarMed Sale, the results
of operations of StarMed are herein reflected in the Company's Consolidated
Statements Of Operations as discontinued operations.

The Company's diagnostic imaging centers provide diagnostic imaging services
to patients referred by physicians in a comfortable, service-oriented
environment located mainly in an outpatient setting. Of the Company's 98
centers, 84 provide magnetic resonance imaging, which accounts for a majority
of the Company's imaging revenues. Many of the Company's centers also provide
some or all of the following services: computerized tomography, ultrasound,
nuclear medicine, general radiology and fluoroscopy and mammography.

At each of the Company's centers, all medical services are performed
exclusively by physician groups (the "Physician Group" or the "Interpreting
Physician"), generally consisting of radiologists, with whom the Company
enters into independent contractor agreements. Pursuant to these agreements,
the Company, among other duties, provides to the Physician Group the
diagnostic imaging facility and equipment, performs all marketing and
administrative functions at the centers and is responsible for the maintenance
and servicing of the equipment and leasehold improvements. The Physician Group
is solely responsible for, and has complete and exclusive control over, all
medical and professional services performed at the centers, including, most
importantly, the interpretation of diagnostic images, as well as the
supervision of technicians, and medical related quality assurance and
communications with referring physicians. Insofar as the Physician Group has
complete and exclusive control over the medical services performed at the
centers, including the manner in which medical services are performed, the
assignment of individual physicians to center duties and the hours that
physicians are to be present at the center, the Company believes that the
Interpreting Physicians who perform medical services at the centers are
independent contractors. In addition, Interpreting Physician Groups which
furnish professional services at the centers generally have their own medical
practices and, in most instances, perform medical services at non-Company
related facilities. The Company's employees do not perform professional
medical services at the centers. Consequently, the Company does not believe
that it engages in the practice of medicine in jurisdictions which prohibit or
permit the corporate practice of medicine. The Company performs only
administrative and technical services and does not exercise any control over
the practice of medicine by physicians at the centers or employ physicians to
provide medical services. The Company is aware of three Interpreting
Physicians who own a nominal percentage of three limited partnerships that are
managed and partially owned by the Company.

3
<PAGE>

include a medical component. The Physician Group grants a power of attorney to
the Company authorizing the Company to establish bank accounts using the
Physician Group's name related to that center's collection activities and to
access such accounts. In states where permitted by law, such as Florida, the
Company generally renders bills in the center's name. In such circumstances,
the Physician Group has no access to associated collections.

The Company recognizes revenue under its agreements with Interpreting
Physicians in one of three ways: (1) the Company receives a technical fee for
each diagnostic imaging procedure performed at the center, the amount of which
is fixed based upon the type of the procedure performed; (2) the Company pays
the Interpreting Physician Group a fixed percentage of fees collected at the
center or a contractually fixed amount, based upon the specific diagnostic
imaging procedures performed; or, (3) the Company receives from an affiliated
physician association a fee for the use of the premises, a fee per procedure
for acting as billing and collection agent for the affiliated physician
association and for administrative and technical services performed at the
centers and the affiliated physician association pays the Physician Group
based upon a percentage of the cash collected at the center. All of such
amounts and the basis for payments are negotiated between the Physician Group
and the Company. The fees received or retained by the Company under the three
types of agreements with Interpreting Physicians described above, expressed as
a percentage of the gross billings net of contractual allowances for the
imaging services provided, range from 78% to 93% for the agreements described
in item (1), 80% to 93% for the agreements described in item (2) and 80% to
89% for the agreements described in item (3). The agreements generally have
terms ranging from one to ten years.

Since the beginning of 1996, the Company has acquired 90 imaging centers
through 27 acquisitions. When the Company acquires an imaging center, the
Company acquires assets relating to the provision of technical, financial,
administrative and marketing services which support the provision of medical
services performed by the Interpreting Physicians. Such assets typically
include equipment, furnishings, supplies, tradenames of the center, books and
records, contractual rights with respect to leases and other agreements and,
in most instances, accounts receivable. Other than with respect to such
accounts receivable for services performed by the acquired company, the
Company does not acquire any rights with respect to or have any direct
relationship, with patients. Patients have relationships with referral sources
who are the primary or specialty care physicians for such patients. These
physicians refer their patients to diagnostic imaging centers which may
include the Company's centers where Interpreting Physicians, under independent
contractor agreements, provide professional medical services. The Company's
acquired imaging centers do not constitute either a radiology, primary care or
specialty care medical practice. In connection with an acquisition of a
center, the Company will generally enter into an agreement, as described
above, with a Physician Group for that physician group as an independent
contractor to perform medical services at the center.

The Company was incorporated in Delaware in August 1990 and has its
principal executive offices at 155 State Street, Hackensack, New Jersey 07601
(telephone no.: (201) 488-6230). Prior to the Company's incorporation, the
Company's operations, which commenced in 1979, were conducted by subsidiary
corporations.

4
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following matters in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby.

ACQUISITION STRATEGY; MANAGEMENT OF GROWTH

One of the Company's objectives is to continue to acquire diagnostic imaging
centers and integrate them into the Company's operations. Successfully
accomplishing this goal depends upon a number of factors, including the
Company's ability to find suitable acquisition candidates, negotiate
acquisitions on acceptable terms, obtain necessary financing on acceptable
terms, retain key personnel of the acquired entities, hire and train other
competent managers, and effectively and profitably integrate the operations of
the acquired businesses into the Company's existing operations. The process of
integrating acquired businesses may require a significant amount of resources
and management attention which will temporarily detract from attention to the
day-to-day business of the Company and may be prolonged due to unforeseen
circumstances. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and controls (including improving and standardization of
its billing systems), and to attract, retain, motivate and manage employees
effectively. The failure of the Company to manage growth in its business
effectively would have a material adverse effect on its results of operations.

Future acquisitions may be financed through the incurrence of additional
indebtedness or the issuance of equity securities. The issuance by the Company
of additional Common Stock in connection with acquisitions could be dilutive
to Company stockholders. In addition, because the Common Stock has experienced
significant market price fluctuations recently, sellers of acquisition targets
may be hesitant to accept shares of Common Stock in payment of all or portions
of the purchase price of centers unless they are provided with suitable price
protection rights. The grant and ultimate exercise of any such rights could
result in material expenditures by the Company. See "Effects of Grant of
Purchase Price Remedies and Earnout Rights to Sellers of Acquired Centers."
Competition for suitable acquisition candidates is expected to be intense and,
in addition to local hospital and physician groups, to include regional and
national diagnostic imaging service companies, regional and national staffing
companies and other medical services companies, many of which have greater
financial resources than the Company.

RECENT LITIGATION

As described below under "Certain Relationships and Related Transactions",
the Company and its directors and certain former officers have been named as
defendants in several actions filed in state and federal court arising out of
the events described below involving, among other matters, allegations against
the Company's practices regarding related-party transactions and securities
fraud. As the cases are still in their preliminary stages, their outcomes
cannot presently be determined. A decision adverse to the Company in these
cases could have a material adverse effect on the Company, its cash flow,
financial condition and results of operation. In addition, the Company may
incur substantial legal and other expenses in connection with the defense of
these cases which could have a material adverse effect on the Company's cash
flows, financial condition and results of operation. The Company cannot
currently estimate the amount or timing of such expenses or the time frame in
which these cases will ultimately be resolved.

EFFECTS OF GRANT OF REPURCHASE AND PURCHASE PRICE REMEDIES AND EARNOUT RIGHTS
TO SELLERS OF ACQUIRED CENTERS

In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration therefor,
the Company granted rights to have such shares registered for resale pursuant
to the federal securities laws. In connection with certain of such
acquisitions, the Company has granted specific remedies to the sellers in the
event the registration statement covering the relevant shares was not declared
effective by the Securities and Exchange Commission within an agreed-upon
period of time, including the right to require the Company to repurchase the
shares issued to such seller. As a result of the Company's failure to register
such shares by the required dates, the Company has become obligated to
repurchase

5
<PAGE>

such shares issued in connection with such acquisition. As of July 10, 1998,
the Company had not registered any shares of Common Stock issued in connection
with the Company's 1997 acquisitions under a registration statement declared
effective by the SEC. As of March 31, 1998, the Company had reflected
$7,187,000 as Common Stock Subject to Redemption on its Consolidated Balance
Sheets which is related to shares that the Company is, has agreed to or may be
required to repurchase. During the first quarter of 1998, the Company paid
$2,547,000 to sellers who exercised their rights to have shares of Common
Stock repurchased. Furthermore, from April 1, 1998 through May 26, 1998, the
Company paid an additional $728,000 to such sellers. In addition, the Company
expects to pay an additional $5,763,000 during the remainder of 1998
($3,695,000 of which was due and payable on June 3, 1998 (the "June 1998
Repurchase Obligation") but has not yet been paid by the Company) in
connection with the settlement of certain repurchase obligations of the
Company subject, under certain circumstances, to the consent of the Senior
Notes holders. With respect to the June 1998 Repurchase Obligation which
remains due and payable, the Company is in discussions with the sellers to
whom such obligations are owed and the Senior Note holders regarding the
timing and satisfaction of the June 1998 Repurchase Obligation.

In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay (in additional shares
and/or cash) to the sellers an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or,
in other cases, as of the execution of the relevant acquisition agreement
(referred to as "Price Protection"). Based upon the closing sales price of the
Company's Common Stock on July 16, 1998 ($3 1/8 per share), such shortfall
would be approximately $9,441,000, which amount may be reduced by up to
$5,977,000 to the extent certain sellers exercise their repurchase rights
referred to above.

In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such
contingent consideration differs for each acquisition. In connection with
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration and in other cases the parties have
agreed that any payment of such contingent consideration may be paid in cash
or shares of Common Stock, or a combination of both.

Although the Company possesses the option, in certain of such cases, to pay
certain of such amounts in shares of Common Stock, payment of significant cash
funds to sellers in the event such remedies or earnout provisions are
triggered could have a material adverse effect on the Company's cash flow and
financial condition. In addition, the Company may be required to finance all
or a portion of any such cash payments from third-party sources. No assurance
can be given that such capital will be available on terms acceptable to the
Company. In addition, the issuance by the Company of shares of Common Stock in
payment of any such owed amounts could be dilutive to the Company's
stockholders.

EFFECTS OF FAILURE TO COMPLY WITH TERMS OF SENIOR NOTES AND CONVERTIBLE
PREFERRED STOCK

As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note holders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note holders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.

6
<PAGE>

such obligations were to be accelerated, in whole or in part, there can be no
assurance that the Company would be successful in identifying or consummating
financing necessary to satisfy the obligations which would become immediately
due and payable. As a result of the uncertainty related to the defaults and
corresponding remedies described above, the Senior Notes and the other loans
and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 and the
Company has a deficit in working capital more fully described below. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The report of the Company's independent auditors, Ernst & Young
LLP, on the consolidated financial statements of the Company for the year
ended December 31, 1997 contains an explanatory paragraph with respect to the
issues that raise substantial doubt about the Company's ability to continue as
a going concern mentioned in Note 2 to the Company's consolidated financial
statements, which report and consolidated financial statements are included
elsewhere herein. In addition to continuing to negotiate with the Senior Note
holders in an attempt to obtain waivers or amendments of the aforementioned
defaults, the Company has taken various actions in response to this situation,
including the following: (i) it effected a workforce reduction in March 1998
aimed at reducing the Company's overall expense levels, and (ii) it has
retained the investment banking firm of SBC Warburg Dillon Read to assist the
Company in the sale of the Company's StarMed temporary staffing subsidiary. On
July 8, 1998, the Company entered into a definitive agreement to sell the
StarMed business, in the form of a stock sale, to RehabCare Group, Inc.
(NASDAQ:RHBC) for $33 million. The financial statements do not include any
further adjustments reflecting the possible future effects on the
recoverability and classification of assets or the amount and classification
of liabilities that may result from the outcome of this uncertainty.

Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, as amended, between the Company and RGC International, LDC
("RGC") (hereinafter referred to as the "RGC Agreements"), the Company issued
18,000 shares of Series C Convertible Preferred Stock, $1,000 stated value per
share (the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement on Form S-3 not
later than October 1997. As amended the RGC Agreements provide for monthly
penalties ("RGC Registration Penalties") in the event that the Company fails
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998.

As a result of the Company's failure to register the RGC Conversion Shares
at various dates on or after December 31, 1997, the Company: (i) issued
warrants to RGC to acquire 1,167,000 shares of Common Stock at an exercise
price ranging from $11.62 to $12.95 per share, subject to reset in November
1998 (such warrants having an estimated value for accounting purposes, of
$3,245,000); and (ii) issued interest bearing promissory notes (the "RGC
Penalty Notes") in the aggregate principal amount of $2,450,000 due the
earlier of (x) January 4, 1999 and (y) the later of (A) five business days
following the sale of StarMed and (B) October 15, 1998 in the event the sale
of StarMed occurs before October 15, 1998. The principal amount of and
interest accrued on the RGC Penalty Notes may be converted, at the option of
the Company or RGC in certain circumstances, into additional shares of Series
C Preferred Stock or Common Stock. Pursuant to an amendment to the RGC
Agreements entered into in June 1998, the Company will no longer incur any
monthly penalties for failure to register the RGC Conversion Shares following
July 23, 1998. However, if the RGC Conversion Shares are not registered as of
September 15, 1998, RGC may demand a one-time penalty of $1,550,000 (the
"September 1998 Penalty"), payable, at the option of RGC, in cash or
additional shares of Common Stock. There can be no assurance that the Company
will be able to register the RGC Conversion Shares by such date or that the
Company will be able to pay the RGC Penalty Notes when due or the September
1998 Penalty, if such payment becomes due.

EFFECTS OF POTENTIAL NASDAQ NATIONAL MARKET DELISTING

7
<PAGE>

the Nasdaq Stock Market subject to certain conditions. The Company was
required to file its Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 on or before June 12, 1998, which the Company was able to do, and
must evidence compliance with either Nasdaq's minimum net tangible assets test
or one of Nasdaq's alternative requirements by July 24, 1998.

Based on the closing price for the Company's Common Stock on July 16, 1998
($3 1/8) and the Company's net tangible assets as of March 31, 1998, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing,
which include, among other things, a minimum bid price for the Common Stock of
$5.00 per share. In order to satisfy the continued listing requirements, the
Company submitted for shareholder approval a reverse stock split, in order to
meet or exceed the $5.00 minimum bid price. In the event the Company does not
satisfy either the minimum net tangible assets requirement or is unable to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able
to demonstrate compliance with the applicable maintenance criteria. On July
23, 1998, the Company's stockholders approved a reverse stock split of the
Common Stock at the Company's 1998 Annual Meeting of Stockholders. The
Company's Board of Directors has not yet authorized the effectiveness of any
reverse stock split. Therefore the information in this Prospectus does not
give effect to any reverse stock split. There can be no assurance that in the
future the Common Stock will meet the continued listing requirements for The
Nasdaq Stock Market.

DEVELOPMENT OF NEW CENTERS

Although the primary focus of the Company's growth strategy has been on
acquisitions of existing centers rather than developing new centers, the
Company may also, from time to time, pursue the development of new centers.
Developing new centers entails the same risks as establishing a new business.
The likelihood of success of a newly developed center must therefore be
considered in light of the initial development and operating complexities,
expenses, difficulties, and delays frequently encountered by a new business
and the competitive environment in which the new business will operate. In
addition, new centers may incur significant operating losses during their
initial operations, which could materially adversely affect the Company's
operating results, cash flows and financial condition.

LIMITATIONS AND DELAYS IN REIMBURSEMENT

Third-party payors, including Medicare, Medicaid, managed care/HMO providers
and certain commercial payors have taken extensive steps to contain or reduce
the costs of healthcare. In certain areas, the payors are subject to
regulations which limit the amount of payments. Discussions within the Federal
government regarding national healthcare reform are emphasizing containment of
healthcare costs. In addition, certain managed care organizations have
negotiated capitated payment arrangements for imaging services. Under
capitation, diagnostic imaging service providers are compensated using a fixed
rate per member of the managed care organization regardless of the total cost,
including the numbers of procedures performed, of rendering diagnostic
services to the members. Services provided under these contracts are expected
to become an increasingly significant part of the Company's business. The
inability of the Company to properly manage the administration of capitated
contracts could materially adversely effect the Company. Although patients are
ultimately responsible for payment for services rendered, substantially all of
the Company's imaging centers' revenues are derived from third-party payors.
Successful reduction of reimbursement amounts and rates, changes in services
covered, delays or denials of reimbursement claims, negotiated or discounted
pricing and other similar measures could materially adversely affect the
Company's respective imaging centers' revenues, profitability and cash flow.

The Company's management believes that overall reimbursement rates will
continue to gradually decline for some period of time due to factors such as
the expansion of managed care organizations and continued national healthcare
reform efforts. The Company enters into contractual arrangements with managed
care organizations which, due to the size of their membership, are able to
command reduced rates for services. The Company expects these agreements to
increase the number of procedures performed due to the additional referrals
from these managed care entities. However, there can be no assurance that the
increased volume of procedures associated with these contractual arrangements
will offset the reduction in reimbursement rate per procedure.

8
<PAGE>

PERSONAL INJURY REVENUE

A significant percentage of the Company's net service revenues from imaging
centers is derived by providing imaging services to individuals involved in
personal injury claims, mainly involving automobile accidents. Imaging revenue
derived from person injury claims, mainly involving automobile accidents,
represented approximately 24% of the Diagnostic Imaging business net service
revenues for 1997. Due to the greater complexity in processing receivables
relating to personal injury claims with automobile insurance carriers
(including dependency on the outcome of settlements or judgments for
collections directly from such individuals), such receivables typically
require a longer period of time to collect, compared to the Company's other
receivables and, in the experience of the Company, incur a higher bad debt
expense.

While the collection process employed by the Company may vary from
jurisdiction to jurisdiction, the processing of a typical personal injury
claim generally commences with the Company obtaining and verifying automobile,
primary health, and secondary health insurance information at the time
services are rendered. The Company then generates and sends a bill to the
automobile insurance carrier, which under state law, typically has an extended
period of time (usually up to 105 days) to accept or reject a claim. The
amount of documentation required by the automobile insurance carriers to
support a claim is substantially in excess of what most other payors require
and carriers frequently request additional information after the initial
submission of a claim. If the individual is subject to a co-payment or
deductible under the automobile insurance policy or has no automobile
insurance coverage, the Company will generally bill the individual's primary
and secondary health policies for the uncovered balance. The automobile
insurance carrier may reject coverage or fail to accept a claim within the
statutory time limit on the basis of, among other reasons, the failure to
provide complete documentation. In such circumstances, the Company generally
pursues arbitration, which typically takes up to 90 days for a judgment, to
collect from the carrier.

The Company will then pursue collection of the remaining receivable from the
individual. Although the Company attempts to bill promptly after providing
services and typically requests payment upon receipt of invoice, the Company
generally defers aggressive collection efforts for the remaining balance until
the personal injury individual's claim is resolved in court, which frequently
takes longer than a year and may take as long as two or three years.
Consequently, the Company's practice is to obtain a written assurance from the
individual and the individual's legal counsel, under which the individual
confirms in writing his or her obligation to pay the outstanding balance
regardless of the outcome of any settlement or judgment of the claim.
Consequently, the Company's services with respect to the personal injury claim
are not contingent. If the settlement or judgment proceeds received by the
individual are insufficient to cover the individual's obligation to the
Company, the Company either (i) accepts a reduced amount in full satisfaction
of the individual's outstanding obligation, or (ii) commences collection
proceedings, which may ultimately result in the Company taking legal action to
enforce its collection rights against the individual regarding all uncollected
accounts.

As a result of the foregoing, the average age of receivables relating to
personal injury claims is greater than for non-personal injury claim
receivables. Significant delays in the collection or the inability to collect
receivables relating to personal injury claims or the refusal of insurance
companies to pay the higher reimbursement rates typically associated with
personal injury claims could have a material adverse effect on the Company's
diagnostic imaging operations.

RESTRICTIONS IMPOSED BY GOVERNMENT REGULATION

The healthcare industry is highly regulated. The ownership, construction,
operation, expansion and acquisition of outpatient diagnostic imaging centers
are subject to various federal and state laws, regulations and approvals
concerning such matters as physician referrals, licensing of facilities and
personnel, and Certificates of Need and other required certificates for
certain types of healthcare facilities and major medical equipment. Among
other penalties, violations of these laws can result in the shutdown of a
company's facilities and loss of Medicare and Medicaid reimbursement for
patient services. The Federal Anti-Kickback Act of 1977, as amended

9
<PAGE>

(the "Anti-Kickback Act") prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for referring Medicare or
Medicaid patients or purchasing, leasing, ordering or arranging for any item
or service that is covered by Medicare or Medicaid. The law provides several
penalties for engaging in prohibited acts, including criminal sanctions and
exclusion from the Medicare and Medicaid programs. Although the Company does
not believe that it is operating in violation of this law, the scope of the
law remains somewhat unclear and there is no assurance that the Company would
prevail in its position. In addition, in 1991 and subsequently, the Office of
the Inspector General of the Department of Health and Human Services
promulgated "safe harbor" regulations specifying activities that will be
protected from criminal and civil investigation and prosecution under the
Anti-Kickback Act. The Office of the Inspector General has stated that failure
to satisfy the conditions of an applicable "safe harbor" does not necessarily
indicate that the arrangement in question violates the Anti-Kickback Act, but
means that the arrangement is not among those that the "safe harbor"
regulations protect from criminal and civil investigation and prosecution
under that law. The finding of a violation must still be determined based upon
the precise language of the Anti-Kickback Act.

The Federal Omnibus Budget Reconciliation Act of 1989, as amended by the
Federal Omnibus Budget Reconciliation Act of 1993, contains provisions that,
unless an exception applies, restrict physicians from making referrals to,
among others, providers of MR and other radiological services for services to
be rendered to Medicare or Medicaid patients in which the physicians have a
"financial relationship" or an ownership interest or with which they have a
compensation arrangement (the so-called "Stark Law"). The Stark Law provides
exceptions for certain types of employment and contractual relationships. The
Company believes that it is in compliance with the Stark Law, but there is no
assurance that the Company will prevail in its position if challenged.

The State of Florida also enacted in 1992 an anti-kickback statute
substantially similar in scope to the Anti-Kickback Act. Although the Company
does not believe that it is operating in violation of this law, as with its
Federal counterpart, the scope of the Florida law remains unclear and there is
no assurance that the Company would prevail in its position.

The States of Florida, Illinois, New Jersey, New York, Maryland and
Pennsylvania in which the Company currently operates centers have enacted laws
that restrict or prohibit physicians from referring patients to healthcare
facilities in which such physicians have a financial interest. Although the
Company does not believe that these laws will have a material adverse effect
on its operations in these states, there is no assurance that these laws will
not be interpreted or applied in such a way as to create such a material
adverse effect, or that these states, or other states in which the Company
does business, will not adopt similar or more restrictive laws or regulations
that could have such a material adverse effect.

All states where the Company has imaging centers have enacted Certificate of
Need laws to facilitate healthcare planning by placing limitations on the
purchase of certain major medical equipment and certain other capital
expenditures. These statutes, together with their implementing regulations,
could limit the Company's ability to acquire new imaging facilities and
imaging equipment or expand or replace its equipment at existing centers, and
no assurances can be given that the required regulatory approvals for any
future acquisitions, expansions or replacements will be granted to the
Company.

The Company continues to review all aspects of its operations and believes
that it complies in all material respects with applicable provisions of the
Anti-Kickback Act, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification, although because of the broad
and sometimes vague nature of these laws and requirements, there can be no
assurance that an enforcement action will not be brought against the Company
or that the Company will not be found to be in violation of one or more of
these regulatory provisions. Further, there can be no assurance that new laws
or regulations will not be enacted, or existing laws or regulations
interpreted or applied in the future in such a way as to have a material
adverse impact on the Company, or that Federal or state governments will not
impose additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.

10
<PAGE>

CORPORATE PRACTICE OF MEDICINE AND FEE SPLITTING

The Company presently operates imaging centers in New York, New Jersey,
Pennsylvania, Maryland, Massachusetts, Ohio, Illinois, Florida, California and
Arkansas. The laws of many states prohibit unlicensed, non-physician-owned
entities or corporations (such as the Company) from performing medical
services, or in certain instances, physicians from splitting fees with non-
physicians, such as the Company. The Company does not believe that it engages
in the unlicensed practice of medicine or the delivery of medical services in
any state where it is prohibited, and is generally not licensed to practice
medicine in states which permit such licensure. Professional medical services,
such as the interpretation of MRI scans, are separately provided by licensed
Interpreting Physicians, as independent contractors, pursuant to agreements
with the Company. At each of the Company's centers, all medical services are
performed exclusively by Physician Groups, generally consisting exclusively of
radiologists, with whom the Company enters into independent contractor
agreements. Pursuant to these agreements, the Company, among other duties,
provides to the Physician Group the diagnostic imaging facility and equipment,
performs all marketing and administrative functions at the centers and is
responsible for the maintenance and servicing of the equipment and leasehold
improvements. The Physician Group is solely responsible for, and has complete
and exclusive control over, all medical and professional services performed at
the centers, including, most importantly, the interpretation of diagnostic
images as well as the supervision of technicians, and medical related quality
assurance and communications with referring physicians. The Company's
employees do not perform professional medical services at the centers.
Consequently, the Company does not believe that it engages in the practice of
medicine in jurisdictions which prohibit or permit the corporate practice of
medicine. The Company performs only administrative and technical services and
does not exercise control over the practice of medicine by physicians at the
centers or employ physicians to provide medical services.

In many jurisdictions, however, the laws restricting the corporate practice
of medicine and fee-splitting have been subject to limited judicial and
regulatory interpretation and, therefore, there is no assurance that, upon
review, some of the Company's activities would not be found to be in violation
of such laws. If such a claim were successfully asserted against it, the
Company could be subject to civil and criminal penalties. Imposition of civil
or criminal penalties against the Company could have a material adverse effect
on its operations, cash flows and financial condition.

POTENTIAL ADVERSE EFFECT OF CAPITATION CONTRACTS

The Company has entered into a number of "capitated contracts" with third
party payors which typically provide for payment of a fixed fee per month on a
per member basis, without regard to the amount or scope of services actually
rendered. Because the obligations to perform services are not related to the
payments, it is possible that either the cost or the value of the services
performed may significantly exceed the fees received, and there may be a
significant period between the time the services are rendered and payment is
received. Approximately 2% of the Company's net service revenues in 1997 was
derived from capitated contracts. While the Company carefully analyzes the
potential risks of capitation arrangements, there can be no assurances that
any capitated contracts to which the Company is a party or which it may enter
into in the future will not generate significant losses to the Company.

In addition, certain types of capitation agreements, may be deemed a form of
risk contracting. Many states limit the extent to which any person can engage
in risk contracting, which involves the assumption of a financial risk with
respect to providing services to a patient. If the fees received by the
Company are less than the cost of providing the services, the Company may be
deemed to be acting as a de facto insurer. In some states, only certain
entities, such as insurance companies, HMOs and independent practice
associations, are permitted to contract for the financial risk of patient
care. In such states, risk contracting in certain cases has been deemed to be
engaging in the business of insurance. The Company believes that it is not in
violation of any restrictions on risk bearing or engaging in the business of
insurance. If the Company is held to be unlawfully engaged in the

11
<PAGE>

business of insurance, such a finding could result in civil or criminal
penalties or require the restructuring of some or all of the Company's
operations, which could have a material adverse effect upon the Company's
business.

SIGNIFICANT DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS

The Company has significant outstanding debt, including capitalized lease
obligations relating to equipment at its centers. The Company has financed the
acquisition of substantially all of the diagnostic imaging equipment used at
its centers (typically with terms ranging from five to seven years) from
lenders and lessors, with the equipment and other assets serving as collateral
for the loans. A significant portion of the Company's assets have been pledged
as collateral for its capitalized lease obligations, as well as other
indebtedness. In certain cases, the center leasing the equipment and the
subsidiary which operates the center are the only obligors under the
capitalized leases. A default under an equipment lease or certain other
indebtedness of the Company could materially adversely affect the operations
of the Company. See "Effects of Failure to Comply with Terms of Senior Notes
and Convertible Preferred Stock."

COMPETITION; RELIANCE ON REFERRALS

The outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals, including
referrals through relationships with managed care organizations, at the local
market level. The Company believes that principal competitors in each of its
markets are hospitals, independent or management company owned imaging
centers, individual-owned imaging centers and mobile MR units. Many of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include facility location, type and quality of
equipment, quality and timeliness of test results, ability to develop and
maintain relationships with referring physicians, convenience of scheduling
and availability of patient appointment times and the pricing of services.
These factors impact the referring physician's decision to direct a patient to
an imaging center. Competition for physician referrals can also be affected by
the ownership or affiliation of competing centers or hospitals. In addition,
managed care has affected the availability of referrals by approving only a
certain number of centers in a given geographic region. The competitive
environment which the Company faces could result in lower patient volume or in
an adverse change in payor mix.

MR systems compete with a variety of other scanning technologies which are
available in physicians offices, hospitals and other diagnostic imaging
centers. Competition with other imaging modalities is generally based on the
nature of the medical procedure to be performed and the condition of the
patient. The use of MR imaging as a diagnostic tool continues to gain both
professional and public acceptance as MR imaging and diagnostic techniques
improve, equipment software is enhanced and attention is directed to MR's
diagnostic successes. The Company's performance is dependent upon physician
and patient confidence in the superiority of its MR imaging and service over
other competing modalities and systems.

There are a number of manufacturers of MR imaging systems. These
manufacturers' marketing efforts can be expected to stimulate others,
including hospitals, to purchase and install the MR systems. Periodically,
manufacturers introduce innovations or newly designed MR systems with enhanced
features. Therefore, the Company encounters strong competition from other MR
diagnostic systems with innovative or enhanced features installed in the areas
where the Company has installed its MR systems, as well as strong competition
in its endeavors to acquire new locations.

The temporary healthcare staffing business is also very competitive. StarMed
competes for clients' business with other providers of travel nurse temporary
staffing and with other staffing companies that provide per diem staffing
services. StarMed also competes for the limited number of available qualified
staff. StarMed competes with several companies which are larger and may
possess greater financial and other resources.

12
<PAGE>

DEPENDENCE ON QUALIFIED INTERPRETING PHYSICIANS

The Company's strategy of maintaining the high quality of its services is
dependent upon its ability to obtain and maintain arrangements with qualified
Interpreting Physicians at each of its centers. No assurance can be given that
the Company's contractual arrangements with Interpreting Physician groups at
each of the Company's centers can be maintained on terms advantageous to the
Company. No assurance can be given that the Interpreting Physicians with whom
the Company has contracts will perform satisfactorily or continue to practice
in the markets served by its imaging centers. In addition, with respect to the
acquired centers, there can be no assurance that arrangements can be entered
into with Interpreting Physicians on acceptable terms or that such physicians
will be successful in such centers. The Company's success is significantly
dependent on the ability of these physicians to attract patient referrals,
thereby enabling the Company's centers to operate profitably. Agreements with
Interpreting Physicians generally range from one to ten years and permit
termination only for cause. Many agreements prohibit the Interpreting
Physician from performing professional interpreting services for a competitor
within a defined geographic distance from the Company's center which may vary
depending upon the relevant demographics and density of the immediate region.
Such restrictive covenants are customarily in effect from one to five years
following the termination of the agreements. The inability of these physicians
to attract sufficient referrals, the termination of their agreements with the
Company or the inability of the Company to enforce the restrictive covenants
contained in the agreements could have a material adverse effect on the
Company's financial condition and operating results.

TECHNOLOGICAL OBSOLESCENCE

There have been rapid technological advancements made in the software and,
to a lesser extent, hardware in the diagnostic imaging industry. Although the
Company believes that its equipment can generally be upgraded as necessary,
the development of new technologies or refinements of existing technologies
might make existing equipment technologically or economically obsolete. If
such obsolescence were to occur, the Company may be compelled to acquire new
equipment, which could have a material adverse effect on its financial
condition, results from operations and cash flow. In addition, certain of the
Company's centers compete against local centers which contain more advanced
imaging equipment or provide additional modalities.

MALPRACTICE LIABILITY CLAIMS AND INSURANCE

Although the Company provides administrative, financial and technical
services and is not engaged in the practice of medicine, the diagnostic
imaging and temporary staffing businesses entail the risk of professional
liability claims. Consequently, the Company may be named as a co-defendant in
medical malpractice claims. The Company's exposure to such liability is
reduced for its imaging centers because Interpreting Physicians are required
to purchase and carry their own medical malpractice insurance. Similarly, the
Company's nursing personnel perform services in accordance with treatments
prescribed by third-party Physicians or under hospital supervision.
Nevertheless, the Company maintains general liability insurance and
professional liability insurance for both its diagnostic imaging business and
its temporary staffing business in amounts deemed adequate by management of
the Company. The Company is subject to one claim seeking $12.5 million in
damages, which is in excess of the Company's insurance coverage of $1,000,000
per incident, as well as six additional lawsuits which do not specify the
amount sought to be recovered. Adverse determinations against the Company with
respect to all such claims or the filing of malpractice claims against the
Company in the future could have a material adverse effect on the Company's
financial condition, results of operations and cash flow.

LOSSES FROM CERTAIN CENTERS; IMPAIRMENT OF CERTAIN ASSETS

Certain centers which the Company has acquired since January 1996 have
generated losses. With respect to these centers, the Company has utilized,
and, in most circumstances, will continue to utilize, working capital to fund
the operations of such centers. The Company cannot determine if or when such
centers will become profitable, or if or when the centers will generate
positive operating cash flows. In the event that the Company determines to
close or sell any such center, the Company would expect to incur a loss in
connection with such

13
<PAGE>

closure. In addition, during 1997, the Company recorded a $12,962,000 loss
from the impairment of goodwill and other long-lived assets. This loss
consists of the write-off of goodwill of $10,425,000, covenants not to compete
of $118,000 and fixed assets of $2,419,000. Substantially all of the
impairment relates to eight of the Company's diagnostic imaging centers which
were under performing. The Company has recorded impairment losses for these
centers because the sum of the expected future cash flows, determined based on
an assumed continuation of current operating methods and structures, does not
cover the carrying value of the related long-lived assets. The Company is,
however, investigating the underlying causes of such under-performance to
determine what actions, if any, may be taken to improve the future operating
performance of such centers. There can be no assurance, however, that
additional assets of the Company will not be impaired in the future or that
the future operating performance of the Company's centers with a history of
losses will improve. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

ABSENCE OF DIVIDENDS

The Company has never paid cash dividends and has no present plans to pay
cash dividends to its stockholders and, for the foreseeable future, intends to
retain all of its earnings, if any, for use in its business. The declaration
of any future dividends by the Company is within the discretion of its Board
of Directors and will be dependent on the earnings, financial condition and
capital requirements of the Company, as well as any other factors deemed
relevant by its Board of Directors. In addition, the payment by the Company of
cash dividends is presently limited by the agreement related to the issuance
of the Senior Notes.

CERTAIN ANTI-TAKEOVER MEASURES

Certain provisions of the Company's Certificate of Incorporation, as well as
Delaware corporate law and the Company's Stockholder Rights Plan (the "Rights
Plan"), may be deemed to have anti- takeover effects and may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. Such provisions also may adversely affect prevailing market prices
for the Common Stock. Certain of such provisions allow the Company's Board of
Directors to issue, without additional stockholder approval, preferred stock
having rights senior to those of the Common Stock. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
matter. In September 1996, the Company adopted the Rights Plan, pursuant to
which holders of the Common Stock received a distribution of rights to
purchase additional shares of Common Stock, which rights become exercisable
upon the occurrence of certain events. Although the Rights Plan was adopted by
the Company to give its Board of Directors significantly more time to properly
consider and to respond to an acquisition proposal, it could have the effect
of discouraging or hindering an unsolicited offer to acquire the Company at
effective valuations which are above the current market capitalization of the
Company.

VOLATILITY OF STOCK PRICE

The market price of the Common Stock has been and may continue to be
volatile. Recently, the stock market in general and the shares of healthcare
and diagnostic imaging services companies in particular have experienced
significant price fluctuations. These broad market and industry fluctuations
may adversely affect the market price of the Common Stock. Factors such as
quarterly fluctuations in results of operations, the timing and terms of
future acquisitions and general conditions in the healthcare industry may have
a significant impact on the market price of the Common Stock.

SALES BY SELLING STOCKHOLDERS; POTENTIAL FOR DILUTION

All of the Shares being offered hereby are offered solely by the Selling
Stockholders who are not restricted as to the prices at which they may sell
the Shares. Shares sold below the then current level at which the shares of
Common Stock are trading may adversely affect the market price of the Common
Stock.

14
<PAGE>

As of July 15, 1998, 15,500 shares of the Company's Series C Preferred Stock
were issued and outstanding. Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser
of (i) $20.70 or (ii) the average of the daily closing bid prices for the
Common Stock for the five (5) consecutive trading days ending five (5) trading
days prior to the date of conversion. On June 18, 1998, 2,500 shares of Series
C Preferred Stock were converted into 1,119,660 shares of Common Stock. If
converted on July 17, 1998, the remaining 15,500 shares of Series C Preferred
Stock would have been convertible into approximately 4,330,183 shares of
Common Stock. Depending on market conditions at the time of conversion, the
number of shares issuable could prove to be significantly greater in the event
of a decrease in the trading price of the Common Stock. As a result of the
Company's failure to register the RGC Conversion Shares at various dates on or
after December 31, 1997, the Company: (i) issued warrants to RGC to acquire
1,167,000 shares of Common Stock at an exercise price ranging form $11.62 to
$12.95 per share, subject to reset in November 1998 (such warrants having an
estimated value for accounting purposes, of $3,245,000); and (ii) issued
interest bearing promissory notes (the "RGC Penalty Notes") in the aggregate
principal amount of $2,450,000 due the earlier of (x) January 4, 1999 and (y)
the later of (A) five business days following the sale of StarMed and (B)
October 15, 1998 in the event the sale of StarMed occurs before October 15,
1998. The principal amount of and interest accrued on the RGC Penalty Notes
may be converted, at the option of the Company or RGC in certain
circumstances, into additional shares of Series C Preferred Stock or Common
Stock. Pursuant to an amendment to the RGC Agreements entered into in June
1998, the Company will no longer incur any monthly penalties for failure to
register the RGC Conversion Shares following July 23, 1998. However, if the
RGC Conversion Shares are not registered as of September 15, 1998, RGC may
demand a one-time penalty of $1,550,000 (the "September 1998 Penalty"),
payable, at the option of RGC, in cash or additional shares of Common Stock.
There can be no assurance that the Company will be able to register the RGC
Conversion Shares by such date or that the Company will be able to pay the RGC
Penalty Notes when due or the September 1998 Penalty, if such payment becomes
due. Purchasers of Common Stock could therefore experience substantial
dilution upon conversion of the Series C Preferred Stock and the RGC Penalty
Notes and the exercise of such warrants. The shares of Series C Preferred
Stock are not registered and may be sold only if registered under the Act or
sold in accordance with an applicable exemption from registration, such as
Rule 144. The shares of Common Stock into which the Series C Preferred Stock
may be converted and the shares underlying such warrants are being registered
pursuant to the Registration Statement of which this Prospectus is a part.

15
<PAGE>

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Shares by the
Selling Stockholders.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock had been traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market, under
the symbol MRII, since November 3, 1995, and on the NASDAQ SmallCap Market
prior thereto. From April 20, 1998 through June 18, 1998 the Company's Common
Stock traded under the symbol MRIIE to reflect the fact that Nasdaq had
commenced proceedings to determine whether or not the Company's Common Stock
should continue to be traded on the Nasdaq Stock Market as a result of the
Company's failure to file its Annual Report on Form 10-K for the year ended
December 31, 1997 in a timely manner. On May 14, 1998, representatives of the
Company attended a hearing before a Nasdaq Qualifications Hearing Panel to
review the Company's failure to comply with NASDAQ's ongoing listing
requirements. On May 29, 1998, the Company was advised that the Panel
determined to continue the listing of the Company's Common Stock on The Nasdaq
Stock Market subject to certain conditions. The Company was required to file
its Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 on or
before June 12, 1998, which the Company was able to do, and must evidence
compliance with either Nasdaq's minimum net tangible assets test or one of
Nasdaq's alternative requirements by July 24, 1998.

Based on the closing price for the Company's Common Stock on July 16, 1998
($3 1/8) and the Company's net tangible assets as of December 31, 1997, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing,
which include, among other things, a minimum bid price for the Common Stock of
$5.00 per share. In order to satisfy the continued listing requirements, the
Company submitted for shareholder approval a reverse stock split, in order to
meet or exceed the $5.00 minimum bid price. In event the Company does not
satisfy either the minimum net tangible assets requirement or is unable to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able
to demonstrate compliance with the applicable maintenance criteria. On July
23, 1998, the Company's stockholders approved a reverse stock split of the
Common Stock at the Company's 1998 Annual Meeting of Stockholders. The
Company's Board of Directors has not yet authorized the effectiveness of any
reverse stock split. Therefore, the information in this Prospectus does not
give effect to any reverse stock split. There can be no assurance that in the
future the Common Stock will meet the continued listed requirements for the
Nasdaq Stock Market.

The following table sets forth for the periods indicated below the high and
low bid prices per share of the Common Stock as reported by NASDAQ:

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1996
First Quarter........................................... $ 6 3/8 $ 4 5/8
Second Quarter.......................................... $10 1/4 $ 6
Third Quarter........................................... $ 9 1/4 $ 6 1/4
Fourth Quarter.......................................... $11 3/4 $ 7
1997
First Quarter........................................... $12 1/8 $ 9 5/8
Second Quarter.......................................... $17 1/8 $10 3/8
Third Quarter........................................... $20 $15 1/8
Fourth Quarter.......................................... $20 5/8 $ 8 5/32
1998
First Quarter........................................... $11 1/16 $ 4 7/8
Second Quarter ......................................... $ 6 1/4 $ 2 1/4
Third Quarter (through July 16, 1998)................... $ 4 $ 2 3/4
</TABLE>

As of the close of business on July 16, 1998, the last reported sales price
per share of the Company's Common Stock was $3 1/8.

16
<PAGE>

There were 435 holders of record of the Company's Common Stock at the close
of business on July 9, 1998. Such number does not include persons, whose
shares are held by a bank, brokerage house or clearing company, but does
include such banks, brokerage houses and clearing companies.

No cash dividends have been paid on the Company's Common Stock since the
organization of the Company and the Company does not anticipate paying
dividends in the foreseeable future. The payment by the Company of cash
dividends is limited by the terms of the agreement related to its issuance of
the Senior Notes. The Company currently intends to retain earnings for future
growth and expansion opportunities.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated historical financial data of the Company
is derived from the Company's consolidated financial statements for the
periods indicated and, as such, reflects the impact of acquired entities from
the effective dates of such transactions, and reflects StarMed as a
discontinued operation due to its pending sale. The selected balance sheet
data at March 31, 1998 and 1997, and the statement of operations data for the
three months ended March 31, 1998 and 1997, have been derived from the
Company's unaudited consolidated financial statements and includes, in the
opinion of management, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such data. The operating
results for the three month period ended March 31, 1998 are not necessarily an
indication of the results to be expected for the year ending December 31, 1998
or for future periods. The information in the table and the notes thereto
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- ----------------------
1997 1996 1995 1994 1993 1998 1997
-------- -------- -------- -------- ------- ---------- ----------
(IN THOUSANDS EXCEPT SUPPLEMENTAL AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net service revenues.... $144,412 $ 64,762 $ 35,860 $ 30,607 $26,934 $ 47,286 $ 26,841
Operating income (loss). (21,297) 13,700 7,194 1,169 1,648 (1,742) 6,713
Income (loss) from
continuing operations
before extraordinary
item................... (31,968) 6,983 4,246 (938) (694) (5,488) 3,362
Income (loss) from
continuing operations
per common share:
Basic(3).............. (1.65) 0.62 .55 (0.13) (.11) (.26) 0.18
Diluted(3)............ (1.65) 0.57 .55 (0.13) (.11) (.26) 0.17
SUPPLEMENTAL DATA:
Number of consolidated
imaging centers at end
of period.............. 98 39 11 8 8 98 54
Total procedures at
consolidated imaging
centers................ 527,477 209,970 124,302 101,460 86,686 168,104 80,507
BALANCE SHEET DATA
Working capital surplus
(deficit)(2)........... $(58,174) $ 42,775 $ 10,738 $ 5,834 $ 3,365 $ (59,043) $ 59,431
Total assets............ 338,956 164,514 44,136 40,372 40,881 330,639 238,112
Long term debt and
capital lease
obligations (excluding
current portion)....... 37,900 21,011 11,157 13,415 19,034 34,047 69,721
Convertible debentures.. -- 6,988 4,350 -- -- -- 1,370
Stockholders' equity.... 126,904 106,384 16,966 11,872 12,939 123,601 119,291
</TABLE>
- - --------
(1) Statement of Operations Data has been restated to reflect the financial
results of StarMed as discontinued operations. See Note 16 of the Notes to
the Consolidated Financial Statements.
(2) As a result of the Company's default of certain financial covenants under
the Company's Senior Notes, the Company's Senior Notes and other loans and
capital leases also subject to acceleration as a result thereof are shown as
current liabilities as of December 31, 1997 and March 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(3) Earnings per share amounts for 1997 include charges related to restricted
common stock and convertible preferred stock of $1,938,000.

Earnings per share amounts for all periods, including related quarters, have
been calculated in conformity with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share."

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF CONTINUING OPERATIONS

Revenue Recognition

At each of the Company's diagnostic imaging centers, all medical services
are performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises,
comprehensive management and administration, including responsibility for
billing and collection of receivables, and technical imaging services to the
Interpreting Physician.

Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party payors and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates and gross billing rates (referred to
as "contractual allowances") are recognized in the determination of net
service revenues at the time services are rendered. Subject to the foregoing,
the Company's diagnostic imaging centers recognize revenue under one of the
three following types of agreements with Interpreting Physicians:

Type I--The Company receives a technical fee for each diagnostic imaging
procedure performed at a center, the amount of which is dependent upon the
type of procedure performed. The fee included in revenues is net of
contractual allowances. The Company and the Interpreting Physician
proportionally share in any losses due to uncollectible amounts from
patients and third party payors, and the Company has established reserves
for its share of the estimated uncollectible amount. Type I net service
revenues for 1997 and the three months ended March 31, 1998 were
$80,818,000, or 56% of revenues, and $24,365,000, or 52% of revenues,
respectively.

Type II--The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physicians either (i) a fixed
percentage of fees collected at the center, or (ii) a contractually fixed
amount based upon the specific diagnostic imaging procedures performed.
Revenues are recorded net of contractual allowances and the Company accrues
the Interpreting Physicians fee as an expense on the Consolidated
Statements of Operations. The Company bears the risk of loss due to
uncollectible amounts from patients and third party payors, and the Company
has established reserves for the estimated uncollectible amount. Type II
net service revenues for 1997 and the three months ended March 31, 1998
were $55,016,000, or 38% of revenues, and $19,168,000, or 41% of revenues,
respectively.

Type III--The Company receives from an affiliated physician association a
fee for the use of the premises, a fee per procedure for acting as billing
and collection agent and a fee for administrative and technical services
performed at the centers. The affiliated physician association contracts
with and pays directly the Interpreting Physicians. The Company's fee, net
of an allowance based upon the affiliated physician association's ability
to pay after the association has fulfilled its obligations (i.e., estimated
future net collections from patients and third party payors less facility
lease expense and Interpreting Physicians fees), constitutes the Company's
net service revenues. Since the Company's net service revenues are
dependent upon the amount ultimately realized from patient and third party
receivables, the Company's revenue and receivables have been reduced by an
estimate of patient and third party payor contractual allowances, as well
as an estimated provision for uncollectible amounts from patients and third
party payors. Type III net service revenues for 1997 and the three months
ended March 31, 1998 were $8,342,000, or 6% of revenues, and $3,440,000, or
7% of revenues, respectively.

Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.

The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of gross billings net of contractual allowances for the

19
<PAGE>

imaging services provided, range from 78% to 93% for the Type I agreements,
80% to 93% for the Type II agreements and 80% to 89% for the Type III
agreements. These agreements generally have terms ranging from one to ten
years.

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. (NASDAQ:RHBC) for $33 million (the "StarMed Sale"). Closing of the
StarMed Sale, which is subject to the satisfaction of customary conditions and
approval by the Company's Senior Note holders, is expected to occur in late
July or in August of this year. Due to the pending StarMed Sale, the results
of operations of StarMed are herein reflected in the Company's Consolidated
Statements Of Operations as discontinued operations.

Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997

For the quarter ended March 31, 1998, the Company's net service revenues
increased $20,445,000, or 76%, to $47,286,000 during the first quarter of 1998
from $26,841,000 for the first quarter of 1997, due primarily to the timing of
various 1997 acquisitions which contributed $ 22,420,000 of the increase.
Revenues at imaging centers that were operated by the Company for all of 1997
decreased $1,975,000, or 8%, to $22,181,000 for the quarter ended March 31,
1998 from $24,156,000 for the same period in 1997. This decrease in revenues
was the net result of higher contractual allowances in relation to gross
billings in the first quarter of 1998, partially offset by the beneficial
effects of increased procedure volumes.

Contractual allowances are largely dependent upon reimbursement rates from
third party payors, including Medicare, Medicaid and managed care providers.
Management believes that it is likely that the Company's overall reimbursement
rates will continue to gradually decline for some period of time, due to
factors such as the expansion of managed care organizations and continued
national healthcare reform efforts. The Company will endeavor to mitigate the
impact of any decline in reimbursement rates by decreasing costs and
increasing referral volumes. If the rate of decline in reimbursement rates
were to increase materially, or if the Company is unsuccessful in reducing its
costs or increasing its volume, the Company's results could be materially and
adversely affected.

Revenue derived from personal injury claims, mainly involving automobile
accidents, represented approximately 24% of net service revenues for the
quarter ended March 31, 1998. Automobile insurance carriers generally pay the
non-deductible non-co-pay portion of the charge, with the remaining balance
payable by the individual. The timing of collection from the individual is
partially dependent upon the outcome and timing of any settlement or judgment
of the injury claim. Accordingly, such receivables typically require a longer
period of time to collect compared to the Company's other receivables, and in
the experience of the Company incur a higher bad debt expense. If the Company
were to become less successful in its efforts in collecting these receivables,
the Company's results could be materially and adversely affected.

Operating costs increased $16,529,000, or 120%, to $30,347,000 for the
quarter ended March 31, 1998 from $13,818,000 for the quarter ended March 31,
1997, due primarily to the addition of operating costs of $13,931,000 from
centers acquired during 1997. Operating costs at imaging centers operated by
the Company for all of 1997 increased $2,598,000, or 21%, to $14,964,000 for
the three months ended March 31, 1998 from $12,366,000 for the three months
ended March 31, 1997, primarily as a result of increased payroll and related
costs.

Center operating margins, which represent net service revenue less imaging
center operating costs as a percent of net revenue, decreased for the quarter
ended March 31, 1998 to 36% from 49% for the quarter ended March 31, 1997 due
primarily to higher contractual allowances as a percentage of gross billings
and generally higher payroll and administrative costs.

20
<PAGE>

The provision for uncollectible accounts receivable for the quarter ended
March 31, 1998 was $3,621,000, or 8%, of related net service revenues,
compared to the first quarter of 1997 provision of $1,821,000, or 7%, of
related net service revenues. The increase in the dollar amount of the
provision for uncollectible accounts receivable was primarily due to higher
revenue levels in the first quarter of 1998.

Corporate general and administrative expense for the three months ended
March 31, 1998 was $4,823,000, an increase of $3,124,000 from the $1,699,000
recorded for the three months ended March 31, 1997. This increase was
primarily due to higher payroll and related costs as a result of the expanded
business development activities and the resulting growth experienced during
1997. In March 1998, the Company announced a workforce reduction and follow-on
attrition program that is expected to result in reduced payroll costs of
approximately $5,000,000 per annum.

Depreciation and amortization expense for the first quarter of 1998 was
$6,477,000, compared to $2,790,000 for the first quarter of 1997, or an
increase of $3,687,000 due primarily to higher equipment depreciation of
$2,207,000 primarily resulting from 1997 acquisitions and increased goodwill
amortization of $1,384,000.

During the first quarter of 1998, the Company recorded $3,760,000 of unusual
charges consisting of (i) $313,000 for shareholder and employee lawsuits, and
(ii) $2,227,000 ($1,194,000 of which was a non-cash charge related to the
issuance of 350,000 Common Stock warrants) for penalties associated with
delays in the registration of the Company's Common Stock issued in connection
with acquisitions or issuable upon conversion of convertible preferred stock,
(iii) $883,000 for costs associated with the investigation of related party
transactions which was concluded in April 1998 and (iv) $337,000 for
management termination benefits and related costs.

The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current
negotiations regarding defaults under the Senior Notes and penalties
associated with the failure to register the Company's Common Stock, as well as
the outcome of certain litigation.

Net interest expense for the three months ended March 31, 1998 was
$3,486,000 as compared to $887,000 for the three months ended March 31, 1997,
an increase of $2,599,000. This increase was primarily attributable to higher
outstanding debt, including the issuance of $78,000,000 of Senior Notes during
1997, notes payable of $36,505,000 and capital lease obligations totaling
$26,612,000 assumed in connection with the Company's 1997 acquisitions.

The Company's income for the quarter ended March 31, 1998 was decreased by
$181,000 attributable to minority interests, as compared to a reduction in the
Company's income of $235,000 for the quarter ended March 31, 1997.

The provision for income taxes for the three months ended March 31, 1998 was
$79,000 as compared to a provision of $2,229,000 for the comparable period
last year. During the first quarter of 1998, the benefit for income taxes was
limited due to the uncertainty regarding the recognition of the full amount of
the Company's deferred tax assets.

The Company's net loss from continuing operations for the quarter ended
March 31, 1998 was $5,488,000 compared to net income from continuing
operations for the quarter ended March 31, 1997 of $3,362,000.

The net loss applicable to common stockholders (used in computing loss per
common share) in the first quarter of 1998 includes charges of $135,000 as a
result of the accretion of the Company's preferred stock.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

For the year ended December 31, 1997, the Company's net service revenues
increased $79,650,000, or 123%, to $144,412,000 in 1997 from $64,762,000 in
1996, due primarily to revenues of $60,849,000 contributed by centers acquired
during 1997. Revenues at imaging centers acquired during 1996 increased
$20,585,000, or

21
<PAGE>

93%, to $42,617,000 in 1997 from $22,032,000 in 1996 primarily as a result of
the timing of the 1996 acquisitions, partially offset by an increase of
$5,896,000 in the estimated provision for uncollectible amounts related to
Type III centers. Revenues at imaging centers that were operated by the
Company for all of 1997 and 1996 decreased $1,784,000, or 4%, to $40,946,000
in 1997 from $42,730,000 in 1996, primarily as a result of higher contractual
allowances in 1997 and relatively constant procedure volumes.

Revenues in 1997 were adversely affected by higher contractual allowance
estimates, including a component related to the ultimate collectibility of
amounts related to the Company's Type III revenue. These contractual allowance
estimates are largely dependent upon reimbursement rates from third party
payors, including Medicare, Medicaid and managed care providers. Management
believes that the Company's overall reimbursement rates will continue to
gradually decline for some period of time, due to factors such as the
expansion of managed care organizations and continued national healthcare
reform efforts. The Company will endeavor to mitigate the impact of any
decline in reimbursement rates by decreasing costs and increasing referral
volume. If the rate of decline in reimbursement rates were to increase
materially, or if the Company is unsuccessful in reducing its costs or
increasing its volume, the Company's results could be materially and adversely
affected.

Revenue derived from personal injury claims, mainly involving automobile
accidents, represented approximately 24% of net service revenues for 1997.
Automobile insurance carriers generally pay the non-deductible non-co-pay
portion of the charge, with the remaining balance payable by the individual.
The timing of collection from the individual is partially dependent upon the
outcome and timing of any settlement or judgment of the injury claim.
Accordingly, such receivables typically require a longer period of time to
collect compared to the Company's other receivables, and in the experience of
the Company incur a higher bad debt expense. If the Company were to become
less successful in its efforts in collecting these receivables, the Company's
results could be materially and adversely affected.

Operating costs increased $54,408,000, or 156%, to $89,234,000 in 1997 from
$34,826,000 in 1996, due primarily to operating costs of $35,079,000 related
to centers acquired during 1997. Operating costs at imaging centers acquired
during 1996 increased $18,155,000, or 149%, to $30,325,000 in 1997 from
$12,170,000 in 1996, primarily as a result of the timing of the 1996
acquisitions. Operating costs at imaging centers that were operated by the
Company for all of 1997 and 1996 increased $2,166,000, or 10%, to $23,830,000
in 1997 from $21,664,000 in 1996, primarily as a result of higher payroll and
related costs.

Center operating margins, which represent net service revenue less imaging
center operating costs as a percent of net revenue, decreased in 1997 to 38%
from 46% in 1996 due primarily to higher contractual allowance estimates,
including a component related to the ultimate collectibility of amounts
related to the Company's Type III revenue, as described above, and generally
higher costs.

The provision for uncollectible accounts receivable in 1997 was $20,364,000,
or 14% of related net service revenues, compared to the 1996 provision of
$4,705,000 or 7% of related net service revenues. The increase in the
provision for uncollectible accounts receivable was due to the deterioration
during 1997 in the aging of the Company's accounts receivable and a
reassessment by the Company of its expected future collections based upon 1997
collection activity, including analyzing collection experience of its personal
injury receivables. Accounts receivable before allowances for uncollectibles
aged over one-year increased to $21,485,000, or 25% of total receivables in
1997, from $7,016,000, or 14% of total receivables in 1996.

Management expects its provision for uncollectible accounts receivable as a
percentage of revenues to approximate 8% for 1998. An additional reserve of
approximately 1% of net imaging revenues for uncollectible patient and third
party payors related to the Company's Type III centers is expected to be
reflected as a reduction in net revenues for 1998.

22
<PAGE>

Corporate general and administrative expense in 1997 was $12,157,000, an
increase of $7,590,000 from the $4,567,000 recorded in 1996. This increase was
primarily due to higher payroll and related costs as a result of the expanded
business development activities and the resulting growth experienced during
the year. In March 1998, the Company announced a workforce reduction and
follow-on attrition program that is expected to result in reduced payroll
costs of approximately $5,000,000 per annum.

During 1997, the Company recorded $2,536,000 of stock-option based
compensation expense. This non-cash charge was related to stock option grants
to employees and directors during 1996 and early 1997 that were subsequently
approved by the Company's stockholders in May, 1997.

Depreciation and amortization expense in 1997 was $18,733,080, compared to
$6,964,000 in 1996, or an increase of $11,769,000 due primarily to higher
equipment depreciation of $6,585,000 resulting from 1997 acquisitions and
increased goodwill amortization of $4,638,000.

During 1997, the Company recorded a $12,962,000 loss from the impairment of
goodwill and other long-lived assets. This loss consists of the write-off of
goodwill of $10,425,000, covenants not to compete of $118,000 and fixed assets
of $2,419,000. Substantially all of the impairment relates to eight of the
Company's diagnostic imaging centers which were under performing. The Company
has recorded impairment losses for these centers because the sum of the
expected future cash flows, determined based on an assumed continuation of
current operating methods and structures, does not cover the carrying value of
the related long-lived assets. The Company is, however, investigating the
underlying causes of such under-performance to determine what actions, if any,
may be taken to improve the future operating performance of such centers.

During 1997, the Company also recorded $9,723,000 of other unusual charges
consisting of (i) $3,256,000 for the estimated net costs associated with the
resolution of the shareholder and employee lawsuits, (ii) $2,243,000 for
higher than normal professional fees, (iii) $2,169,000 ($2,051,000 of which
was a non-cash charge related to the issuance of 817,000 common stock
warrants) for penalties associated with delays in the registration of the
Company's common stock issued in connection with acquisitions or issuable upon
conversion of convertible preferred stock, (iv) $1,150,000 for the loss on
investment related to a potential acquisition not consummated, (v) $469,000
for costs associated with the investigation of related party transactions and
(vi) $436,000 for management termination benefits and related costs.

The Company expects to incur additional unusual charges of at least
$4,500,000 during 1998 primarily related to the estimated net costs associated
with the resolution of the shareholder and employee lawsuits, penalties
associated with delays in the registration of the Company's Common Stock, and
costs associated with the investigation of related party transactions which
was concluded in April 1998. Such additional amounts could be substantially
higher depending upon the outcome of current negotiations regarding penalties
associated with the failure to register the Company's common stock and the
outcome of certain litigation.

Net interest expense for 1997 was $8,814,000 as compared to $2,834,000 for
1996, an increase of $5,980,000. This increase was primarily attributable to
higher outstanding debt, including the issuance of $78,000,000 of Senior Notes
during 1997, notes payable of $36,505,000 and capital lease obligations
totaling $26,612,000 assumed in connection with the Company's acquisitions.

The Company's earnings in 1997 were reduced by $636,000 attributable to
minority interests, as compared to $308,000 in 1996. The increase of $328,000
is primarily due to the acquisition of entities during 1997 that operate
limited partnerships with minority holdings.

The provision for income taxes in 1997 was $1,221,000, as compared to
$3,575,000 in 1996. During 1997, the income tax benefit calculated based upon
the Company's pre-tax loss was reduced by an income tax valuation allowance of
$10,700,000. This valuation allowance was recorded due to uncertainty
regarding the realization of the full amount of the Company's net deferred
income tax assets.

23
<PAGE>

The Company's net loss from continuing operations for 1997 was $31,968,000
compared to net income from continuing operations for 1996 of $6,983,000.

The net loss applicable to common stockholders (used in computing loss per
common share) in 1997 includes charges of $1,938,000 related to Common Stock
subject to redemption and convertible preferred stock. These charges relate to
price protection agreements provided in connection with the Company's 1997
acquisitions of $1,696,000 and the accretion of the Company's preferred stock
of $242,000.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

For the year ended December 31, 1996, net service revenues amounted to
$64,762,000 versus $35,860,000 for the year ended December 31, 1995, an
increase of $28,902,000 or 80.6%. Management fee and use revenues for
diagnostic imaging services increased $8,270,000 from $31,174,000 for the year
ended December 31, 1995 to $39,445,000 for the year ended December 31, 1996.
This increase is primarily attributable to an increase of $1,326,000 (4.5%) at
centers which were included in revenue for all of 1996 and 1995; $2,752,000
(169%) in revenue at a center acquired during 1995 and $4,192,000 of revenue
contributed by imaging centers acquired during 1996.

Diagnostic imaging patient service revenues increased $20,631,000 for the
year ended December 31, 1996 to $25,317,000 from $4,686,000 for the year ended
December 31, 1995. This increase is attributable to an increase of $615,000
(19%) at centers which were included in revenue for all of 1995 and 1996;
$2,670,000 (183%) at centers acquired during 1995 and; $22,032,000 of revenue
was contributed by centers acquired during 1996.

Technical services payroll and related costs for the year ended December 31,
1996 amounted to $10,836,000 compared to $6,815,000 for the year ended
December 31, 1995, an increase of $4,021,000 or 59%.

Medical supplies amounted to $4,223,000 for the year ended December 31, 1996
as compared to $2,439,000 for the year ended December 31, 1995, an increase of
$1,784,000 or 73%. Of this increase $1,725,000 or 97% is attributable to
centers acquired during 1995 and 1996.

For the year ended December 31, 1996 diagnostic equipment maintenance
increased $1,627,000 or 99% to $3,274,000 from $1,647,000 for the year ended
December 31, 1995. This increase is primarily due to centers acquired during
1995 and 1996.

Independent contractor fees amounted to $1,202,000 for the year ended
December 31, 1996 as compared to $437,000, for the year ended 1995. This
increase of $765,000 or 175% is attributable to the Type II (see Note 1)
centers acquired during 1995 and 1996.

Administrative costs which include facilities rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately $6,685,000 or 127% from $5,252,000
for the year ended December 31, 1995 to $11,937,000. This increase is
primarily due to costs incurred at imaging centers acquired during 1995 and
1996.

Other costs increased by $1,924,000 or 134% for the year ended December 31,
1996 to $3,354,000 as compared to $1,430,000 in the prior year primarily due
to an increase in accounting, legal and professional fees for the centers.

Provision for uncollectible accounts receivable increased $1,327,000 or 39%
from $3,378,000 from the year ended December 31, 1995 to $4,705,000 for the
year ended December 31, 1996. The 1996 provision for uncollectible accounts
consists of 7.3% of revenue as compared to 9.4% of revenue in 1995. The
decrease in the provision for uncollectible accounts receivable as a
percentage of revenues is due to acquired companies having a more favorable
collection experience due to differences in payor mix.

24
<PAGE>

Corporate general and administrative expense increased by $1,573,000 or 53%
from $2,994,000 for the year ended December 31, 1995 to $4,567,000 for the
year ended December 31, 1996. This increase is primarily due to the expanded
business development activities and the resulting growth experienced during
the year, particularly following the acquisition of NMR of America, Inc.
("NMR").

Depreciation and amortization expense was $6,964,000 for the year ended
December 31, 1996 compared to $4,274,000 for the year ended December 31, 1995
or an increase of $2,690,000 or 63% due primarily to depreciation expense
relating to acquired assets and increased goodwill amortization incurred in
connection with such acquisitions.

Interest expense for the year ended December 31, 1996 was $2,834,000 as
compared to $1,829,000 for the prior year, an increase of $1,005,000 or 55%.
This increase is primarily attributable to an increase in interest on
convertible debentures and lines of credit outstanding during 1996 of $646,000
and increases in interest on debt assumed in acquisitions during 1996 totaling
$764,000 offset by decreases in interest expense relating to scheduled
reductions in outstanding principal balances.

Minority interest amounted to $308,000 for the year ended December 31, 1996
as compared to ($124,000) for the year ended December 31, 1995. The increase
of $432,000 or 348.4% is attributable to increased profitability at the
Company's St. Petersburg, Florida and Yonkers, New York facilities ($383,000)
and the acquisition of the NMR facilities ($49,000).

The provisions for income taxes increased $2,332,000 or 188% for the year
ended December 31, 1996 from $1,243,000 to $3,575,000. This increase is
attributable to the increased profitability of the Company's existing and
acquired businesses during 1996 and an increase in the Company's effective
income tax rate. The Company's provision for income taxes resulted in
effective tax rates of 33.9% in 1996 and 22.4% in 1995, respectively.

The 1996 provision was higher than the statutory rate primarily due to state
and local income taxes, net of the Federal tax effect (6.3%), the impact on
non-deductible goodwill (1.8%) and meals and entertainment, offset by other
items amounting to (8.2%). In 1995, the effective tax rate was lower than the
statutory rate primarily due to a reduction in the deferred tax asset
valuation allowance (27.7%) offset by other items amounting to 16.3%.

For the reasons described above, the Company's net income from continuing
operations for the year ended December 31, 1996 increased $2,737,000 or 64.5%
from $4,246,000 for the year ended December 31, 1995 to $6,983,000.

RESULTS OF DISCONTINUED OPERATIONS

Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997

Net service revenues for StarMed increased to $19,816,000 in the first
quarter of 1998 from $13,146,000 in the first quarter of 1997, an increase of
$6,670,000 or 51%. Internal growth in the staffing business, consisting
primarily of the opening of new per diem offices, accounted for $2,401,000 of
the increase in revenues. Revenues at per diem offices acquired during the
three month period ended March 31, 1997 accounted for $2,735,000 of the
increase and revenues of $1,534,000 were contributed by per diem offices
acquired after March 31, 1997.

Operating costs for StarMed for the three months ended March 31, 1998 were
$15,725,000 compared to $10,737,000 for the three months ended March 31, 1997,
an increase of $4,988,000 or 46%. Internal growth in the staffing business
accounted for $1,841,000 of the increase in operating costs. Increased costs
at per diem offices opened or acquired during 1997 accounted for $3,147,000 of
the additional operating costs.

Center operating margins in for StarMed increased for the three months ended
March 31, 1998 to 21% from 18% for the three months ended March 31, 1997 due
primarily to improved profitability of per diem offices opened or acquired
prior to 1997.

25
<PAGE>

Net earnings related to StarMed increased to $749,000 in the first quarter
of 1998 from $240,000 in the first quarter of 1997.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net service revenues for StarMed increased to $57,974,000 in 1997 from
$29,023,000 in 1996, an increase of $28,951,000 or 100%. Internal growth in
the staffing business, consisting primarily of the opening of new per diem
offices, accounted for $5,442,000 of the increase in revenues. Increased
revenues at per diem offices opened or acquired during 1996 accounted for
$16,861,000 of revenues and revenues of $6,648,000 were contributed by per
diem offices acquired during 1997.

Operating costs for StarMed in 1997 were $46,831,000 compared to $24,238,000
for the year ended December 31, 1996, an increase of $22,593,000 or 93%.
Internal growth in the staffing business, accounted for $4,143,000 of the
increase in operating costs. Increased costs at per diem offices opened or
acquired during 1996 accounted for $11,812,000 of the higher operating costs
and operating costs of $5,646,000 were contributed by per diem offices
acquired during 1997.

Center operating margins for StarMed increased in 1997 to 19% from 16% due
primarily to improved profitability of per diem offices opened or acquired
prior to 1997.

Net earnings related to StarMed increased to $729,000 in 1997 from $271,000
in 1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

StarMed revenues increased $12,890,000 (80.3%) primarily due to internal
growth and acquisitions. Internal growth in the staffing segment consisting of
the opening of new per diem offices accounted for approximately $3,200,000 of
the increase in staffing revenue. Increased revenues at per diem offices
opened during 1995, related primarily to improved volume as these offices
matured from their start up phase, accounted for approximately $3,400,000 of
the increase in staffing revenues. Per diem staffing businesses acquired
during 1996 contributed approximately $6,300,000 in revenues during the year.

Technical services payroll and related costs for StarMed for the year ended
December 31, 1996 amounted to $24,238,000 compared to $12,711,000 for the year
ended December 31, 1995, an increase of $11,527,000 or 91%. Of this increase
$6,569,000 or 42% is attributable to the opening of new per Diem offices and
the staffing acquisitions and $2,622,000 increase is due to the maturation of
per diem offices opened in 1995.

Net earnings related to StarMed were $271,000 for 1996, as compared to a net
loss of $103,000 for 1995.

Net loss related to the Company's discontinued maternity apparel subsidiary
was $2,453,000 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of 1998, the Company's primary source of cash flow
was from reductions in the Company's cash balances of $10,166,000 and
borrowings under the Company's line of credit of $2,847,000. The primary use
of cash was the repayment of principal amount of capital lease obligations and
notes and mortgages payable of $4,316,000, and repurchase of Common Stock
subject to redemption as a result of the exercise of puts provided by the
Company in connection with 1997 acquisitions of $2,547,000. Operating
activities resulted in a net use of cash of $5,025,000 during the first
quarter of 1998 due primarily to increases in accounts receivable.

During 1997, the Company's primary source of cash flow was from financing
activities, largely as a result of net proceeds from the Senior Notes of
$76,523,000, net proceeds from the issuance of convertible preferred stock of
$16,965,000, and other financing activities. The primary use of cash was to
fund acquisitions which totaled $73,121,000 and to fund the repayment of
certain notes and capital lease obligations of $13,764,000.

26
<PAGE>

Operating activities resulted in a net use of cash of $5,322,000 during 1997
due primarily to increases in accounts receivable.

Net cash provided by operating activities for 1996 and 1995 was $1,450,000
and $2,335,000, respectively, representing a decrease of $885,000 in 1996. The
decrease was due primarily to a large increase in accounts receivable and
certain other assets which relate primarily to the Company's expansion
activities offset by increases in net income, non-cash charges and other
liabilities. In 1996, net cash used in investing activities totaled
$16,703,000 which includes (i) $8,569,000 expended for the purchase of
diagnostic imaging centers, offset by $2,157,000 of cash acquired in the
acquisition of NMR, (ii) $2,314,000 for the purchase of Per Diem staffing
businesses and (iii) $184,000 for the purchase of limited partnership
interests. During 1996, the Company purchased $6,137,000 of investments,
$4,500,000 of these investments were subsequently set aside (restricted)
pursuant to the terms of a letter of credit issued in connection with an
acquisition. An additional $600,000 in cash was set aside (restricted)
pursuant to a letter of credit issued in conjunction with a consulting
agreement to which the Company is a party. The Company expended $1,070,000 in
1996 for medical diagnostic and office equipment. Financing activities
provided $27,110,000 in cash during the year ended December 31, 1996, which
consisted of net proceeds of $25,164,000 received through a public offering of
the Company's Common Stock, $6,533,000 of net proceeds from the issuance of
subordinated debentures, $1,229,000 proceeds from borrowings during the year
(used to purchase equipment for the imaging centers), $2,022,000 realized from
the exercise of stock options and warrants, offset by $7,773,000 utilized for
the repayment of debt and capital lease obligations and $64,000 used to
purchase shares of the Company's Common Stock.

The Company has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payments of such dividends is not
permitted.

In the event that the Senior Note holders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying
or consummating financing necessary to satisfy the obligations which would
become immediately due and payable. As a result of the uncertainty related to
the defaults and corresponding remedies described above, the Senior Notes and
the other loans and capital leases are shown as current liabilities on the
Company's Consolidated Balance Sheets at March 31, 1998 and December 31, 1997
and the Company has a deficit in working capital more fully described below.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. In addition to continuing to negotiate with the Senior
Note holders in an attempt to obtain waivers or amendments of the
aforementioned defaults, the Company has taken various actions in response to
this situation, including the following: (i) it effected a workforce reduction
in March 1998 aimed at reducing the Company's overall expense levels, and (ii)
it has retained the investment banking firm of SBC Warburg Dillon Read to
assist the Company in the sale of the Company's StarMed temporary staffing
subsidiary. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. (NASDAQ:RHBC) for $33 million (the "StarMed Sale"). The financial
statements do not include any further adjustments reflecting the possible
future effects on the recoverability and classification of assets or the
amount and classification of liabilities that may result from the outcome of
this uncertainty.

27
<PAGE>

The Company has a working capital deficit of $59,043,000 at March 31, 1998
compared to a working capital deficit of $58,174,000 at December 31, 1997 and
a working capital surplus of $42,775,000 at December 31, 1996. The deficit at
March 31, 1998 and December 31, 1997 is primarily due to $78,000,000 of Senior
Notes due 2001 through 2005 and other debt and capital leases shown as current
liabilities as a result of financial covenant defaults under such agreements.

In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the federal securities laws. In
certain of such acquisitions, the Company has granted specific remedies to the
sellers in the event that a registration statement covering the relevant
shares is not declared effective by the SEC within an agreed-upon period of
time, including the right to require the Company to repurchase the shares
issued to such seller. In the event the Company is unable to register such
shares by the required dates, the Company would become obligated to repurchase
the shares issued in connection with such acquisition. As of June 10, 1998,
the Company had not registered any shares of Common Stock issued in connection
with the Company's 1997 acquisitions under a registration statement declared
effective by the SEC. As of March 31, 1998 and December 31, 1997, the Company
had reflected $7,187,000 and $9,734,000, respectively, of Common Stock subject
to redemption on its Consolidated Balance Sheets related to shares that the
Company is, has agreed to or may be required to repurchase. During the first
quarter of 1998, the Company paid $2,547,000 to sellers who exercised their
rights to have shares of Common Stock repurchased. Furthermore, from April 1,
1998 through May 26, 1998, the Company paid an additional $728,000 to such
sellers. In addition, the Company expects to pay an additional $5,763,000
during the remainder of 1998 ($3,695,000 of which was due and payable on June
3, 1998 (the "June 1998 Repurchase Obligation") but has not yet been paid by
the Company) in connection with the settlement of certain repurchase
obligations of the Company subject, under certain circumstances, to the
consent of the Senior Notes holders. With respect to the June 1998 Repurchase
Obligation which remains due and payable, the Company is in discussions with
the sellers to whom such obligations are owed and the Senior Note holders
regarding the timing and satisfaction of the June 1998 Repurchase Obligation.

In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay to the sellers (in
additional shares and/or cash) an amount equal to the shortfall in the value
of the issued shares in the event the market value of such shares at the
relevant effective date of the registration statement or other negotiated date
is less than the market value of such shares as of the closing of the
acquisition or, in other cases, as of the execution of the relevant
acquisition agreement (referred to as "Price Protection"). Based upon the
closing sales price of the Company's Common Stock on July 16, 1998 ($3 1/8 per
share), such shortfall would be approximately $9,441,000, which amount may be
reduced by up to $5,977,000 to the extent certain sellers exercise their
repurchase rights referred to above.

In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such
contingent consideration differ for each acquisition. In connection with
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration and in other cases the parties have
agreed that any payment of such contingent consideration may be paid in cash
or shares of Common Stock, or a combination of both.

Although the Company has the option, in certain cases, to pay certain of
such amounts in shares of Common Stock, payment of significant cash funds to
sellers in the event such remedies or earnout provisions are triggered could
have a material adverse effect on the Company's cash flow and financial
condition. In addition, the Company may be required to finance all or a
portion of any such cash payments from third-party sources. No assurance can
be given that such capital will be available on terms acceptable to the
Company. In addition, the issuance by the Company of shares of Common Stock in
payment of any such owed amounts could be dilutive to the Company's
stockholders.

28
<PAGE>

Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, as amended between the Company and RGC International, LDC
("RGC") (hereinafter referred to as the "RGC Agreements"), the Company issued
18,000 shares of Series C Convertible Preferred Stock, $1,000 stated value per
share (the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement on Form S-3 not
later than October 1997. As amended, the RGC Agreements provide for monthly
penalties ("RGC Registration Penalties") in the event that the Company fails
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998.

On May 14, 1998, management appeared before the Nasdaq Qualifications
Hearing Panel (the "Panel"). This hearing resulted from the Company's failure
to file timely its Form 10-K for 1997 and was held to determine if the
Company's Common Stock should continue to be listed on The Nasdaq Stock
Market. On May 29, 1998, the Company was advised that the Panel determined to
continue the listing of the Company's Common Stock on the Nasdaq Stock Market
subject to certain conditions. The Company was required to file its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 on or before June 12,
1998, which the Company was able to do, and must evidence compliance with
either Nasdaq's minimum net tangible assets test or one of Nasdaq's
alternative requirements by July 24, 1998.

Based on the closing price for the Company's Common Stock on July 16, 1998
($3 1/8) and the Company's net tangible assets as of March 31, 1998, the
Company does not currently satisfy either Nasdaq's minimum net tangible assets
requirement or one of the alternative requirements for continued listing,
which include, among other things, a minimum bid price for the Common Stock of
$5.00 per share. In order to satisfy the continued listing requirements, the
Company submitted for shareholder approval a reverse stock split in order to
meet or exceed the $5.00 minimum bid price. In the event the Company does not
satisfy either the minimum net tangible assets requirement or is unable to
meet or exceed the $5.00 per share requirement, the Panel will consider moving
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able
to demonstrate compliance with the applicable maintenance criteria. On July
23, 1998, the Company's stockholders approved a reverse stock split of the
Common Stock at the Company's 1998 Annual Meeting of Stockholders. The
Company's Board of Directors has not yet authorized any reverse stock split.
Therefore, the information in this Prospectus does not give effect to any
reverse stock split. There can be no assurance that in the future the Common
Stock will meet the continued listing requirements for The Nasdaq Stock
Market.

29
<PAGE>

The Company's sources of liquidity consist of its cash balances and its
ability to enter into operating leases to fund expansions and equipment
replacement at its centers. At March 31, 1998 and May 29, 1998, the Company's
cash and cash equivalents were $13,032,000 and $10,711,000 respectively. In
addition, in March of 1998, the Company announced its intention to explore
strategic alternatives for (and the possible sale of) its StarMed temporary
staffing subsidiary, which the Company expects may result in cash proceeds to
Medical Resources, Inc. Assuming that the Company (i) reaches satisfactory
resolution with the Senior Note lenders regarding the financial covenant
defaults, and (ii) sells its Temporary Staffing and Per Diem business over the
next several months (see discussion below), while no assurance can be given,
the Company believes that it will have sufficient funds available to finance
its working capital requirements through 1998.

SALE OF STARMED

On July 8, 1998, the Company entered into a definitive agreement to sell the
StarMed business, in the form of a stock sale, to RehabCare Group, Inc.
(NASDAQ:RHBC) for $33 million (the "StarMed Sale"). Closing of the StarMed
Sale, which is subject to the satisfaction of customary conditions and
approval by the Company's Senior Note holders, is expected to occur in late
July or in August of this year. Due to the pending StarMed Sale, the results
of operations of StarMed are herein reflected in the Company's Consolidated
Statements Of Operations as discontinued operations.

Net cash proceeds from the StarMed Sale at closing, before income taxes but
after estimated costs of sale and after the repayment of StarMed's outstanding
third-party debt, is expected to be approximately $19 million. Net of cash of
approximately $4 million at June 30, 1998 in the StarMed business (which will
be retained by RehabCare Group, Inc.), the StarMed Sale is expected to
increase the Company's consolidated cash balance at closing by approximately
$15 million. $2 million of the $33 million sales price will be placed in
escrow at closing to be available, for a specified period of time, to offset
indemnification obligations that may be incurred by the Company; subject to
actual claims experience, part or all of this amount will be payable to the
Company over time as additional cash proceeds. For accounting purposes, a
pretax gain from the StarMed Sale of approximately $5 million is expected to
be reported in the third quarter of 1998.

SEASONALITY AND INFLATION

The Company believes that its imaging business is generally unaffected by
seasonality. The Company's temporary staffing business usually experiences
lower revenues during the third quarter due to reduced activity during the
summer months.

The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Management is aware
of general inflationary expectations and growing health care cost containment
pressures, and believes that the Company may not be able to raise the prices
for its diagnostic imaging procedures by an amount sufficient to offset such
negative effects. While the Company has responded to these concerns in the
past by increasing the volume of its business there can be no assurance that
the Company will be able to increase its volume of business in the future. In
addition, current discussions within the Federal Government regarding national
health care reform are emphasizing containment of health care costs as well as
expansion of the number of eligible parties. The implementation of this reform
could have a material effect on the financial results of the Company.

IMPACT OF YEAR 2000 ON COMPANY'S COMPUTER SOFTWARE

The Computer programming code utilized in the Company's financial, billing
and imaging equipment systems were generally written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognizes a date using 00's as the year
1900 rather than the year 2000. This could cause a system failure or
miscalculations resulting in disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities.

30
<PAGE>

The Company has completed an assessment of its material financial and
billing computer systems. The Company is in the process of upgrading these
systems to be Year 2000 compliant and expects to complete this process by late
1998 to early 1999. The cost to be incurred related to Year 2000 compliance
for these systems is currently not expected to be material.

The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has also initiated a program to determine whether
embedded applications that control certain medical and other equipment will be
affected. The Company has not yet completed these reviews. The nature of the
Company's business is such that any failure to these types of applications may
have a material adverse effect on its business.

Because of the many uncertainties associated with Year 2000 compliance
issues, and because the Company's assessment is necessarily based on
information from third party-vendors, payors and suppliers, there can be no
assurance that the Company's assessment is correct or as to the materiality or
effect of any failure of such assessment to be correct.

Software sold by the Company's wholly-owned subsidiary, Dalcon Technologies,
Inc., is expected to be fully year 2000 compliant in connection with the
annual upgrade planned for late 1998.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS No. 130, "Reporting Comprehensive Income", requires an entity to report
comprehensive income and its components for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting
disclosures, but will have no impact on the Company's financial position or
results of operations.

Statement Of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", requires an entity to expense all
software development costs incurred in the preliminary project state training
costs and data conversion costs for fiscal years beginning after December 15,
1998. The Company believes that this statement will not have a material effect
on the Company's accounting for computer software acquisition cost.

Statement Of Position 97-2, "Consolidation of Physicians' Practice
Entities", requires an entity to consolidate Physicians' Practice Entities in
circumstances in which substantial control is exercised by the Company. The
Company believes that this statement will not have a material effect on the
Company's financial position or results of operations.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements contained in this Prospectus that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results may differ
materially from that projected or suggested herein due to certain risks and
uncertainties including, without limitation: the ability of the Company to
effectively integrate the operations and information systems of businesses
acquired in 1997 and earlier; the ability of the Company to generate net
positive cash flows from operations; the payment timing and ultimate
collectibility of accounts receivable (including purchased accounts
receivable) from different payor groups (including Personal Injury-type); the
economic impact of involuntary share repurchases and other payments (including
price protection payments and penalty payments) caused by the delay in the
effectiveness of the Company's Registration Statement of which this Prospectus
is a part and by the recent decline in the Company's share price; the ability
of the Company to cure any defaults under its debt agreements and/or other
obligations, in general, and in a manner that avoids significant common stock
dilution; the impact of a changing and increasing mix of managed care and
personal injury claim business on contractual allowance provisions, net
revenues and bad debt provisions; the ultimate economic impact of recent
litigation including shareholder and former management lawsuits against the
Company and certain of its Directors; the availability of debt and/or equity
capital, on reasonable terms, to finance operations as needed and to finance
growth; and the effects of federal and state laws and regulations on the
Company's business over time. Additional information concerning certain risks
and uncertainties that could cause actual results to differ materially from
that projected or suggested may be identified from time to time in the
Company's Securities and Exchange Commission filings and the Company's public
announcements.

31
<PAGE>

BUSINESS

GENERAL

Medical Resources, Inc. ("Medical Resources" and collectively with its
subsidiaries, affiliated partnerships and joint ventures, the "Company")
specializes in the operation and management of fixed-site outpatient
diagnostic imaging centers, and also provides temporary healthcare staffing
services to acute and sub-acute care facilities. Through its Diagnostic
Imaging division, the Company currently operates 98 outpatient diagnostic
imaging centers located in the Northeast (58), Southeast (24), the Midwest
(11) and California (5), and provides network management services to managed
care organizations. The Company has grown rapidly and has increased the number
of diagnostic imaging centers it operates from 39 at December 31, 1996 to 98
at May 26, 1998. The Company, through its wholly-owned subsidiary, Dalcon
Technologies, Inc. ("Dalcon"), also develops and markets software products and
systems for the diagnostic imaging industry.

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. (NASDAQ:RHBC) for $33 million (the "StarMed Sale"). Closing of the
StarMed Sale, which is subject to the satisfaction of customary conditions and
approval by the Company's Senior Note holders, is expected to occur in late
July or in August of this year. Due to the pending StarMed Sale, the results
of operations of StarMed are herein reflected in the Company's Consolidated
Statements Of Operations as discontinued operations.

Diagnostic Imaging Division. The Company's diagnostic imaging centers
provide diagnostic imaging services in a comfortable, service-oriented
outpatient environment to patients referred by physicians. At each of its
centers, the Company provides management, administrative, marketing and
technical services, as well as equipment, technologists and facilities, to
physicians who interpret scans performed on patients. Medical services at the
Company's imaging centers are provided by board certified interpreting
physicians, generally radiologists, with whom the Company enters into
contracts. Of the Company's 98 centers, 84 provide magnetic resonance imaging.
Many of the Company's centers also provide some or all of the following
services: computerized tomography, ultrasound, nuclear medicine, general
radiology, fluoroscopy and mammography.

The Company's goal is to become the leading operator of fixed-site
outpatient diagnostic imaging centers in the United States. The number of
outpatient diagnostic imaging centers in the United States is estimated to
have grown from approximately 700 in 1984 to approximately 2,500 as of
December 31, 1997. Ownership of fixed-site outpatient diagnostic imaging
centers is highly fragmented, with no dominant national provider. The Company
believes that the environment faced by diagnostic imaging center operators is
characterized by an increased influence of managed care organizations, rising
business complexity, growing control over patient flows by payors, and
continued overall reimbursement pressures, all of which have been and will
continue to require center owners to seek operational efficiencies. In
addition, the Company believes that public and private reforms in the
healthcare industry emphasizing cost containment and accountability will
continue to shift the delivery of imaging services from highly fragmented,
individual or small center operators to companies operating larger multi-
modality networks of centers.

The Company intends, over time, to capitalize on the fragmented nature of
the diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy has also been to seek to expand the scope and
efficiency of its operations at its existing and acquired facilities by: (i)
leveraging the geographic concentration of its centers; (ii) expanding the
imaging services offered by its centers by upgrading existing technology and
adding new modalities; (iii) applying sophisticated operating, financial and
information systems and procedures; (iv) utilizing targeted local marketing
programs; and (v) developing its network management services to address more
fully the needs of managed care organizations.

Dalcon is a developer and provider of software system applications to
diagnostic imaging center operators. Through its proprietary radiology
information system, ICIS, Dalcon provides the Company's imaging centers, as
well as imaging centers owned and/or operated by third-parties, with
information system development, service

32
<PAGE>

and support specifically designed for the administration and operation of
imaging centers, including patient scheduling, registration, transcription,
film tracking, billing, and insurance claim processing. The Company purchased
Dalcon in September 1997. As of June 1998, the substantial majority of the
Company's imaging centers had been fully integrated and operating on Dalcon's
ICIS system. In addition, in February 1998, Dalcon entered into a multi-year
agreement with HealthSouth Corporation, pursuant to which Dalcon is to install
its ICIS information system at all of HealthSouth's imaging centers not
currently using it.

Per Diem and Travel Nursing Divisions. The Company's temporary staffing
business, StarMed, was founded in 1978 and acquired by the Company in August
1994. StarMed's Per Diem staffing division provides registered nurses,
licensed practical nurses, nursing assistants, therapists and medical
transcriptionists on a daily basis to healthcare facilities through 35 offices
located in 16 states as of March 31, 1998. StarMed's Travel Nursing division
is operated from a central office in Clearwater, Florida and provides
registered nurses and operating room technicians for periods usually ranging
from 8 to 26 weeks. StarMed commenced its Per Diem operations in March 1995
and, since that time, it has opened 31 offices, acquired 4 staffing companies
operating six additional offices and consolidated the operations of two other
offices. The Company's growth strategy for its temporary staffing business
includes offering new services to clients, expanding the number of markets
served by StarMed's Per Diem division and acquiring other companies in the
temporary healthcare staffing industry in selected markets. Due to the pending
StarMed Sale, the results of operations of StarMed are herein reflected in the
Company's Consolidated Statements of Operations as discontinued operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Discontinued Operations."

Medical Resources was incorporated in Delaware in August 1990 and has its
principal executive office at 155 State Street, Hackensack, New Jersey 07601,
telephone number (201) 488-6230. Prior to the Company's incorporation, the
Company's operations, which commenced in 1979, were conducted by corporations
which are now among its subsidiaries.

DIAGNOSTIC IMAGING SERVICES INDUSTRY

OVERVIEW

Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as Magnetic Resonance Imaging ("MR"),
Computerized Tomography ("CT"), Ultrasound, Nuclear Medicine, Mammography and
X-ray in an outpatient setting. Diagnostic imaging procedures are used to
diagnose diseases and physical injuries through the use of various imaging
modalities. The use of non-invasive diagnostic imaging has grown rapidly in
recent years because it allows physicians to diagnose quickly and accurately a
wide variety of diseases and injuries without exploratory surgery or other
invasive procedures, which are usually more expensive, risky and potentially
debilitating for patients. In addition, diagnostic imaging is increasingly
being used as a screening tool for preventative care. While conventional X-ray
continues to be the primary imaging modality based on the number of procedures
performed, the use of MR and CT procedures has increased due to their more
sophisticated diagnostic capabilities. The Company believes that utilization
will continue to increase because of the growth in demand for diagnostic
imaging services as well as the introduction of new diagnostic imaging
procedures involving new or existing modalities.

EQUIPMENT AND MODALITIES

Diagnostic imaging systems are generally based on the ability of energy
waves to penetrate human tissue and generate images of the body which can be
displayed either on film or on a video monitor. Imaging systems have evolved
from conventional x-rays to the advanced technologies of MR, CT, Ultrasound,
Nuclear Medicine and Mammography. The principal diagnostic imaging modalities
used by the Company include the following:

Magnetic Resonance Imaging. MR is a sophisticated diagnostic imaging system
that utilizes a strong magnetic field in conjunction with low energy
electromagnetic waves which are processed by a computer to produce high
resolution images of body tissue. A principal element of MR imaging is that
the atoms in various

33
<PAGE>

kinds of body tissue behave differently in response to a magnetic field,
enabling the differentiation of internal organs and normal and diseased
tissue. Unlike CT and X-rays, MR does not utilize ionizing radiation which can
cause tissue damage in high doses. As with other diagnostic imaging
technologies, MR is generally non-invasive.

Computerized Tomography. CT is used to detect tumors and other conditions
affecting bones and internal organs. CT provides higher resolution images than
conventional X-rays. In a CT, a computer directs the movement of an X-ray tube
to produce multi-cross sectional images of a particular organ or area of the
body.

Ultrasound. Ultrasound has widespread application, particularly for
procedures in obstetrics, gynecology and cardiology. Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images of
internal organs and the vascular system. A computer processes sound waves as
they are reflected by body tissue, providing an image that may be viewed
immediately on a computer screen or recorded continuously or in single images
for further interpretation.

Nuclear Medicine. Nuclear medicine is used primarily to study anatomic and
metabolic functions. During a nuclear medicine procedure, short lived
radioactive isotopes are administered to the patient by ingestion or
injection. The isotopes release small amounts of radioactivity that can be
recorded by a gamma camera and processed by a computer to produce an image of
various anatomical structures.

General Radiology and Fluoroscopy (X-ray). The most frequently used type of
imaging equipment in radiology utilizes "X-rays" or ionizing radiation to
penetrate the body and record images on film. Fluoroscopy uses a video viewing
system for real time monitoring of the organs being visualized.

Mammography. Mammography is a specialized form of radiology equipment using
low dosage X-rays to visualize breast tissue. It is the primary screening tool
for breast cancer.

IMAGING CENTER LOCATION AND OWNERSHIP STRUCTURE

The following table sets forth certain information concerning the imaging
centers operated by the Company. Imaging centers that are not 100% owned by
the Company, through a wholly-owned subsidiary, are typically owned by limited
partnership or other business entities in which a subsidiary of the Company is
the sole general partner or manager. The equity ownership interest shown
includes general and limited partnership interests or other equity interests
owned by the Company. For the centers not wholly owned by the Company, the
Company is generally paid a management fee based on services provided under
management agreements with the imaging center's ownership entity.

<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
Northeast Region(58)
Englewood, NJ...... Englewood Imaging Center December 1979 100% MR, CT, US, R, F, M
MRImaging of South
Marlton, NJ........ Jersey July 1984 91.0% MR
Union, NJ.......... Open MRI of Union August 1984 79.7% MR
Morristown, NJ..... MRImaging of Morristown December 1984 94.2% MR
Philadelphia, PA... Academy Imaging Center January 1986 97.7% MR, CT, US, NM, R, F, M
MRImaging of Lehigh
Allentown, PA...... Valley May 1986 95.9% MR
Clifton Medical Imaging
Clifton, NJ........ Center June 1987 100% MR, CT, US, NM, R, F, M
Yonkers, NY........ Inter-County Imaging September 1987 65.0% MR, CT, US, R, F, M
West Orange, NJ(4). Northfield Imaging January 1991 100% MR, CT, US, NM, R, F, M
Bel Air, MD........ Colonnade Imaging Center November 1991 62.9% MR, CT, US, NM, R, F, M
M.R. Institute at
Jersey City, NJ.... Midtown July 1992 100% MR
Advanced MRA Imaging
Brooklyn, NY....... Associates January 1993 100% MR, CT, US, NM, R, F, M
Seabrook Radiological
Seabrook, MD....... Center April 1995 87.1% MR, CT
Hackensack Diagnostic
Hackensack, NJ..... Imaging June 1995 100% MR, CT, US, R, F, M
Westchester Square
Bronx, NY.......... Imaging January 1996 100% MR, CT
MRI-CT Scanning of
New York, NY....... Manhattan January 1996 100% MR, CT, US, R, M
Centereach, NY..... Open MRI of Centereach July 1996 100% MR
Garden City, NY.... Open MRI at Garden City November 1996 100% MR
East Setauket, NY.. Open MRI at Smith Haven November 1996 100% MR
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
Imaging Center of the
Newark, NJ............ Ironbound December 1996 100% MR
The MRI Center at
North Bergen, NJ...... Palisades March 1997 9.0% MR
West Hudson MRI
Kearny, NJ............ Associates March 1997 25.0% MR
Cranford Diagnostic
Cranford, NJ.......... Imaging March 1997 75.0% MR, CT, US, M
Montvale, NJ.......... Montvale Medical Imaging March 1997 13.8% MR, CT, US, R, F, M
Randolph, NJ.......... Morris-Sussex MRI March 1997 20.0% MR
Advantage Imaging at
Totowa, NJ............ Totowa Road March 1997 15.0% MR
Dedham, MA............ MRI of Dedham March 1997 35.0% MR
Seekonk, MA........... RI-MASS MRI March 1997 5.0% MR
Chelmsford, MA........ MRI of Chelmsford March 1997 65.0% MR
Parlin Diagnostic
Parlin, NJ............ Imaging May 1997 100% CT, US, R, F, M
Vineland, NJ.......... South Jersey MRI May 1997 100% MR
Baltimore, MD......... Baltimore Open MRI May 1997 100% MR
Accessible MRI of
Silver Springs, MD.... Montgomery Cty May 1997 100% MR
Accessible MRI of
Towson, MD............ Baltimore County May 1997 100% MR, CT
Trevose, PA........... Bensalem Open MRI May 1997 100% MR
Philadelphia, PA...... Callowhill Open MRI May 1997 100% MR
Broomall, PA.......... Mainline Open MRI May 1997 100% MR
Oxford Valley Diagnostic
Langhorn, PA.......... Center May 1997 100% MR, CT, US, NM, R, F, M
Springfield Diagnostic
Springfield, PA....... Imaging Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA...... Lansdowne Medical Center May 1997 100% R
Havertown, PA......... Manoa Radiology May 1997 100% CT, US, NM, R, F, M
Havertown, PA......... Haverford MRI May 1997 100% MR
Lawrence Park Radiology
Broomall, PA.......... Center May 1997 100% R
Havertown, PA......... Pick & Levine Radiology May 1997 100% US, R, F, MM
Philadelphia, PA...... Northeast Imaging May 1997 100% MR, CT, US, NM, R, F, M
South Philadelphia
Philadelphia, PA...... Radiology Center May 1997 100% MR, CT, US, NM, R, F, M
Philadelphia, PA...... Union Health Radiology May 1997 100% R, M
Philadelphia, PA...... Juaniata Park May 1997 100% R
Albany, NY............ Albany Open MRI May 1997 100% MR
Syracuse, NY.......... Syracuse Open MRI May 1997 100% MR
Brooklyn Medical Imaging
Brooklyn, NY--Ave P... Center June 1997 100% MR, CT, US, NM, R, F, M
Brooklyn Medical Imaging
Brooklyn, NY--Midwood. Center June 1997 100% US, R, F, M
Meadows Mid-Queens
Flushing, NY.......... Imaging Center June 1997 100% MR, CT, US, R, M
Staten Island Medical
Staten Island, NY..... Imaging Center June 1997 100% MR, CT
Bronx, NY............. MRI of the Bronx September 1997 100% MR, CT
Flushing, NY.......... MRI of Queens September 1997 100% MR
Philadelphia, PA...... Germantown MRI Center September 1997 100% MR
Philadelphia, PA...... Diamond Radiology September 1997 100% R
Southeast(24)
Magnetic Resonance
St. Petersburg, FL.... Associates July 1984 80.2% MR
Naples, FL............ Gulf Coast MRI June 1993 100% MR
Fort Myers, FL........ Fort Myers MRI Central May 1995 100% MR, CT
Fort Myers, FL........ Fort Myers MRI South May 1995 100% MR
Cape Coral, FL........ Cape Coral MRI September 1996 100% MR
Naples, FL............ Naples MRI September 1996 100% MR
Titusville, FL........ MRI of North Brevard September 1996 100% MR
Sarasota, FL.......... Sarasota Outpatient MRI
& Diagnostic Center September 1996 100% MR, CT
Tampa, FL............. Americare MRI May 1996 100% MR
Tampa, FL............. Americare Imaging May 1996 100% CT, US, R, F, M
Clearwater, FL........ Access Imaging May 1996 100% MR, CT
Melbourne, FL......... South Brevard Imaging January 1997 100% MR
MRI Center of
Jacksonville, FL...... Jacksonville February 1997 100% MR
West Palm Beach, FL... The Magnet of Palm Beach March 1997 100% MR, CT, US, NM, R, F, M
Monticello, AR(5)..... Monticello Center May 1997 (5) R
Ocala, FL(5).......... Ocala Center May 1997 (5) R
Miami, FL............. Coral Way MRI August 1997 100% MR
Sarasota, FL.......... Gulf Side Open MRI August 1997 100% MR
Jupiter, FL........... MRI of Jupiter August 1997 100% MR, R
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
OPERATED
LOCATION NAME SINCE (1) OWNERSHIP(2) MODALITIES(3)
-------- ---- -------------- ------------ -----------------------
<C> <S> <C> <C> <C>
Magnetic Imaging Center
Bradenton, FL........ of Manatee August 1997 100% MR
Open MRI of South
Hollywood, FL........ Florida August 1997 100% MR
Tampa, FL............ Northside Imaging &
Breast Care Center August 1997 100% MR
Venice Imaging & MRI
Venice, FL........... Center August 1997 100% MR, CT, US, R, F, M
The MRI Center of
Port Charlotte, FL... Charlotte County September 1997 100% MR
Midwest(11)
Chicago, IL.......... MRImaging of Chicago April 1987 87.2% MR
Chicago, IL.......... Open MRI of Chicago June 1992 79.6% MR, CT, US, NM, R, F, M
Oak Lawn MR & Imaging
Oak Lawn, IL......... Center January 1994 100% MR, CT, US, R, F, M
Des Plaines, IL...... Golf MRI & Diagnostic
Imaging Center January 1995 75.0% MR, CT, US, NM, R, F, M
Libertyville Imaging
Libertyville, IL..... Center January 1995 100% MR
Central Diversey Imaging
Chicago, IL.......... Center January 1996 100% MR
Centerville, OH...... Dayton Open MRI May 1997 100% MR
Advanced
Warren, OH........... Radiology/Access MRI October 1997 100% MR, CT, US, R, F, M
Austintown, OH....... Austintown X-Ray October 1997 100% CT, US, R, F, M
Boardman, OH......... Boardman X-Ray/MRI October 1997 100% MR, CT, US, R, F, M
Western Reserve Imaging
Youngstown, OH....... Center October 1997 100% CT, US, R, F, M
California(5)
Long Beach, CA....... Pacific MRI January 1997 100% MR
OceanView Radiology
San Clemente, CA..... Center January 1997 100% MR, CT, US, R, F, M
Rancho Cucamonga, CA. Grove Diagnostic Imaging March 1997 100% MR, CT, US, NM, R, F, M
Diagnostic Imaging
San Jose, CA......... Network August 1997 51% MR, CT, US, NM, R, F, M
San Jose, CA......... O'Connor MRI August 1997 60% MR, CT
</TABLE>
- - --------
(1) Operated by the Company or NMR of America, Inc. since such date.
(2) Represents the Company's ownership interest in the respective centers.
(3) Modalities are magnetic resonance imaging (MR), computerized tomography
(CT), ultrasound (US), nuclear medicine (NM), radiology (R), fluorscopy
(F) and mammography (M).
(4) Includes the operation of the Livingston Breast Care mammography unit
which is located at the Northfield Imaging Center.
(5) The Company manages the operations of a radiology facility under the terms
of a management agreement.

Where it deems it economically attractive, the Company may further increase
its ownership of its non-wholly-owned centers by acquiring additional minority
interests in such centers, but there can be no assurance that the Company will
be successful in so doing. The Company has also added new imaging equipment
modalities to certain centers and plans to continue this strategy in those
situations where the Company believes that such additions are economically
justified.

Each center consists of a waiting/reception area and one room per modality,
dressing rooms, billing/administration rooms and radiologist interpreting
rooms. The size of the Company's centers generally ranges from 1,500 to 11,400
square feet.

GROWTH STRATEGY AT EXISTING AND ACQUIRED CENTERS

Leveraging Geographic Concentration. The Company has developed clusters of
imaging centers in certain geographic areas that enable it to improve the
utilization of its centers by attracting business from larger referral
sources, such as managed care organizations, due to the Company's ability to
meet the quality, volume and geographical coverage requirements of these
payors. The Company intends, over time, to increase its center concentration
in existing markets to attract additional referrals of this type and to expand
into new geographic areas, through acquisitions, in order to attract
additional managed care and other contracts.

Expanding Imaging Services Offered. The Company expands the imaging services
it offers by upgrading existing technology and adding new modalities at
selected centers. In 1997 and to date in 1998, the Company upgraded technology
and expanded service modalities at 15 centers. The Company's imaging centers
utilize state

36
<PAGE>

of the art imaging equipment for which new applications are continually being
developed. New developments and system upgrades frequently have the ancillary
benefit of reducing imaging time and thus increasing capacity of the centers'
imaging equipment. The development and improvement of diagnostic quality
"open" MR systems have expanded the public acceptance and potential market for
MR imaging services. The Company currently operates 32 centers that provide MR
imaging services using "open" systems and the Company plans to expand this
coverage in markets where it believes such expansion is economically
justified.

Apply Sophisticated Operating, Financial and Information Systems and
Procedures. The Company provides management expertise, financial and operating
controls, and capital resources to its centers in an attempt to optimize their
performance. The financial systems and operating procedures of acquired
centers are, over time, integrated with those of the Company. In that regard,
as of June 1998 the Company completed the installation of the ICIS system
developed by Dalcon in substantially all of its centers. The ICIS system will
enable the Company to standardize reporting of each center and provide
management with on- line access to its centers nationwide. In addition, the
Company is able to achieve economies of scale and provide cost savings in
developing managed care contracts and negotiating group purchasing of goods
and services.

Utilize Targeted Localized Marketing. The Company develops and coordinates
marketing programs which center managers, sales representatives and affiliated
interpreting physicians utilize to establish referral relationships and to
maximize facility usage and reimbursement yield. The Company's marketing
programs emphasize the capabilities of its imaging equipment, the quality and
timeliness of the imaging results and reports, and the high level of patient
and referring physician service.

Develop Network Management Services. The Company plans to develop and expand
further its network management services business. As a network manager, the
Company enters into contracts with managed care organizations to coordinate
the demand for imaging services and to provide certain administrative
functions related to the delivery of such services. The Company includes
certain of its centers in these networks and believes that the inclusion of
these centers in the networks will increase their utilization. In addition,
the Company believes that its network management services enhance its
relationships with managed care organizations and its ability to enter into
additional contracts with such entities.

CENTER OPERATIONS AND IMAGING SERVICES PROVIDED BY THE COMPANY

General. The Company's diagnostic imaging centers provide diagnostic imaging
services in a comfortable, service-oriented environment located mainly in an
outpatient setting to patients referred by physicians. Of the Company's 98
centers, 84 provide magnetic resonance imaging, which accounts for a majority
of the Company's diagnostic imaging revenues. Many of the Company's centers
also provide some or all of the following services: Computerized Tomography,
Ultrasound, Nuclear Medicine, General Radiology and Fluoroscopy and
Mammography.

Interpreting Physician Arrangements. At each of the Company's centers, all
medical services are performed exclusively by physician groups (the "Physician
Group" or the "Interpreting Physician"), generally consisting of radiologists,
with whom the Company enters into independent contractor agreements. Pursuant
to these agreements, the Company, among other duties, provides to the
Physician Group the diagnostic imaging facility and equipment, performs all
marketing and administrative functions at the centers and is responsible for
the maintenance and servicing of the equipment and leasehold improvements. The
Physician Group is solely responsible for, and has complete and exclusive
control over, all medical and professional services performed at the centers,
including, most importantly, the interpretation of diagnostic images, as well
as the supervision of technicians, and medical-related quality assurance and
communications with referring physicians.

Insofar as the Physician Group has complete and exclusive control over the
medical services performed at the centers, including the manner in which
medical services are performed, the assignment of individual physicians to
center duties and the hours that physicians are to be present at the center,
the Company believes

37
<PAGE>

that the Interpreting Physicians who perform medical services at the centers
are independent contractors. In addition, Physician Groups that furnish
professional services at the centers generally have their own medical
practices and, in most instances, perform medical services at non-Company
related facilities. The Company's employees do not perform professional
medical services at the centers. Consequently, the Company believes that it
does not engage in the practice of medicine in jurisdictions that prohibit or
limit the corporate practice of medicine. The Company performs only
administrative and technical services and does not exercise any control over
the practice of medicine by physicians at the centers or employ physicians to
provide medical services. The Company is aware of three Interpreting
Physicians who own a nominal percentage of three limited partnerships that are
managed and partially owned by the Company.

As part of its administrative responsibilities under the terms of the
Interpreting Physician agreements, the Company is responsible for the
administrative aspects of billing and collection functions at the centers.
Certain third-party payor sources, such as Medicare, insurance companies and
managed care organizations, require that they receive a single or "global"
billing statement for the imaging services provided at the Company's centers.
Consequently, billing is done in the name of the Physician Group because such
billings include a medical component. The Physician Group grants a power of
attorney to the Company authorizing the Company to establish bank accounts
using the Physician Group's name related to that center's collection
activities and to access such accounts. In states where permitted by law, such
as Florida, the Company generally renders bills in the center's name. In such
circumstances, the Physician Group has no access to associated collections.

The Company recognizes revenue under its agreements with Interpreting
Physicians in one of three ways: (I) the Company receives a technical fee for
each diagnostic imaging procedure performed at the center, the amount of which
is fixed based upon the type of the procedure performed; (II) the Company pays
the Interpreting Physicians a fixed percentage of fees collected at the
center, or a contractually fixed amount based upon the specific diagnostic
imaging procedures performed; or, (III) the Company receives from an
affiliated physician association a fee for the use of the premises, a fee per
procedure for acting as billing and collection agent for the affiliated
physician association and for administrative and technical services performed
at the centers and the affiliated physician association pays the Physician
Group based upon a percentage of the cash collected at the center. All of such
amounts and the basis for payments are negotiated between the Physician Group
and the Company.

The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of the gross billings net of contractual allowances for the imaging
services provided, range from 78% to 93% for the agreements described in item
(I), 80% to 93% for the agreements described in item (II) and 80% to 89% for
the agreements described in item (III). The agreements generally have terms
ranging from one to ten years. For additional information pertaining to the
Company's arrangements with Interpreting Physicians, see Note 1 to the
Company's Consolidated Financial Statements--Revenue Recognition.

Sales And Marketing. The Company develops and coordinates marketing programs
which center managers, sales representatives, affiliated Interpreting
Physicians and corporate managers utilize in an effort to establish and
maintain profitable referring physician relationships and to maximize
reimbursement yields. These marketing programs identify and target selected
market segments consisting of area physicians with certain desirable medical
specialties and reimbursement yields. Corporate and center managers determine
these market segments based upon an analysis of competition, imaging demand,
medical specialty and/or payor mix of each referral from the local market. The
Company also directs marketing efforts at managed care organizations.

Managed care organizations are becoming an increasingly important factor in
the diagnostic imaging industry, and, consequently, the Company places major
emphasis on cultivating and developing relationships with such organizations.
The Company employs industry professionals who have significant experience in
dealing with managed care and other providers. The Company believes that the
geographic concentration of its centers, the presence of multi-modality
centers in all of its regions, its ability to offer cost effective services
and

38
<PAGE>

its experience in developing relationships with various managed care
organizations will constitute a competitive advantage with managed care
organizations.

Personal Injury Revenue. A significant percentage of the Company's net
service revenues from imaging centers is derived by providing imaging services
to individuals involved in personal injury claims, mainly involving automobile
accidents. Imaging revenue derived from personal injury claims, mainly
involving automobile accidents, represented approximately 24% of the
Diagnostic Imaging business net service revenues for 1997. Due to the greater
complexity in processing receivables relating to personal injury claims with
automobile insurance carriers (including dependency on the outcome of
settlements or judgements for collections directly from such individuals),
such receivables typically require a longer period of time to collect,
compared to the Company's other receivables and, in the experience of the
Company, incur a higher bad debt expense.

While the collection process employed by the Company varies from
jurisdiction to jurisdiction, the processing of a typical personal injury
claim generally commences with the Company obtaining and verifying automobile,
primary health and secondary health insurance information at the time services
are rendered. The Company then generates and sends a bill to the automobile
insurance carrier, which under state law, typically has an extended period of
time (usually up to 105 days) to accept or reject a claim. The amount of
documentation required by the automobile insurance carriers to support a claim
is substantially in excess of what most other payors require and carriers
frequently request additional information after the initial submission of a
claim. If the individual is subject to a co-payment or deductible under the
automobile insurance policy or has no automobile insurance coverage, the
Company generally will bill the individual's primary and secondary health
policies for the uncovered balance. The automobile insurance carrier may
reject coverage or fail to accept a claim within the statutory time limit on
the basis of, among other reasons, the failure to provide complete
documentation. In such circumstances, the Company may pursue arbitration,
which typically takes up to 90 days for a judgment, to collect from the
carrier.

The Company will then pursue collection of the remaining receivable from the
individual. Although the Company attempts to bill promptly after providing
services and typically requests payment upon receipt of invoice, the Company
generally defers aggressive collection efforts for the remaining balance until
the individual's claim is resolved in court, which frequently takes longer
than a year and may take as long as two or three years. Consequently, the
Company's practice is to attempt to obtain a written assurance from the
individual and the individual's legal counsel, under which the individual
confirms in writing his or her obligation to pay the outstanding balance
regardless of the outcome of any settlement or judgment of the claim. If the
settlement or judgment proceeds received by the individual are insufficient to
cover the individual's obligation to the Company, and the individual does not
otherwise satisfy his or her liability to the Company, the Company either (i)
accepts a reduced amount in full satisfaction of the individual's outstanding
obligation, or (ii) commences collection proceedings, which may ultimately
result in the Company taking legal action to enforce its collection rights
against the individual regarding all uncollected accounts. As a result of the
foregoing, the average age of receivables relating to personal injury claims
is greater than for non-personal injury claim receivables.

Managed Care Capitation Agreements. The Company has entered into a number of
"capitated contracts" with third party payors which typically provide for the
payment of a fixed fee per month on a per member basis, without regard to the
amount or scope of services rendered. Because the obligations to perform
service are not related to the payments, it is possible that either the cost
or the value of the services performed may significantly exceed the fees
received, and there may be a significant period between the time the services
are rendered and payment is received. While only approximately 2% of the
Company's 1997 net service revenues were derived from capitated contracts, and
although the Company carefully analyzes the potential risks of capitation
arrangements, there can be no assurances that any capitated contracts to which
the Company is or may in the future become a party will not generate
significant losses to the Company.

In addition, certain types of capitation agreements may be deemed a form of
risk contracting. Many states limit the extent to which any person can engage
in risk contracting, which involves the assumption of a financial risk with
respect to providing services to a patient. If the fees received by the
Company are less than the cost of

39
<PAGE>

providing the services, the Company may be deemed to be acting as a de facto
insurer. In some states, only certain entities, such as insurance companies,
HMOs and independent practice associations, are permitted to contract for the
financial risk of patient care. In such states, risk contracting in certain
cases has been deemed to be engaging in the business of insurance. The Company
believes that it is not in violation of any restrictions on risk bearing or
engaging in the business of insurance. If the Company is held to be unlawfully
engaged in the business of insurance, such finding could result in civil or
criminal penalties or require the restructuring of some or all of the
Company's operations, which could have a material adverse effect upon the
Company's business.

Billings And Collections. Under the Interpreting Physician agreements, the
Company is generally responsible for preparing and submitting bills per
imaging study performed. The preparation and submission of bills is completed
by each center, or by a regional billing office, generally on behalf of and in
the name of the appropriate Interpreting Physician. Prior to 1998, each center
was also responsible for collecting its own receivables and pursuing any
parties that were delinquent in payment of their bills. In February 1998, the
Company commenced a restructuring of its collection efforts for the purpose of
ultimately consolidating all collection activities within four or more
regional collection offices. The restructuring is in response to the need to
improve overall collection results and controls, and to better coordinate
collection efforts previously employed by individual centers (especially where
third parties had been retained to manage the center's collection efforts), as
well as the need to integrate the Company's 1997 acquisitions and to insure
consistent Company-wide collection policies and practices.

Management Information Systems. The Company acquired Dalcon in September
1997. As of June 1998, a substantial majority of the Company's imaging centers
had been fully operating on Dalcon's ICIS radiology information system. The
ICIS radiology information system is designed to, among other things, enhance
the efficiency and productivity of the Company's centers, lower operating
costs, facilitate financial controls, increase reimbursement and assist in the
analysis of sales, marketing and referral data. The ICIS system provides on-
line, real-time information, reporting and access to managers with respect to
billing, patient scheduling, marketing, sales, accounts receivable, referrals
and collections, as well as other matters.

Healthcare Reform and Cost Reduction Efforts. Third-party payors, including
Medicare, Medicaid, managed care/HMO organizations and certain commercial
payors have taken extensive steps to contain or reduce the costs of
healthcare. In certain areas, the payors are subject to regulations which
limit the amount of payments. Discussions within the Federal government
regarding national healthcare reform are emphasizing containment of healthcare
costs. In addition, certain managed care organizations have negotiated
capitated payment arrangements for imaging services. Under capitation
arrangements, diagnostic imaging service providers are compensated using a
fixed rate per member of the managed care organization regardless of the
number of procedures performed or the total cost of rendering diagnostic
services to the members. Services provided under these contracts are expected
to become an increasingly significant part of the Company's business. The
inability of the Company to properly manage the administration of capitated
contracts could materially adversely effect the Company. Although patients are
ultimately responsible for payment of services rendered, substantially all of
the Company's imaging centers' revenues are derived from third-party payors.
Successful reduction of reimbursement amounts and rates, changes in services
covered, delays or denials of reimbursement claims, negotiated or discounted
pricing and other similar measures could materially adversely affect the
Company's respective imaging centers' revenues, profitability and cash flow.

40
<PAGE>

ACQUIRED CENTERS; COMMON STOCK REPURCHASE OBLIGATIONS

Since 1996, the Company has grown by aggressively acquiring imaging centers
and integrating their operations. The Company has acquired 92 imaging centers
through 27 acquisitions since January 1, 1996. When the Company acquires an
imaging center, it generally acquires assets relating to the provision of
technical, financial, administrative and marketing services which support the
provision of medical services performed by the Interpreting Physicians. Such
assets typically include equipment, furnishings, supplies, tradenames of the
center, books and records, contractual rights with respect to leases, managed
care and other agreements and, in most instances, accounts receivable. Other
than with respect to such accounts receivable for services performed by the
acquired company, the Company does not acquire any rights with respect to or
have any direct relationship, with patients. Patients have relationships with
referral sources who are the primary or specialty care physicians for such
patients. These physicians refer their patients to diagnostic imaging centers
which may include the Company's centers where Interpreting Physicians, under
independent contractor agreements, provide professional medical services. The
Company's acquired imaging centers do not constitute either a radiology,
primary care or specialty care medical practice. In connection with an
acquisition of a center, the Company will generally enter into an agreement,
as described above, with a Physician Group to act as an independent contractor
to perform medical services at the center.

In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as consideration, the Company agreed
to register such shares for resale pursuant to the federal securities laws. In
certain of such acquisitions, the Company has granted specific remedies to the
sellers in the event that a registration statement covering the relevant
shares is not declared effective by the Securities and Exchange Commission
(the "SEC") within an agreed-upon period of time, including the right to
require the Company to repurchase the shares issued to such seller. In the
event the Company is unable to register such shares by the required dates, the
Company would become obligated to repurchase the shares issued in connection
with such acquisition. As of May 26, 1998, the Company had not registered any
shares of Common Stock issued in connection with the Company's 1997
acquisitions under a registration statement declared effective by the SEC. As
of December 31, 1997 and March 31, 1998, the Company had reflected $9,734,000
and $7,187,000, respectively, of Common Stock subject to redemption on its
Consolidated Balance Sheets related to shares that the Company may be required
to repurchase. From January 1, 1998 through May 26, 1998, the Company paid
$3,275,000 to sellers who exercised their rights to have 179,000 shares of
Common Stock repurchased. In addition, the Company expects to become obligated
to pay an additional $5,763,000 during the remainder of 1998 in connection
with the settlement of certain repurchase obligations of the Company subject
to, under certain circumstances, the consent of the Senior Note holders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay to the seller (in
additional shares and/or cash) an amount equal to the shortfall in the value
of the issued shares in the event the market value of such shares at the
relevant effective date of the registration statement or other negotiated date
is less than the market value of such shares as of the closing of the
acquisition or, in other cases, as of the execution of the relevant
acquisition agreement. Based upon the closing sales price of the Company's
Common Stock on July 16, 1998 ($3 1/8 per share), such shortfall would be
approximately $9,441,000, which amount may be reduced by up to $5,977,000 to
the extent certain sellers exercise their repurchase rights referred to above.

In connection with certain of the Company's acquisitions, the Company has
also agreed with certain sellers that all or a portion of the consideration
for such acquisitions will be paid on a contingent basis based upon the
profitability, revenues or other financial criteria of the acquired business
during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such
contingent consideration differs for each acquisition. In connection with
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration and in other cases the parties have
agreed that any payment of such contingent consideration may be paid in cash
or shares of Common Stock, or a combination of both.

41
<PAGE>

Although the Company has the option, in certain of such cases, to pay
certain of such amounts in shares of Common Stock, payment of significant cash
funds to sellers in the event such remedies or earnout provisions are
triggered could have a material adverse effect on the Company's cash flow and
financial condition. In addition, the Company may be required to finance all
or a portion of any such cash payments from third-party sources. No assurance
can be given that such capital will be available on terms acceptable to the
Company. In addition, the issuance by the Company of shares of Common Stock in
payment of any such owed amounts could be dilutive to the Company's
stockholders.

TEMPORARY HEALTHCARE STAFFING INDUSTRY

STARMED SALE

On July 8, 1998, the Company entered into a definitive agreement pursuant to
which StarMed is to be sold to RehabCare Group Inc. for $33 million.
Consummation of the StarMed Sale is expected to occur in late July or early
August 1998. As a result of the pending sale of StarMed Sale, the results of
operations of StarMed are reflected herein in the Company's Consolidated
Statements of Operations as discontinued operations.

OVERVIEW

The demand for supplemental per diem staffing services in the healthcare
market is being driven by a variety of factors in the acute and sub-acute care
segments. The increasing presence of managed care and the rapid evolution of
technology has dramatically reduced the average length of stay in acute care
hospitals. The dynamics of this reduction in length of stay has made the task
of staffing a facility difficult. Many hospitals are reducing the number of
full time staff and managing the peak periods by utilizing per diem nursing
services. The attractiveness of utilizing per diem services is the ability to
monitor and regulate expenses more closely. When a hospital adds full time
staff, it makes a commitment in salary and benefits which it can avoid with
per diem services. With the emphasis on outpatient care, the needs of the
hospital's admitted patients have increased which subsequently requires a high
level of critical care nursing skills. Due to the intense environment of
critical care units, turnover is a significant challenge for a hospital. The
ability to utilize per diem services to address the needs of these units is
becoming increasingly advantageous to hospitals. In addition, the number of
nursing home beds continues to increase each year in an attempt to meet the
needs of the country's aging population. The ability of nursing services to
recruit and place qualified nursing assistants and licensed practical nurses
in these facilities who are available on a day by day or part time basis is a
great benefit to this client base. Nursing homes, like hospitals, are
regulated on a state by state basis and are required to maintain a specific
patient to caregiver ratio. Per diem services provide experienced employees
who are productive on their first assignment, compared to new graduates who
may require extensive orientation.

The demand for travel nursing is being driven by dynamics similar to that of
the per diem market. In most cases, the client utilizes travel nurses when
they require additional personnel for an extended period of time. Examples of
this would be the opening of a new satellite facility, an information system
conversion that might divert existing hospital employees from other duties
and, in many cases, a severe local market shortage for a specific nursing
specialty. Additionally, in areas of the country that have significant
population changes tied to seasonality, such as Florida during the winter
months, the utilization of travel nurses is an economic alternative.

TEMPORARY HEALTHCARE STAFFING SERVICES PROVIDED BY STARMED

42
<PAGE>

is expected to occur in late July or in August of this year. Due to the
pending StarMed Sale, the results of operations of StarMed are herein
reflected in the Company's Consolidated Statements Of Operations as
discontinued operations.

StarMed commenced its Per Diem operations in March 1995 and, since that
time, it has opened 31 offices, acquired 4 staffing companies operating six
additional offices and consolidated the operations of two other offices. The
Company's growth strategy for its temporary staffing business includes
offering new services to clients, expanding the number of markets served by
StarMed's Per Diem division and acquiring other companies in the temporary
healthcare staffing industry in selected markets.

Clients And Marketing. StarMed has entered into agreements with client
hospitals nationwide to provide temporary staffing of healthcare personnel.
These hospitals, which are both for-profit and not-for-profit, range from
small rural hospitals to major teaching and trauma centers. StarMed's Per Diem
division markets its services primarily through its own direct sales force.

StarMed's marketing approach targets hospitals in major metropolitan areas
or other areas which are attractive from a patient census perspective as well
as to nurses and other professional medical personnel. Marketing for the
Travel Nursing division is conducted primarily by telemarketing and also by
attendance at national and regional conventions, seminars and direct
solicitations. In certain geographic markets, the Company has contracted with
a health services marketing and per diem placement firm to market its
services.

Recruitment. Temporary staff are recruited through advertising in industry
publications, job fairs, referrals and other methods. All applicants for
employment are screened to ensure they have the required practical current
experience and skills, valid licenses and positive references. StarMed
believes that temporary assignments are attractive for nurses and other
medical personnel because they provide competitive compensation, the ability
to work in various clinical environments during the course of the year and
flexible work schedules.

Upon receiving an order from a client for a travel nursing position, StarMed
utilizes a sophisticated software application program to match available
candidates to the client's order. The application program considers a number
of unique hiring criteria established by the client and also certain general
criteria established by StarMed. Suitable candidates are then presented to the
client for temporary staffing assignments.

COMPETITION

The Company's business is highly competitive. In the Company's diagnostic
imaging business, competition focuses primarily on attracting physician
referrals at the local market level and, increasingly, referrals through
relationships with managed care and physician/hospital organizations. The
Company believes that principal competitors in each of the Company's markets
are hospitals, independent or management company-owned imaging centers,
individual-owned imaging centers and mobile MR units. Many of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include quality and timeliness of test results,
ability to develop and maintain relationships with managed care organizations
and referring physicians, type and quality of equipment, facility location,
convenience of scheduling and availability of patient appointment times.
Competition for referrals can also be affected by the ownership or affiliation
of competing centers or hospitals.

GOVERNMENT REGULATION

The healthcare industry is highly regulated at the Federal, state and local
levels. The following factors affect the Company's operation and development
activities:

43
<PAGE>

Certificates Of Need, Licensing And Certification

Many of the states in which the Company currently operates or may operate
have laws that may require a certificate of need ("CON") in certain
circumstances to establish, construct, acquire or expand healthcare facilities
and services or for the purchase, expansion or replacement of major movable
equipment, including outpatient diagnosis imaging centers utilizing MR or
other major medical equipment. At the present time, the CON laws of New
Jersey, New York, Illinois, Florida, Maryland and California pertain to the
Company's activities. In states with CON programs, regulatory approvals are
frequently required for capital expenditures exceeding certain amounts, if
such expenditures relate to certain types of medical services or equipment.

State CON statutes generally provide that prior to construction of new
facilities or the introduction of new services, a state health planning agency
(a "Planning Agency") must determine that a need exists for those facilities
or services. The CON process is intended to promote comprehensive healthcare
planning, assist in providing high quality health care at the lowest possible
cost and avoid unnecessary duplication by ensuring that only those healthcare
facilities that are needed will be built.

Typically, the provider submits an application to the appropriate Planning
Agency with information concerning the geographic area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan, if applicable, and the cost per patient for the type of care
contemplated. Whether the CON is granted is based upon a finding of need by
the Planning Agency in accordance with criteria set forth in CON statutes,
applicable regulations and applicable state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be an appropriate provider, the Planning Agency will issue a CON
containing a maximum amount of expenditure and a specific time period for the
holder of the CON to implement the approved project.

The necessity for these CON approvals serves as a barrier to entry in
certain markets which the Company wishes to service and has the potential to
increase the costs and delay the Company's acquisition, addition or expansion
of centers. A CON program or similar requirement has the potential to curtail
the Company's expansion which could have a material adverse effect on the
Company's future growth.

The Company may also have to comply with Federal certification requirements.
For example, the Company's centers which provide mammography examinations must
be certified by the Federal government. Further, additional certification
requirements may affect the Company's centers, but such certification
generally will follow specific standards and requirements that are set forth
in readily available public documents. Compliance with the requirements often
is monitored by annual on site inspections by representatives of various
government agencies. The Company believes that it currently has obtained all
necessary certifications, but the failure to obtain a necessary certification
could have a material adverse effect on the Company's imaging business.

In addition to the CON programs and Federal certification described above,
the operations of outpatient imaging centers are subject to Federal and state
regulations relating to licensure, standards of testing, accreditation of
certain personnel and compliance with government reimbursement programs. The
operation of these centers requires a number of Federal and state licenses,
including licenses for personnel and certain equipment. Although the Company
believes that currently it has obtained or is in the process of obtaining all
such necessary CON approvals and licenses, the failure to obtain a required
approval could have a material adverse effect on the Company's diagnostic
imaging business. The Company believes that diagnostic testing will continue
to be subject to intense regulation at the Federal and state levels and cannot
predict the scope and effect of such regulation nor the cost to the Company of
such compliance.

44
<PAGE>

Medicare Anti-Kickback Provisions

The Federal Medicare and Medicaid Anti-Kickback Statute (the "Anti-Kickback
Statute") prohibits the offering, payment, solicitation or receipt of any form
of remuneration in return for the referral of patients covered by Medicare,
Medicaid or certain other Federal and state healthcare programs, or in return
for the purchase, lease or order or provision of any item or service that is
covered by Medicare or Medicaid or certain other Federal and state healthcare
programs. Violation of the Anti-Kickback Statute is punishable by substantial
fines, imprisonment for up to five years, or both. In addition, the Medicare
and Medicaid Patient and Program Protection Act of 1987 (the "Protection Act")
provides that persons guilty of violating the Anti-Kickback Statute may be
excluded from the Medicare or Medicaid programs. Investigations leading to
prosecutions and/or program exclusion may be conducted by the Office of
Inspector General ("OIG") of the Department of Health and Human Services
("HHS").

The OIG has issued "safe harbor" regulations which describe practices that
will not be considered violations of the Anti-Kickback Statute. The fact that
a particular arrangement does not fall within a safe harbor does not mean that
the arrangement does not comply with the Anti-Kickback Statute. The safe
harbor regulations simply provide a guarantee that qualifying arrangements do
not violate this federal law. They do not extend the scope of the statutory
prohibitions. Thus, arrangements that do not qualify for safe harbor
protection are in largely the same position as they were prior to the
promulgation of these regulations, meaning that they must be carefully
evaluated in light of the provisions of the Anti-Kickback Statute itself. To
the extent possible, the Company will structure its agreements with referral
sources, such as physicians to comply with applicable safe harbors, but there
are no assurances that it will be able to so with every contract. Further,
these safe harbor regulations have so far been relatively untested in
practice. No assurances can be given that a Federal or state agency charged
with enforcement of the Anti-Kickback Statute and similar laws might not
assert a contrary position or that new Federal or state laws or new
interpretation of existing laws might not adversely affect relationships
established by the Company with healthcare providers, including physicians, or
result in the imposition of penalties on the Company or certain of its
centers. The assertion of a violation, even if successfully defended by the
Company, could have a material adverse effect upon the Company.

Corporate Practice Of Medicine And Fee Splitting

The laws of many states prohibit unlicensed, non-physician-owned entities or
corporations from performing medical services or physicians from splitting
fees with non-physicians. The Company is unlicensed for certain of its
services. The Company does not believe however, that it engages in the
unlawful practice of medicine or the delivery of medical services in any state
where it is prohibited, and is not licensed to practice medicine in states
which permit such licensure. Professional medical services, such as the
interpretation of MRI scans, are separately provided by independent contractor
Interpreting Physicians pursuant to agreements with the Company. The Company
performs only administrative and technical services and does not exercise
control over the practice of medicine by physicians or employ physicians to
provide medical services. However, in many jurisdictions, the laws restricting
the corporate practice of medicine and fee-splitting have been subject to
limited judicial and regulatory interpretation and, therefore, there can be no
assurance that, upon review, some of the Company's activities would not be
found to be in violation of such laws. If such a claim were successfully
asserted against it, the Company could be subject to civil and criminal
penalties and could be required to restructure its contractual relationships.
In addition, certain provisions of its contracts with Interpreting Physicians,
including the payment of management fees and restrictive covenants could be
held to be unenforceable. Such results or the inability of the Company to
restructure its contractual relationships could have a material adverse effect
upon the Company.

Stark Law Prohibition On Physician Referrals

The Federal "Stark Law" as amended in 1993 provides that when a physician
has a "financial relationship" with a provider of "designated health services"
(including, among other activities, the provision of MR and other radiology
services which are provided by the Company), the physician will be prohibited
from making a referral of Medicaid or Medicare patients to the healthcare
provider, and the provider will be prohibited from billing Medicare or
Medicaid, for the designated health service. In August 1995, regulations were
issued

45
<PAGE>

pursuant to the Stark Law as it existed prior to its amendment in 1993 (when
it only applied to clinical laboratories). Draft regulations for the
provisions of the Stark Law applicable to MR and other radiology services were
issued in January, 1998. Submission of a claim that a provider knows, or
should know, is for services for which payment is prohibited under the amended
Stark Law, could result in refunds of any amounts billed, civil money
penalties of not more than $15,000 for each service billed, and possible
exclusion from the Medicare and Medicaid programs.

The Stark Law provides exceptions from its prohibition for referrals which
include certain types of employment, personal service arrangements and
contractual relationships. The Company continues to review all aspects of its
operations and endeavors to comply in all material respects with applicable
provisions of the Stark Law. Due to the broad and sometimes vague nature of
this law, the ambiguity of related regulations, the absence of final
regulations, and the lack of interpretive case law, there can be no assurance
that an enforcement action will not be brought against the Company or that the
Company will not be found to be in violation of the Stark Law.

False Claims Act

A number of Federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by
the government. Under one such law, the False Claims Act, civil damages may
include an amount that is three times the government's loss plus $5,000 to
$10,000 per claim. Actions to enforce the False Claims Act may be commenced by
a private citizen on behalf of the Federal government, and such private
citizens receive between 15 and 30 percent of the recovery. Efforts have been
made to assert that any claim resulting from a relationship in violation of
the Anti-Kickback Statute or the Stark Law is false and fraudulent under the
False Claims Act. The Company carefully monitors its submissions to HCFA and
all other claims for reimbursement to assure that they are not false or
fraudulent.

State Laws

Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals
and other types of financial arrangements with healthcare providers, which,
while similar in certain respects to the Federal legislation, vary from state
to state. Some states expressly prohibit referrals by physicians to facilities
in which such physicians have a financial interest. Sanctions for violating
these state restrictions may include loss of licensure and civil and criminal
penalties assessed against either the referral source or the recipient
provider. Certain states also have begun requiring healthcare practitioners to
disclose to patients any financial relationship with other providers,
including advising patients of the availability of alternative providers.

The Company continues to review all aspects of its operations and endeavors
to comply in all material respects with applicable provisions of the Anti-
Kickback Statute, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification. Due to the broad and sometimes
vague nature of these laws and requirements, the evolving interpretations of
these laws (as evidenced by the recent draft regulations for the Stark Law),
there can be no assurance that an enforcement action will not be brought
against the Company or that the Company will not be found to be in violation
of one or more of these regulatory provisions. Further, there can be no
assurance that new laws or regulations will not be enacted, or existing laws
or regulations interpreted or applied in the future in such a way as to have a
material adverse effect on the Company, or that Federal or state governments
will not impose additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.

Regulations Affecting StarMed

StarMed has obtained all material necessary licenses to conduct business in
the states where required. Temporary staff are also subject to various
occupational and professional licensing laws that apply to medical
professionals. Many states have temporary staff laws requiring training,
monitoring and regulating of medical professionals.

46
<PAGE>

Because the services of StarMed's temporary staff are paid for directly by
the client hospitals, StarMed is not subject to the reimbursement, billing and
collection procedure required by the existence of government and private third
party payors as is the case with respect to the Company's diagnostic imaging
centers.

EMPLOYEES

As of December 31, 1997, the Company had approximately 1,277 full time
employees. This number does not include the healthcare personnel contracted by
StarMed for its Per Diem and Travel Nursing divisions. The Company is not a
party to any collective bargaining agreements and considers its relationship
with its employees to be good.

INSURANCE

The nature of the services provided by the Company expose the Company to risk
that certain parties may attempt to recover from the Company for alleged
wrongful acts committed by others. As a result of this risk, the Company
maintains malpractice and professional liability insurance for both its Imaging
and Temporary Healthcare Staffing Divisions, as well as workmen's compensation
insurance, comprehensive and general liability coverage, fire, allied perils
coverage and professional liability insurance in amounts deemed adequate by
management to cover all potential risk. There can be no assurance that
potential claims will not exceed the coverage amounts, that the cost of
coverage will not substantially increase or require the Company to insure
itself or that certain coverage will not be reduced or become unavailable.

PROPERTIES

The Company leases its 36,133 square foot principal and executive offices
pursuant to two leases with terms of five years and four years, respectively,
remaining. The building also houses the Company's Hackensack imaging center.
The Company's 98 imaging centers range in size from approximately 1,500 to
11,400 square feet. Each center consists of a waiting/reception area and one
room per modality, dressing rooms, billing/administration rooms and radiologist
interpreting rooms. The Company owns the real property in which certain of its
centers operate, and leases its remaining centers under leases which expire
from December 1997 through October 2002 and, in certain instances, contain
options to renew. StarMed's 35 per diem staffing offices lease approximately
14,000 square feet of office space in the aggregate under various lease terms
expiring through December 1999. The Company believes that if it were unable to
renew the lease on any of these facilities, other suitable facilities would be
available to meet the Company's needs.

LITIGATION

As described below under "Certain Relationships and Related Transactions",
the Company and certain of its officers and directors have been named as
defendants in several actions filed in state and federal court arising out of
the events also described below and in the Company's Current Report on Form 8-K
filed by the Company on November 10, 1997, involving, among other matters,
allegations against the Company with respect to related-party transactions and
securities fraud.

In 1996, an individual and his spouse brought an action in the Supreme Court
of the State of New York, King's County against Advanced MRA Imaging Associates
in Brooklyn, New York, a wholly owned subsidiary of the Company ("MRA
Imaging"), for damages aggregating $12.5 million. The plaintiff alleges
negligent operations, improper supervision and hiring practices and the failure
to operate the premises in a safe manner, as a result of which the individual
suffered physical injury. The Company's general liability and professional
negligence insurance carriers have been notified, and it has been agreed that
the general liability insurance will pursue the defense of this matter, however
such insurers have reserved the right to claim that the scope of the matter
falls outside the Company's coverage. The parties to this matter are engaged in
discovery.

47
<PAGE>

concealed or failed to disclose adverse material information about the Company
in connection with the sale of Wesley to the Company by the plaintiff. The
plaintiff seeks damages in the amount of $4.25 million or, alternatively,
recession of the sale of Wesley. The Company believes that it has meritorious
defenses to the claims asserted by plaintiff, and intends to defend itself
vigorously. In July 1998, the Company and the named defendants filed a motion
to dismiss the plaintiff's complaint on numerous grounds.

The legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims
against it, the Company is unable to predict with any certainty the ultimate
outcome of those proceedings.

In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that such
other litigation will not have a material adverse effect on the Company's
financial position, cash flows or results of operations.

48
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information with respect to each nominee for
director and each executive officer of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Sally W. Crawford.... 44 Director
Peter B. Davis....... 53 Director
Gary L. Fuhrman...... 37 Director
John H. Josephson.... 36 Director
Duane C. Montopoli... 49 Chief Executive Officer, President and Director
Gary N. Siegler...... 36 Director
Chairman of the Board and Director, Chairman of the
D. Gordon Strickland. 51 Executive Committee
Gerald H. Allen...... 50 Senior Vice President--Diagnostic Imaging Business
Senior Vice President--Legal Affairs and
Christopher J. Joyce. 34 Administration and Secretary
President and Chief Operating Officer, StarMed
Gregory Mikkelsen.... 50 Staffing, Inc.
Chief Financial Officer and Senior Vice President--
Geoffrey A. Whynot... 39 Finance
</TABLE>

Sally W. Crawford was appointed a director of the Company by the Board of
Directors in June 1998. Ms. Crawford was the Chief Operating Officer of
Healthsource Inc. from 1985 to 1997. Prior thereto, Ms. Crawford was employed
by Beacon Health where she was the marketing director. Ms. Crawford is also a
director of Harborside Healthcare, Yankee Publishing and CYTYC Corporation.

Peter B. Davis was appointed a director of the Company by the Board of
Directors in June 1998. Mr. Davis is the President and the CEO of St. Joseph
Hospital in Nashua, New Hampshire. From January 1997 through June 1998, Mr.
Davis was the Interim President and CEO of Optima Healthcare, a New Hampshire
joint operating company, where he has been employed since January 1997.

Gary L. Fuhrman has been a director of the Company since 1992 and is a
member of the Board's Executive and Audit Committees. Mr. Fuhrman has been a
director and Senior Vice President of Arnhold and S. Bleichroeder, Inc., an
investment banking firm, since March 1995 and January 1993, respectively, and
a Vice President of such firm for more than five years prior thereto.

John H. Josephson has been a director of the Company since July 1994 and is
a member of the Board's Executive, Nominating and Compensation Committees. Mr.
Josephson is a Vice President and Director of Allen & Company Incorporated, an
investment banking firm, and has been with such firm since 1987. Mr. Josephson
is also a director of Norwood Promotional Products, Inc.

Duane C. Montopoli was appointed President and Chief Executive Officer and a
director of the Company effective January 30, 1998. Previously, Mr. Montopoli
was President and Chief Executive Officer of Chemfab Corporation (NYSE:CFA)
which he joined in 1986. Until January 1990, he was also a partner in Oak
Grove Ventures which he joined in December 1983. Prior to that time, Mr.
Montopoli was employed by Arthur Young & Company (now Ernst & Young LLP) where
he was a general partner from October 1982 through December 1983.

Gary N. Siegler, a director since 1990, served as Chairman of the Board of
Directors of the Company from 1990 until June 1998. Mr. Siegler is a co-
founder and, since January 1989, has been President of Siegler, Collery & Co.,
a New York-based investment firm ("Siegler Collery"). Mr. Siegler is a
principal member of the general partner of The SC Fundamental Value Fund, L.P.
("Fundamental Value Fund"), a fund investing in marketable securities, and an
executive officer of SC Fundamental Value BVI, Inc. ("Fundamental Value BVI"),
the managing partner of the investment advisor to an offshore fund investing
in marketable securities. Mr. Siegler

49
<PAGE>

serves as the Chairman of the Board of Directors of National R.V. Holdings,
Inc., a manufacturer of motor homes and other recreational vehicles.

D. Gordon Strickland has been a director of the Company since December 1997
and was appointed Chairman of the Board's Executive Committee in January 1998.
He was appointed Chairman of the Board and a member of the Compensation
Committee in June 1998. Mr. Strickland is also a member of the Board's
Nominating Committee. Mr. Strickland is Senior Vice President--Investments for
Tauber Enterprises, a private investment holding company. Mr. Strickland was
President and Chief Executive Officer of Kerr Group, Inc. ("Kerr Group"), a
NYSE-listed manufacturer of plastic packaging products, from 1996 to September
1997. From 1986 to 1996, he served as Senior Vice President, Finance and Chief
Financial Officer of Kerr Group.

Gerald H. Allen was appointed in March 1998 as President of the Imaging
Division of the Company (now, Senior Vice President--Diagnostic Imaging
Business) and since April 1995 has also held the positions of Senior Vice
President--Operations and Senior Vice President--Development. Mr. Allen was
employed by the Company in several executive capacities from 1984 to 1993.
From 1993 through March 1995, Mr. Allen was the Executive Vice President and
Chief Financial Officer of Prime Capital Corporation, a merchant banking
company.

Christopher J. Joyce was appointed Senior Vice President--Legal Affairs and
Administration and Secretary in April 1998. Previously, he was Executive Vice
President and General Counsel of Alliance Entertainment Corp., a publicly-
traded entertainment and music distribution company which filed for protection
under Chapter 11 of the United States Bankruptcy Code in July 1997. From
February 1992 to July 1995, Mr. Joyce served as Executive Vice President of
Business Affairs and General Counsel of Independent National Distributors,
Inc., a privately-held independent music distribution company. From September
1988 to February 1992, Mr. Joyce was an associate at the law firm of Willkie
Farr & Gallagher.

Gregory Mikkelsen joined Starmed Staffing, Inc. as President and Chief
Operating Officer in August 1996. Prior thereto, Mr. Mikkelsen was President
and Chief Executive Officer of Medical Recruiters of America, Inc. Mr.
Mikkelsen has also held Senior Executive positions with Baxter Health Care and
The Norrell Corporation.

Geoffrey A. Whynot was appointed Senior Vice President and Chief Financial
Officer of the Company in March 1998. Previously, he was Chief Financial
Officer of Kerr Group. During his tenure with Kerr Group, Mr. Whynot served as
Assistant Controller, Corporate Vice President and Treasurer, prior to
becoming CFO. A Certified Public Accountant, Mr. Whynot was employed by Arthur
Andersen & Company from 1980 to 1987.

50
<PAGE>

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation awarded to, earned by or
paid for the fiscal years specified below to certain individuals serving as
executive officers of the Company (the "Named Officers") during the fiscal
year ended December 31, 1997:

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS
--------------------------------------- ------------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS(1) SARS(#)(2) OPTIONS COMPENSATION($)(3)
- - --------------------------- ---- --------- -------- ------------ ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence J. Ramaekers 1997 $119,510(5) -- -- -- 75,000(6) --
Former Acting President
and Chief Executive Of-
ficer(4)
William D. Farrell 1997 $247,342 $150,000 -- -- -- $6,016
Former President and
Chief Operating Offi- 1996 $152,415 $150,000 -- -- 140,000 $4,093
cer(7) 1995 $131,643 $ 60,000 -- -- 135,000 $3,245
John P. O'Malley, III 1997 $626,550 -- -- -- --
Former Executive Vice 1996 $183,333 -- -- -- 203,438
President Finance and
Chief --
Financial Officer(8) --
Gary I. Fields 1997 $106,542 -- -- -- 60,000 --
Former Senior Vice Pres-
ident and General Coun-
sel(7)
Gregory Mikkelsen 1997 $179,867 $ 10,000 -- -- -- --
President and Chief Ex- 1996 $ 68,955 -- -- -- 50,000 --
ecutive
Officer of StarMed
</TABLE>
- - --------
(1) The aggregate amount of all perquisites and other personal benefits paid
to each Named Individual is not greater than either $50,000 or 10% of the
total of the annual salary and bonus reported for either such executive.

(2) Due to the fact that the 1997 Plan was not presented to the Company's
shareholders for approval within one year of the plan's adoption by the
Company, all options granted pursuant to the 1997 Plan have lapsed and such
grants are not deemed to be outstanding.

(3) Represents matching contributions under the Company's 401(k) plan.

(4) J. Alix & Associates ("J. Alix") was retained by the Company on November
2, 1997 to provide interim management services to the Company. Mr.
Ramaekers, a principal of J. Alix, was appointed Acting President and Chief
Executive Officer of the Company on November 2, 1997 and served in such
capacity until February 2, 1998.

(5) Represents the portion of the fees paid to J. Alix for Mr. Ramaekers'
services during the year ended December 31, 1997.

(6) Represents warrants to purchase 75,000 shares of Common Stock issued to J.
Alix in connection with its engagement by the Company to provide interim
management services to the Company.

(7) On November 7, 1997, Mr. Farrell and Mr. Fields resigned from their
respective positions.

(8) Mr. O'Malley was appointed Executive Vice President--Finance and Chief
Financial Officer in September 1996 and removed from such position on
November 8, 1997.

EMPLOYMENT AGREEMENTS

The Company is a party to an employment agreement with Mr. Duane C.
Montopoli (the "Montopoli Employment Agreement"). The term of the Montopoli
Employment Agreement shall continue until terminated by either the Company or
Mr. Montopoli. Pursuant to the Montopoli Employment Agreement, Mr. Montopoli
acts as President and Chief Executive Officer of the Company, and is entitled
to receive an annual base salary of $275,000. Such annual salary may be
increased from time to time in the discretion of the Board of Directors. Mr.
Montopoli is eligible to receive a bonus for each calendar year during his
term of employment provided he is employed on the last day of the calendar
year. The bonus' target amount for any year shall be equal to 50% of Mr.
Montopoli's base salary for such year and the actual amount of the bonus shall
be determined by the Board of Directors within 60 days following the end of
such year. In connection with the execution of the Montopoli Employment
Agreement, the Company granted to Mr. Montopoli ten-year options to purchase
600,000 shares of Common Stock, 400,000 of which have an exercise price of
$10.625 and 200,000 of which have an exercise price of $14.50. Such options
vest in five equal annual installments beginning January 30, 1998, unless
sooner accelerated by certain "change of control" events. Under the terms of
the Montopoli Employment Agreement,

51
<PAGE>

the Company is obligated to pay the premiums with respect to a term life
insurance policy with a death benefit payable to Mr. Montopoli's named
beneficiaries in the amount of $1 million. In the event Mr. Montopoli's
employment is terminated by the Company other than for "Cause" or "Disability"
(as such terms are defined in the Montopoli Employment Agreement), or if Mr.
Montopoli terminates his employment for "Good Reason" (as defined in the
Montopoli Employment Agreement), the Company shall (i) pay Mr. Montopoli a
lump sum payment equal to his accrued but unpaid salary and a portion of the
bonus he would have received for such year; (ii) continue his base salary for
a period of 18 months; and (iii) continue benefits under the Company's
employee welfare plans during the salary continuation period unless such
benefits are provided by another employer. Mr. Montopoli is prohibited from
competing with the Company for a period of 18 months following the termination
of the Montopoli Employment Agreement.

The Company is a party to an employment agreement with Mr. William D.
Farrell dated January 1, 1997, which was scheduled to expire on December 31,
1999. Pursuant to such employment agreement, Mr. Farrell acted as President
and Chief Operating Officer of the Company, for which he received an annual
salary of $225,000. In addition, pursuant to such agreement, Mr. Farrell is
prohibited from competing with the Company for a period of one year following
the termination of the agreement. On November 7, 1997, Mr. Farrell resigned
from his position as President and Chief Operating Officer of the Company. The
Company is in litigation with Mr. Farrell relating, in part, to Mr. Farrell's
employment agreement. See "Certain Relationships and Related Transactions."

The Company is party to a non-competition and consulting agreement with Mr.
John P. O'Malley III which expires on August 30, 1998 entered into in
connection with the acquisition of NMR in August 1996 (the "NMR Acquisition").
Pursuant to such consulting agreement, Mr. O'Malley receives $550,000
annually, and the Company issued to Mr. O'Malley at the closing of the NMR
Acquisition (i) five-year warrants to purchase 50,000 shares of Common Stock
at an exercise price of $8.00 per share, and (ii) in exchange of his NMR
employee stock options, four separate five-year stock purchase warrants to
purchase 10,313; 27,500; 41,250; and 34,375 shares of Common Stock at exercise
prices of $4.00, $3.36, $4.18 and $4.73, respectively. Subsequent to the
closing of the NMR Acquisition, Mr. O'Malley was appointed Senior Vice
President--Finance and Chief Financial Officer of the Company in September
1996 and he was removed from such position on November 8, 1997 for failure to
perform certain of his functions as Chief Financial Officer. The Company is in
litigation with Mr. O'Malley relating, in part, to Mr. O'Malley's consulting
agreement. See "Certain Relationships and Related Transactions."

The Company is a party to an employment agreement with Mr. Geoffrey A.
Whynot (the "Whynot Employment Agreement"). The term of the Whynot Employment
Agreement shall continue until terminated by either the Company or Mr. Whynot.
Pursuant to the Whynot Employment Agreement, Mr. Whynot acts as Senior Vice
President--Finance and Chief Financial Officer of the Company, and is entitled
to receive an annual base salary of $185,000. Such annual salary may be
increased from time to time in the discretion of the Board of Directors. Mr.
Whynot is also eligible to receive a bonus for each calendar year during this
term of employment provided he is employed on the last day of the calendar
year. For calendar year 1998, Mr. Whynot shall receive a bonus in an amount
not less than $100,000. For all other calendar years, the target amount of the
bonus shall be equal to 50% of Mr. Whynot's base salary for such year and the
actual amount of the bonus shall be determined by the Board of Directors at
its discretion and paid no later than March 15 of the calendar year following
the calendar year for which the bonus is awarded. In connection with the
execution of the Whynot Employment Agreement, the Company granted to Mr.
Whynot ten-year options to purchase 160,000 shares of Common Stock at an
exercise price of $10.625. Such options vest in four equal annual installments
beginning March 23, 1999, unless sooner accelerated by certain "change of
control" events. In the event Mr. Whynot's employment is terminated by the
Company other than for "Cause" or "Disability" (as such terms are defined in
the Whynot Employment Agreement), or if Mr. Whynot terminates his employment
for "Good Reason" (as defined in the Whynot Employment Agreement), the Company
shall (i) pay him a lump sum payment equal to his accrued but unpaid salary
and a portion of the bonus he would have received for such year; (ii) continue
his base salary for a period of 12 months; provided that such amounts will be
offset by any compensation received

52
<PAGE>

from another employer; further, provided that if such termination occurs
within 12 months following a "Change in Control" (as defined in the Whynot
Employment Agreement), Mr. Whynot shall receive a lump sum payment equal to 12
months of his then base salary, which amount shall not be subject to reduction
for any compensation earned from another employer; and (iii) continue benefits
under the Company's employee welfare plans during the salary continuation
period unless such benefits are provided by another employer. Mr. Whynot is
prohibited from competing with the Company for a period of 12 months following
the termination of the Whynot Employment Agreement.

The Company is a party to an employment agreement with Mr. Christopher J.
Joyce (the "Joyce Employment Agreement"). The term of the Joyce Employment
Agreement shall continue until terminated by either the Company or Mr. Joyce.
Pursuant to the Joyce Employment Agreement, Mr. Joyce acts as Senior Vice
President--Legal Affairs and Administration which position includes serving as
the Company's General Counsel and Secretary, and is entitled to receive an
annual base salary of $170,000. Such annual salary may be increased from time
to time in the discretion of the Board of Directors. Mr. Joyce is also
eligible to receive a bonus for each calendar year during this term of
employment provided he is employed on the last day of the calendar year. For
calendar year 1998, Mr. Joyce shall receive a bonus not less than 50% of Mr.
Joyce's base salary for such year. For all other calendar years, the target
amount of the bonus shall be equal to 50% of Mr. Joyce's base salary for such
year and the actual amount of the bonus shall be determined by the Board of
Directors, in its discretion, and paid no later than March 15 of the calendar
year following the calendar year for which the bonus is awarded. In connection
with the execution of the Joyce Employment Agreement, the Company granted to
Mr. Joyce ten-year options to purchase 120,000 shares of Common Stock at an
exercise price of $10.625. Such options vest in four equal annual installments
beginning April 6, 1999, unless sooner accelerated by certain "change of
control" events. In the event Mr. Joyce's employment is terminated by the
Company other than for "Cause" or "Disability" (as such terms are defined in
the Joyce Employment Agreement), or if Mr. Joyce terminates his employment for
"Good Reason" (as defined in the Joyce Employment Agreement), the Company
shall (i) pay him a lump sum payment equal to his accrued but unpaid salary
and a portion of the bonus he would have received for such year; (ii) continue
his base salary for a period of 9 months; and (iii) continue benefits under
the Company's employee welfare plans during the salary continuation period
unless such benefits are provided by another employer. Mr. Joyce is prohibited
from competing with the Company for a period of nine months following the
termination of the Joyce Employment Agreement.

STOCK OPTION PLANS

1992 Stock Option Plan

In July 1992, the Company adopted and approved the 1992 Stock Option Plan
(the "1992 Plan"). The 1992 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The
1992 Plan provides for the award of options to purchase up to 240,000 shares
of Common Stock, of which 142,003 were subject to outstanding options as of
April 1, 1998. The 1992 Plan is administered by the Stock Option Committee of
the Board of Directors. The Stock Option Committee has, subject to the
provisions of the 1992 Plan, full authority to select Company individuals
eligible to participate in the 1992 Plan, including officers, directors
(whether or not employees) and consultants. The 1992 Plan provides for the
awarding of incentive stock options (as defined in Section 422 of the Internal
Revenue Code of 1986) and non-incentive stock options. Options granted
pursuant to the 1992 Plan have such vesting schedules and expiration dates as
the Stock Option Committee has established or shall establish in connection
with each participant in the 1992 Plan, which terms shall be reflected in an
option agreement executed in connection with the granting of the option. In
fiscal 1997, no options were granted under the 1992 Plan.

1995 Stock Option Plan

In March 1995, the Company adopted and approved the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The
1995 Plan provides for the award of options to purchase up to 400,000 shares
of Common Stock,

53
<PAGE>

of which 130,232 were subject to outstanding options as of April 1, 1998. The
1995 Plan is administered by the Stock Option Committee of the Board of
Directors. The Stock Option Committee has, subject to the provisions of the
1995 Plan, full authority to select Company individuals eligible to
participate in the 1995 Plan, including officers, directors (whether or not
employees) and consultants. The 1995 Plan provides for the awarding of
incentive stock options (as defined in Section 422 of the Internal Revenue
Code of 1986) and non-incentive stock options. Options granted pursuant to the
1995 Plan have such vesting schedules and expiration dates as the Stock Option
Committee has established or shall establish in connection with each
participant in the 1995 Plan, which terms shall be reflected in an option
agreement executed in connection with the granting of the option. In fiscal
1997, no options were granted under the 1995 Plan.

1996 Stock Option Plan

In February 1996, the Company adopted and approved the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. The
1996 Plan provides for the award of options to purchase up to 224,000 shares
of Common Stock, of which 155,165 were subject to outstanding options as of
April 1, 1998. The 1996 Plan is administered by the Stock Option Committee of
the Board of Directors. The Stock Option Committee has, subject to the
provisions of the 1996 Plan, full authority to select Company individuals
eligible to participate in the 1996 Plan, including officers, directors
(whether or not employees) and consultants. The 1996 Plan provides for the
awarding of incentive stock options (as defined in Section 422 of the Internal
Revenue Code of 1986) and non-incentive stock options. Options granted
pursuant to the 1996 Plan have such vesting schedules and expiration dates as
the Stock Option Committee has established or shall establish in connection
with each participant in the 1996 Plan, which terms shall be reflected in an
option agreement executed in connection with the granting of the option. In
fiscal 1997, no options were granted under the 1996 Plan.

1996 Stock Option Plan B

In February 1996, the Company adopted and approved the 1996 Stock Option
Plan B (the "1996 B Plan"). The 1996 B Plan is designed to serve as an
incentive for retaining qualified and competent directors, employees and
consultants. The 1996 B Plan provides for the award of options to purchase up
to 1,000,000 shares of Common Stock, of which 480,328 were subject to
outstanding options as of April 1, 1998. The 1996 B Plan is administered by
the Stock Option Committee of the Board of Directors. The Stock Option
Committee has, subject to the provisions of the 1996 B Plan, full authority to
select Company individuals eligible to participate in the 1996 B Plan,
including officers, directors (whether or not employees) and consultants. The
1996 B Plan provides for the awarding of incentive stock options (as defined
in Section 422 of the Internal Revenue Code of 1986) and non-incentive stock
options. Options granted pursuant to the 1996 B Plan have such vesting
schedules and expiration dates as the Stock Option Committee has established
or shall establish in connection with each participant in the 1996 B Plan,
which terms shall be reflected in an option agreement executed in connection
with the granting of the option. In fiscal 1997, 15,000 options were granted
under the 1996 B Plan.

1997 Stock Option Plan

On May 27, 1997, the Company adopted and approved the 1997 Stock Option Plan
(the "1997 Plan"). The 1997 Plan was designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants. As of
April 1, 1998, there were 1,741,000 shares of Common Stock subject to
outstanding options granted under the 1997 Plan. Due to the fact that the 1997
Plan was not presented to the Company's shareholders for approval within one
year of the plan's adoption by the Company, all options granted pursuant to
the 1997 Plan have lapsed and such grants are not deemed to be outstanding.

54
<PAGE>

OPTIONS AND WARRANTS GRANTED IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION
(1) FOR OPTION TERM (2)
----------------- --------------------
PERCENT OF TOTAL
OPTIONS/SARS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- ----------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Ramaekers...... 25,000(3) (4) $18.125 5/2/99 $ 7,507 $ 40,798
25,000(3) (4) $ 21.00 5/2/99 $ 0 $ 0
25,000(3) (4) $ 25.00 5/2/99 $ 0 $ 0
William D. Farrell...... -- -- -- -- -- --
John P. O'Malley, III... -- -- -- -- -- --
Gary I. Fields.......... 25,000 (4) $ 12.00 5/19/02 $ 82,884 $ 183,153
35,000 (4) $ 14.00 5/19/02 $ 46,038 $ 186,414
Gregory Mikkelsen -- -- -- -- -- --
</TABLE>
The following table sets forth certain information concerning options and
warrants granted during fiscal 1997 to the Named Officers.
- - --------
(1) Due to the fact that the 1997 Plan was not presented to the Company's
shareholders for approval within one year of the plan's adoption by the
Company, all options granted pursuant to the 1997 Plan have lapsed and
such grants are not deemed to be outstanding.
(2) The 5% and 10% assumed annual rates of appreciation of the grant date
market prices are mandated by rules of the Securities and Exchange
Commission ("SEC") and do not reflect estimates or projections of future
Common Stock prices. There can be no assurance that the amounts reflected
in this table will be achieved.
(3) Represents warrants to purchase 75,000 shares of Common Stock issued to J.
Alix in connection with its engagement by the Company to provide interim
management services to the Company. Mr. Ramaekers, a principal of J. Alix,
was appointed Acting President and Chief Executive Officer of the Company
on November 2, 1997 and served in such capacity until February 2, 1998.
(4) After giving effect to the termination of all conditional options granted
during 1997 under the Company's 1997 Stock Option Plan, no options or
warrants were granted in 1997 to any of the Company's Named Officers,
except Mr. Fields. Warrants were granted to J. Alix as described in
footnote 3 above.

OPTION/WARRANT VALUES

The following table sets forth, as of December 31, 1997 the number of
options and warrants and the value of unexercised options and warrants held by
the Named Officers.

<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
IN VALUE OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997 ($)(1)
EXERCISE REALIZED ----------------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence J. Ramaekers... -- -- 75,000(2) -- $ 0 --
William D. Farrell...... 52,500 $891,065 23,332 -- $113,744 --
John P. O'Malley, III... 10,313(3) $192,197 166,458(4) 26,667 $619,796 $23,334
Gary I. Fields.......... -- -- -- -- -- --
Gregory Mikkelsen....... 8,100 $136,513 8,566 33,334 $ 0 $ 0
</TABLE>
- - --------
(1) On December 31, 1997 the last reported sales price for the Common Stock on
the Nasdaq Market was $9.375.

55
<PAGE>

(2) Represents warrants to purchase 75,000 shares of Common Stock issued to J.
Alix in connection with its engagement by the Company to provide interim
management services to the Company. Mr. Ramaekers, a principal of J. Alix,
was appointed Acting President and Chief Executive Officer of the Company
on November 2, 1997 and served in such capacity until February 2, 1998.
(3) Represents shares underlying warrants issued to Mr. O'Malley, the former
Executive Vice-President--Finance and Chief Financial Officer of NMR, in
connection with the NMR Acquisition. See "Management--Employment
Agreements."
(4) Of such total amount of shares, 153,125 shares represent shares underlying
warrants issued to Mr. O'Malley, the former Executive Vice-President--
Finance and Chief Financial Officer of NMR, in connection with the NMR
Acquisition. See "Management--Employment Agreements."

56
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table set forth as of July 16, 1998 the number and percentage
of shares of Common Stock held by (i) each of the Named Officers and directors
of the Company, (ii) all persons who are known by the Company to be the
beneficial owners of, or who otherwise exercise voting or dispositive control
over, five percent or more of the Company's outstanding Common Stock and (iii)
all of the Company's present executive officers and directors as a group:

<TABLE>
<CAPTION>
BENEFICIAL COMMON STOCK PERCENTAGE OF
OWNER OWNED(1) OUTSTANDING
---------- ------------ -------------
<S> <C> <C>
Gary N. Siegler(2)(3)............................... 4,328,117 17.2%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Duane C. Montopoli(4)............................... 120,000 *
Gary L. Fuhrman(5).................................. 112,591 *
John H. Josephson(6)................................ 44,375 *
D. Gordon Strickland................................ 0 0%
Sally W. Crawford................................... 0 0%
Peter B. Davis...................................... 0 0%
Peter M. Collery(2)(7).............................. 3,092,002 12.8%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
Fir Tree Partners(8)................................ 2,861,000 11.9%
1211 Avenue of the Americas
29th Floor
New York, New York 10036
StarMed Investors, L.P.(2).......................... 1,441,087 6.0%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022
HHH Investments Limited Partnership(9).............. 1,330,000 5.5%
920 King Street
Wilmington, DE 19801
William D. Farrell.................................. 24,832 *
John P. O'Malley, III(10)........................... 170,981 *
Gary I. Fields...................................... 7,000 *
All executive officers and Directors as a group (9 4,605,083 18.1%
in
number) (2)(3)(4)(5)(6)............................
</TABLE>
- - --------
* Less than one percent.
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them.

57
<PAGE>

(2) Messrs. Siegler and Collery, due to their joint ownership of Siegler
Collery and other affiliates which control StarMed Investors, L.P. (which
is included in the table), and certain other entities which beneficially
own an aggregate of 1,444,216 shares of Common Stock are each deemed to
beneficially own all of the shares of Common Stock owned of record by all
such entities.
(3) Includes 608,666 shares underlying outstanding options which are
exercisable immediately or within 60 days, 202,898 shares owned by The
Gary N. Siegler Foundation, a charitable foundation, and warrants to
acquire 525,000 shares of Common Stock held by 712 Advisory Services,
Inc. Mr. Siegler is deemed to beneficially own all of the shares of
Common Stock owned of record by such entities.
(4) Includes 120,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(5) Includes 36,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(6) Includes 40,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(7) Includes 51,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(8) Based solely upon information contained in a Schedule 13D, filed with the
SEC.
(9) Based solely upon information contained in a Schedule 13D, as amended by
Amendments Nos. 1, 2 and 3 thereto, filed with the SEC. As disclosed in
Amendment No. 3 to such Schedule 13D filed with the SEC on December 16,
1997, the total in the table excludes (i) an aggregate of 382,524 shares
of Common Stock owned by three corporations, the sole shareholders of
which are the limited partners of HHH Investments Limited Partnership
("HHH"), (ii) 40,000 shares of Common Stock owned by The Francis D.
Hussey, Jr. Pension Plan (the "Pension Plan") and (iii) 10,000 shares of
Common Stock owned by Francis D. Hussey, Jr. Mr. Hussey is the president
of the general partner of HHH and is the trustee and a beneficiary of the
Pension Plan.
(10) Includes 13,333 shares underlying outstanding options which are
exercisable immediately or within 60 days and warrants to acquire 153,125
shares of Common Stock.

58
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 1997, in connection with the placement of the Series C Convertible
Preferred Stock, the Company paid $967,000 in fees and expenses to Arnhold and
S. Bleichroeder, Inc., of which Gary Fuhrman, a director of the Company, is an
executive officer and director. Also during 1997, for legal services rendered
to the Company, the Company paid legal fees and expenses in the amount of
$971,000 to Werbel & Carnelutti, of which Stephen Davis, a former director of
the Company, is a partner. In addition, during 1997, the Company reimbursed
the managing underwriter of the Company's October 1996 public offering $84,000
in charter fees (which rates were at or below market rates) for the use by the
managing underwriter and the Company of an airplane owned by an affiliate of
the Chairman of the Board during the public offering roadshow.

In 1997 and previous years, the Company paid an annual financial advisory
fee to 712 Advisory Services, Inc., a financial advisory firm and affiliate of
the Company's Chairman of the Board (the "Affiliate"). Mr. Neil H. Koffler, a
director of the Company, is also an employee of the Affiliate. Such fees
amounted to $112,500, $102,000 and $225,000 in the years ended December 31,
1997, 1996, and 1995, respectively. During the year ended December 31, 1997,
the Company also paid transaction related advisory fees and expenses
(including fees associated with the issuance of the Senior Notes) to the
Affiliate of $1,761,000 and issued to the Affiliate warrants to purchase
675,000 shares of the Company's Common stock exercisable at prices ranging
from $10.31 to $12.59 per share for financial advisory services rendered to
the Company in connection with such transactions. As discussed below, pursuant
to recommendations made by a special committee of the Board of Directors, the
Affiliate has reimbursed to the Company $1,536,000 of the fees paid to the
Affiliate for services rendered in 1997 and waived $112,500 of fees payable
for 1997.

In order to incentivize officers, directors, employees and consultants to
the Company, the Company from time to time has granted options at fair market
value to such individuals. As of December 31, 1997, stock options to purchase
1,468,666 shares of the Company's Common Stock have been issued to the
Chairman and Mr. Koffler. Included in this amount are stock options to
purchase 750,000 shares and 15,000 shares of the Company's Common Stock which
were granted to the Chairman and Mr. Koffler, respectively, under the 1997
Plan. As discussed below, the Chairman and Mr. Koffler have voluntarily agreed
to relinquish the stock options that were granted to them under the 1997 Plan
and to permit the Board's Compensation Committee, with the assistance of
compensation experts, to determine the appropriate director compensation for
them for 1997.

Additionally, in September 1997, the Company acquired, for $3.25 million, a
limited partnership interest in Dune Jet Services, L.P. (the "Partnership"), a
Delaware limited partnership formed for the purposes of acquiring and
operating an airplane for the partners' business uses and for third-party
charter flights. The general partner of the Partnership is Dune Jet Services,
Inc., a Delaware corporation, the sole stockholder of which is the Company's
Chairman. In October 1997, the Company's interest in the Partnership was
repurchased by the Partnership at cost plus interest following discussions
among management (members of which expressed objections to such acquisition),
a special committee of the Company's Board of Directors (the "Committee"), and
other members of the Board of Directors (including the Chairman).

In October 1997, members of the Company's management communicated to the
Board that certain Company stockholders had questioned them regarding the
manner in which related-party transactions were being scrutinized by the
Company and its Board. Management stated that it shared the concerns of these
stockholders and had engaged counsel to conduct a review of such transactions.

In order to address and satisfy the concerns management had communicated,
the Company authorized a review of its practices regarding related-party
transactions, as well as the fairness of all such transactions and the
adequacy of the disclosure of the same, including but not limited to
transactions as to which fees already had been paid and warrants and options
to purchase shares had been issued, and public disclosure had been made in
prior periods. The review also was to seek to develop recommendations as to
what changes, if any, should be made to the Company's procedures regarding
related-party transactions.

59
<PAGE>

To oversee the review, the Board formed the Committee consisting of
directors who were not officers, directors, employees, stockholders or
otherwise affiliates of the Affiliate. The Committee retained, on behalf of
the Company, outside counsel with which neither the Company nor any of its
directors has or had any current or prior relationship, to assist and advise
the Committee in the conduct of the review. The Chairman, on behalf of the
Affiliate, expressed its position that the related-party transactions and fees
are and were proper, but nevertheless advised the Committee that the Affiliate
would return to the Company any sums that the Committee deemed improper.

Thereafter, in response to expressions of dissatisfaction with the Committee
and its ongoing review, as well as disclosure related thereto, by certain
members of management who questioned, among other things, the Committee's
ability to conduct an independent review, the Board determined, and the
Company announced, that it was seeking to add to the Board two new independent
directors. The new directors, who would retain other independent counsel of
their choice, would assume ultimate responsibility for the review. The
Company's Chairman and the Affiliate thereafter restated that although they
believe that all related-party transactions and financial advisory fees are
and were proper, they nevertheless agreed to abide by the findings of the
Company's independent review and to return to the Company any sums that the
Committee deemed improper. On December 8, 1997, D. Gordon Strickland and Peter
J. Powers were appointed to the Board of Directors of the Company and to serve
as the members of the Committee that was formed to examine the related-party
transactions. The Committee engaged the law firm of Kaye, Scholer, Fierman,
Hays & Handler to advise and assist its examination.

The Committee reported to the directors that it had determined that: (i)
there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) the
Affiliate performed acquisition advisory services fully consistent with the
expectations and understanding of the committee of outside directors that had
approved the Affiliate's acquisition fees; and (iv) the acquisition advisory
fees paid to the Affiliate in connection with the Company's acquisitions in
1997 were within the range of customary acquisition advisory fees paid to
investment bankers on transactions of similar size.

The Committee also recommended and the Board of Directors has adopted the
following measures to improve corporate governance:

. To avoid any appearance of possible conflicts of interest, the Board
adopted a policy disfavoring related-party transactions. The policy can
be subject to exceptional circumstances, but even exceptional
circumstances will be considered only in the informed judgment of the
Board or an independent committee, assisted by independent counsel.

. The Chief Executive Officer of the Company, with the assistance of the
Company's general counsel and in consultation with the Board of
Directors, will be responsible for the selection of all outside counsel,
bearing in mind the policy disfavoring related-party transactions. To
avoid any appearance of possible conflicts of interest, corporate counsel
advising on issues of corporate governance and disclosure will have no
relationship to any member of the Board of Directors. Without limiting
the generality of the foregoing, no director of the Company will be a
member of or counsel to such law firm. Corporate counsel advising on such
issues will not otherwise provide legal services to any member of the
Board of Directors, including entities affiliated with Board members.

. Absent exceptional circumstances, all related-party contracts, unless
manifestly immaterial, will be filed publicly with appropriate SEC
filings.

. The Compensation Committee has been authorized and directed to formulate
clear written standards for reimbursement of director expenses, subject
to review by the Board of Directors.

60
<PAGE>

In addition to the foregoing, the Committee recommended and the Board of
Directors has determined to endeavor to reconfigure the Board to give outside
directors a majority of its seats and select a new chairman from the outside
directors.

The Committee understood that in late 1996, the Board of Directors had
turned to the Affiliate to supervise an extensive acquisition program of 59
diagnostic imaging centers and one staffing company because of the Board's
perceptions that former senior management was still relatively inexperienced
and did not yet have the formal training and necessary skills to manage an
extensive acquisition program, former senior management was not directly
supervising nor providing sufficient input with respect to the acquisition
program, and there was a limited window of time within which the acquisition
program could take place, given the increasingly competitive marketplace. The
Committee expressed their view that given the Board's perceptions, the Board
should have acted sooner to bring any additional needed skills in-house,
rather than continue to rely upon, and pay fees to, the Affiliate to provide
such services.

Accordingly, the Committee recommended and the Affiliate agreed to reimburse
the Company approximately $1,424,000 in fees for acquisition transactions
completed after June 1, 1997, to reimburse $112,500 of the retainer paid to
the Affiliate for 1997, to waive payment of an additional $112,500 of fees
accrued by the Company for the third and fourth quarters of 1997, and to pay a
substantial amount of the expenses associated with the Committee's
investigation. All such amounts have been reimbursed or paid to the Company.
In addition, in light of the subsequent hiring of Duane C. Montopoli as
President and Chief Executive Officer, Geoffrey Whynot as Chief Financial
Officer and SBC Warburg Dillon Read as Financial Advisor, the Committee
recommended and the Affiliate agreed to allow the Company to terminate its
relationship with the Affiliate.

The Chairman and Mr. Koffler also agreed voluntarily to relinquish 765,000
stock options that were granted to them in May 1997 and permit the Board's
Compensation Committee, with the assistance of compensation experts, to
determine the appropriate director compensation for them for 1997.

On November 5, 1997, ZPR Investments, Inc., ZP Investments, Inc., Wyoming
Valley Physicians Imaging Center, L.P., Camp Hill Physicians Imaging Center,
L.P., Wexford Radiology, P.C., Sanoy Medical Group, Ltd., Reading Open
Imaging, P.A., Yonas Zegeye, M.D., and Hirut Seleshi, parties who had agreed
to sell to the Company five related imaging centers located in Pennsylvania,
brought action in the Court of Chancery of the State of Delaware, New Castle
County, against the Company and five recently formed subsidiaries of the
Company, seeking specific performance of the acquisition agreements and
unspecified breach of contract damages. The plaintiffs alleged that the
Company and the subsidiaries failed to consummate the acquisition in
accordance with the terms of the acquisitions agreements. The aggregate
purchase price for the acquisitions is $8.4 million in cash and $5.6 million
payable in shares of Company Common Stock based upon the average price for the
five business days preceding September 21, 1997 (approximately 320,000
shares). Pursuant to the acquisition agreement, the shares of Common Stock
issued in connection with such acquisition are subject to price protection of
the issuance price compared to the market price at effectiveness of the
registration statement. In December 1997, the Company entered into an amended
agreement to settle such action and therein agreed to purchase the centers for
$1 million in cash, a promissory note for $7.4 million, plus interest, $5.6
million payable in shares of Company Common Stock, and the payment of certain
fees. The plaintiffs have announced that they do not intend to go forward with
the sale, although they continue to claim that the Company is in breach of the
acquisition agreements. The litigation in the Court of Chancery remains
stayed.

On November 7, 1997, William D. Farrell resigned from his position as
President and Chief Operating Officer of the Company and as Director and Gary
I. Fields resigned from his position as Senior Vice President and General
Counsel. On the same date, Messrs. Farrell and Fields, filed a Complaint in
the Superior Court of New Jersey, Law Division, Essex County, against the
Company and the members of the Company's Board of Directors, claiming
retaliatory discharge under the New Jersey Conscientious Employee Protection
Act and breach of contract. On December 17, 1997, the plaintiffs amended their
complaint to add a claim for violation of public policy. The plaintiffs allege
that they were constructively terminated as a result of their objection to
certain

61
<PAGE>

related-party transactions, the purported failure of the defendants to
adequately disclose the circumstances surrounding such transactions, and the
Company's public issuance of allegedly false and misleading accounts
concerning or relating to such related-party transactions. The plaintiffs seek
unspecified compensatory and punitive damages, interest and costs and
reinstatement of the plaintiffs to their positions with the Company. On April
8, 1998, the Company filed its Answer to the Amended Complaint, and asserted a
counterclaim against Messrs. Farrell and Fields for breach of fiduciary
duties. The Company intends to defend vigorously against the allegations.

On November 12, 1997, Mr. Gerald Broder, who claims to be a company
stockholder, filed a derivative suit in the Court of Chancery of the State of
Delaware, New Castle County, naming the Company and Stephen M. Davis, Gary L.
Fuhrman, John H. Josephson, Neil H. Koffler, and Gary N. Siegler as
defendants. The complaint alleges that members of the Company's Board of
Directors breached their fiduciary duties owed to the Company and its
stockholders by allegedly engaging in self-dealing transactions that caused
the Company financial harm. The complaint seeks injunctive relief directing
such directors to account to the Company for its damages and their profits
from the wrongs complained of therein, enjoining them from continuing to
engage in self-dealing transactions harmful to the Company and its
shareholders, and awarding plaintiff the costs and expenses incurred in
bringing the lawsuit. The Company intends to defend vigorously against the
allegations.

On November 14, 1997, Mr. John P. O'Malley III filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and Gary N. Siegler, Neil H. Koffler, Stephen M. Davis, Gary L. Fuhrman, John
H. Josephson and Lawrence Ramaekers, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation. Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions. In addition, the plaintiff alleges that the Company
published false and defamatory statements about him. Mr. O'Malley seeks
unspecified compensatory and punitive damages, interest and costs of bringing
the action. On April 8, 1998, the Company filed its Answer to the Complaint,
and asserted a counterclaim against Mr. O'Malley for breach of fiduciary
duties. The Company intends to defend vigorously against the allegations.

Between November 14, 1997 and January 9, 1998, seven class action lawsuits
were filed in the United States District Court for the District of New Jersey
against the Company and certain of the Company's directors and/or officers. On
November 14, 1997, Joan D. Ferrari, who claims to be a Company stockholder,
filed a lawsuit on behalf of all persons who purchased Common Stock during the
period between May 15, 1997 and November 7, 1997. The Ferrari complaint names
as defendants the Company and Gary N. Siegler, Stephen M. Davis, Gary L.
Fuhrman, John H. Josephson and Neil H. Koffler. On November 18, 1997, Tri-
Masonry Company, who claims to be a Company stockholder, filed a complaint on
behalf of all persons who purchased Common Stock during the period between
March 19, 1997 and November 10, 1997. On November 19, 1997, Yaakov Prager, who
claims to be a Company stockholder, filed a complaint on behalf of all persons
who purchased Common Stock during the period between May 16, 1997 and November
10, 1997. The Tri-Masonry and Prager complaints name as defendants the
Company, William D. Farrell, John P. O'Malley and Gary N. Siegler. On November
20, 1997, Albert Schonert, who claims to be a Company stockholder, filed a
complaint on behalf of all persons who purchased Common Stock during the
period between May 15, 1997 and November 7, 1997. The Schonert complaint names
as defendants the Company and Gary N. Siegler, Stephen M . Davis, Gary L.
Fuhrman, John H. Josephson, Neil H. Koffler and William D. Farrell. On
December 12, 1997, Anne Benjamin, Scott L. Benjamin, Maxine Benjamin, Donald
Benjamin and Andrew M. Schreiber, who claim to be Company stockholders, filed
a complaint on behalf of all persons who purchased Common Stock during the
period between March 31, 1997 and November 10, 1997. The Benjamin complaint
names as defendants the Company and Gary N. Siegler, John P. O'Malley and
William D. Farrell. On December 31, 1997, Allen H. Weingarten, who claims to
be a Company stockholder, filed a complaint on behalf of all persons who
purchased Common Stock during the period between March 19, 1997 and November
10, 1997. The Weingarten complaint names as defendants the Company and William
D. Farrell, John P. O'Malley and Gary N. Siegler. On January 9, 1998, Roselle
Sachs,

62
<PAGE>

who claims to be a Company stockholder, filed a complaint on behalf of all
persons who purchased Common Stock during the period between May 15, 1997 and
November 10, 1997. The Sachs complaint names as defendants the Company and
Gary N. Siegler, Stephen M. Davis, Gary L. Fuhrman, Neil H. Koffler and
William D. Farrell.

The complaints in each action assert that the Company and the named
defendants violated Section 10(b), and that certain named defendants violated
Section 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
alleging that the Company omitted and/or misrepresented material information
in its public filings, including that the Company failed to disclose that it
had entered into acquisitions that were not in the best interest of the
Company, that it had paid unreasonable and unearned acquisition and financial
advisory fees to related parties, and that it concealed or failed to disclose
adverse material information about the Company. The complaints each seek
unspecified compensatory damages, with interest , and the costs and expenses
incurred in bringing the action. On February 9, 1998, the Honorable Joel
Pisano, United States Magistrate Judge, entered an Order consolidating the
above-mentioned class actions for all purposes. On March 31, 1998, the lead
plaintiffs in the consolidated class actions served their Consolidated Class
Action Complaint, asserting that the Company and the named defendants violated
Section 10(b) of the Exchange Act, and that certain named defendants violated
Sections 20(a) and 20A of the Exchange Act. The Company intends to defend
vigorously against the allegations.

As previously disclosed by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related-party transactions referenced above. In addition as
previously disclosed, the Company has received an inquiry from the SEC, but no
formal proceedings have been commenced by the SEC. The Company has cooperated
fully with these authorities and provided all information requested by them.

63
<PAGE>

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine. Each
stockholder is entitled to one vote for each share of Common Stock held by
such stockholder. The Company's Certificate of Incorporation does not provide
for cumulative voting. The Common Stock is not entitled to preemptive rights
and is not subject to redemption. Upon liquidation, dissolution, or winding-up
of the Company, the assets legally available for distribution to stockholders
are distributed ratably among the holders of Common Stock outstanding at that
time after payment of liquidation preferences, if any, on any outstanding
Preferred Stock. Each outstanding share of Common Stock is fully paid and
nonassessable.

Preferred Stock Purchase Rights. Pursuant to the Company's Stockholder
Rights Plan, holders of the Common Stock received a distribution of one right
(the "Rights") to purchase one ten thousandth of a share of Series C Junior
Participating Preferred Stock for each share of Common Stock owned. The Rights
will generally become exercisable ten days after a person or group acquires
15% of the Company's outstanding voting securities or ten business days after
a person or group commences or announces an intention to commence a tender or
exchange offer that could result in the acquisition of 15% of any such
securities. Ten days after a person acquires 15% or more of the Company's
outstanding voting securities (unless this time period is extended by the
board of directors) each Right would, subject to certain adjustments and
alternatives, entitle the rightholder to purchase Common Stock of the Company
or stock of the acquiring company having a market value of twice the $24.00
exercise price of the Right (except that the acquiring person or group and
other related holders would not be able to purchase common stock of the
company on these terms). The Rights are nonvoting, expire in 2006 and may be
redeemed by the Company at a price of $.001 per Right at any time prior to the
tenth day after an individual or group acquired 15% of the Company's voting
stock, unless extended. The purpose of the Rights is to encourage potential
acquirors to negotiate with the Company's Board of Directors prior to
attempting a takeover and to give the Board leverage in negotiating on behalf
of the stockholder the terms of any proposed takeover.

PREFERRED STOCK

The Company's Certificate of Incorporation provides that the Company may,
without further action by the Company's stockholders, issue shares of
Preferred Stock in one or more series. The Board of Directors is authorized to
establish from time to time the number of shares to be included in any such
series and to fix the relative rights and preferences of the shares of any
such series, including without limitation dividend rights, dividend rate,
voting rights, redemption rights and terms, liquidation preferences and
sinking fund provisions. The Board of Directors may authorize and issue
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Common Stock. In addition,
the issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company.

Series C Preferred Stock. On July 21, 1997, the Company completed a private
placement of $18,000,0000 of a newly designated Series C Convertible Preferred
Stock (the "Series C Preferred Stock") to one institutional investor, RGC
International Investors, LDC. The face amount of the Preferred Stock accrues
at a rate of 3% per annum from the closing date to the conversion date. The
Preferred Stock is convertible from time to time into the Company's Common
Stock at a price equal to the lesser of (i) an amount equal to 100% of the
average of the closing bid prices of the Company's Common Stock for the five
consecutive trading days ending on the fifth trading day preceding a notice of
conversion and (ii) $20.70. The Company has agreed to file a registration
statement under the Securities Act of 1933 covering the shares of Common Stock
issuable upon conversion of the Preferred Stock issued in the private
placement. Subject to certain limitations, the Company may require the

64
<PAGE>

conversion of all the outstanding Preferred Stock beginning 180 days following
the date such registration statement is declared effective by the Securities
and Exchange Commission.

TRANSFER AGENT

The Transfer Agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.

SELLING STOCKHOLDERS

The Shares offered hereby consist of (i) 116,666 outstanding shares of
Common Stock which were issued upon conversion of certain convertible
debentures sold by the Company in a February 1996 private placement, (ii)
50,000 shares of Common Stock which were issued upon conversion of certain
convertible debentures sold by the Company in a June 1995 private placement,
(iii) up to 1,960,174 shares of Common Stock issued or issuable in connection
with certain of the Company's acquisitions in 1997, (iv) approximately
5,449,843 shares issued or issuable upon conversion of the Preferred Stock
(based upon the conversion price existing as of July 17, 1998), (v)
approximately 1,984,686 shares issuable upon the conversion of $6,723,125 in
aggregate principal amount of convertible promissory notes (based upon the
conversion price existing as of July 17, 1998) issued in connection with
certain of the Company's acquisitions in 1997 (the "Convertible Notes"), (vi)
1,342,000 shares of Common Stock issuable pursuant to the exercise of warrants
issued or issuable to certain Selling Stockholders, (vii) 880,000 shares of
Common Stock issuable pursuant to the exercise of options issued to certain
Selling Stockholders and (viii) 13,780 other shares of Common Stock owned by
the Selling Stockholders.

The following table sets forth as of July 16, 1998, information regarding
the beneficial ownership of the Company's Common Stock held by each Selling
Stockholder who may sell the Shares pursuant to this Prospectus as of such
date, the number of Shares pursuant to this Prospectus as of such date, the
number of Shares offered hereunder by each such Selling Stockholder and the
net ownership of shares of Common Stock, if all such Shares so offered are
sold by each Selling Stockholder.

65
<PAGE>

<TABLE>
<CAPTION>
TOTAL NUMBER
OF
SHARES TO BE TOTAL SHARES TO BE
OFFERED FOR OWNED UPON COMPLETION
SHARES OWNED SELLING OF THIS OFFERING(2)
PRIOR TO THIS STOCKHOLDER'S --------------------------------
NAME OF SELLING STOCKHOLDER OFFERING(1) ACCOUNT(2) NUMBER PERCENT
- - --------------------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Siegler, Collery & Co.
Profit Sharing Plan.... 12,500 12,500 0 0%
The SC Fundamental Value
Fund, L.P. ............ 401,690 65,000 336,690 1.4%
SC Fundamental Value
BVI, Ltd. ............. 195,710 35,000 160,710 *
Gary L. Fuhrman(3)...... 112,591(4) 41,666 70,925(4) *
Peter M. Collery(5)..... 3,092,002(6)(7) 6,250 3,085,752(6)(7) 12.8%
Gary N. Siegler(8)...... 4,328,117(6)(9) 6,250 4,321,867(6)(9) 17.2%
Grove Diagnostic Imaging
Center, Inc. .......... 44,016 44,016 0 0%
Accessible MRI of
Baltimore County Inc. . 119,166 553,506(10) 0 0%
Robert Wasserman........ 5,000 5,000 0 0%
Robert Kupchak.......... 63,163 63,163 0 0%
Mark Novick(12)......... 221,402 221,402 0 0%
Dennis Rossi(12)........ 64,575 64,575 0 0%
Art Taylor(12).......... 43,544 43,544 0 0%
Eliezer Offenbacher(12). 32,288 32,288 0 0%
Aldonna McCarthy(12).... 14,021 14,021 0 0%
Ronald W. Ash........... 116,639 116,639 0 0%
Sandra Lowson........... 20,583 20,583 0 0%
Bronx MRI Associates.... 44,021 276,754(10) 0 0%
Queens MRI Associates... 58,694 369,002(10) 0 0%
Vascular Services,
Inc. .................. 7,337 46,125(10) 0 0%
National Medical
Development, Inc. ..... 43,415 255,720(10) 0 0%
RGC International
Investors, LDC(11)..... 6,616,843 6,616,843 0 0%
PresGar Imaging,
LLC(12)................ 433,237 433,237 0 0%
PresGar Medical Imaging,
Inc.(12)............... 433,237 433,237 0 0%
Radiology Partners,
Inc.(12)............... 72,077 72,077 0 0%
Drs. Sheer, Ahearn & As-
sociates, Inc.(12)..... 82,124 82,124 0 0%
Oaktree Radiology,
P.A.(12)............... 71,576 71,576 0 0%
Regional Imaging Consul-
tants Corp.(12)........ 295,203 295,203 0 0%
Grajo Imaging, Inc.(12). 187,454 187,454 0 0%
Advance Radiology--Imag-
ing Services of Trum-
bull, Inc.(12)......... 33,948 33,948 0 0%
Parvez Shirazi.......... 8,780 8,780 0 0%
David L. Condra......... 51,617 51,617 0 0%
Sirrom Investments,
Inc.................... 55,549 55,549 0 0%
The MRI Center of Jack-
sonville, Inc. ........ 107,500 107,500 0 0%
DVI Financial Services
Inc. .................. 100,000(13) 100,000(13) 0 0%
Duane C. Montopoli(14).. 120,000(15) 600,000(16) 0 0%
J. Alix & Associ-
ates(17)............... 75,000(18) 75,000(18) 0 0%
Geoffrey A. Whynot(19).. 0 160,000(20) 0 0%
Christopher J.
Joyce(21).............. 0 120,000(22) 0 0%
</TABLE>
- - --------
* Less than 1 percent.
(1) Except as otherwise noted, all shares or rights to these shares are
beneficially owned and sole voting and investment power is held by the
party named.
(2) Assumes that none of the Selling Stockholders sells shares of Common
Stock not being offered hereunder or purchases additional shares of
Common Stock.
(3) Mr. Fuhrman is a Director of the Company and is a Director and Senior
Vice President of Arnhold and S. Bleichroder, Inc. ("ASB"). ASB acted as
financial advisor to the Company in connection with the private
placements of the Company's 11% Convertible Subordinated Debentures due
2000, 10.5% Convertible

66
<PAGE>

Subordinated Debentures due 2001 and Preferred Stock in May 1995, February
1996 and July 1997, respectively.
(4) Includes 36,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(5) Mr. Collery is a former Director of the Company.
(6) Messrs. Siegler and Collery are the trustees of the Siegler, Collery &
Co. Profit Sharing Plan and are controlling shareholders of the general
partner and investment manager of SC Fundamental Value Fund, L.P. and SC
Fundamental Value BVI, Ltd., respectively. In addition, Messrs. Siegler
and Collery may be deemed to control other entities which beneficially
own shares of the Company's Common Stock. All such shares are included in
such number.
(7) Includes 51,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(8) Mr. Siegler is a Director of the Company.
(9) Includes 608,666 shares underlying outstanding options which are
exercisable immediately or within 60 days, 202,898 shares owned by The
Gary N. Siegler Foundation, a charitable foundation, and warrants to
acquire 525,000 shares of Common Stock held by 712 Advisory Services,
Inc. Mr. Siegler is deemed to beneficially own all of the shares of
Common Stock owned of record by such entities.
(10) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholders. Such Selling Stockholders are parties to certain
acquisition agreements with the Company, in which the Company has agreed
to pay (in additional shares and/or cash) to the Selling Stockholders an
amount equal to the shortfall in the market value of the shares issued to
such Selling Stockholders at the closings of the relevant acquisitions in
the event the market value of such shares at the relevant effective date
of this Registration Statement is less than the market value of such
shares as of the closing of the acquisition or, in other cases, as of the
execution of the relevant acquisition agreement. The actual number of
shares of Common Stock issuable pursuant to such provisions is
indeterminate and is subject to adjustment depending on the future market
price of the Common Stock. The actual number of shares of Common Stock
offered hereby, and included in the Registration Statement of which this
Prospectus is a part, include such additional number of shares of Common
Stock as may be issued or issuable pursuant to such provisions. For
purpose of estimating the number of shares of Common Stock to be included
in this Registration Statement, the Company calculated 125% of the number
of shares issuable upon the exercise of such remedies as of July 17, 1998
(based upon a market price of $3.39 which is 100% of the average of the
daily closing prices of the Common Stock reported on the Nasdaq National
Market for the five consecutive trading days preceding July 17, 1998).
(11) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholder upon conversion of, or issued in respect of, the Preferred
Stock held by such Selling Stockholder, including 1,167,000 shares of
Common Stock issuable pursuant to the exercise of warrants issued or
issuable to the holder of such Preferred Stock and other shares of Common
Stock which may be issuable to the holder of such Preferred Stock
pursuant to the terms of the Preferred Stock. The actual number of shares
of Common Stock issuable upon conversion of, or issued in respect of,
Preferred Stock is indeterminate, is subject to adjustment and could be
materially less or more than such estimated number depending on factors
which cannot be predicted by the Company at this time, including, among
other factors, the future market price of the Common Stock. The actual
number of shares of Common Stock offered hereby, and included in the
Registration Statement of which this Prospectus is a part, includes such
additional number of shares of Common Stock as may be issued or issuable
upon conversion of the Preferred Stock by reason of the floating rate
conversion price mechanism or other adjustment mechanisms described
therein, or by reason of any stock split, stock dividend or similar
transaction involving the Common Stock, in order to prevent dilution, in
accordance with Rule 416 under the Act. Pursuant to the terms of the
Preferred Stock, if the outstanding Preferred Stock had been actually
converted on July 17, 1998 the conversion price would have been $3.69
(100% of the average of the daily closing bid prices of the Common Stock
for the five consecutive trading days ending on the fifth trading day
immediately preceding such date) at which price the outstanding Preferred
Stock would have been converted into approximately 4,330,183 shares of
Common Stock. On June 18, 1998, 2,500 shares of

67
<PAGE>

Preferred Stock were converted into 1,119,660 shares of Common Stock.
Pursuant to the terms of the Preferred Stock, the shares of Preferred Stock
are convertible by any holder only to the extent that the number of shares
of Common Stock thereby issuable, together with the number of shares of
Common Stock owned by such holder and its affiliates (but not including
shares of Common Stock underlying unconverted shares of Preferred Stock),
would not exceed 4.9% of the then outstanding Common Stock as determined in
accordance with Section 13(a) of the Exchange Act. Accordingly, the number
of shares of Common Stock set forth in the table for this Selling
Stockholder exceeds the number of shares of Common Stock that this Selling
Stockholder could own beneficially at any given time through their
ownership of the Series C Preferred Stock. In that regard, beneficial
ownership of this Selling Stockholder set forth in the table is not
determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant
to the terms of the Preferred Stock, the Company has registered 200% of the
number of shares issuable upon the conversion of the outstanding Preferred
Stock as a good faith estimate of the shares issuable upon conversion of
the Preferred Stock. For purposes of this table, only 100% of the number of
shares of Common Stock issuable upon conversion of the outstanding
Preferred Stock as of July 17, 1998 (or 4,330,183 shares) are included in
this table, even though 8,660,366 shares, representing 200%, are covered by
this Prospectus.
(12) The number of shares set forth in the table represents an estimate of the
number of shares of Common Stock to be offered by such Selling
Stockholders upon conversion of the Convertible Notes held by such Selling
Stockholders. The actual number of shares of Common Stock issuable upon
conversion of the Convertible Notes is indeterminate, is subject to
adjustment and could be materially less or more than such estimated number
depending on factors which cannot be predicted by the Company at this
time, including, among other factors, the future market price of the
Common Stock. The actual number of shares of Common Stock offered hereby,
and included in the Registration Statement of which this Prospectus is a
part, include such additional number of shares of Common Stock as may be
issued or issuable upon conversion of the Convertible Notes by reason of
the floating rate conversion price mechanism, or by reason of any stock
split, stock dividend or similar transaction involving the Common Stock,
in order to prevent dilution, in accordance with Rule 416 under the Act.
Pursuant to the terms of the Convertible Notes, if the Convertible Notes
had been actually converted on July 17, 1998 the conversion price would
have been $3.39 (100% of the average of the daily closing prices of the
Common Stock reported on the Nasdaq National Market for the five
consecutive trading days immediately preceding such date) at which price
the Convertible Notes would have been converted into approximately
1,984,686 aggregate shares of Common Stock.
(13) Represents shares of Common Stock issuable pursuant to warrants issued or
issuable to the Selling Stockholder.
(14) Mr. Montopoli is the President and Chief Executive Officer of the Company.
(15) Constitutes 120,000 shares underlying outstanding options which are
exercisable immediately or within 60 days.
(16) Constitutes 600,000 shares underlying outstanding options granted to Mr.
Montopoli upon his appointment as the Company's President and Chief
Executive Officer on February 2, 1998. Such options vest in five equal
annual installments beginning January 30, 1998, unless sooner accelerated
by certain "change of control" events. See "Management--Employment
Agreements."
(17) J. Alix & Associates was retained by the Company on November 2, 1997 to
provide interim management services to the Company.
(18) Constitutes 75,000 shares underlying outstanding warrants exercisable by
the Selling Stockholder.
(19) Mr. Whynot is the Chief Financial Officer and Senior Vice President--
Finance of the Company.
(20) Constitutes 160,000 shares underlying outstanding options granted to Mr.
Whynot upon his appointment as the Company's Chief Financial Officer and
Senior Vice President--Finance on March 23, 1998. Such options vest in
four equal installments beginning March 23, 1998 unless accelerated by
certain "change of control" events. See "Management--Employment
Agreements."
(21) Mr. Joyce is Senior Vice President--Legal Affairs and Administration and
Secretary of the Company.
(22) Constitutes 120,000 shares underlying outstanding options granted to Mr.
Joyce upon his appointment as the Company's Senior Vice President--Legal
Affairs and Administration and Secretary on April 6, 1998. Such options
vest in four equal installments beginning April 6, 1998 unless accelerated
by certain "change of control" events. See "Management--Employment
Agreements."

68
<PAGE>

PLAN OF DISTRIBUTION

The Selling Stockholders, or their respective pledgees, donees, transferees
or other successors in interest, may sell some or all of the Shares in one or
more transactions (which may involve block transactions) on the Nasdaq
National Market or on such other market on which the Common Stock may from
time to time be trading, in privately negotiated transactions, through the
writing of options on the Shares, short sales or any combination thereof. The
sale price to the public may be the market price prevailing at the time of
sale, a price related to such prevailing market price or such other price as
the Selling Stockholders determine from time to time. The Shares may also be
sold pursuant to Rule 144.

The Selling Stockholders, or their respective pledgees, donees, tranferees
or other successors in interest, may also sell the Shares directly to market
makers acting as principals and/or broker/dealers, who may act as agent or
acquire the Shares as principal. Any broker/dealer participating in such
transactions as agent may receive a commission from the Selling Stockholders
(and, if they act as agent for the purchaser of such Shares, from such
purchaser). Usual and customary brokerage fees will be paid by the Selling
Stockholders. Broker/dealers may agree with the Selling Stockholders to sell a
specified number of Shares at a stipulated price per Share and, to the extent
such broker/dealer is unable to do so acting as agent for the Selling
Stockholders, to purchase as principal any unsold Shares at the price required
to fulfill the respective broker/dealer's commitment to the Selling
Stockholders. Broker/dealers who acquire Shares as principals may thereafter
resell such Shares from time to time in transactions (which may involve cross
and block transactions and which may involve sales to and through other
broker/dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in
connection which such resales may pay to or receive commissions from the
purchasers of such Shares. If applicable, the Selling Stockholders also may
have distributed or may distribute Shares to one or more of their limited
partners which are unaffiliated with the Company; such limited partners may,
in turn, distribute such shares as described above. There can be no assurance
that all or any of the Shares offered hereby will be sold by the Selling
Stockholders.

The Company is bearing all costs relating to the registration of the Shares,
provided that any commissions or other fees payable to broker/dealers in
connection with any sale of the Shares will be borne by the Selling
Stockholders or other party selling such Shares. The Company has agreed to
indemnify certain of the Selling Stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the Act,
or to contribute to payments the Selling Stockholders, or their transferees or
assignees, may be required to make in respect thereof.

The Selling Stockholders must comply with the requirements of the Act and
the Exchange Act and the rules and regulations thereunder in the offer and
sale of the Shares. In particular, during such times as the Selling
Stockholders may be deemed to be engaged in a distribution of the Common
Stock, and therefore be deemed to be an underwriter under the Act, it must
comply with the Exchange Act, as amended, and will, among other things:

(a) not engage in any stabilization activities in connection with the
Company's securities;

(b) furnish each broker/dealer through which Shares may be offered such
copies of this Prospectus, as amended from time to time, as may be required
by such broker/dealer; and

(c) not bid for or purchase any securities of the Company or attempt to
induce any person to purchase any securities of the Company other than as
permitted under the Exchange Act.

LEGAL MATTERS

The validity of the shares of the Company's Common Stock offered hereby will
be passed upon for the Company by Christopher J. Joyce, Esq., Senior Vice
President--Legal Affairs and Administration of the Company.

69
<PAGE>

EXPERTS

The consolidated balance sheet of Medical Resources, Inc. as of December 31,
1997 and the consolidated statements of operations, stockholders' equity, and
cash flows and the financial statement schedule for the years ended December
31, 1997 and 1995, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph with respect to
the issues that raise substantial doubt about the Company's ability to
continue as a going concern mentioned in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

The consolidated balance sheet of the Company as of December 31, 1996 and
the related consolidated statements of operations, cash flows and changes in
stockholders' equity for the year ended December 31, 1996, included in this
Prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants as set forth in their
report thereon included herein. The consolidated financial statements referred
to above are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy and
information statements filed by the Company may be inspected and copied at the
Public Reference Section of the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W.,
Washington D.C. 20549 at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding the Company; the address of such site is http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act"), with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including all exhibits
thereto, may be obtained from the Commission's principal office in Washington
D.C. upon payment of the fees prescribed by the Commission or may be examined
without charge at the offices of the Commission as described above.

The Company's securities are quoted on the Nasdaq National Market. Reports
and other information about the Company may be inspected at the offices
maintained by the National Association of Securities Dealers, Inc., NASDAQ
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.

70
<PAGE>

MEDICAL RESOURCES, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP--Independent Auditors......................... F-2
Report of Coopers & Lybrand L.L.P.--Independent Accountants............... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Schedule II--Valuation and Qualifying Accounts............................ F-46
Unaudited Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997................................................................. F-47
Unaudited Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1997.................................................. F-48
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997.................................................. F-49
Notes to Unaudited Consolidated Financial Statements...................... F-50
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Medical Resources, Inc.

We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
the consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1997 and 1995. Our audits also included
the financial statement schedule listed on page F-1 for the years then ended.
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Medical Resources, Inc. and Subsidiaries at December 31, 1997 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein for 1997 and 1995.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2,
the Company incurred a net loss in 1997 and has a working capital deficiency
at December 31, 1997. In addition, the Company has not complied with certain
covenants of loan agreements. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Hackensack, New Jersey
May 26, 1998 except for Note 16,
as to which the date is July 8, 1998

F-2
<PAGE>

MEDICAL RESOURCES, INC.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Medical Resources, Inc.

We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
the related consolidated statement of operations, stockholders' equity, and
cash flows and the financial statement schedule listed in the index on page F-
1 for the year ended December 31, 1996. These financial statements and the
Schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Medical Resources, Inc. and Subsidiaries at December 31, 1996 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.

/s/ Coopers & Lybrand L.L.P.

Parsippany, New Jersey
March 28, 1997

F-3
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 23,198 $ 15,346
Short-term investments.............................. -- 1,663
Cash and short-term investments, restricted......... 600 4,500
Accounts receivable, net............................ 65,887 39,878
Other receivables................................... 5,430 2,291
Prepaid expenses.................................... 7,027 3,715
Income taxes recoverable............................ 6,504 --
Deferred tax assets, net............................ 2,492 3,354
-------- --------
Total current assets................................ 111,138 70,747
-------- --------
Property and equipment, net.......................... 64,343 24,397
Goodwill, net........................................ 149,624 62,639
Other intangible assets, net......................... 6,836 2,119
Other assets......................................... 4,189 1,216
Deferred tax assets, net............................. 2,353 2,351
Restricted cash...................................... 473 1,045
-------- --------
Total assets........................................ $338,956 $164,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior Notes due 2001 through 2005, classified as
current............................................ $ 78,000 $ --
Notes and mortgages payable, classified as current.. 3,206 --
Capital lease obligations, classified as current.... 9,555 --
Current portion of notes and mortgages payable...... 13,313 6,729
Current portion of capital lease obligations........ 10,311 5,992
Borrowings under line of credit..................... 3,744 --
Accounts payable.................................... 13,141 10,903
Accrued expenses.................................... 28,018 2,167
Income taxes payable................................ -- 2,064
Common stock subject to redemption.................. 9,734 --
Other current liabilities........................... 290 117
-------- --------
Total current liabilities........................... 169,312 27,972
Notes and mortgages payable, less current portion.... 21,539 12,638
Obligations under capital leases, less current
portion............................................. 16,361 8,373
Convertible debentures............................... -- 6,988
Other long term liabilities.......................... 178 108
-------- --------
Total liabilities................................... 207,390 56,079
Minority interest.................................... 4,662 2,051
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000
shares, 21,889 issued and outstanding at December
31, 1997 and 18,594 issued and 18,326 outstanding
at December 31, 1996............................... 219 186
Common stock to be issued; 600 shares............... -- 1,721
Series C Convertible Preferred Stock, $1,000 per
share stated value; 18 shares issued and
outstanding (liquidation preference of 3% per
annum)............................................. 18,242 --
Additional paid-in capital.......................... 138,664 102,928
Unrealized appreciation of investments.............. -- 26
Retained earnings (deficit)......................... (30,221) 2,956
Less 268 common shares in Treasury, at cost......... -- (1,433)
-------- --------
Total stockholders' equity.......................... 126,904 106,384
-------- --------
Total liabilities and stockholders' equity.......... $338,956 $164,514
======== ========
</TABLE>

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

F-4
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Net service revenues............................... $144,412 $64,762 $35,860
Imaging center and staffing operating costs:
Technical services payroll and related expenses.. 33,552 10,836 6,815
Medical supplies................................. 9,286 4,223 2,439
Diagnostic equipment maintenance................. 7,761 3,274 1,647
Independent contractor fees...................... 6,810 1,202 437
Administrative expenses.......................... 22,878 11,937 5,252
Other center level costs......................... 8,947 3,354 1,430
Provision for uncollectible accounts receivable.... 20,364 4,705 3,378
Corporate general and administrative............... 12,157 4,567 2,994
Depreciation and amortization...................... 18,733 6,964 4,274
Stock-option based compensation.................... 2,536 -- --
Loss on impairment of goodwill and other long lived
assets............................................ 12,962 -- --
Other unusual charges.............................. 9,723 -- --
--------- ------- -------
Operating income (loss)........................ (21,297) 13,700 7,194
Interest expense, net.............................. 8,814 2,834 1,829
--------- ------- -------
Income (loss) from continuing operations before
minority interest and income taxes................ (30,111) 10,866 5,365
Minority interest (loss)........................... 636 308 (124)
--------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... (30,747) 10,558 5,489
Provision for income taxes......................... 1,221 3,575 1,243
--------- ------- -------
Income (loss) from continuing operations........... (31,968) 6,983 4,246
Discontinued operations, net of tax:
Income (loss) from discontinued operations (net
of income tax provision of $1,079, $587 and
$103, respectively)............................. 729 271 (1,180)
Loss on sale of discontinued business (net of tax
benefit of $656)................................ -- -- (1,376)
--------- ------- -------
Income (loss) from discontinued operations....... 729 271 (2,556)
--------- ------- -------
Net income (loss).................................. (31,239) 7,254 1,690
Charges related to restricted common stock and
convertible preferred stock....................... (1,938) -- --
--------- ------- -------
Net income (loss) applicable to common
stockholders...................................... $ (33,177) $ 7,254 $ 1,690
--------- ------- -------
Income (loss) per common share applicable to common
stockholders:
Basic--
Net income (loss) per share before discontinued
operations...................................... $ (1.65) $ 0.62 $ 0.55
Discontinued operations.......................... .03 .02 (.33)
--------- ------- -------
Net income (loss) per share...................... $ (1.62) $ 0.64 $ 0.22
--------- ------- -------
Diluted--
Net income (loss) per share before discontinued
operations...................................... $ (1.65) $ 0.57 $ 0.55
Discontinued operations.......................... .03 .02 (.33)
--------- ------- -------
Net income (loss) per share...................... $ (1.62) $ 0.59 $ 0.22
========= ======= =======
</TABLE>

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

F-5
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(31,239) $ 7,254 $ 1,690
-------- -------- -------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 19,334 7,466 4,567
Provision for uncollectible accounts receivable.. 20,656 4,784 3,378
Deferred income tax provision.................... (836) (841) (2,161)
Stock-option based compensation expense.......... 2,536 -- --
Expense incurred in connection with warrants
issued to preferred stockholders................ 2,051 -- --
Loss on impairment of goodwill and other long
lived assets.................................... 12,962 -- --
Loss on sale of discontinued business............ -- -- 1,376
Other, net....................................... 112 94 149
Changes in operating assets and liabilities:
Accounts receivable.............................. (30,270) (14,386) (6,309)
Other receivables................................ (2,219) (1,814) (171)
Prepaid expenses................................. (2,403) (1,502) (614)
Income taxes recoverable or payable.............. (7,568) 2,186 (323)
Other assets..................................... (3,253) (1,495) (27)
Accounts payable and accrued expenses............ 16,560 2,081 4
Other current liabilities........................ (315) (1,510) 568
Other long-term liabilities...................... (1,430) (867) 208
-------- -------- -------
Total adjustments................................ 25,917 (5,804) 645
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... (5,322) 1,450 2,335
-------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (5,429) (1,070) (877)
Acquisition of diagnostic imaging centers, net of
cash acquired.................................... (57,883) (6,411) (1,764)
Acquisition of temporary staffing offices, net of
cash acquired.................................... 176 (2,314) --
Acquisition of Dalcon Technologies, Inc., net of
cash acquired.................................... (615) -- --
Investment in diagnostic imaging center joint
venture.......................................... (1,000)
Costs associated with refinancing of assets under
capital leases................................... (1,461) -- --
Sale (purchase) of short-term investments, net.... 6,109 (1,637) 600
Purchase of restricted short-term investments..... -- (4,500) --
Increase in restricted cash....................... -- (600) --
Change in net assets of discontinued business..... -- -- 1,396
Other, net........................................ -- (171) --
-------- -------- -------
Net cash used in investing activities............ (60,103) (16,703) (645)
-------- -------- -------
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs. 76,523 -- --
Proceeds from issuance of preferred stock, net.... 16,965 -- --
Proceeds from sale/leaseback transactions......... 9,866 -- --
Proceeds from borrowings under notes payable...... 7,850 1,229 --
Borrowings under line of credit................... 3,744 -- --
Proceeds from common stock offering............... -- 25,944 --
Common stock issuance cost........................ -- (780) --
Proceeds from exercise of options and warrants.... 2,696 2,020 --
Note and capital lease repayments in connection
with acquisitions................................ (13,799) -- --
Note and capital lease repayments in connection
with Senior Notes transaction.................... (13,764) -- --
Note and capital lease repayments in connection
with sale/leaseback transactions................. (4,822) -- --
Principal payments under capital lease
obligations...................................... (6,651) (4,805) (3,043)
Principal payments on notes and mortgages payable. (5,312) (2,968) (1,119)
Proceeds from (redemption of) convertible
debentures....................................... (19) 6,533 4,103
Purchase of treasury stock........................ -- (64) (1,368)
Purchase of Maternity preferred stock............. -- -- (269)
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... 73,277 27,109 (1,696)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 7,852 11,856 (6)
Cash and cash equivalents at beginning of year.... 15,346 3,935 3,941
Reclassification of prior year restricted cash.... -- (445) --
-------- -------- -------
Cash and cash equivalents at end of year.......... $ 23,198 $ 15,346 $ 3,935
======== ======== =======
</TABLE>

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

F-6
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Income taxes........................................ $ 11,091 $ 3,440 $ 1,982
Interest............................................ 7,201 2,639 1,894
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital lease obligations and notes payable incurred
for diagnostic imaging and computer equipment....... 13,654 2,469 1,159
Capital lease obligations assumed in connection with
acquisitions........................................ 26,612 6,749 --
Notes payable obligations assumed in connection with
acquisitions........................................ 36,505 13,850 --
Conversion of subordinated debentures to Common
Stock, net of issuance costs........................ 6,636 5,735 --
Issuance of Common Stock in connection with
acquisitions........................................ 17,281 47,938 3,448
Common stock subject to redemption................... 9,734
Issuance of warrants in connection with acquisitions. 3,853 975 --
Issuance of warrants to convertible preferred
stockholders........................................ 2,051 -- --
Issuance of notes payable in connection with
acquisitions........................................ 4,250 1,848 --
Tax benefit from exercise of stock options........... 1,000 -- --
Maternity debt forgiveness treated as capital
contribution........................................ -- -- 1,022
</TABLE>

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

F-7
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED TREASURY UNREALIZED
COMMON STOCK TO PREFERRED PAID-IN EARNINGS SHARES APPREC. ON
TOTAL STOCK BE ISSUED STOCK CAPITAL (DEFICIT) AT COST INVESTMENTS
-------- ------ --------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... $ 11,873 $ 71 $ 18,360 $ (6,558)
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 3,448 6 $ 1,721 1,721
Maternity debt
forgiveness treated as
a capital contribution. 1,022 1,022
Maternity short period
(1/1-1/31/95).......... 570 570
Redemption by Maternity
of its preferred stock. (269) (269)
Preferred stock buyout.. 1 1
Purchase of treasury
shares................. (1,368) $(1,368)
Net income.............. 1,690 1,690
-------- ---- ------- ------- -------- -------- ------- ----
Balance at December 31,
1995................... 16,967 77 1,721 20,835 (4,298) (1,368)
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 47,938 56 47,882
Warrants issued related
to acquisition of
diagnostic imaging
centers................ 975 975
Net proceeds from public
offering of 3,680,000
shares of Common Stock. 25,944 37 25,907
Public offering issuance
costs.................. (780) (780)
Conversion of
subordinated debentures
into Common Stock...... 5,735 12 5,723
Exercise of stock
options................ 2,022 4 2,018
Tax benefit from
exercise of stock
options................ 368 368
Unrealized appreciation
on investment.......... 26 $ 26
Purchase of treasury
shares................. (65) (65)
Net income.............. 7,254 7,254
-------- ---- ------- ------- -------- -------- ------- ----
Balance at December 31,
1996................... 106,384 186 1,721 102,928 2,956 (1,433) 26
Issuance of Common Stock
related to acquisition
of diagnostic imaging
centers................ 10,673 12 (1,721) 10,949 1,433
Issuance of Common Stock
related to acquisition
of staffing offices.... 2,000 1 1,999
Issuance of Common Stock
related to acquisition
of Dalcon Technologies. 1,934 1 1,933
Warrants issued related
to acquisition of
diagnostic imaging
centers................ 3,853 3,853
Warrants issued in
connection with
preferred stock........ 2,051 2,051
Warrants issued in
connection with long-
term borrowings........ 337 337
Conversion of
debentures............. 6,636 13 6,623
Exercise of stock
options and warrants... 2,696 4 2,692
Stock-option based
compensation expense... 2,536 2,536
Tax benefit from
exercise of stock
options................ 1,000 1,000
Common Stock issued in
connection with
acquisition earnout.... 2,676 3 2,673
Issuance of Convertible
Preferred Stock........ 16,965 $18,000 (1,035)
Accretion of Convertible
Preferred Stock........ -- 242 (242)
Increase in price
protection related to
certain restricted
common stock........... (1,696) (1,696)
Other, net.............. 99 125 (26)
Net loss................ (31,239) (31,239)
-------- ---- ------- ------- -------- -------- ------- ----
Balance at December 31,
1997................... $126,904 $219 $ -- $18,242 $138,664 $(30,221) $ -- $--
======== ==== ======= ======= ======== ======== ======= ====
</TABLE>

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

F-8
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company

Medical Resources, Inc., (herein referred to as "MRI" and collectively with
its subsidiaries, affiliated partnerships and joint ventures, referred to
herein as the "Company") specializes in the operation and management of
diagnostic imaging centers. The Company operates and manages primarily fixed-
site, free-standing outpatient diagnostic imaging centers (herein referred to
as "centers"), and provides diagnostic imaging network management services to
managed care providers. The Company's diagnostic imaging segment also develops
and sells radiology industry information systems through its subsidiary,
Dalcon Technologies, Inc.

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. (NASDAQ:RHBC) for $33 million (the "StarMed Sale"). Closing of the
StarMed Sale, which is subject to the satisfaction of customary conditions and
approval by the Company's Senior Note holders, is expected to occur in late
July or in August of this year. Due to the pending StarMed Sale, the results
of operations of StarMed are herein reflected in the Company's Consolidated
Statements Of Operations as discontinued operations (see Note 16).

Consolidation

The accompanying consolidated financial statements include the accounts of
MRI, its wholly-owned subsidiaries, majority-owned joint ventures and limited
partnerships in which the Company is a general partner. All material
intercompany balances and transactions have been eliminated. As general
partner, the Company is subject to all the liabilities of a general partner
and as of December 31, 1997, is entitled to share in partnership profits,
losses and distributable cash as provided in the partnership agreements. The
limited partnership interests are shown in the accompanying financial
statements as minority interest. Under certain of the partnerships, the
Company also is paid a monthly management fee based on patient cash
collections and/or patient volume under management agreements. Partnership
losses allocable to limited partners in excess of their respective capital
accounts are charged to the Company as general partner. Future income related
to such partnerships will be allocated to the Company as general partner until
such time as the Company has recovered the excess losses. Certain of the
limited partnership agreements require limited partners to make cash
contributions in the event their respective capital accounts are reduced below
zero due to partnership operating losses. The Company has not reflected this
potential recovery from the limited partners due to uncertainty regarding the
ultimate receipt of the cash contributions.

Revenue Recognition

F-9
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the time services are rendered. Subject to the foregoing, the Company's
imaging centers recognize revenue under one of the three following types of
agreements with Interpreting Physicians:

Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.

The Company also recognizes revenue from the sale of radiology information
systems. Such revenues are recognized on an accrual basis as earned.

Reclassification

Certain prior year items have been reclassified to conform to the current
year presentation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues, expenses, assets
and liabilities, and the disclosure of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. The most
significant estimates relate to contractual allowances, the allowance for
doubtful accounts receivable, income taxes, contingencies and the useful lives
of equipment. In addition, healthcare industry reforms and reimbursement
practices will continue to impact the Company's operations and the
determination of contractual and other allowance estimates. Actual results
could differ from management's estimates.

Cash and Cash Equivalents

For financial statement purposes cash equivalents include short-term
investments with an original maturity of ninety days or less. Restricted cash
consists of amounts held pursuant to the terms of letters of credit and is
classified based upon the expiration of the restriction.

F-10
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Short-Term Investments

At December 31, 1996 the Company's short-term investments, consist of
certificates of deposits and treasury bills with maturities between three and
twelve months. Such securities are classified as available-for-sale.
Securities available for sale are carried at fair value with unrealized gains
and losses, net of tax, reported as a separate component of shareholders'
equity. Any realized gains and losses are determined on the specific
identification method.

Restricted short-term investments at December 31, 1996 consist of $4,500,000
of United States Government obligations held pursuant to a letter of credit
issued in connection with one of the Company's acquisitions. The letter of
credit served to reserve consideration for the acquisition in the event that
the shares of the Company's Common Stock issued to the seller were not
registered within 60 days of the closing of the sale. During 1997, the shares
were registered within the specified timeframe of the agreement, and as such,
the restriction of the investment was removed.

Investments in Joint Ventures and Limited Partnerships

The minority interests in the equity of consolidated joint ventures and
limited partnerships, which are not material, are reflected in the
accompanying consolidated financial statements. Investments by the Company in
joint ventures and limited partnerships over which the Company can exercise
significant influence but does not control are accounted for using the equity
method.

The Company suspends recognition of its share of joint ventures losses in
entities in which it holds a minority interest when its investment is reduced
to zero. The Company does not provide for additional losses unless, as a
partner or joint venturer, the Company has guaranteed obligations of the joint
venture or limited partnership.

Property and Equipment

Property and equipment procured in the normal course of business is stated
at cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives,
generally five to seven years, or the term of a capital lease, if applicable.
Leasehold improvements are being amortized over the shorter of the useful life
or the remaining lease term. Expenditures for maintenance and repairs are
charged to operations as incurred. Renewals and betterments are capitalized.

Goodwill and other intangible assets

The excess of purchase price of businesses over the fair value of assets
acquired is recorded as goodwill and is amortized on a straight line basis
generally over twenty years. Other intangible assets consist of covenants not
to compete, value of managed care contracts, organizational costs and
capitalized lease costs related to acquired businesses and are amortized on a
straight line basis over their respective initial estimated lives of three to
ten years. Gross intangible assets and related accumulated amortization are as
follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Goodwill
Gross intangible........................................ $157,362 $65,666
Less accumulated amortization........................... (7,738) (3,027)
-------- -------
Net................................................... $149,624 $62,639
======== =======
Other intangibles
Gross intangibles....................................... $ 9,484 $ 3,996
Less accumulated amortization........................... (2,648) (1,877)
-------- -------
Net................................................... $ 6,836 $ 2,119
======== =======
</TABLE>

F-11
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Amortization expense from continuing operations for goodwill was $5,626,000,
$1,039,000 and $161,000 in 1997, 1996 and 1995, respectively. Amortization
expense for other intangibles was $1,151,000, $506,000 and $337,000 in 1997,
1996 and 1995, respectively.

The Company periodically reviews goodwill to assess recoverability based
upon expectations of undiscounted cash flows and operating income of each
entity having a material goodwill balance. An impairment would be recognized
in operating results, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the related costs in excess of net assets acquired. The amount of the
impairment would be measured by comparing the carrying value of intangible and
other long-lived assets to their fair values. See discussion of 1997
impairment loss in Note 3 of the Notes to Consolidated Financial Statements.

F-12
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Earnings Per Share

Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The adoption of SFAS No. 128 requires the presentation of Basic
Earnings per Share and Diluted Earnings per Share. Basic earnings per share is
based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share is based on the weighted average number of
common shares outstanding during the year plus the potentially issuable common
shares related to outstanding stock options, warrants and convertible debt.
Earnings per share amounts for prior periods, including related quarters, have
been restated to conform to the requirements of SFAS No. 128. The computations
of basic earnings per share and diluted earnings per share were as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE INFORMATION
Income (loss) from continuing operations............. $(31,968) $ 6,983 $4,246
Income (loss) from discontinued operations........... 729 271 (2,556)
-------- ------- ------
Net income (loss).................................... (31,239) 7,254 1,690
Charges related to restricted common stock and
convertible preferred stock......................... (1,938) -- --
-------- ------- ------
Net income (loss) applicable to common Stockholders.. $(33,177) $ 7,254 $1,690
======== ======= ======
Weighted average number of common shares............. 20,495 11,296 7,730
======== ======= ======
Net income (loss) per share before discontinued
operations.......................................... $ (1.65) $ 0.62 $ 0.55
Discontinued operations.............................. 0.03 0.02 (0.33)
-------- ------- ------
Basic earnings per share............................. $ (1.62) $ 0.64 $ 0.22
======== ======= ======
DILUTED EARNINGS PER SHARE INFORMATION
Income (loss) from continuing operations............. $(31,968) $ 6,983 $4,246
Loss from discontinued operations.................... 729 271 (2,556)
-------- ------- ------
Net income (loss).................................... (31,239) 7,254 1,690
Interest savings from conversion of convertible
subordinated debentures............................. -- 405 --
Charges related to restricted common stock and
convertible preferred stock......................... (1,938) -- --
-------- ------- ------
Net income (loss) applicable to common Stockholders
after assumed conversions........................... $(33,177) $ 7,659 $1,690
======== ======= ======
Weighted average number of common shares............. 20,495 11,296 7,730
Incremental shares issuable on exercise of warrants
and options......................................... -- 417 51
Incremental shares issuable on conversion of
convertible subordinated debentures................. -- 1,213 --
-------- ------- ------
Weighted average number of diluted common shares..... 20,495 12,926 7,781
======== ======= ======
Net income (loss) per share before discontinued
operations.......................................... $ (1.65) $ 0.57 $ 0.55
Discontinued operations.............................. 0.03 0.02 (0.33)
-------- ------- ------
Diluted earnings (loss) per share.................... $ (1.62) $ 0.59 $ 0.22
======== ======= ======
</TABLE>

Stock Options

SFAS No. 123, Accounting for Stock-Based Compensation requires the Company
to choose between two different methods of accounting for stock options. The
Statement defines a fair-value-based method of accounting for stock options
but allows an entity to continue to measure compensation cost for stock
options using the

F-13
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). The Company has elected to continue using the
accounting methods prescribed by APB No. 25 and will disclose the amount of
the proforma compensation expense, required to be disclosed under the SFAS No.
123. See disclosure in Note 9 of the Notes to the Consolidated Financial
Statements.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. As of December 31,
1997, the Company has provided a valuation reserve against a portion of its
net deferred income tax assets due to uncertainty regarding the ultimate
recovery of such deferred income tax assets. See further discussion in Note 10
of the Notes to the Consolidated Financial Statements.

Recent Accounting Pronouncements

Statement Of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", requires an entity to expense all
software development costs incurred in the preliminary project state, training
costs and data conversion costs for fiscal years beginning after December 15,
1998. The Company believes that this statement will not have a material effect
on the Company's accounting for computer software acquisition cost.

2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY

As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note lenders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.

F-14
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

successful in identifying or consummating financing necessary to satisfy the
obligations which would become immediately due and payable. As a result of the
uncertainty related to the defaults and corresponding remedies described
above, the Senior Notes and the other loans and capital leases are shown as
current liabilities on the Company's Consolidated Balance Sheet at December
31, 1997 and the Company has a deficit in working capital of $58,174,000.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. In addition to continuing to negotiate with the Senior
Note lenders in an attempt to obtain waivers or amendments of the
aforementioned defaults, the Company has taken various actions in response to
this situation, including the following: (i) it effected a workforce reduction
in March 1998 aimed at reducing the Company's overall expense levels, and (ii)
it has retained the investment banking firm of SBC Warburg Dillon Read to
assist the Company in exploring a possible sale of the Company's StarMed
temporary staffing subsidiary (see Note 16).

The financial statements, however, do not include any further adjustments
reflecting the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of this uncertainty.

3. LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS AND OTHER
UNUSUAL CHARGES

During the fourth quarter of 1997, the Company recorded a $12,962,000 loss
on the impairment of goodwill and other long-lived assets. This loss consists
of the write-off of goodwill of $10,425,000, covenants not to compete of
$118,000 and fixed assets of $2,419,000. Primarily the entire impairment
relates to eight of the Company's diagnostic imaging centers that are under-
performing. The Company has recorded impairment losses for these centers
because the sum of the expected future cash flows, determined based on an
assumed continuation of current operating methods and structures, does not
cover the carrying value of the related long-lived assets.

During the fourth quarter of 1997, the Company also recorded $9,723,000 of
other unusual charges consisting of (i) $3,256,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits, (ii)
$2,243,000 for higher than normal professional fees, (iii) $2,169,000
($2,051,000 of which was a non-cash charge related to the issuance of 817,000
warrants) for penalties associated with delays in the registration of the
Company's common stock issued in connection with acquisitions or issuable upon
conversion of convertible preferred stock, (iv) $1,150,000 for the loss on
investment related to a potential acquisition not consummated, (v) $469,000
for costs associated with the investigation of related party transactions
which was concluded in April 1998 and (vi) $436,000 for management termination
benefits and related costs.

The Company expects to incur additional unusual charges of at least
$4,500,000 during 1998 primarily related to the estimated net costs associated
with the resolution of the shareholder and employee lawsuits, penalties
associated with delays in the registration of the Company's Common Stock and
costs associated with the investigation of related party transactions. Such
additional unusual charges could be substantially higher depending upon the
ultimate outcome of current negotiations regarding penalties associated with
failure to register the Company's Common Stock and the outcome of certain
litigation. See further discussion in Note 11 of the Notes to the Consolidated
Financial Statements.

F-15
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net is comprised of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Management fee receivables (net of contractual allowances)
Due from unaffiliated physicians (Type I revenues)...... $ 35,540 $23,188
Due from affiliated physicians (Type III revenues)...... 8,585 9,195
Patient and third party payor accounts receivable (Type II
revenues)................................................ 27,284 10,757
Temporary staffing service accounts receivable............ 13,400 6,335
Less: Allowance for doubtful accounts..................... (18,922) (9,597)
-------- -------
$ 65,887 $39,878
======== =======
</TABLE>

Accounts receivable is net of contractual allowances which represent
standard fee reductions negotiated with certain third party payors.
Contractual allowances amounted to approximately $93,490,000, $25,270,000 and
$13,375,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

The Company's receivables relate to a variety of different structures (see
discussion of revenue recognition in Note 1 of the Notes to Consolidated
Financial Statements) as well as a variety of payor classes, including third
party medical reimbursement organizations, principally insurance companies.
Approximately 24.2% and 19.5% of the Company's 1997 and 1996 imaging revenues
was derived from the delivery of services with respect to the timing of
payment is substantially contingent upon the timing of settlement of pending
litigation involving the recipient of services and third parties (Personal
Injury Type accounts receivable). The Company undertakes certain measures to
identify and document the individual's obligation to pay for services rendered
regardless of the outcome of the pending litigation. By its nature, the
realization of a substantial portion of these receivables is expected to
extend beyond one year from the date the service was rendered. The Company
anticipates that a material amount of its Personal Injury Type accounts
receivable will be outstanding for periods in excess of twelve months in the
future. The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts. For Personal Injury
Type accounts receivables, the Company provides for uncollectible accounts at
substantially higher rates than any other revenue source.

5. SHORT-TERM INVESTMENTS

The following is a summary of the investments in debt securities classified
as current assets, and which are available for sale (in thousands):

<TABLE>
<CAPTION>
UNREALIZED FAIR
COST GAINS VALUE
---------- ----- -------
<S> <C> <C> <C>
December 31, 1996
Available-for-sale:
US Government obligations...................... $ 5,361 $26 $ 5,387
Certificates of deposit........................ 776 -- 776
------- --- -------
Total.............................................. 6,137 26 6,163
Less: Restricted Investments..................... (4,500) -- (4,500)
------- --- -------
$ 1,637 $26 $ 1,663
======= === =======
</TABLE>

As of December 31, 1997, there were no short-term investments available-for-
sale.

F-16
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. PROPERTY AND EQUIPMENT

Property and equipment stated at cost are set forth below (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Diagnostic equipment..................................... $ 63,186 $ 33,938
Leasehold improvements................................... 18,684 9,352
Furniture and fixtures................................... 10,571 2,997
Land and buildings....................................... 4,987 632
Construction in progress................................. -- 270
-------- --------
97,428 47,189
Less: accumulated depreciation and amortization.......... (33,085) (22,792)
-------- --------
$ 64,343 $ 24,397
======== ========
</TABLE>

Depreciation and amortization expense from continuing operations related to
property and equipment amounted to $11,955,000, $5,419,000 and $3,775,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

7. ACCRUED EXPENSES

Accrued expenses are comprised of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Accrued professional fees................................... $ 5,875 $ 354
Accrued payroll and bonuses................................. 4,242 792
Accrued interest............................................ 2,749 323
Accrued radiologist fees.................................... 3,398 629
Other accrued expenses...................................... 11,754 69
------- -------
$28,018 $ 2,167
======= =======
</TABLE>

8. DEBT

Outstanding debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Senior Notes due 2001 through 2005, classified as current
due to financial covenant defaults...................... $ 78,000 $ --
======== =======
Revolving line of credit................................. $ 3,744 $ --
======== =======
Convertible debentures................................... $ -- $ 6,988
======== =======
OTHER NOTES AND MORTGAGES PAYABLE:
Debt issued or assumed in connection with 1997
acquisitions............................................ $ 19,809 $ --
Debt issued or assumed in connection with 1996
acquisitions............................................ 6,785 13,748
10.25% unsecured promissory note, monthly payments of
$171 including interest through December 2002........... 8,000 --
Other debt............................................... 3,464 5,619
-------- -------
Total other notes and mortgages payable.............. 38,058 19,367
-------- -------
Less current installments................................ (13,313) (6,729)
Less debt shown as current due to financial covenant
default................................................. (3,206) --
-------- -------
Total other notes and mortgages payable shown as long-
term.................................................... $ 21,539 $12,638
======== =======
</TABLE>

F-17
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During 1997, the Company borrowed $78,000,000 of Senior Notes (the "Senior
Notes") from a group of insurance companies led by the John Hancock Mutual
Life Insurance Company ("John Hancock"). The notes bear interest at an average
annual rate of 7.87%, are subject to annual sinking fund payments commencing
February 2001 and have a final maturity in February 2005. The Senior Notes are
guaranteed by substantially all of the Company's diagnostic imaging
subsidiaries and collateralized by certain partnership interests owned through
subsidiaries by the Company. In addition, the agreement relating to the
issuance of the Senior Notes imposes certain affirmative and negative
covenants on the Company and its restricted subsidiaries, including
restrictions on the payment of dividends. The Company used a portion of the
proceeds from the Senior Notes to retire capital lease obligations totaling
$8,274,000 and notes payable totaling $5,490,000. The difference between the
amount used to retire capital lease obligations and the carrying value of such
obligations was approximately $1,461,000. In accordance with Financial
Accounting Standards Board Interpretation 26 ("FIN 26") "Accounting for the
Purchase of a Leased Asset by the Lessee During the Term of the Lease," the
book value of the related assets have been increased by this amount, not to
exceed the fair value of the assets, which will be amortized over the
remaining useful lives of the assets. In connection with the Senior Note
transaction, the Company paid $337,000 to 712 Advisory Services, Inc., an
affiliate (the "Affiliate") of the Company's Chairman of the Board, for
financial advisory services.

The Company is currently in default of certain financial covenants under the
Senior Notes. See Note 2 of the Notes to the Consolidated Financial
Statements, Basis Of Financial Statement Presentation And Issues Affecting
Liquidity.

Debt issued or assumed in connection with 1997 acquisitions bear interest at
rates ranging from 8.6% to 13.75% and mature from 1998 through 2010. Such debt
includes the following convertible notes:

In August 1997, as part of the purchase price for the acquisition of the
business assets of the Presgar centers, the Company issued up to $3,700,000
in notes convertible into the Company's Common Stock, of which, $1,200,000
in principal amount is contingent upon the occurrence of certain events.
The notes ($2,500,000 outstanding at December 31, 1997) bear interest at
prime plus 1% (9.5% at December 31, 1997) and mature on August 21, 1998.

In October 1997, as part of the purchase price of the acquisition of the
Ohio centers, the Company issued $1,750,000 in notes convertible into the
Company's Common Stock. The notes bear interest at 12% and mature on
October 3, 1998.

Debt issued or assumed in connection with 1996 acquisitions includes the
following:

In January 1996, as part of the purchase price for the acquisition of the
business assets of MRI-CT, Inc., the Company issued an $88,000 note payable
bearing interest at prime (8.5% at December 31, 1997) due January 9, 2001.
Also in January 1996, as part of the purchase price for the acquisition of
the common stock of NurseCare Plus, Inc. the Company issued a note payable
for $1,250,000 bearing interest at prime plus one percent (9.5% at December
31, 1997) due January 12, 1999. In June 1996, the Company issued a $510,000
note payable as part of the purchase price of WeCare Allied Health Care,
Inc. The note bears interest at prime plus one percent (9.5% at December
31, 1997) and is due August 1998.

In August 1996, in connection with the NMR Acquisition the Company
assumed NMR's existing equipment debt obligations, aggregating $13,235,700.
These notes bear interest at rates ranging from 7.0% to 11.5% and require
monthly payments ranging from $623 to $38,095 including interest (an
aggregate of $172,539 per month). The notes are payable over varying terms
with the last note due in December 2000. The foregoing notes are
collateralized by the respective centers' imaging equipment. As of December
31, 1997, the outstanding balance declined to $4,108,000 primarily as a
result of the application of proceeds from the issuance of the Senior
Notes.

F-18
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Other debt includes the following:

In 1994, StarMed and a creditor renegotiated a note payable. At the time
of the restructuring, the note balance was adjusted to the amount of the
projected undiscounted future cash payments based upon the prevailing
interest rate and, accordingly, no interest expense has been recorded
subsequent to the effective date of the renegotiation other than the
amounts attributed to a change in the variable rate and is due in 2000. The
balance of such note at December 31, 1997 was $3,042,000.

On February 7, 1996, the Company issued at par $6,533,000 aggregate
principal amount of 10.5% Convertible Subordinated Debentures due 2001 (the
"1996 Debentures"). The Company called for the redemption of the 1996
Debentures at the conversion price of $6.00 per share on or before March 27,
1997. As of December 31, 1997, all of the 1996 Debentures have been converted.
On May 30, 1995, the Company issued at par $4,350,000 aggregate principal
amount of 11% Convertible Subordinated Debentures due 2000 (the "1995
Debentures"). The 1995 Debentures automatically converted to Common Stock
when, on June 20, 1997 the market price of the Stock exceeded $6.00 per share
for a 15 consecutive day period. Under the terms of the merger agreement with
NMR, the Company assumed the obligations under NMR's 8% Convertible
Subordinated Debentures due 2001 including payment of principal and interest
(the "NMR Debentures"). The Company called for redemption of the NMR
Debentures at the conversion price of $6.54 per share on or before March 27,
1997. As of December 31, 1997, all of the NMR Debentures had either been
redeemed or converted into Common Stock of the Company. During 1997 and 1996,
debentures of $6,988,000 and $5,735,000, respectively, were converted into
Common Stock.

In connection with the private placements of the 1995 Debentures and the
1996 Debentures, the Company paid $248,000 and $357,000, respectively, in
placement agent fees and expenses to an investment banking firm. Mr. Gary L.
Fuhrman, a director of the Company, is an executive officer and director of
such investment banking firm.

Aggregate originally scheduled maturities (prior to classification of
certain amounts as current due to the financial covenant defaults) of the
Company's Senior Notes and other notes and mortgages payable for years 1998
through 2002 and thereafter are as follows (in thousands):

<TABLE>
<S> <C>
1998................................................................. $13,313
1999................................................................. 7,209
2000................................................................. 9,285
2001................................................................. 20,795
2002................................................................. 18,061
thereafter........................................................... 47,395
</TABLE>

The Company has three revolving lines of credit from a third party financing
corporation totaling $12,000,000. The lines bear interest at prime plus 1.5%
(10% at December 31, 1997) and have a two-year term. As of December 31, 1997
and 1996, no amounts were outstanding under these lines of credit.

On December 29, 1997, the Company entered into a $15 million credit facility
with DVI Financial Services Inc. (the "Facility"). The Facility provides for
two advances to the Company, one for $8 million and the other for $7 million.
In consideration for making the Facility available to the Company, the lender
received warrants to purchase an aggregate of 100,000 shares of Common Stock
at an exercise price based upon 110% of the average market prices over a
period prior to the issuance of the warrants. In the event that the lender
refuses to make the second advance, warrants to purchase 46,667 shares of
Common Stock will be canceled. As of December 31, 1997, $8,000,000 had been
borrowed under the Facility.

F-19
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During 1997, StarMed obtained a revolving line of credit from a third party
financing corporation. The $6,000,000 line bears interest at a rate of prime
plus 1.5% (10% at December 31, 1997), has a two year term and is
collateralized by substantially all of StarMed's accounts receivable. At
December 31, 1997, $3,744,000 was outstanding under the line. In early 1998,
StarMed increased the availability under the revolving line of credit by
$1,000,000.

9. STOCKHOLDERS' EQUITY

Authorized Stock

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 100,000 shares of Preferred Stock,
par value $.01 per share ("Preferred Stock"). The Company has a Shareholders'
Rights Plan (described below) which requires the issuance of Series C Junior
Participating Preferred Stock, in connection with the exercise of certain
stock purchase rights. At December 31, 1997, there was (i) 21,889,000 shares
of Common Stock issued and outstanding and, (ii) 18,000 shares of Series C
Convertible Preferred Stock outstanding (the "Convertible Preferred Shares").

Shareholders' Rights Plan

Pursuant to the Shareholders' Rights Plan, in August 1996 holders of the
Common Stock received a distribution of one right (the "Rights") to purchase
one ten thousandth of a share of Series C Junior Participating Preferred Stock
for each share of Common Stock owned. The Rights will generally become
exercisable ten days after a person or group acquires 15% of the Company's
outstanding voting securities or ten business days after a person or group
commences or announces an intention to commence a tender or exchange offer
that could result in the acquisition of 15% of any such securities. Ten days
after a person acquires 15% or more of the Company's outstanding voting
securities (unless this time period is extended by the Board of Directors)
each Right would, subject to certain adjustments and alternatives, entitle the
rightholder to purchase Common Stock of the Company or stock of the acquiring
company having a market value of twice the $24.00 exercise price of the Right
(except that the acquiring person or group and other related holders would not
be able to purchase common stock of the Company on these terms). The Rights
are nonvoting, expire in 2006 and may be redeemed by the Company at a price of
$.001 per Right at any time prior to the tenth day after an individual or
group acquired 15% of the Company's voting stock, unless extended.

The purpose of the Rights is to encourage potential acquirers to negotiate
with the Company's Board of Directors prior to attempting a takeover and to
give the Board leverage in negotiating on behalf of the shareholder the terms
of any proposed takeover.

Convertible Preferred Stock

In July 1997, the Company issued 18,000 shares of $1,000 Series C
Convertible Preferred Stock, $.01 par value, to RGC International, LDC
("RGC"). The Convertible Preferred Shares are convertible into Common Stock of
the Company at the option of RGC beginning on the date on which a registration
statement relating to the Common Stock underlying the Convertible Preferred
Shares (the "Conversion Shares") is declared effective by the Securities and
Exchange Commission, provided that, beginning 180 days from the effectiveness
of such registration statement, the Company may require the conversion of all
or a portion of the Convertible Preferred Shares.

The Convertible Preferred Shares convert into the Company's Common Stock by
dividing the Stated Value of the Convertible Preferred Shares, plus 3% per
annum to the date of conversion, by the lesser of (i) $20.70 and (ii) the
average of the daily closing bid prices for the Company's Common Stock for the
five (5) consecutive trading day period ending five (5) trading days prior to
the date of conversion. If the average closing price of the Company's Common
Stock (the "Closing Price") for any ten (10) consecutive trading days does not
exceed

F-20
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

$12.25 (the "Floor Price"), the Company has the right to block conversion of
the Convertible Preferred Shares by RGC for up to thirty (30) days in the
aggregate. Effective May 1998, in exchange for certain concessions with
respect to penalties, the Company waived the above-described right to block
conversion. If the Closing Price does not exceed the Floor Price for 30
consecutive calendar days, the Convertible Preferred Shares are redeemable, in
whole or in part, at the option of the Company for 110% of the stated value
plus 3% per annum. RGC is subject to volume restrictions which prohibit the
sale of more than 25% of the daily or weekly trading volume in any such
period, unless certain circumstances exist. The liquidation preference of each
Convertible Preferred Share is $1,000 plus 3% per annum. The holder of the
Convertible Preferred Shares is entitled to limited voting rights.

As of December 31, 1997, based upon the current market price of the
Company's Common Stock, the Convertible Preferred Shares would be convertible
into 1,944,000 shares of Company Common Stock, representing 8% of the
outstanding shares of Common Stock as of such date after giving effect to the
conversion of the Convertible Preferred Shares. Under the terms of the
Convertible Preferred Shares, RGC is not permitted to convert Shares of the
Convertible Preferred Shares which would result in RGC owning in excess of 5%
of the outstanding shares of Common Stock. As discussed above, the Company has
the option to repurchase the shares at 110% of stated value plus 3% per annum.

Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement (the "Series C Preferred Stock Purchase Agreement"), dated July 21,
1997, between the Company and RGC, and the Registration Rights Agreement,
dated July 21, 1997, (the "Series C Registration Rights Agreement"), between
the Company and RGC (the Series C Stock Purchase Agreement and the RGC
Registration Rights Agreement are hereinafter referred to as the "RGC
Agreements"), the Company was required to use its best efforts to include the
shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock (the "RGC Conversion Shares") in an effective Registration Statement on
Form S-3 not later than October 1997. The RGC Agreements provide for monthly
penalties ("RGC Registration Penalties") in the event that the Company fails
to register the Conversion Shares prior to October 1997 with such penalties
continuing until such time as the Conversion Shares are registered as required
by the RGC Agreements.

As a result of the Company's failure to register the RGC Conversion Shares
at various dates on or after December 31, 1997, the Company: (i) in lieu of
RGC Registration Penalties accruing on or before December 31, 1997, issued
warrants to RGC to acquire 817,000 shares of Common Stock at an exercise price
of $11.62 per share (such warrants having an estimated value for accounting
purposes of $2,051,000); (ii) in lieu of RGC Registration Penalties accruing
during the month of January 1998, issued warrants to RGC to acquire 350,000
shares of Common Stock at an exercise price of $12.95 per share (such warrants
having an estimated value for accounting purposes only of $1,194,000); and
(iii) in lieu of RGC Registration Penalties accruing from February 1, 1998 to
April 30, 1998, issued to RGC interest bearing promissory notes, due May 1,
1998 (the "RGC Penalty Notes"), in the aggregate principal amount of
$1,440,000. On May 1, 1998, as a result of the Company's failure to register
the Conversion Shares on or before such date, RGC was entitled under the RGC
Agreements to demand a one-time penalty of $1,800,000 (the "May 1998 Penalty")
payable, at the option of RGC, in cash or additional shares of Common Stock.
As of May 26, 1998, RGC had not demanded payment or other satisfaction of the
May 1998 Penalty.

On May 1, 1998, the Company did not pay RGC the $1,440,000 that was then due
and payable under the RGC Penalty Notes. Additionally, as a result of the
Company's continuing failure to register the Conversion Shares, RGC is
entitled to additional penalties of $540,000 per month (payable at the option
of RGC in cash or additional shares of Common Stock). The Company and RGC are
currently in discussions regarding the restructuring of the Penalty Notes, the
May 1998 Penalty and the on-going monthly penalties, but there can be no
assurance that the Company will be successful in restructuring such
obligations on terms favorable to the Company or its shareholders.

F-21
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock Options and Employee Stock Grants

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October 1995, establishing
a fair value-based method of accounting for stock-based compensation plans,
including stock options and stock purchase plans. SFAS No. 123 allows
companies to adopt a fair-value-based method of accounting for stock-based
compensation plans or, at their option, to retain the intrinsic-value based
method of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and supplement it with pro forma
disclosures of net earnings and earnings per share data as if the fair value
method had been applied. The Company has elected to continue to account for
stock-based compensation plans under APB No. 25 and, as such, the adoption of
this standard has not impacted the consolidated results of earnings or
financial condition.

The Company's five stock option plans provide for the awarding of incentive
and non qualified stock options to employees, directors and consultants who
may contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
Common Stock at the date of grant. Options granted to consultants are
accounted for based on the fair value of the options issued.

During 1996 and the first quarter of 1997, options were granted to employees
under stock option plans which were approved by the Company's Shareholders in
May 1997. The difference between the exercise price of the options and the
market price of the Company's Common Stock on the date of plan approval
resulted in compensation aggregating $3,381,000. The 1997 expense of
$2,536,000 representing the portion of such options vested in 1997 is included
as stock based compensation expense in the accompanying Consolidated
Statements of Operations. The remaining balance of $845,000 will be recognized
ratably over the remaining vesting period of the options. In the following
tables, these options are treated as if they were granted on the date of the
plan approvals in May 1997.

Options to purchase 1,740,938 shares of the Company's Common Stock granted
to employees of the Company in 1997 under an option plan (the "1997 Plan")
have lapsed and are not deemed to have been granted due to the fact that the
1997 Plan was not presented for approval to the Company's Stockholders within
one year of such plan's approval by the Board of Directors of the Company.

Had the fair-value based method of accounting been adopted to recognize
compensation expense for the above plans (excluding the 1997 Plan), the
Company's net earnings and earnings per share would have been reduced to the
pro forma amounts for the years ended December 31, 1997, 1996 and 1995 as
indicated below (in thousands except per share amounts):

<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Net income (loss) applicable to common
stockholders:
As reported..................................... $(33,177) $7,254 $1,690
Pro forma....................................... (34,049) 6,732 1,652
Basic income (loss) per share:
As reported..................................... (1.62) 0.64 0.22
Pro forma....................................... (1.66) 0.59 0.21
Diluted income (loss) per share:
As reported..................................... (1.62) 0.59 0.22
Pro forma....................................... (1.66) 0.55 0.21
</TABLE>

F-22
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The fair value of each option granted under all plans is estimated on the
date of grant using the Black-Scholes option-pricing model based on the
following assumptions:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
All Plans:
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 70% 52% 52%
Expected life (years)....................................... 2 2 2
</TABLE>

The risk-free interest rates for 1997, 1996 and 1995 were based upon rates
with maturities equal to the expected term of the option. The weighted average
interest rate in 1997, 1996 and 1995 amounted to 5.52%, 5.93% and 6.41%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1997, 1996 and 1995 amounted to $4.20, $2.34 and
$1.15, respectively.

Stock option share activity and weighted average exercise price under these
plans and grants for the years ended December 31, 1997, 1996 and 1995, were as
follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, January 1, 1995..................... 393,675 $4.92
Granted........................................ 472,500 5.32
Exercised...................................... (12,916) 4.00
Forfeited...................................... (63,584) 4.50
---------
Outstanding, December 31, 1995................... 789,675 5.21
Granted........................................ 1,073,140 7.94
Granted as transfer of NMR Options............. 132,687 5.05
Exercised...................................... (243,197) 5.42
Forfeited...................................... (120,587) 6.58
---------
Outstanding, December 31, 1996................... 1,631,718 6.76
Granted........................................ 399,000 8.46
Exercised...................................... (234,855) 5.17
Forfeited...................................... (315,500) 7.33
---------
Outstanding, December 31, 1997................... 1,480,363 7.51
=========
Exercisable at:
December 31, 1995.............................. 301,209 5.31
December 31, 1996.............................. 909,710 6.40
December 31, 1997.............................. 1,129,641 6.98
</TABLE>

F-23
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The exercise price for options outstanding as of December 31, 1997 ranged
from $4.00 to $12.00. The following table summarizes information about stock
options outstanding and exercisable at December 31, 1997:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------- -----------------
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
-------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
$4.00 to 5.00.................... 203,978 6 years $ 4.64 196,144 $ 4.70
$5.50............................ 305,000 5 years $ 5.50 305,000 $ 5.50
$6.50 to 6.55.................... 215,272 6 years $ 6.50 131,268 $ 6.51
$7.51 to 8.50.................... 413,213 9 years $ 8.42 361,666 $ 8.50
$9.00 to 10.00................... 91,900 8 years $ 9.46 58,566 $ 9.15
$10.38 to 11.13.................. 176,000 4 years $10.44 68,664 $10.54
$11.63 to 12.00.................. 75,000 4 years $11.88 8,333 $12.00
--------- ---------
$4.00 to 12.00................... 1,480,363 1,129,641
========= =========
</TABLE>

Stock Purchase Warrants

The Company does not have a formal stock warrant plan. The Company's Board
of Directors authorizes the issuance of stock purchase warrants at its
discretion. The Company's Board of Directors have generally granted warrants
in connection with purchase and financing transactions. The number of warrants
issued and related terms are determined by a committee of independent
directors.

As of December 31, 1997, the Company had granted warrants, which are
currently outstanding, to purchase its Common Stock with the following terms:

<TABLE>
<CAPTION>
WARRANTS NUMBER OF RANGE OF
EXPIRING IN SHARES EXERCISE PRICE
----------- --------- ---------------
<S> <C> <C>
1998............................................... -- --
1999............................................... 93,188 $4.50 to $25.00
2000............................................... -- --
2001............................................... 651,374 3.36 to 12.00
2002............................................... 1,660,000 9.50 to 12.59
2003............................................... 51,563 4.63
2004............................................... 73,959 5.70 to 9.54
---------
2,530,084
=========
</TABLE>

For services rendered by a financial advisory company owned by the Chairman
of the Board (the "Affiliate") in connection with several acquisitions, the
Company issued warrants (the "Acquisition Warrants") to purchase shares of the
Company's Common Stock at exercise prices equal to the market price of the
Company's Common Stock on the date of issuance. The fair value of such
warrants was considered part of the purchase price of the related acquisition,
and was determined (for accounting purposes only) using the Black-Scholes
option pricing model using the following assumptions: Dividend yield 0%;
expected volatility 62%; Expected life three to five years and a risk free
interest rate of 5.6% as set forth below. The Acquisition Warrants are
exercisable at prices ranging from $10.31 to $12.59 per share. As of May 26,
1998, none of the Acquisition Warrants had been exercised, and the closing
sale price of the Common Stock was $3 1/16.

Warrants issued in connection with the acquisition of a diagnostic
imaging center located in Jacksonville, Florida to purchase 32,000 shares
of the Company's Common Stock at an exercise price of $10.31 per share. The
warrants have a term of three years, are exercisable from the date of grant
and have an estimated fair value (for accounting purposes only) of
$150,000.

F-24
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Warrants issued in connection with the acquisition of Advanced Diagnostic
Imaging, Inc. to purchase 137,000 shares of the Company's Common Stock at
an exercise price of $10.60 per share. The warrants have a term of three
years, are exercisable from the date of grant and have an estimated fair
value (for accounting purposes only) of $662,000.

Warrants issued in connection with the acquisition of a diagnostic center
located in West Palm Beach, Florida to purchase 57,000 shares of the
Company's Common Stock at an exercise price of $10.64 per share. The
warrants have a term of three years, are exercisable from the date of
grant, and have an estimated fair value (for accounting purposes only) of
$276,000.

Warrants issued in connection with the acquisition of ATI Centers, Inc.
to purchase 168,000 shares of the Company's Common Stock at an exercise
price of $11.06 per share. The warrants have a term of three years, are
exercisable from the date of grant and have an estimated fair value (for
accounting purposes only) of $847,000.

Warrants issued in connection with the acquisition of a diagnostic
imaging center located in Rancho Cucamonga, California to purchase 55,000
shares of the Company's Common Stock at an exercise price of $11.25 per
share. The warrants have a term of three years, are exercisable from the
date of grant, and have an estimated fair value (for accounting purposes
only) of $282,000.

Warrants to purchase 66,000 and 160,000 of the Company's Common Stock at
an exercise price of $12.59 per share were granted in connection with the
acquisition of diagnostic imaging centers in Maryland, and from Capstone
Management, Inc., respectively. The warrants have a term of five years and
are exercisable from the date of grant. The estimated fair value (for
accounting purposes only) of $478,000 and $1,158,000, respectively.

In December 1997, the Company issued warrants to RGC to purchase 817,000
shares of the Company's Common Stock with an exercise price of $11.62 per
share. These warrants have a term of five years and are exercisable from the
date of grant. The warrants had an estimated fair value of $2,051,000. The
fair value of such warrants was estimated using the Black-Scholes option
pricing model using the following assumptions: Dividend yield 0%, Expected
volatility 62%, Expected life one year and a risk free interest rate of 5.50%
based upon the expected life of the warrants.

In December 1997, the Company granted warrants to a financing company in
connection with a line of credit entered into by the Company. The warrants to
purchase 53,334 shares of the Company's Common Stock at an exercise price of
$9.54 per share have a term of seven years and are exercisable from the date
of grant. The warrants had an estimated fair value of $337,000 which was
recorded as a deferred financing expense and is being amortized as additional
interest over the term of the facility. The fair value of each warrant was
estimated using the Black-Scholes option pricing model using the following
assumptions: Dividend yield 0%, Expected volatility 62%, Expected life seven
years and a risk free interest rate of 5.63% based on the expected life of the
warrants.

For warrants granted during 1996, the fair value of each stock purchase
warrant issued has been accounted for as a component of each transaction's
purchase price and the value has been estimated on the date of grant using the
Black-Scholes option pricing model based on the following assumptions:
dividend yield--0%, expected volatility--52% and an expected life of 2 years,
unless otherwise noted.

In March 1996 a financial consulting firm doing business with the Company
was granted warrants to purchase 75,000 shares of the Company's Common Stock
consisting of 37,500 warrants with an exercise price of $8.00 per share and
37,500 warrants with an exercise price of $12.00 per share. These warrants
have a term of five years and are exercisable from date of grant. The number
of such warrants was subsequently increased by 4,687 with an exercise price of
$8.00 per share and 4,687 warrants with an exercise price of $12.00 per share.

F-25
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1997, warrants to purchase 42,187 shares of the Company's
Common Stock at $8.00 a share and 42,187 at $12.00 per share were outstanding.
The warrants had an estimated fair value of $60,000. The fair value of each
warrant was estimated using the Black-Scholes option pricing model using the
following assumptions: Dividend yield 0%, Expected volatility 52%, Expected
life 5 years and a risk free interest rate of 5.93% based upon the expected
term of the warrants.

Under the terms of the merger agreement with NMR, all outstanding NMR
warrants were deemed to be exercisable for that number of shares of the
Company's Common Stock the warrant holder would have received in the NMR
Acquisition, had the holder exercised the NMR warrant prior to the NMR
Acquisition. As such, in connection with the NMR Acquisition the Company
assumed the following warrants:

Warrants issued to purchase 17,188 shares of the Company's Common Stock
at an exercise price of $7.27 per share to a radiology group providing
services to one of its centers. As of December 31, 1997, none of the
warrants to purchase 17,188 shares of the Company's Common Stock had been
exercised.

Warrants issued to purchase 4,813 shares of the Company's Common Stock at
an exercise price of $7.27 per share, in connection with the execution of a
ground lease for one of its facilities. As of December 31, 1997, the
warrants to purchase 4,813 shares of the Company's Common Stock have been
cancelled and are no longer outstanding.

Warrants issued to acquire 68,750 shares of the Company's Common Stock at
$11.64 per share to a financial consulting firm. As of December 31, 1997,
the warrants to purchase 68,750 shares of the Company's Common Stock have
been cancelled and are no longer outstanding.

Warrants granted to non-employee directors of NMR to purchase 130,625
shares of the Company's Common Stock at $9.27 per share. As of December 31,
1997, warrants to purchase 55,000 shares of the Company's Common Stock
remain outstanding.

Warrants granted to a non-employee director of NMR to purchase 2,750
shares of the Company's Common Stock at an exercise price of $5.70 per
share. As of December 31, 1997, warrants to purchase 1,000 shares of the
Company's Common Stock remain outstanding.

Warrants issued to purchase 17,188 shares of the Company's Common Stock
at an exercise price of $4.50 per share to a professional corporation
providing legal services to NMR. As of December 31, 1997, all of the
warrants to purchase 17,188 shares of the Company's Common Stock have been
exercised and are no longer outstanding.

Warrants granted to an officer and director of NMR to acquire 51,563
shares of the Company's Common Stock at an exercise price of $4.36, and
20,625 shares of common stock at an exercise price of $5.70. As of December
31, 1997, none of the warrants to purchase 51,563 and 20,625 shares of the
Company's Common Stock have been exercised.

For services rendered by a financial advisory company owned by the Chairman
of the Board of Directors of the Company in connection with the NMR
Acquisition, the Company issued warrants to purchase 120,000 shares of the
Company's Common Stock at an exercise price of $9.00 per share. These warrants
have a term of five years and are exercisable from date of grant. As of
December 31, 1997, none of the warrants to purchase 120,000 shares of the
Company's Common Stock have been exercised.

As required by the merger agreement with NMR, the President of NMR was
granted (i) five year warrants to purchase 40,000 shares of the Company's
Common Stock at an exercise price of $8.00 per share (the "$8.00 Warrants")
and (ii) six year warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $9.50 per share (the "$9.50 Warrants"), and
(iii) in exchange for his NMR employee stock options, three separate five year
warrants to purchase (A) 34,375 shares at $9.27, (B) 68,750 shares at $4.18
and

F-26
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(C) 34,375 shares of the Company's Common Stock at $4.73. As of December 31,
1997, 40,000 of the $8.00 Warrants, 168,000 of the $9.50 Warrants, warrants to
purchase 68,750 shares at $4.18 and 34,375 shares of the Company's Common
Stock at $4.73 remain outstanding.

As required by the merger agreement with NMR, the Executive Vice President--
Finance of NMR was granted (i) five year warrants to purchase 50,000 shares of
the Company's Common Stock at an exercise price of $8.00 per share and (ii) in
exchange for his NMR employee stock options, four separate five year warrants
to purchase 10,313 shares at $4.00, 27,500 shares at $3.36, 41,250 shares at
$4.18 and 34,375 shares of the Company's Common Stock at $4.73. As of December
31, 1997, the warrants to purchase 50,000 shares at $8.00 per share, 27,500
shares at $3.36 per share, 41,250 at $4.18 per share and 34,735 shares of the
Company's Common Stock at $4.73 per share remain outstanding.

The warrants the Company issued to the officers of NMR in connection with
the NMR Acquisition had an estimated fair value of approximately $650,000 and
were considered part of the consideration paid in connection with the NMR
Acquisition and such value is being amortized over the term of the officers'
covenant not to compete agreements. The 564,440 warrants the Company issued in
exchange for previously outstanding NMR options or warrants and the 120,000
warrants issued to the financial advisory company had an estimated fair value
of approximately $210,000 and $325,000 respectively, and were considered part
of the NMR Acquisition purchase price.

5,954,000 shares of Common Stock were reserved for the issuance related to
the above described stock options, warrants and preferred stock.

10. INCOME TAXES

The total income tax provisions (benefits) from continuing operations for
the years ended December 31, 1997, 1996 and 1995 are allocated as follows (in
thousands):

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Tax provision (benefit) from continuing operations
before valuation allowances....................... $(9,479) $3,575 $ 2,751
Income tax valuation allowance related to
continuing operations............................. 10,700 -0- (1,508)
------- ------ -------
Income tax provision from continuing
operations.................................... $ 1,221 $3,575 $ 1,243
======= ====== =======
Tax provision from discontinued operations......... $ 1,079 $ 587 $ 103
======= ====== =======
Tax (benefit) related to sale of discontinued
business.......................................... $ -0- $ -0- $ (656)
======= ====== =======
Tax benefit associated with the exercise of
employee stock options which has been credited to
stockholders' equity.............................. $(1,000) $ (368) $ -0-
======= ====== =======
</TABLE>

F-27
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The components of the Company's income tax provision (benefit) from
continuing operations are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Current provision.............................. $ 993 $ 990 $ 1,983
Deferred benefit............................... (879) 117 (762)
------- ------ -------
Income tax provision........................... $ 114 $1,107 $ 1,221
======= ====== =======
<CAPTION>
DECEMBER 31, 1996
--------------------------
<S> <C> <C> <C>
Current provision.............................. $ 3,263 $1,185 $ 4,448
Deferred benefit............................... (733) (140) (873)
------- ------ -------
Income tax provision........................... $ 2,530 $1,045 $ 3,575
======= ====== =======
<CAPTION>
DECEMBER 31, 1995
--------------------------
<S> <C> <C> <C>
Current provision.............................. $ 2,778 $ 722 $ 3,500
Deferred benefit............................... (1,871) (386) (2,257)
------- ------ -------
Income tax provision........................... $ 907 $ 336 $ 1,243
======= ====== =======

A reconciliation of the enacted federal statutory income tax to the Company's
recorded effective income tax rate for continuing operations is as follows:

<CAPTION>
DECEMBER 31
--------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Statutory federal income tax at 34%............ (34.0)% 34.0 % 34.0 %
Effect of partnership status and amounts taxed
to parties other than the company............. -- (1.2) 2.1
State income tax expense (benefit) net of
federal benefit............................... (1.2) 6.3 4.0
Meals and entertainment........................ .4 .3 .3
Change in valuation allowance.................. 34.8 -- (27.7)
Goodwill amortization.......................... 2.8 1.8 --
Other.......................................... 1.2 (7.3) 9.9
------- ------ -------
Effective tax rate............................. 4.0 % 33.9 % 22.4 %
======= ====== =======
</TABLE>

F-28
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................. $ (841) $ (857)
Deferred rent.......................................... (37) (59)
Cash to accrual adjustment............................. (41) (362)
-------- -------
Deferred tax liabilities............................... (919) (1,278)
Deferred tax assets:
Net operating losses................................... 2,956 2,956
Tax credit carryforwards............................... 385 385
Accounts receivable reserves........................... 5,225 3,354
Capital leases......................................... 110 135
Intangible assets...................................... 4,940 220
Accrued expenses....................................... 2,721 --
Capital loss carryforward.............................. 127 133
-------- -------
Deferred tax assets...................................... 16,464 7,183
-------- -------
Subtotal............................................. 15,545 5,905
-------- -------
Less: Valuation allowance................................ (10,700) (200)
-------- -------
Net deferred tax asset................................... $ 4,845 $ 5,705
======== =======
</TABLE>

The Company's existing deferred tax assets at December 31, 1997 have been
reduced by a valuation allowance of $10,700,000, due to the uncertainty
regarding the realization of the full amount of such deferred tax assets.

At December 31, 1997, the Company has available federal net operating loss
carryforwards of approximately $8,028,000 expiring in years 1999 through 2009.

Utilization of the Company's tax net operating losses is limited to the
separately determined taxable incomes of certain of its subsidiaries. In
addition, the Tax Reform Act of 1986 enacted a complex set of rules ("Section
382") limiting the utilization of net operating loss carryforwards in periods
following a corporate ownership change. In general, a corporate ownership
change is deemed to occur if the percentage of stock of a loss corporation
owned (actually, constructively and in certain cases deemed owned) by one or
more "5% shareholders" has increased by 50 percentage points over the lowest
percentage of such stock owned during a specified testing period (generally a
three year period). The utilization of the Company's available net operating
loss carryforwards is subject to such limitations. Should the Company
experience further ownership changes, its ability to utilize the available
federal net operating loss carryforwards could be subject to further
limitation.

The Company also has available tax credit carryforwards of approximately
$385,000 expiring between 1998 and 2011. The utilization of such credits is
also subject to a limitation similar to the net operating loss limitation
described above.

F-29
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. COMMITMENTS AND CONTINGENCIES

Leases

The Company has entered into noncancelable leases for certain medical
diagnostic equipment and furniture and fixtures, and has capitalized the
assets relating to these leases. In most cases, the leases are collateralized
by the related equipment. Certain leases included renewal options for
additional periods.

The following is a summary of assets under capital leases which amounts are
included in Property and Equipment (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- --------
<S> <C> <C>
Diagnostic equipment and associated leaseholds............ $31,211 $ 23,036
Less: Accumulated amortization............................ (5,221) (12,096)
------- --------
$25,990 $ 10,940
======= ========
</TABLE>

Amortization expense relating to property and equipment under capital leases
at December 31, 1997, 1996 and 1995 was $3,496,000, $3,377,000 and $2,045,000,
respectively.

The following analysis schedules the minimum future lease payments under
capital leases as of December 31, 1997 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................................. $ 13,044
1999.............................................................. 11,263
2000.............................................................. 9,876
2001.............................................................. 5,611
2002.............................................................. 2,063
Thereafter........................................................ 571
--------
Total minimum lease payments...................................... 42,428
Less: amount representing interest (imputed at an average rate of
7%).............................................................. (6,201)
--------
Present value of minimum lease payments........................... 36,227
Less current installments......................................... (10,311)
Less debt shown as current due to financial covenant default
installments..................................................... (9,555)
--------
Obligations under capital leases, shown as long-term.............. $ 16,361
========
</TABLE>

In connection with certain of the Company's acquisitions, the Company
entered into agreements for the sale and leaseback of medical diagnostic
equipment. Included in future minimum lease payments listed above are
$1,782,000 for each of the years 1998, 1999, 2000, 2001 and $803,000 for 2002,
relating to these transactions.

The Company leases its corporate offices and certain centers for periods
generally ranging from three to ten years. These leases include rent
escalation clauses generally tied to the consumer price index and contain
provisions for additional terms at the option of the tenant. The leases
generally require the Company to pay utilities, taxes, insurance and other
costs. Rental expense under such leases was approximately $6,585,000,
$2,597,000 and $2,238,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Ten of the offices are subleased to affiliated Physicians.
By reason of the sublease arrangements, if the respective Physicians should be
unable to pay the rental on the site, the Company would be contingently
liable. As of December 31,

F-30
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1997, the Company has subleased the operating sites to the Physicians for the
base rental as stipulated in the original lease. The related sublease income
has been offset by the lease rent expense. The Company also has operating
leases for diagnostic imaging equipment installed in certain of its imaging
centers.

The following summary of non-cancelable obligations includes the sublease
arrangements described above, certain equipment leases and the Company's
corporate rentals. As of December 31, 1997, the aggregate future minimum lease
payments and sublease rentals are as follows (in thousands):

<TABLE>
<CAPTION>
ORIGINAL
YEAR ENDED DECEMBER 31, LEASES SUBLEASES NET
----------------------- ------- --------- -------
<S> <C> <C> <C>
1998.............................................. $11,900 $ 707 $11,193
1999.............................................. 10,106 626 9,480
2000.............................................. 9,069 643 8,426
2001.............................................. 8,280 267 8,013
2002.............................................. 5,874 96 5,778
thereafter........................................ 6,538 228 6,310
------- ------ -------
$51,767 $2,567 $49,200
======= ====== =======
</TABLE>

Contingencies

Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning the related party transactions investigated by the Special
Committee of the Board of Directors ("Special Committee"). The complaints in
each action assert that the Company and the named defendants violated Section
10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the
Company omitted and/or misrepresented material information in its public
filings, including that the Company failed to disclose that it had entered
into acquisitions that were not in the best interest of the Company, that it
had paid unreasonable and unearned acquisition and financial advisory fees to
related parties, and that it concealed or failed to disclose adverse material
information about the Company. Each action seeks unspecified compensatory
damages, with interest, and the costs and expenses incurred in bringing the
action. On February 9, 1998, the above-mentioned class actions were
consolidated for all purposes in federal district court in New Jersey. On
March 31, 1998, the lead plaintiffs in the consolidated class actions served
their Consolidated Class Action Complaint, asserting that the Company and the
named defendants violated Section 10(b) of the Exchange Act, and that certain
named defendants violated Sections 20(a) and 20A of the Exchange Act. The
Company intends to defend vigorously against the allegations.

As previously announced by the Company the U.S. Attorney for the District of
New Jersey commenced an investigation in connection with the disclosures
regarding the related party transactions referred to above. In addition, as
previously disclosed, the Company has also received an inquiry from the SEC,
but no formal proceedings have been commenced by the SEC. The Company has
cooperated fully with these authorities and provided all information requested
by them.

F-31
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

surrounding such transactions, and the Company's public issuance of alleged
false and misleading accounts concerning or relating to such related-party
transactions. The plaintiffs seek unspecified compensatory and punitive
damages, interest and costs and reinstatement of the plaintiffs to their
positions with the Company. On April 8, 1998, the Company filed its Answer to
the Amended Complaint, and asserted a counterclaim against Messrs. Farrell and
Fields for breach of fiduciary duties. The Company intends to defend
vigorously against the allegations.

On November 8, 1997, the Company removed John P. O'Malley III, the Company's
Chief Financial Officer, for failure to fulfill certain of his functions as
Chief Financial Officer. Mr. O'Malley has filed a complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and
members of the Board of Directors, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation. Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions. In addition, Mr. O'Malley alleges that the Company
published false and defamatory statements about him. Mr. O'Malley seeks
unspecified compensatory and punitive damages, interest and costs of bringing
the action. On April 8, 1998, the Company filed its Answer to the Complaint,
and asserted a counterclaim against Mr. O'Malley for breach of fiduciary
duties. The Company intends to defend vigorously against the allegations.

In 1996, an individual and his spouse brought an action in the Supreme Court
of the State of New York, King's County against Advanced MRA Imaging
Associates in Brooklyn, New York, a wholly owned subsidiary of the Company
("MRA Imaging"), for damages aggregating $12,500,000 million. The plaintiff
alleges negligent operations, improper supervision and hiring practices and
the failure to operate the premises in a safe manner, as a result of which the
individual suffered physical injury. The Company's general liability and
professional negligence insurance carriers have been notified, and it has been
agreed that the general liability insurance will pursue the defense of this
matter, however such insurers have reserved the right to claim that the scope
of the matter falls outside the Company's coverage. The parties to this matter
are engaged in discovery.

In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration, the
Company granted rights to have such shares registered for resale pursuant to
the federal securities laws. In certain of such acquisitions, the Company has
granted specific remedies to the sellers in the event that the registration
statement covering the relevant shares is not declared effective by the
Securities and Exchange Commission within an agreed-upon period of time,
including the right to require the Company to repurchase the shares issued to
such seller. In the event the Company is unable to register such shares by the
required dates, the Company would become obligated to repurchase the shares
issued in connection with such acquisition. As of December 31, 1997, the
Company had reflected $9,734,000 of Common Stock subject to redemption on its
Consolidated Balance Sheet related to shares that the Company may be required
to repurchase. During January 1, 1998 through May 26, 1998, the Company paid
$3,275,000 to sellers who exercised their rights to have 179,000 shares of
Common Stock repurchased. In addition, the Company expects to pay an
additional $5,763,000 during the remainder of 1998 in connection with the
settlement of certain repurchase obligations of the Company, (representing
414,000 shares of Common Stock) subject under certain circumstances, to the
consent of the Senior Notes holders.

F-32
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay (in additional shares
and/or cash) to the sellers an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or,
in other cases, as of the execution of the relevant acquisition agreement
(referred to as "Price Protection"). Based upon the closing sales price of the
Company's Common Stock on May 26, 1998 ($3 1/16 per share), such shortfall
would be approximately $9,634,000, which amount may be reduced by up to
$5,977,000 to the extent certain sellers exercise their repurchase rights
referred to above.

In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such
contingent consideration differs for each acquisition. In connection with
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration, and in other cases, the parties
have agreed that any payment of such contingent consideration may be paid in
cash or shares of Common Stock, or a combination of both.

12. RELATED PARTY TRANSACTIONS

During 1997, in connection with the placement of the Preferred Stock, the
Company paid $967,000 in fees and expenses to Arnhold & S. Bleichroeder, Inc.,
of which Gary Fuhrman, a director of the Company, is an executive officer and
director. Also during 1997, for legal services rendered to the Company, the
Company paid legal fees in the amount of $971,000 to Werbel & Carnelutti, of
which Stephen Davis, a director of the Company, is a partner. In addition,
during 1997, the Company reimbursed the managing underwriter of the Company's
October public offering $84,000 in charter fees for the use by the managing
underwriter and the Company of an airplane owned by an affiliate of the
Chairman of the Board during the public offering roadshow.

In 1997 and previous years, the Company paid an annual financial advisory
fee to 712 Advisory Services, Inc., a financial advisory firm and affiliate of
the Company's Chairman of the Board (the "Affiliate"). Mr. Neil H. Koffler, a
director of the Company, is also an employee of the Affiliate. Such fees
amounted to $112,500, $102,000 and $225,000 in the years ended December 31,
1997, 1996 and 1995, respectively. During the year ended December 31, 1997,
the Company also paid transaction related advisory fees and expenses
(including fees associated with the issuance of the Senior Notes) to the
Affiliate of $1,761,000 and issued to the Affiliate warrants to purchase
675,000 shares of the Company's Common Stock exercisable at between $10.31 and
$12.59 per share for financial advisory services rendered to the Company in
connection with such transactions. As discussed below, pursuant to
recommendations made by the Special Committee, the Affiliate has reimbursed
the Company $1,536,000 of the fees paid to the Affiliate for services rendered
in 1997 and waived $112,500 of fees payable in 1997.

In order to incentivize officers, directors, employees and consultants to
the Company, the Company from time to time has granted options at fair market
value to such individuals. As of December 31, 1997, stock options to purchase
1,468,666 shares of the Company's Common Stock have been issued to the
Chairman and Mr. Koffler. Included in this amount are stock options to
purchase 750,000 shares and 15,000 shares of the Company's Common Stock which
were granted to the Chairman and Mr. Koffler, respectively, under the
Company's 1997 Stock Option Plan (the "1997 Plan"). As discussed below, the
Chairman and Mr. Koffler have agreed to relinquish the stock options that were
granted to them under the 1997 Plan.

F-33
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In September 1997, the Company acquired, for $3,250,000, a limited
partnership interest in Dune Jet Services, L.P. (the "Partnership"), a
Delaware limited partnership formed for the purposes of acquiring and
operating an airplane for the partner's business uses and for third party
charter flights. The general partner of the Partnership is Dune Jet Services,
Inc., a Delaware corporation, the sole stockholder of which is the Company's
Chairman. In October 1997, following discussions among management (members of
which expressed objections to such acquisition), the Special Committee, and
other members of the Board of Directors (including the Chairman), the
Company's interest in the partnership was repurchased by the partnership at
cost plus interest.

In October 1997, members of the Company's management communicated to the
Board that certain Company stockholders had questioned them regarding the
manner in which related-party transactions are scrutinized by the Company and
its Board. Management stated that it shared the concerns of these stockholders
and had engaged counsel to conduct a review of such transactions.

In order to address and satisfy the concerns management had communicated,
the Company instituted a special investigation to review related-party
transactions and the adequacy of the disclosure of the same. The review also
was to seek to develop recommendations as to what changes, if any, should be
made to the Company's procedures regarding related-party transactions.

The Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April
6, 1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Committee recommended and the
Affiliate agreed to reimburse the Company approximately $1,424,000 in fees for
transactions completed after June 1, 1997, to reimburse $112,500 of the
retainer paid to the Affiliate for 1997, to waive payment of an additional
$112,500 of fees accrued by the Company for the third and fourth quarters of
1997, and to pay a substantial amount of the expenses associated with the
Committee's investigations. In addition, the Committee recommended and the
Affiliate agreed to allow the Company to terminate its relationship with the
Affiliate.

The Committee responded to the directors that it had determined that: (i)
there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) the
Affiliate performed acquisition advisory services fully consistent with the
expectations and understanding of the committee of outside directors that had
approved the Affiliate's acquisition fees; and (iv) the acquisition advisory
fees paid to the Affiliate in connection with the Company's acquisitions in
1997 were within the range of customary acquisition advisory fees paid to
investment bankers on transactions of similar size.

In addition, for the year ended December 31, 1996, the Company paid
transaction related advisory fees and expenses to the Affiliate of $363,000
and issued to the Affiliate warrants to purchase 120,000 shares of the
Company's common stock exercisable at $9.00 per share for services rendered to
the Company, including services in connection with the NMR acquisition, the
public offering of the Company's common stock in October 1996 and other
transactions. See Note 11 of notes to Consolidated Financial Statements for
discussion of litigation matters regarding related party transactions.

F-34
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $ 23,198 $ 23,198
Restricted cash......................................... 1,073 1,073
Patient receivables and due from physician associations,
net.................................................... 65,887 65,887
Liabilities:
Notes payable, line of credit and mortgages............. 119,802 111,085
Capital lease obligations............................... 36,227 35,281
Convertible debentures.................................. -- --
<CAPTION>
DECEMBER 31, 1996
-----------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $15,346 $15,346
Short-term investments.................................. 6,163 6,163
Restricted cash......................................... 1,045 1,045
Patient receivables and due from physician associations,
net.................................................... 39,878 39,878
Liabilities:
Notes payable, line of credit and mortgages............. 19,367 19,093
Capital lease obligations............................... 14,365 14,681
Convertible debentures.................................. 6,988 6,972
</TABLE>

The carrying amounts of cash and cash equivalents, short-term investments,
long-term investments and due from affiliated physician associations and
patient receivables, net are a reasonable estimate of their fair value. The
fair value of the Company's notes and mortgage payable, capital lease
obligations and convertible debentures are based upon a discounted cash flow
calculation utilizing rates under which similar borrowing arrangements can be
entered into by the Company.

14. ACQUISITIONS

1997 Acquisitions

On January 10, 1997, the Company, through its wholly owned subsidiary,
StarMed, acquired the assets of National Health Care Solutions, Inc. a medical
staffing company in Detroit, Michigan for approximately $50,000 in cash. The
excess of the purchase price and direct acquisition costs over the fair value
of net assets acquired amounted to approximately $311,000 and is being
amortized on a straight-line basis over 20 years.

On January 16, 1997, the Company acquired a diagnostic imaging center
located in Melbourne, Florida (the "Melbourne" center) for approximately
$1,125,000 in cash. The excess of the purchase price and direct acquisition
costs over the fair value of net liabilities assumed amounted to approximately
$1,311,000 and is being amortized on a straight-line basis over 20 years.

F-35
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On January 28, 1997, the Company acquired two diagnostic imaging centers in
southern California (the "California" centers); a multi-modality imaging
center in San Clemente, California and an imaging facility in Oceanside,
California for approximately $1,030,000 payable in cash and contingent
consideration based on the centers achieving certain financial objectives
during the one-year period subsequent to the closing of the transaction. Of
the contingent consideration payable, up to $2,600,000 of such consideration
may be payable in shares of the Company's Common Stock within 90 days of the
end of the measurement period. The measurement period ended February 28, 1998,
and the Company and the seller are currently in negotiations regarding the
contingent consideration due and payable. The excess of the purchase price and
direct acquisition costs over the fair value of net liabilities assumed
amounted to approximately $4,604,000 and is being amortized on a straight-line
basis over 20 years.

On February 28, 1997, the Company acquired a diagnostic imaging center
located in Jacksonville, Florida (the "Jacksonville" center) for 215,000
shares of the Company's Common Stock valued at $2,333,000 and contingent
consideration based on the center achieving certain financial objectives
during the one year period subsequent to the closing of the transaction. The
shares of the Company's Common Stock issued in connection with the acquisition
are subject to registration rights. Contingent consideration of up to
$1,850,000 is payable in shares of the Company's Common Stock within 90 days
of the end of the measurement period. The excess of the purchase price and
direct acquisition costs, including 32,000 warrants, with an exercise price of
$10.31, valued (for accounting purposes only) at $150,000 issued to the
Affiliate for financial advisory services, over the fair value of net assets
acquired amounted to approximately $2,245,000 and is being amortized on a
straight-line basis over 20 years.

On March 10, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $6,986,000 in cash, plus $825,000 of deferred
consideration which was paid in March 1998. ADI owned interests in and
operated nine diagnostic imaging centers in the Northeast. As part of the
transaction, the Company has acquired an option to purchase an additional
center located in the Northeast. This option has not been exercised. The
excess of the purchase price and direct acquisition costs, including 137,000
warrants, with an exercise price of $10.60, valued (for accounting purposes
only) at $662,000 issued to the Affiliate for financial advisory services,
over the fair value of net liabilities assumed amounted to approximately
$14,299,000 and is being amortized on a straight-line basis over 20 years.

On March 10, 1997, the Company acquired a diagnostic imaging center located
in West Palm Beach, Florida (the "Palm Beach" center) for approximately
$3,459,000 in cash and 56,670 shares of the Company's Common Stock valued at
approximately $600,000. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the difference between the issuance price ($10.59 per
share) and the market price at effectiveness of the registration statement.
The Company may satisfy any deficiency in such price by the issuance of
additional shares of Common Stock. As of May 26, 1998, the shares of Common
Stock issued in connection with the acquisition had not been registered by the
Company. The excess of the purchase price and direct acquisition costs,
including 57,000 warrants, with an exercise price of $10.64, valued (for
accounting purposes only) at $276,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $2,178,000 and is being amortized on a straight-line basis over
20 years.

On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California (the "Rancho Cucamonga" center) for approximately
$3,948,000 in cash and 44,016 shares of the Company's Common Stock valued at
$500,000. The shares of the Company's Common Stock are subject to registration
rights. The excess of the purchase price and direct acquisition costs,
including 55,000 warrants with an exercise price of $11.25 valued (for
accounting purposes only) at $282,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $4,073,000 and is being amortized on a straight-line basis over
20 years.

F-36
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Effective May 1, 1997, the Company acquired Capstone Management Group, Inc.
("Capstone") for approximately $6,934,000 in cash and 397,204 shares of the
Company's Common Stock valued at $6,696,000 and contingent consideration based
on the centers achieving certain financial objectives during the one year
period beginning June 1997. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection equal to the issuance price, as adjusted ($17.925 per share). The
Company must satisfy any deficiency in cash. In November 1997, the Company and
the sellers agreed that the sellers would have the right to require the
Company to repurchase up to 317,763 shares of Common Stock (obligations
related to repurchase of 79,441 shares have expired) at various intervals in
the event the Company failed to register the shares of Common Stock prior to
such intervals. As of May 26, 1998, the Company had purchased 111,576 shares
of Common Stock from the sellers for aggregate consideration of $2,000,000 and
will be required on June 3, 1998 to repurchase the remaining 206,187 shares of
Common Stock for aggregate consideration of approximately $3,696,000.
Contingent consideration based upon future cash flow is payable within 90 days
of the end of the measurement period. Capstone owned and operated ten
diagnostic imaging centers, nine of which are located in the northeast and one
located in Ohio. The excess of the purchase price and direct acquisition
costs, including 160,000 warrants, with an exercise price of $12.59, valued
(for accounting purposes only) at $1,158,000 issued to the Affiliate for
financial advisory services, over the fair value of net liabilities assumed
amounted to approximately $15,292,000 and is being amortized on a straight-
line basis over 20 years.

On May 7, 1997, the Company acquired ATI Centers, Inc. ("ATI") for
approximately $13,558,000 in cash consideration and contingent consideration
based on the centers achieving certain financial objectives during the one
year period subsequent to the closing of the transaction. Contingent
consideration of up to $1,500,000 is payable within 90 days of the end of the
measurement period. ATI owned and operated eleven diagnostic imaging centers
in New Jersey and Pennsylvania. The excess of the purchase price and direct
acquisition costs, including 168,000 warrants, with an exercise price of
$11.06, valued (for accounting purposes only) at $847,000 issued to the
Affiliate for financial advisory services, over the fair value of net assets
acquired amounted to approximately $13,445,000 and is being amortized on a
straight-line basis over 20 years.

On May 7, 1997, the Company acquired two diagnostic imaging centers located
in Maryland (the "Maryland" centers) for approximately $2,830,000 in cash and
119,166 shares of the Company's Common Stock valued at $1,500,000. The shares
of the Company's Common Stock issued in connection with the acquisition are
subject to registration rights and price protection equal to the difference
between the issuance price ($12.59 per share) and the market price at
effectiveness of the registration statement. The Company may satisfy any price
deficiency by the issuance of additional unregistered shares of Common Stock
or by the payment of cash. As of May 26, 1998, the shares of Common Stock
issued in connection with the acquisition had not been registered by the
Company. The excess of the purchase price and direct acquisition costs,
including 66,000 warrants, with an exercise price of $12.59, valued (for
accounting purposes only) at $478,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $4,404,000 and is being amortized on a straight-line basis over
20 years.

On June 24, 1997, the Company acquired the assets of Wesley Medical
Resources, Inc. ("Wesley") a medical staffing company in San Francisco,
California for 137,222 shares of the Company's Common Stock valued at
$2,000,000 and contingent consideration based on the company achieving certain
financial objectives during the three year period subsequent to the
transaction. In the event that substantially all of the capital stock or
assets of Wesley are sold by the Company prior to the completion of the
measurement period, the measurement period shall be deemed to be completed as
of the date of such sale. The shares issued in connection with the acquisition
are subject to registration rights. Contingent consideration based upon future
cash flow is payable within 90 days of the end of the measurement period. The
excess of the purchase price and direct acquisition costs over the fair value
of net assets acquired amounted to approximately $2,448,000 and is being
amortized on a straight-line basis over 20 years. See Note 16.

F-37
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On June 24, 1997 the Company announced it had invested $1,000,000 in a joint
venture for a multi-modality imaging center located in Manhattan, New York.
The Company will own approximately 51% of the center which is expected to open
in June 1998.

On June 30, 1997, the Company acquired three diagnostic imaging centers in
New York (the "New York" centers) for approximately $4,338,000 in cash and
152,356 shares of the Company's Common Stock valued at $2,546,000. The shares
of the Company's Common Stock issued in connection with the acquisition are
subject to registration rights. In the event that the registration statement
was not declared effective by December 30, 1997, the sellers may sell the
shares back to the Company for $2,546,000. In March 1998, the Company issued
an interest bearing convertible promissory note in the amount of $2,546,000
payable in ten monthly installments in exchange for the shares of Common Stock
issued in connection with the acquisition. The excess of the purchase price
and direct acquisition costs over the fair value of net assets acquired
amounted to approximately $6,709,000 and is being amortized on a straight-line
basis over 20 years.

On July 31, 1997, the Company acquired a diagnostic imaging center in
Hollywood, Florida (the "Hollywood" center) for approximately $1,532,000 in
cash and 37,539 shares of the Company's stock valued at $674,000 plus the
assumption of indebtedness and additional consideration based on the center's
performance over a three year period subsequent to the closing of the
transaction. The shares of the Company's Common Stock issued in connection
with the acquisition are subject to registration rights and price protection
equal to the difference between the issuance price ($18.00 per share) and the
market price at effectiveness of the registration statement. The Company may
satisfy any price deficiency by the issuance of additional shares of Common
Stock or by the payment of cash. In the event that the registration statement
is not declared effective by February 1, 1998, the seller may sell the shares
back to the Company for $674,000. As of May 26, 1998, the shares of Common
Stock issued in connection with the acquisition had not been registered by the
Company. The excess of the purchase price and direct acquisition costs over
the fair value of net assets acquired amounted to approximately $1,071,000 and
is being amortized on a straight-line basis over 20 years.

On August 1, 1997, the Company acquired Coral Way MRI, Inc. ("Coral Way
MRI") a diagnostic imaging center in Miami, Florida for $684,000 in cash and
92,243 shares of the Company's stock valued at $1,650,000 plus the assumption
of indebtedness and additional consideration based on the center's performance
over a two year period subsequent to the closing of the transaction. The
shares of the Company's Common Stock issued in connection with any additional
consideration are subject to registration rights. The excess of the purchase
price and direct acquisition costs over the fair value of net assets acquired
amounted to approximately $2,062,000 and is being amortized on a straight-line
basis over 20 years.

On August 13, 1997, the Company acquired MRI of Jupiter, Inc. a diagnostic
imaging center in Jupiter, Florida for approximately $2,000,000 in cash and
7,337 shares of the Company's stock valued at $125,000 plus additional
consideration based on the center's performance over the one year period
subsequent to the closing of the transaction. The shares of the Company's
Common Stock issued in connection with the acquisition are subject to
registration rights and price protection equal to the difference between the
issuance price ($17.00 per share) and the market price at effectiveness of the
registration statement. The Company may satisfy any price deficiency by the
issuance of additional registered shares of Common Stock or by the payment of
cash. As of May 26, 1998, the shares of Common Stock issued in connection with
the acquisition had not been registered by the Company. The excess of the
purchase price and direct acquisition costs over the fair value of net assets
acquired amounted to approximately $1,541,000 and is being amortized on a
straight-line basis over 20 years.

On August 21, 1997, the Company acquired four diagnostic imaging centers
(the "Presgar" centers) on the west coast of Florida for approximately
$5,575,000 in cash and up to $3,700,000 in promissory notes, due August 21,
1998 and convertible into the Company's Common Stock, of which $1,200,000 in
principal amount is

F-38
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

contingent upon the occurrence of certain events, plus the assumption of
indebtedness. The excess of the purchase price and direct acquisition costs
over the fair value of net liabilities assumed amounted to approximately
$8,514,000 and is being amortized on a straight-line basis over 20 years.

On August 29, 1997, the Company acquired a controlling interest in a limited
partnership and a limited liability company which each operate an imaging
center located in San Jose, California (the "San Jose" centers) for
approximately $3,037,000 in cash and 43,415 shares of the Company's stock
valued at $693,000 plus the assumption of indebtedness and additional
consideration based on each center's performance over the one year period
subsequent to the closing of the transaction. The shares of the Company's
Common Stock issued in connection with the acquisition are subject to
registration rights and price protection equal to the difference between the
issuance price ($15.96 per share) and the market price at effectiveness of the
registration statement. The Company may satisfy any price deficiency by the
issuance of additional shares of Common Stock or by the payment of cash. As of
May 26, 1998, the shares of Common Stock issued in connection with the
acquisition had not been registered by the Company. As a result of the failure
to have the registration statement declared effective by February 28, 1998,
the seller is entitled to sell the shares back to the Company at their
issuance price. The excess of the purchase price and direct acquisition costs
over the fair value of net liabilities assumed amounted to approximately
$4,198,000 and is being amortized on a straight-line basis over 20 years.

On September 4, 1997, the Company acquired Germantown MRI Center
("Germantown MRI") a diagnostic imaging center located in Germantown,
Pennsylvania for approximately $805,000 in cash plus the assumption of
indebtedness. The excess of the purchase price and direct acquisition costs
over the fair value of net assets acquired amounted to approximately $279,000
and is being amortized on a straight-line basis over 20 years.

On September 5, 1997, the Company acquired MRI Imaging Center of Charlotte
County a diagnostic imaging center in Port Charlotte, Florida (the "Port
Charlotte" center) for $1,293,000 in cash and 75,281 shares of the Company's
stock valued at $1,340,000 plus the assumption of indebtedness and contingent
consideration based on the center's performance over the two year period
subsequent to the closing of the transaction. The shares of the Company's
Common Stock issued in connection with any contingent consideration are
subject to registration rights. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $1,608,000 and is being amortized on a straight-line basis over
20 years.

On September 16, 1997, the Company acquired one diagnostic imaging center
located in Bronx, New York and one diagnostic imaging center located in
Queens, New York (the "Bronx and Queens" centers) for approximately $1,750,000
in cash and 102,715 shares of the Company's stock valued at $1,750,000 plus
the assumption of indebtedness. The shares of the Company's Common Stock
issued in connection with the acquisition are subject to registration rights
and price protection equal to the difference between the issuance price
($17.00 per share) and the market price at effectiveness of the registration
statement. The Company may satisfy any price deficiency by the issuance of
additional unregistered shares of Common Stock or by the payment of cash. As
of May 26, 1998, the shares of Common Stock issued in connection with the
acquisition had not been registered by the Company. The excess of the purchase
price and direct acquisition costs over the fair value of net assets acquired
amounted to approximately $2,444,000 and is being amortized on a straight-line
basis over 20 years.

On September 24, 1997, the Company acquired Dalcon Technologies, Inc.
("Dalcon") located in Nashville, Tennessee a software developer and provider
of radiology information systems for $645,000 in cash and 107,166 shares of
the Company's stock valued at $1,934,000. The shares of the Company's Common
Stock issued at the closing are subject to registration rights. The excess of
the purchase price and direct acquisition costs over the fair value of net
liabilities assumed amounted to approximately $2,615,000 and is being
amortized on a straight-line basis over 5 years.

F-39
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On October 4, 1997, the Company acquired six diagnostic imaging centers
located in Ohio (the "Ohio" centers) for approximately $8,018,000 in cash and
a $1,750,000 promissory note, due October 3, 1998 and convertible at the
Company's option into shares of Common Stock. The excess of the purchase price
and direct acquisition costs over the fair value of net assets acquired
amounted to $7,791,000 and is being amortized on a straight-line basis over 20
years.

Each of the above acquisitions consummated in 1997 (the "1997 Acquisitions")
was accounted for under the purchase method of accounting. The operations of
the imaging center acquisitions are included as part of continuing operations
in the Consolidated Statements of Operations from the date of purchase. With
respect to the 1997 Acquisitions, the fair value of the assets acquired and
liabilities assumed, in the aggregate, was approximately $64,759,000 and
$64,908,000, respectively. Contingent consideration associated with
acquisitions is recorded as additional purchase price.

As recommended by the Special Committee, the Affiliate has repaid to the
Company $1,424,000 representing all of the financial advisory fees paid by the
Company to the Affiliate with respect to the acquisition of Wesley, Manhattan,
New York, MRI of Jupiter, Presgar, San Jose, Germantown, Port Charlotte and
Bronx and Queens centers. See Note 12 of Notes to Consolidated Financial
Statements.

1996 Acquisitions

On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., ("MRI-CT") comprised primarily of four diagnostic
imaging centers in New York City. The acquisition was consummated pursuant to
an Asset Purchase Agreement dated December 21, 1995 by and among the Company
and MRI-CT. Pursuant to the Agreement, a wholly owned subsidiary of the
Company acquired all of the business assets of MRI-CT for a combination of
$553,000 cash, 194,113 shares of the Company's Common Stock valued at $914,000
and a $88,000 note payable bearing interest at prime due January 9, 2001. The
excess of the purchase price over the fair value of net assets acquired
amounted to $1,540,000 and is being amortized on a straight line basis over 20
years.

On January 12, 1996, the Company consummated the acquisition of the common
stock of NurseCare Plus, Inc. ("NurseCare"), a California corporation based in
Oceanside, California, which provides supplemental healthcare staffing
services for clients including hospitals, clinics and home health agencies in
Southern California. The NurseCare acquisition was consummated pursuant to a
Stock Purchase Agreement dated as of January 11, 1996 by and among StarMed
Staffing, Inc. ("StarMed") and NurseCare. Pursuant to the NurseCare agreement,
StarMed acquired from NurseCare all of the common stock of NurseCare for
$2,514,000 payable $1,264,000 in cash and a note payable for $1,250,000
bearing interest at prime plus one percent due January 12, 1999. The excess of
the purchase price over the fair value of net assets acquired amounted to
$2,087,000 and is being amortized on a straight line basis over 20 years. See
Note 16.

On May 1, 1996, the Company entered into an Asset Purchase Agreement with
Americare Imaging Centers, Inc. and MRI Associates of Tarpon Springs, Inc.
("Americare"), which owns and operates imaging centers in the Tampa, Florida
area. Pursuant to the acquisition agreement, the Company acquired certain of
the assets and liabilities of Americare for $1,500,000 cash and 228,751 shares
of the Company's Common Stock valued at $1,275,000. The excess of the purchase
price over the fair value of net assets acquired amounted to $2,862,000 and is
being amortized on a straight line basis over 20 years.

On May 22, 1996, the Company entered into an Asset Purchase Agreement with
Clearwater, Florida based Access Imaging Center, Inc. ("Access"). Pursuant to
the acquisition, the Company acquired certain of the assets and liabilities of
Access for $1,300,000 cash and 192,063 shares of the Company's Common Stock
valued at $1,445,000. The excess of the purchase price over the fair value of
net assets acquired amounted to $1,972,000 and is being amortized on a
straight line basis over 20 years.

F-40
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On June 28, 1996, the Company entered into an Asset Purchase Agreement with
WeCare Allied Health Care, Inc. ("WeCare"), a healthcare staffing company.
Pursuant to the agreement, the Company acquired certain assets for $1,050,000
cash and a $510,000 note payable bearing interest at prime plus one percent
due July 1998. The excess of the purchase price over the fair value of net
assets acquired amounted to $1,769,000 and is being amortized on a straight
line basis over 20 years. See Note 16.

On July 3, 1996, the Company acquired a diagnostic imaging center in
Centereach, New York ("Centereach"). Pursuant to the acquisition, the Company
acquired certain of the assets for approximately $3,100,000 in cash. The
excess of the purchase price over the fair value of net assets acquired
amounted to $2,989,000 and is being amortized on a straight line basis over 20
years.

On August 30, 1996, the Company consummated the NMR Acquisition. NMR was
engaged directly and through limited partnerships in the operation of eighteen
diagnostic imaging centers. Pursuant to the acquisition agreement, NMR was
merged into a wholly owned subsidiary of the Company and each issued and
outstanding share of NMR Common Stock was converted into 0.6875 shares of the
Company's Common Stock resulting in the issuance of 4,456,500 shares of the
Company's Common Stock valued at $39,350,000. The excess of the purchase price
and direct acquisition costs (including $200,000 in fees and 120,000 warrants,
with an exercise price of $9.00, valued (for accounting purposes only) at
$325,000 for financial advisory services issued to the Affiliate) over the
fair value of net assets acquired amounted to approximately $35,286,000 and is
being amortized on a straight line basis over twenty years.

On November 25, 1996 the Company consummated the acquisition of two
diagnostic imaging centers in Garden City and East Setauket, New York (the
"Long Island" centers). Pursuant to the acquisition agreement, the Company
acquired certain assets and liabilities for a $4,500,000 convertible
promissory note due January 9, 1997 and $1,900,000 in cash. The convertible
promissory note converted into 533,175 shares of the Company's Common Stock
upon registration of the shares in accordance with its terms at a conversion
price of $8.44. The excess of the purchase price and direct acquisition costs,
including $60,000 in financial advisory fees paid to the Affiliate, over the
fair value of net assets acquired amounted to $6,042,000 and is being
amortized on a straight line basis over 20 years.

On December 16, 1996, the Company acquired the Imaging Center of the
Ironbound in Newark, New Jersey (the "Ironbound" center) from TME, Inc. for
$216,000 in cash and 18,868 shares of Company Common Stock valued at $200,000.
The excess of the purchase price and direct acquisition costs over the fair
value of net assets acquired amounted to approximately $440,000 and is being
amortized on a straight line basis over 20 years.

Each of the above acquisitions consummated in 1996 (the "1996 Acquisitions")
were accounted for under the purchase method of accounting. The operations of
the imaging center acquisitions are included as part of continuing operations
in the Consolidated Statements of Operations from the date of purchase.
Contingent consideration associated with acquisitions is recorded as
additional purchase price.

1995 Acquisitions

On February 24, 1995, the Company consummated a merger (the "Merger") with
Maternity Resources, Inc. ("Maternity Resources"), a Delaware corporation
engaged in the wholesale, manufacture and retail sale of maternity apparel.
The merger was consummated pursuant to a Stock Purchase Agreement (the
"Agreement") dated as of February 24, 1995 by and among the Company, Maternity
Resources and the other parties named therein (the "Sellers"). Maternity
Resources was formed on December 27, 1994 for the sole purpose of acquiring
Maternity Retail Partners, L.P. and Kik Kin, L.P. Pursuant to the Agreement,
the Company acquired (i) 100% of the issued and outstanding common stock of
Maternity Resources from the Sellers in exchange for

F-41
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

an aggregate of 480,000 shares of the Company's Common Stock, par value $0.01
and (ii) 100% of the issued and outstanding shares of Series B and Series C
Preferred Stock of Maternity Resources from the holders thereof in exchange
for shares of the Company's Series A Preferred Stock and Series B Preferred
Stock. At the time of the Merger, the Company and Maternity Resources were
under common control through stock ownership and, as a result, the Merger was
accounted for as a transfer between entities under common control. Under this
method of accounting, when entities are under common control, the assets,
liabilities and operations are combined at historical cost in a manner similar
to that in pooling of interests accounting. In November 1995, the Company sold
its Maternity Resources subsidiaries and consequently transferred all of
Maternity Resources liabilities to unaffiliated third parties. The Company has
no material contingent liabilities remaining with respect to Maternity
Resources. Since the Maternity operations have been sold, Maternity Resources
has been reported as a discontinued operation.

Maternity apparel revenues were recognized on an accrual basis as earned and
realizable and consisted of net revenue derived from the wholesale and retail
sale of maternity clothing and apparel. Maternity apparel revenues amounted to
approximately $11,057,000 for the year ended December 31, 1995. The initial
purchase price of $4,076,000 (the aggregate recorded fair value of the Common
Stock and the Preferred Stock issued by the Company in connection with the
Merger) exceeded the book value of net assets acquired of $1,120,000 by
$2,955,000. This amount could be considered a distribution to shareholders. On
December 27, 1995, preferred shares, which were included as part of the
$4,076,000 having a potential redemption value of $2,392,000 were redeemed by
the Company for an agreed upon aggregate amount of $24,000. The net amount
paid in excess of the net assets acquired after the redemption amounted to
$564,000. The acquisition of Maternity was accounted for in a manner similar
to that in a pooling of interests. This accounting resulted in certain
adjustments directly to stockholders' equity. A credit of $1,022,000 was made
to paid-in-capital related to the forgiveness of certain debt owed by
Maternity to affiliated organizations that is accounted for as a capital
contribution due to the related party nature. A credit of $570,000 was made to
retained deficit that represents a portion of Maternity's January 1995 losses
attributable to a subsidiary. These losses were included in the Company's 1994
operations in recognition of the then full year's operating results for the
specific subsidiary's year ended January 31, 1995. Accordingly, the amount
duplicated in 1995 operating results is reversed. A charge of $269,000 to
paid-in-capital relates to a cash redemption by Maternity of its then
outstanding redeemable preferred stock prior to the merger. Maternity Retail
Partners L.P. has also been included in the Company's consolidated operating
results for the twelve months ended December 31, 1995.

On May 26, 1995, the Company consummated the acquisition of the business
operations of New England MRI, Inc. ("New England MRI"), a Florida corporation
based in Fort Myers, Florida, which owned and managed two diagnostic imaging
centers (the "Centers"). The acquisition was consummated pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of May 17, 1995 by and among two
of the Company's wholly owned subsidiaries--Fort Myers Resources, Inc. ("FMR")
and Central Fort Myers Resources, Inc. ("CFMR"), and "New England MRI".
Pursuant to the Agreement, FMR acquired substantially all of the assets of one
of the centers and CFMR acquired all of the assets of the other center through
the issuance of 1,200,000 shares of the Company's Common Stock valued at
$3,449,000. Of the 1,200,000 shares, 600,000 shares were issued at closing
with the remaining 600,000 shares to be issued within two years of closing
(600,000 of such shares were issued in 1997). The centers achieved certain
earnings objectives and as a result, an additional 200,000 shares were issued
in September 1997, to New England MRI, in accordance with the additional
consideration provisions in the purchase agreement. The market value of the
shares upon issuance was recorded as additional goodwill subject to
amortization over the stated period. The excess of the purchase price over the
fair value of net assets acquired amounted to approximately $5,746,000 and is
being amortized on a straight line basis over 20 years. The accompanying
Consolidated Financial Statements include the operations of FMR and CFMR from
the above date of acquisition. The shares issued to New England MRI as
consideration for the purchased assets are subject to certain registration
rights.

F-42
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On June 19, 1995, the Company consummated the acquisition of the business
operations of PCC Imaging, Inc. ("PCC"), which owns and manages a diagnostic
imaging center. The acquisition was consummated pursuant to an Asset Purchase
Agreement (the "Agreement") dated June 19, 1995 by and among the Company's
wholly owned subsidiary, Hackensack Resources, Inc. ("HRI") and PCC. Pursuant
to the agreement, HRI acquired substantially all of the assets of the center
for $1,800,000 in cash. The acquisition was accounted for as a purchase, under
which the purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired amounted to
$751,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of PCC
from the above date of acquisition.

The following table summarizes the unaudited pro forma results of continuing
operations for the years ended December 31, 1997 and 1996, assuming the 1997
imaging center acquisitions had occurred on January 1, 1997 and 1996 and the
1996 imaging center acquisitions had occurred on January 1, 1996 (in
thousands, except per share data):

<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue, net...................................... $185,309 $192,131
Operating income (loss)........................... (17,323)(a) 26,190
Income (loss) before income taxes................. (30,134) 10,360
Net income (loss) form continuing operations...... (31,355) 6,376
Basic net income (loss) per share from continuing
operations....................................... $ (1.54) $ .31
</TABLE>
- - --------
(a) 1997 pro forma results include a $12,962,000 loss on the impairment of
goodwill and other long-lived assets and other unusual charges of
$9,723,000. See Note 3 of the Notes to the Consolidated Financial
Statements for further details.

15. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of unaudited quarterly consolidated financial
results of continuing operations for the years ended December 31, 1997 and
1996 (in thousands except per share amounts) (see Note 16):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenue, net............................. $26,841 $37,877 $42,022 $37,672
Operating income (loss).................. 6,713 5,896 9,159 (43,065)
Net income (loss) from continuing
operations.............................. 3,362 2,628 3,909 (43,805)
Basic earnings (loss) per share from
continuing operations................... 0.18 0.13 0.19 (2.14)
Diluted earnings (loss) per share from
continuing operations................... 0.17 0.12 0.16 (2.14)
1996
Revenue, net............................. $11,367 $12,899 $17,088 $23,408
Operating income......................... 2,064 2,771 3,704 5,161
Net income from continuing operations.... 1,235 1,538 1,775 2,435
Basic earnings per share from continuing
operations.............................. 0.15 0.17 0.16 0.14
Diluted earnings per share from
continuing operations................... 0.15 0.16 0.15 0.13
</TABLE>

In the table above, the second quarter of 1997 has been restated to include
a non-cash charge of $2,305,000 for compensation expense resulting from stock
options granted in 1996 and early 1997 that were approved by the Company's
stockholders in May 1997.

F-43
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The fourth quarter of 1997 includes a $12,962,000 loss on the impairment of
goodwill and other long-lived assets and other unusual charges of $9,723,000.
See Note 3 of the Notes to the Consolidated Financial Statements for further
details.

Quarterly results are generally affected by the timing of acquisitions.

16. SUBSEQUENT EVENTS

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. for $33 million (the "StarMed Sale"). Closing of the StarMed Sale, which
is subject to the satisfaction of customary conditions and approval by the
Company's Senior Note lenders, is expected to occur in late July or in August
of this year. Due to the pending StarMed Sale, the results of operations of
StarMed are herein reflected in the Company's Consolidated Statements Of
Operations as discontinued operations. The amounts in accompanying
consolidated statements of operations and related notes thereto, have been
restated to reflect StarMed as a discontinued operation.

Net cash proceeds from the StarMed Sale at closing, before income taxes but
after estimated costs of sale and after the repayment of StarMed's outstanding
third-party debt, is expected to be approximately $19 million. Net of cash of
approximately $4 million at June 30, 1998 in the StarMed business (which will
be retained by RehabCare Group, Inc.), the StarMed Sale is expected to
increase the Company's consolidated cash balance at closing by approximately
$15 million. $2 million of the $33 million sales price will be placed in
escrow at closing to be available, for a specified period of time, to offset
indemnification obligations that may be incurred by the Company; subject to
actual claims experience, part or all of this amount will be payable to the
Company over time. For accounting purposes, a pretax gain from the StarMed
Sale of approximately $5 million is expected to be reported in the third
quarter of 1998.

The following table shows summary balance sheets for StarMed as of December
31 (in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 455 $ --
Accounts receivable, net............................... 12,657 5,287
Other Current Assets................................... 279 185
------- -------
Total current assets................................. 13,391 5,472
Property and equipment, net.............................. 428 275
Goodwill, net............................................ 10,442 8,026
Other assets............................................. 218 --
------- -------
Total assets........................................... $24,479 $13,773
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current notes and mortgages payable $ 850 $ 1,275
Borrowings under line of credit........................ 3,744 --
Debt due parent........................................ 4,000 3,554
Accounts payable and accrued expenses 2,229 884
------- -------
Total current liabilities............................ 10,823 5,713
Notes and mortgages payable, less current portion........ 2,827 3,635
Debt due parent.......................................... 6,279 --
Equity................................................... 4,550 4,425
------- -------
Total liabilities and stockholder's equity............. $24,479 $13,773
======= =======
</TABLE>

F-44
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table shows summary statements of operations for StarMed for
the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net service revenues............................ $57,974 $29,023 $16,133
Office level operating costs and provision for
uncollectible accounts receivable.............. 47,123 24,316 13,543
Corporate general and administrative............ 8,089 3,212 1,984
Depreciation and amortization................... 601 502 293
------- ------- -------
Operating income.............................. 2,161 993 313
Interest expense, net........................... 353 135 --
------- ------- -------
Income before income taxes...................... 1,808 858 313
Provision for income taxes...................... 1,079 587 416
------- ------- -------
Net income (loss)............................... $ 729 $ 271 $ (103)
======= ======= =======
</TABLE>

See note 14 for discontinued operations relating to Maternity Resources, Inc.
for 1995

In June 1998, an individual filed a complaint against the Company, StarMed,
Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"), and
certain officers and directors of the Company in the United States District
Court for the Northern District of California. The complaint, among other
things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed
to disclose adverse material information about the Company in connection with
the sale of Wesley to the Company by the plaintiff. The plaintiff seeks
damages in the amount of $4.25 million or, alternatively, recession of the
sale of Wesley. The Company believes that it has meritorious defenses to the
claims asserted by plaintiff, and intends to defend itself vigorously. In July
1998, the Company and the named defendants filed a motion to dismiss the
plaintiff's complaint on numerous grounds. The legal proceeding described
above is in its preliminary stages. Although the Company believes it has
meritorious defenses to all claims against it, the Company is unable to
predict with any certainty the ultimate outcome of such proceeding.

F-45
<PAGE>

MEDICAL RESOURCES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO AT END
DESCRIPTION PERIOD EXPENSE ADDITIONS/(DEDUCTIONS) OF PERIOD
----------- ------------ ---------- ---------------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31,
1995
Total Allowances for
Doubtful Accounts.... $ 2,881 $ 3,378 $ 0 (1)
(427)(2) $ 5,832
Year ended December 31,
1996
Total Allowances for 5,832 4,705 78 (1)
Doubtful Accounts.... (247)(2) 10,368
Year ended December 31,
1997
Total Allowances for 10,368 20,364 292 (1)
Doubtful Accounts.... (12,102)(2) 18,922
</TABLE>
- - --------
(1) Represents provision for bad debts of discontinued operations.
(2) Uncollectible accounts written off, net of recoveries.

F-46
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 13,032 $ 23,198
Cash and short-term investments, restricted........... 241 600
Accounts receivable, net.............................. 71,296 65,887
Other receivables..................................... 7,957 5,430
Prepaid expenses...................................... 6,970 7,027
Income taxes recoverable.............................. 6,275 6,504
Deferred tax assets, net.............................. 2,492 2,492
-------- --------
Total current assets................................ 108,263 111,138
Property and equipment, net........................... 60,934 64,343
Goodwill, net......................................... 148,286 149,624
Other intangible assets, net.......................... 6,336 6,836
Other assets.......................................... 3,994 4,189
Deferred tax assets, net.............................. 2,353 2,353
Restricted cash....................................... 473 473
-------- --------
Total assets........................................ $330,639 $338,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior Notes due 2001 through 2005, classified as
current.............................................. $ 78,000 $ 78,000
Notes and mortgages payable, classified as current.... 2,985 3,206
Capital lease obligations, classified as current...... 8,831 9,555
Current portion of notes and mortgages payable........ 14,746 13,313
Current portion of capital lease obligations.......... 10,460 10,311
Borrowings under line of credit....................... 6,591 3,744
Accounts payable...................................... 13,557 13,141
Accrued expenses...................................... 24,455 28,018
Common stock subject to redemption.................... 7,187 9,734
Other current liabilities............................. 494 290
-------- --------
Total current liabilities........................... 167,306 169,312
Notes and mortgages payable, less current portion....... 19,549 21,539
Obligations under capital leases, less current portion.. 14,498 16,361
Other long term liabilities............................. 882 178
-------- --------
Total liabilities................................... 202,235 207,390
Minority interest....................................... 4,803 4,662
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000
shares, 21,942 issued and outstanding at March 31,
1998 and 21,889 issued and outstanding at December
31, 1997............................................. 219 219
Series C Convertible Preferred Stock, $1,000 per share
stated value; 18 shares issued and outstanding
(liquidation preference of 3% per annum)............. 18,377 18,242
Additional paid-in capital............................ 140,100 138,664
Accumulated deficit................................... (35,095) (30,221)
-------- --------
Total stockholders' equity.......................... 123,601 126,904
-------- --------
Total liabilities and stockholders' equity.......... $330,639 $338,956
======== ========
</TABLE>

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

F-47
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Net service revenues.......................................... $47,286 $26,841
Imaging center and staffing operating costs:
Technical services payroll and related expenses............. 11,582 4,653
Medical supplies............................................ 2,999 1,390
Diagnostic equipment maintenance............................ 2,860 1,509
Independent contractor fees................................. 2,567 1,311
Administrative expenses..................................... 7,135 3,902
Other center level costs.................................... 3,204 1,053
Provision for uncollectible accounts receivable............... 3,621 1,821
Corporate general and administrative.......................... 4,823 1,699
Depreciation and amortization................................. 6,477 2,790
Unusual charges............................................... 3,760 --
------- -------
Operating income (loss)................................... (1,742) 6,713
Interest expense, net......................................... 3,486 887
------- -------
Income (loss) for continuing operations before minority
interest and income taxes.................................... (5,228) 5,826
Minority interest income...................................... 181 235
------- -------
Income (loss) from continuing operations before income taxes.. (5,409) 5,591
Provision (benefit) for income taxes.......................... 79 2,229
------- -------
Income (loss) from continuing operations...................... (5,488) 3,362
Income from discontinued operations (net of income tax
provision of $61 and $327, respectively)..................... 749 240
------- -------
Net income (loss)............................................. (4,739) 3,602
Charges related to convertible preferred stock................ (135) --
------- -------
Net income (loss) applicable to common stockholders........... $(4,874) $ 3,602
======= =======
Income (loss) per common share applicable to common
stockholders:
Basic--
Net income (loss) per share before discontinued operations. $ (.26) $ .18
Discounted operations...................................... .04 .01
------- -------
Net income (loss) per share................................ $ (.22) $ .19
======= =======
Diluted--
Net income (loss) per share before discontinued operations. $ (.26) $ 0.17
Discontinued operations.................................... .04 .01
------- -------
Net income (loss) per share................................ (.22) .18
======= =======
</TABLE>

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

F-48
<PAGE>

MEDICAL RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (4,739) $ 3,602
-------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 6,648 2,921
Provision for uncollectible accounts receivable........... 3,693 1,825
Deferred income tax provision............................. -- 526
Expense incurred in connection with warrants and notes
issued to preferred stockholders......................... 2,094 --
Other, net................................................ 370 235
Changes in operating assets and liabilities:
Accounts receivable....................................... (9,102) (8,912)
Other receivables......................................... (2,527) 486
Prepaid expenses.......................................... 57 (1,110)
Income taxes recoverable or payable....................... 229 (340)
Other assets.............................................. 175 (431)
Accounts payable and accrued expenses..................... (2,831) (1,778)
Other current liabilities................................. 204 118
Other long-term liabilities............................... 704 (319)
-------- --------
Total adjustments......................................... (286) (6,779)
-------- --------
Net cash provided by (used in) operating activities...... (5,025) (3,177)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment......................... (919) (1,736)
Acquisition of diagnostic imaging centers, net of cash
acquired.................................................. -- (12,725)
Acquisition of temporary staffing offices, net of cash
acquired.................................................. -- (50)
Contingent consideration related to prior year
acquisitions.............................................. (334) --
Costs associated with refinancing of assets under capital
leases.................................................... -- (1,461)
Sale (purchase) of short-term investments, net............. -- (4,562)
-------- --------
Net cash used in investing activities.................... (1,253) (20,534)
-------- --------
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs.......... -- 51,113
Repurchase of Common Stock subject to redemption........... (2,547)
Proceeds from borrowing under notes payable................ -- 309
Borrowings under line of credit............................ 2,847 --
Proceeds from exercise of options and warrants............. 128 160
Note and capital lease repayments in connection with
acquisitions.............................................. -- (7,001)
Note and capital lease repayments in connection with Senior
Notes transaction......................................... -- (13,764)
Principal payments under capital lease obligations......... (2,438) (1,331)
Principal payments on notes and mortgages payable.......... (1,878) (1,634)
Other, net................................................. -- (19)
-------- --------
Net cash provided by (used in) financing activities...... (3,888) 27,833
-------- --------
Net increase (decrease) in cash and cash equivalents....... (10,166) 4,122
Cash and cash equivalents at beginning of year............. 23,198 15,346
-------- --------
Cash and cash equivalents at March 31,..................... $ 13,032 $ 19,468
======== ========
</TABLE>

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

F-49
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

General

The accompanying unaudited consolidated financial statements of Medical
Resources, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the interim periods are
not necessarily indicative of the results that may be expected for an entire
year.

The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the "SEC") for the year ended December 31,
1997.

Revenue Recognition

Net service revenues are reported, when earned, at their estimated net
realizable amounts from patients, third party payors and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates and gross billing rates ("contractual
allowances") are recognized in the determination of net service revenues at
the time services are rendered. Subject to the foregoing, the Company's
imaging centers recognize revenue under one of the three following types of
agreements with Interpreting Physicians:

F-50
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

constitutes the Company's net service revenues. Since the Company's net
service revenues are dependent upon the amount ultimately realized from
patient and third party receivables, the Company's revenue and receivables
have been reduced by an estimate of patient and third party payor
contractual allowances, as well as an estimated provision for uncollectible
amounts from patients and third party payors.

Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. The Company is not aware of any pending audits.

The Company also recognizes revenue from the sale of radiology information
systems. Such revenues are recognized on an accrual basis as earned.

Reclassification

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

F-51
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Earnings Per Share

Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement requires the presentation of Basic Earnings per Share
and Diluted Earnings per Share. Basic earnings per share is based on the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is based on the weighted average number of common
shares outstanding during the period plus the potentially issuable common
shares related to outstanding stock options, warrants and convertible debt.
Earnings per share amounts for the quarter ended March 31, 1997 have been
restated to conform to the requirements of SFAS No. 128. The computations of
basic earning per share and diluted earnings per share for the quarters ended
March 31, were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
BASIC EARNINGS PER SHARE INFORMATION
Income (loss) from continuing operations................... $(5,488) $ 3,362
Income from discontinued operations........................ 749 240
------- -------
Net income (loss).......................................... (4,739) 3,602
Charges related to convertible preferred stock............. (135) --
------- -------
Net income (loss) applicable to common stockholders........ $(4,874) $ 3,602
======= =======
Weighted average number of common shares................... 21,859 19,067
======= =======
Income (loss) per share before discontinued operations..... $ (.26) $ 0.18
Discontinued operations.................................... .04 0.01
------- -------
Basic earnings (loss) per share............................ $ (0.22) $ 0.19
======= =======
DILUTED EARNINGS PER SHARE INFORMATION
Income (loss) from continuing operations................... $(5,488) $ 3,362
Income from discontinued operations........................ 749 240
------- -------
(4,739) 3,602
Interest savings from conversion of convertible
subordinated debentures................................... -- 92
Charges related to convertible preferred stock............. (135) --
------- -------
Net income (loss) applicable to common stockholders after
assumed conversions....................................... $(4,874) $ 3,694
======= =======
Weighted average number of common shares................... 21,859 19,067
Incremental shares issuable on exercise of warrants and
options................................................... -- 709
Incremental shares issuable on conversion of convertible
subordinated debentures................................... -- 1,104
------- -------
Weighted average number of diluted common shares........... 21,859 20,880
======= =======
Income (loss) per share before discontinued operations..... $ (.26) $ 0.17
Discontinued operations.................................... .04 0.01
------- -------
Diluted earnings (loss) per share.......................... $ (0.22) $ 0.18
======= =======
</TABLE>

2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY

F-52
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

medical equipment notes, and operating and capital leases of the Company
contain provisions which allow the creditors or lessors to accelerate their
debt or terminate their leases and seek certain other remedies if the Company
is in default under the terms of agreements such as the Senior Notes.

In the event that the Senior Note holders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying
or consummating financing necessary to satisfy the obligations which would
become immediately due and payable. As a result of the uncertainty related to
the defaults and corresponding remedies described above, the Senior Notes and
the other loans and capital leases are shown as current liabilities on the
Company's Consolidated Balance Sheets at March 31, 1998 and December 31, 1997.
Accordingly, the Company has a deficit in working capital of $59,043,000 at
March 31, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. In addition to continuing to negotiate
with the Senior Note lenders in an attempt to obtain waivers or amendments of
the aforementioned defaults, the Company has taken various actions in response
to this situation, including the following: (i) it effected a workforce
reduction in March 1998 aimed at reducing the Company's overall expense
levels, and (ii) it has retained the investment banking firm of SBC Warburg
Dillon Read to assist the Company in exploring a possible sale of the
Company's StarMed temporary staffing subsidiary. See Note 5.

3. UNUSUAL CHARGES

During the first quarter of 1998, the Company recorded $3,760,000 of unusual
charges consisting of (i) $313,000 for defense costs relating to shareholder
and employee lawsuits, (ii) $2,227,000 ($1,194,000 of which was a non-cash
charge related to the issuance of 350,000 common stock warrants) for penalties
associated with delays in the registration of the Company's Common Stock
issued in connection with acquisitions or issuable upon conversion of
convertible preferred stock, (iii) $883,000 for costs associated with the
investigation of related party transactions which was concluded in April 1998
and (iv) $337,000 for management termination benefits and related costs.

The Company could incur a substantial additional amount of unusual charges
during the remainder of 1998 depending upon the outcome of current
negotiations regarding defaults under the Seior Notes and penalties associated
with the failure to register the Company's Common Stock as well as the outcome
of certain litigation.

4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, is comprised of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Management fee receivables (net of contractual
allowances)
Due from unaffiliated physicians (Type I revenues)... $ 38,923 $ 35,540
Due from affiliated physicians (Type III revenues)... 6,995 8,585
Patient and third party payor accounts receivable
(Type II revenues).................................. 31,865 27,284
Temporary staffing service accounts receivable....... 14,544 13,400
-------- --------
Gross accounts receivable............................ 92,327 84,809
Less: Allowance for doubtful accounts................ (21,031) (18,922)
-------- --------
$ 71,296 $ 65,887
======== ========
</TABLE>

F-53
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Accounts receivable is net of contractual allowances which represent
standard fee reductions negotiated with certain third party payors.
Contractual allowances amounted to approximately $28,850,000 and $8,462,000
for the quarters ended March 31, 1998 and 1997, respectively.

5. SUBSEQUENT EVENTS

Through the Per Diem and Travel Nursing Divisions of its wholly-owned
subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources Inc.
("StarMed"), the Company provides temporary healthcare staffing of registered
nurses and other medical personnel to acute and sub-acute care facilities
nationwide. On July 8, 1998, the Company entered into a definitive agreement
to sell the StarMed business, in the form of a stock sale, to RehabCare Group,
Inc. for $33 million (the "StarMed Sale"). Closing of the StarMed Sale, which
is subject to the satisfaction of customary conditions and approval by the
Company's Senior Note lenders, is expected to occur in late July or in August
of this year. Due to the pending StarMed Sale, the results of operations of
StarMed are herein reflected in the Company's Consolidated Statements of
Operations as discontinued operations. The amounts in accompanying
consolidated statements of operations and related notes thereto, have been
restated to reflect StarMed as a discontinued operation.

Net cash proceeds from the StarMed Sale at closing, before income taxes but
after estimated costs of sale and after the repayment of StarMed's outstanding
third-party debt, is expected to be approximately $19 million. Net of cash of
approximately $4 million at June 30, 1998 in the StarMed business (which will
be retained by RehabCare Group, Inc.), the StarMed Sale is expected to
increase the Company's consolidated cash balance at closing by approximately
$15 million. $2 million of the $33 million sales price will be placed in
escrow at closing to be available, for a specified period of time, to offset
indemnification obligations that may be incurred by the Company; subject to
actual claims experience, part or all of this amount will be payable to the
Company over time. For accounting purposes, a pretax gain from the StarMed
Sale of approximately $5 million is expected to be reported in the third
quarter of 1998.

The following table shows summary balance sheets for StarMed as of March 31,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 2,193 $ 455
Accounts receivable, net.............. 14,014 12,657
Other current assets.................. 82 279
------- -------
Total current assets................ 16,289 13,391
Property and equipment, net............. 471 428
Goodwill, net........................... 10,298 10,442
Other assets............................ 31 218
------- -------
Total assets.......................... $27,089 $24,479
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current notes and mortgages payable... $ 699 $ 850
Borrowings under line of credit....... 6,591 3,744
Debt due parent....................... 4,000 4,000
Accounts payable and accrued expenses. 1,723 2,229
------- -------
Total current liabilities........... 13,013 10,823
Notes and mortgages payable, less
current portion........................ 2,729 2,827
Debt due parent......................... 6,048 6,279
Equity.................................. 5,299 4,550
------- -------
Total liabilities and stockholder's
equity............................... $27,089 $24,479
======= =======
</TABLE>

F-54
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

The following table shows summary statements of operations for StarMed for
the quarters ended March 31 (in thousands):

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
---------------
1998 1997
------- -------
<S> <C> <C>
Net service revenues..................................... $19,816 $13,146
Office level operating costs and provision for
uncollectible accounts receivable....................... 15,797 10,740
Corporate general and administrative..................... 2,856 1,665
Depreciation and amortization............................ 171 131
------- -------
Operating income....................................... 992 610
Interest expense, net.................................... 182 43
------- -------
Income before income taxes............................... 810 567
Provision for income taxes............................... 61 327
------- -------
Net income .............................................. $ 749 $ 240
======= =======
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

The Special Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April
6, 1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Special Committee recommended and
712 Advisory Services, Inc., a financial advisory firm and affiliate of the
Company's Chairman of the Board (the "Affiliate"),

F-55
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

agreed to reimburse the Company approximately $1,424,000 in fees for
transactions completed after June 1, 1997, to reimburse $112,500 of the
retainer paid to the Affiliate for 1997, to waive payment of an additional
$112,500 of fees accrued by the Company for the third and fourth quarters of
1997, and to pay a substantial amount of the expenses associated with the
Special Committee's investigations. All such amounts have been paid or
reimbursed to the Company. In addition, the Special Committee recommended and
the Affiliate agreed to allow the Company to terminate its relationship with
the Affiliate.

The Special Committee reported to the directors that it had determined that:
(i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) the
Affiliate performed acquisition advisory services fully consistent with the
expectations and understanding of the committee of outside directors that had
approved the Affiliate's acquisition fees; and (iv) the acquisition advisory
fees paid to the Affiliate in connection with the Company's acquisitions in
1997 were within the range of customary acquisition advisory fees paid to
investment bankers on transactions of similar size.

As previously announced by the Company, the U.S. Attorney for the District
of New Jersey commenced an investigation in connection with the disclosures
regarding the related party transactions referred to above. In addition, the
Company has also received an inquiry from the SEC, but there have been no
formal proceedings commenced by the SEC. The Company has cooperated fully with
these authorities and provided all information requested by them.

On November 7, 1997, the Company accepted the resignations of William D.
Farrell, as President and Chief Operating Officer of the Company and as
Director, and Gary I. Fields, as Senior Vice President and General Counsel. On
the same date, Messrs. Farrell and Fields filed a complaint in the Superior
Court of New Jersey, Law Division, Essex County, against the Company and the
members of the Company's Board of Directors, claiming retaliatory discharge
under the New Jersey Conscientious Employee Protection Act and breach of
contract. On December 17, 1997, the plaintiffs amended their complaint to add
a claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain related-
party transactions, the purported failure of the defendants to adequately
disclose the circumstances surrounding such transactions, and the Company's
public issuance of alleged false and misleading accounts concerning or
relating to such related-party transactions. The plaintiffs seek unspecified
compensatory and punitive damages, interest and costs and reinstatement of the
plaintiffs to their positions with the Company. On April 8, 1998, the Company
filed its Answer to the Amended Complaint, and asserted a counterclaim against
Messrs. Farrell and Fields for breach of fiduciary duties. The Company intends
to defend vigorously against the allegations.

F-56
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

In connection with certain of the Company's 1997 acquisitions in which the
Company issued shares of its Common Stock as partial consideration, the
Company granted rights to have such shares registered for resale pursuant to
the federal securities laws. In certain of such acquisitions, the Company has
granted specific remedies to the sellers in the event that the registration
statement covering the relevant shares is not declared effective by the SEC
within an agreed-upon period of time, including the right to require the
Company to repurchase the shares issued to such seller. In the event the
Company is unable to register such shares by the required dates, the Company
would become obligated to repurchase the shares issued in connection with such
acquisition. As of March 31, 1998, the Company had reflected $7,187,000 of
Common Stock subject to redemption on its Consolidated Balance Sheet related
to shares that the Company may be required to repurchase. During the first
quarter of 1998, the Company paid $2,547,000 to sellers who exercised their
rights to have shares of Common Stock repurchased. Furthermore, from April 1,
1998 through May 26, 1998, the Company paid an additional $728,000 to such
sellers. In addition, the Company expects to pay an additional $5,763,000
during the remainder of 1998 ($3,695,000 of which was due and payable on June
3, 1998 (the "June 1998 Repurchase Obligation") but has not yet been paid by
the Company) in connection with the settlement of certain repurchase
obligations of the Company subject, under certain circumstances, to the
consent of the Senior Note holders. With respect to the June 1998 Repurchase
Obligation which remains due and payable, the Company is in discussions with
the sellers to whom such obligations are owed and the Senior Note holders
regarding the timing and satisfaction of the June 1998 Repurchase Obligation.

In addition, in connection with certain of such acquisitions, the Company
has agreed with the sellers in such acquisitions to pay (in additional shares
and/or cash) to the sellers an amount equal to the shortfall in the value of
the issued shares in the event the market value of such shares at the relevant
effective date of the registration statement or other negotiated date is less
than the market value of such shares as of the closing of the acquisition or,
in other cases, as of the execution of the relevant acquisition agreement
(referred to as "Price Protection"). Based upon the closing sales price of the
Company's Common Stock on May 26, 1998 ($3 1/16 per share), such shortfall
would be approximately $9,634,000, which amount may be reduced by up to
$5,977,000 to the extent certain sellers exercise their repurchase rights
referred to above.

In addition, in connection with certain of the Company's acquisitions, the
Company has agreed with the relevant sellers that all or a portion of the
consideration for such acquisitions will be paid on a contingent basis based
upon the profitability, revenues or other financial criteria of the acquired
business during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such
contingent consideration differs for each acquisition. In connection with
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration, and in other cases, the parties
have agreed that any payment of such contingent consideration may be paid in
cash or shares of Common Stock, or a combination of both.

Pursuant to the terms of the Series C Convertible Preferred Stock Purchase
Agreement, dated July 21, 1997, and the Registration Rights Agreement, dated
July 21, 1997, between the Company and RGC International, LDC ("RGC")
(hereinafter referred to as the "RGC Agreements"), the Company issued 18,000
shares of Series C Convertible Preferred Stock, $1,000 stated value per share
(the "Series C Preferred Stock") to RGC. Under the RGC Agreements, the Company
was required to use its best efforts to include the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock (the "RGC Conversion
Shares") in an effective Registration Statement on Form S-3 not later than
October 1997. The RGC Agreements provide for monthly

F-57
<PAGE>

MEDICAL RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

penalties ("RGC Registration Penalties") in the event that the Company failed
to register the Conversion Shares prior to October 1997 with such penalties
continuing until such time as the Conversion Shares are registered as required
by the RGC Agreements.

As a result of the Company's continued failure to register the RGC
Conversion Shares, the Company: (i) issued warrants to RGC to acquire
1,167,000 shares of Common Stock at an exercise prices ranging from $11.62 to
$12.95 per share (such warrants having an estimated value, for accounting
purposes, of $3,245,000); (ii) issued interest bearing promissory notes, due
May 1, 1998 (the "RGC Penalty Notes"), in the aggregate principal amount of
$1,440,000; and (iii) is incurring additional penalties of $540,000 per month
(payable at the option of RGC in cash or additional shares of Common Stock).
On May 1, 1998, the Company did not pay RGC the $1,440,000 that was then due
and payable under the RGC Penalty Notes. Additionally, on May 1, 1998, as a
result of the Company's failure to register the Conversion Shares on or before
such date, RGC was entitled under the RGC Agreements to demand a one-time
penalty of $1,800,000 (the "May 1998 Penalty") payable, at the option of RGC,
in cash or additional shares of Common Stock. The Company has not received
notice of a demand for payment or other satisfaction of the RGC Penalty Notes
and the May 1998 Penalty, and the Company and RGC are currently in discussions
regarding the restructuring of the RGC Penalty Notes, the May 1998 Penalty and
the on-going monthly penalties. There can be no assurance, however, that the
Company will be successful in restructuring such obligations on terms
favorable to the Company or its shareholders.

F-58
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $31,817
Accounting fees and expenses........................................... 10,000
Legal fees and expenses................................................ 12,000
Blue Sky fees and expenses............................................. 2,000
Miscellaneous.......................................................... 2,000
-------
Total................................................................ $57,817
=======
</TABLE>
- - --------
* All amounts are estimates other than the Commission's registration fee. No
portion of these expenses will be borne by the Selling Stockholders.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the State of Delaware ("DGCL")
empowers the Company to, and the Certificate of Incorporation of the Company
provides that it shall, indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by any reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; except that, in the case of an action or suit by or in the right
of the Company, no indemnification may be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Company unless
and only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine that such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.

The Company's Certificate of Incorporation provides, pursuant to Section 145
of the DGCL, for indemnification of officers, directors, employees and agents
of the Company and persons serving at the request of the Company in such
capacities within other business organizations against certain losses, costs,
liabilities and expenses incurred by reason of their position with the Company
or such other business organizations.

Article Ninth of the Company's Certificate of Incorporation limits a
director's liability in accordance with Section 102(b) of the DGCL.
Specifically, Article Ninth provides that no director of the Company shall be
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper
personal benefit. Article Ninth also provides that if the DGCL is further
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, the liability of a director of the Company
shall be eliminated or limited to the fullest extent permitted by the DGCL.

In May 1997, the Company entered into an indemnification agreement (the
"Agreement" and collectively, the "Agreements") with each member of the
Company's Board of Directors (each, a "Member"). The Agreements provide that
each Member is indemnified to the fullest extent permitted by Delaware law. In
connection with any litigation for which a Member is entitled to
indemnification, the Agreement provides that

II-1
<PAGE>

the Member may request that the Company make advances of fees and expenses
prior to the final disposition of such action as long as the Member signs an
undertaking to repay such amounts if it is ultimately determined that the
Member is not entitled to indemnification. If the Company does not pay in full
a claim for indemnification made by a Member, the Member may recover all
expenses (including attorney's fees and expenses) of bringing such action, as
well as the amount of such claim. In any event, the Company is still required
to make advance interim payments to the Member prior to the final disposition
of any such controversy. Pursuant to the Agreements, each Member shall have
the right to reasonably approve the legal counsel selected by the Company to
defend any action to which the Member is involved and, in certain cases, to
have separate counsel represent the Member at the Company's expense.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following is a list of equity securities sold by the Company within the
past three years which, pursuant to the exemption provided by Section 4(2) of
the Securities Act, were not registered under the Securities Act.

On May 30, 1995, the Company consummated the private placement of $4,350,000
principal amount of 11.0% Convertible Subordinated Debentures to various
investors. The Company paid $247,500 in placement agent fees and expenses to
Arnhold and S. Bleichroeder, Inc., an investment banking firm which acted as
placement agent, in connection with such private placement.

On January 9, 1996, the Company issued 194,113 shares of Common Stock to
MRI-CT, Inc. as partial consideration for the acquisition of four imaging
centers in Manhattan, Bronx and Brooklyn, New York.

On February 7, 1996, the Company consummated the private placement of
$6,533,000 principal amount of 10.5% Convertible Subordinated Debentures to
various investors. The Company paid $356,650 in placement agent fees and
expenses to Arnhold and S. Bleichroeder, Inc., an investment banking firm
which acted as placement agent, in connection with such private placement.

On March 22, 1996, the Company issued warrants to purchase 150,000 shares of
Common Stock for financial advisory services to Brean Murray, Foster
Securities, Inc.

On May 1, 1996, the Company issued 228,751 shares of Common Stock to the
stockholder of Americare Imaging Centers, Inc. as partial consideration for
the acquisition of three imaging centers in Tampa and Tarpon Springs, Florida.

On May 20, 1996, the Company issued warrants to purchase 120,000 shares of
Common Stock to 712 Advisory Services, Inc. ("712 Advisory") for financial
advisory services rendered in connection with the merger with NMR of America,
Inc.

On May 22, 1996, the Company issued 192,063 shares of Common Stock to the
stockholders of Access Imaging Center, Inc. as partial consideration for the
acquisition of an imaging center in Clearwater, Florida.

On November 1, 1996, the Company issued warrants to purchase 5,000 shares of
Common Stock to Robert Wasserman for financial consulting services rendered to
the Company.

On November 25, 1996, the Company issued $4,500,000 principal amount of
convertible promissory notes to RGB Management Corp. as consideration for the
acquisition of two imaging centers in Garden City and East Setauket, New York.

On December 16, 1996, the Company issued 18,868 shares of Common Stock to
NMR Associates 1983-I, Ltd. as partial consideration for the acquisition of an
imaging center in Newark, New Jersey.

On February 24, 1997, the Company issued 525,000 shares of Common Stock to
New England MRI, Inc. in payment of a partial amount of the deferred purchase
price respecting the May 5, 1995 acquisition of an imaging center in Ft.
Myers, Florida.

II-2
<PAGE>

On February 28, 1997, the Company issued to The MRI Center of Jacksonville,
Inc. 215,000 shares of the Company's Common Stock as consideration for the
acquisition of a diagnostic imaging center in Jacksonville, Florida.

On March 10, 1997, the Company issued to The Magnet of Palm Beach, Ltd.,
57,670 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in West Palm Beach, Florida.

On March 14, 1997, the Company issued to Grove Diagnostic Center, Inc.
44,016 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in Rancho Cucamonga, California.

On April 30, 1997, the Company issued 75,000 shares of Common Stock to New
England MRI, Inc. in payment of a partial amount of the deferred purchase
price respecting the May 5, 1995 acquisition of an imaging center in Ft.
Myers, Florida.

On May 9, 1997, the Company issued to Accessible MRI of Baltimore County,
Inc. 119,166 shares of the Company's Common Stock as partial consideration for
the acquisition of two diagnostic imaging centers in Towson and Silver Spring,
Maryland.

On May 30, 1997, the Company issued to Capstone Management Group, Inc.
397,204 shares of the Company's Common Stock as partial consideration for the
acquisition of ten diagnostic imaging centers in the Northeast and Ohio.

On June 24, 1997, the Company issued to Wesley Medical Resources, Inc.
137,222 shares of the Company's Common Stock as consideration for the
acquisition of a medical staffing company in San Francisco, California.

On June 25, 1997, the Company issued to 8,780 shares of the Company's Common
Stock as consideration for forgiveness of a note payable.

On June 30, 1997, the Company issued to equity holders of Brooklyn Medical
Imaging Center, Meadows Medical Management, Inc. and The Staten Island Medical
Imaging, Inc., 152,356 shares of the Company's Common Stock as partial
consideration for the acquisition of three diagnostic imaging centers located
in New York.

On July 21, 1997, the Company consummated the private placement of 18,000
shares of Series C Convertible Preferred Stock to RGC International Investors,
LDC. The Company paid $967,500 in placement agent fees and expenses to Arnhold
and S. Bleichroeder, Inc., an investment banking firm, in connection with such
private placement.

On July 31, 1997, the Company issued to Medical Imaging of Hollywood, Inc.
37,539 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in Hollywood, Florida.

On August 1, 1997, the Company issued to Coral Way MRI, Inc. 92,243 shares
of the Company's Common Stock as consideration for the acquisition of a
diagnostic imaging centers in Miami, Florida.

On August 13, 1997, the Company issued to Vascular Services, Inc. 7,337
shares of the Company's Common Stock as partial consideration for the
acquisition of an imaging center in Jupiter, Florida.

On August 21, 1997, the Company issued $3,700,000 aggregate principal amount
of convertible promissory notes to the equity holders of Presgar Imaging of
Florida, LLC, Presgar Imaging of Tampa, LLC and Presgar Imaging of Sarasota,
LLC as partial consideration in connection with the acquisition of four
imaging centers in Florida.

II-3
<PAGE>

On August 29, 1997, the Company issued to National Medical Development, Inc.
43,415 shares of the Company's Common Stock as partial consideration for the
acquisition of a partnership interest in a partnership which operates one
diagnostic imaging center in San Jose, California.

On September 5, 1997, the Company issued to Magnetic Scans, Inc. 75,281
shares of the Company's Common Stock as consideration for the acquisition of a
diagnostic imaging center in Port Charlotte, Florida.

On September 16, 1997, the Company issued to Bronx MRI Associates and Queens
MRI Associates 44,021 shares and 58,694 shares, respectively, of the Company's
Common Stock as partial consideration for the acquisition of two diagnostic
imaging centers in New York City, New York.

On September 24, 1997, the Company issued to David L. Condra and Sirrom
Investment, Inc., 51,617 shares and 55,549 shares, respectively, of the
Company's Common Stock as partial consideration for the acquisition of a
software company for radiology information systems in Nashville, Tennessee.

On September 26, 1997, the Company issued 200,000 shares of the Company's
Common Stock as additional contingent consideration due to the achievement of
certain earnings objectives by the Ft. Myers center per the May 17, 1995 Asset
Purchase Agreement for the acquisition of the assets of New England MRI, Inc.

In addition, the Company issued to 712 Advisory, for financial advisory
services rendered to the Company in connection with the acquisitions which
were consummated in the first or second quarters of 1997, five-year warrants
to purchase an aggregate 675,000 shares of the Company's Common Stock in
connection with the acquisitions. These warrants were issued as of the date of
the date of the public announcement of such acquisitions, and were contingent
upon the transaction closing. The exercise prices were based on the average of
the last sales price to the Company's Common Stock for the ten consecutive
trading days prior to the public announcement.

On October 3, 1997, the Company issued $1,750,000 principal amount of
convertible promissory notes to the equity owners of Regional Imaging
Consultants Corp., Grajo Imaging, Inc. and Advance Radiology--Imaging Services
of Trumbull, Inc. as partial consideration for the acquisition of six imaging
centers in Ohio.

On November 3, 1997, the Company issued warrants to purchase 75,000 shares
of Common Stock to J. Alix & Associates in connection with engagement of such
company to provide interim management services to the Company.

On December 29, 1997, the Company issued warrants to purchase 817,000 shares
of Common Stock to RGC International Investors, LDC in lieu of fees owing to
the holder of the Preferred Stock and for other consideration.

On December 31, 1997, the Company issued warrants to purchase 100,000 shares
of Common Stock to DVI Financial Services, Inc. in connection with drawdown of
$8 million of a $15 million credit facility.

In January 1998, the Company issued to RGC International, LDC ("RGC")
warrants to purchase 350,000 shares of Common Stock at an exercise price of
$12.95 per share in payment of certain monthly penalties payable to RGC as a
result of the failure by the Company to register the shares of Common Stock
issuable upon the conversion of the Series C Convertible Preferred Stock held
by RGC.

In February 1998, the Company issued to Robert Kupchak ("Kupchak") 25,624
shares of Common Stock. Kupchak had been the seller of a certain diagnostic
imaging center located in Hollywood, Florida in July 1997 and, at the closing
of such sale, received shares of Common Stock from the Company as partial
consideration for such center (the "Closing Shares"). The shares issued in
February 1998 were issued by the Company as a result of the election by
Kupchak of his right to have the Company pay the shortfall (approximately
$275,000) with respect to the market value of his Closing Shares as of
February 1, 1998 compared to the market value of his Closing Shares at the
time of the closing of the relevant acquisition.

II-4
<PAGE>

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Company's Certificate of Incorporation, as amended to date.*
3.2 Company's By-Laws, as amended.*
3.3 Certificate of Designations, Preferences and Rights of the Company's
Series C Convertible Preferred Stock.**
4.1 Common Stock Specimen Certificate.*
4.2 Shareholder Rights Plan of the Company, dated September 15, 1996.***
5.1 Opinion of Christopher J. Joyce, Esq.
10.1 Note Purchase Agreement ($52,000,000 7.77% Senior Notes), dated as of
February 20, 1997, between the Company and the Purchasers listed
therein.****
10.2 Note Purchase Agreement ($20,000,000 8.10% and $6,000,000 8.01% Senior
Notes), dated as of June 26, 1997, between the Company and the
Purchasers listed therein.*****
10.3 Securities Purchase Agreement, dated as of July 21, 1997, between the
Company and RGC International Investors, LDC.**
10.4 Registration Rights Agreement, dated as of July 21, 1997, between the
Company and RGC International Investors, LDC.**
10.5 $15,000,000 Promissory Note, dated December 29, 1997, payable to DVI
Financial Services Inc. together with Warrant, dated 1997 to purchase
100,000 shares of Common Stock*********
10.6 1992 Stock Option Plan.*
10.7 1995 Stock Option Plan of the Company.******
10.8 1996 Stock Option Plan of the Company.*******
10.9 1996 Stock Option Plan B of the Company.*******
10.10 Warrant, dated December 30, 1997, to purchase 817,000 shares of Common
Stock issued to RGC International, LDC.*********
10.11 Employment Agreement, dated January 30, 1998, between the Company and
Duane C. Montopoli.*********
10.12 Employment Agreement, dated March 23, 1998, between the Company and
Geoffrey A. Whynot.*********
10.13 Employment Agreement, dated April 6, 1998, between the Company and
Christopher J. Joyce*********
10.14 Stock Purchase Agreement dated as of July 8, 1998 between the Company
and RehabCare Group Inc. and Healthcare Staffing Solutions, Inc.
21.1 List of Subsidiaries.*********
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP
Power of Attorney (Reference is made to the signature page of the
24.1 Registration Statement).
99.1 Important Factors Regarding Forward-Looking Statements.(1)
99.2 Asset Purchase Agreement, dated as of January 16, 1997, between
Melbourne Neurologic, P.A., Thomas G. Hoffman, Scott L. Gold, Eugene
M. Shepherd, Melbourne Resources, Inc. and the Company.(1)
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
99.3 Asset Purchase Agreement, dated as of January 27, 1997, among
Dedicated Medical Imaging, San Clemente, Inc., Long Beach Radiology
Center, Ltd., Mr. Joseph Payne, San Clemente Resources, Inc., Long
Beach Resources, Inc. and the Company.(1)
99.4 Asset Purchase Agreement, dated as of January 31, 1997, by and among
The MRI Center of Jacksonville Inc., Mr. Francis D. Hussey,
Jacksonville Resources, Inc. and the Company.(1)
99.5 Stock Purchase Agreement, dated as of February 27, 1997, by and among
Advanced Diagnostic Imaging, Inc., Drew M. Netter, William Lehn and
the Company.(1)
99.6 Asset Purchase Agreement, dated as of March 10, 1997, between MRI of
Palm Beach, Inc., The Magnet of Palm Beach, Ltd., West Palm Beach
Resources, Inc. and the Company.(1)
99.7 Asset Purchase Agreement, dated as of March 14, 1997, between Grove
Diagnostic Imaging Center Inc., J. Kenneth Luke, J.M. Venesky, Rancho
Cucamonga Resources, Inc. and the Company.(1)
99.8 Asset Purchase Agreement, dated as of May 7, 1997, among Accessible
MRI of Baltimore County, Inc., Accessible MRI of Montgomery County,
Inc., Ross H. Taber, Phyllis S. Taber, Accessible Resources, Inc., and
the Company.(1)
99.9 Asset Purchase Agreement, dated as of May 9, 1997, between Capstone
Management Group, Inc., Albany MRI Management, Inc., Bensalem MRI
Management, Inc., Syracuse MRI Management, Inc., James M. Domesek,
M.D., Robert D. Baca, Lynne A. Fox, Robert Maskulyak, Darryl Johnson,
John Wisdo, Christine Rawski, MRI Capstone Resources, Inc. and the
Company.**********
99.10 Asset Purchase Agreement, dated as of March 7, 1997 by and among the
Company, ATI Resources, Inc., ATI Centers, Inc., Americare Health
Services Inc., John A. Bennet, M.D. and Nancy D. Rocco.(1)
99.11 Securities Purchase Agreement, dated as of July 21, 1997, between the
Company and RGC International Investors, LDC.*
99.12 Registration Rights Agreement, dated as of July 21, 1997, between the
Company and RGC International Investors, LDC.*
</TABLE>
- - --------
(1) Previously filed.

* Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (File No. 33-48848).
** Incorporated herein by reference from the Company's Current Report
on Form 8-K dated July 21, 1997.
*** Incorporated herein by reference from the Company's Current Report
on Form 8-K dated September 13, 1996.
**** Incorporated herein by reference from the Company's Current Report
on Form 8-K dated March 4, 1997.
***** Incorporated herein by reference from the Company's Current Report
on Form 8-K dated June 26, 1997.
****** Incorporated herein by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
******* Incorporated herein by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
******** Incorporated herein by reference from the Company's Current Report
on Form 8-K/A filed on December 24, 1997, amending the Company's
Current Report on Form 8-K dated December 4, 1997.
********* Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
********** Incorporated by reference from the Company's Current Report on Form
8-K dated May 30, 1997 filed with the Commission on June 16, 1997.

II-6
<PAGE>

ITEM 17. UNDERTAKING.

The undersigned registrant hereby undertakes:

1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");

(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") that
are incorporated by reference in this Registration Statement.

2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

3. To remove from registration by means of a post-effective amendment any of
the securities being registered hereby which remain unsold at the termination
of the offering.

Insofar as indemnifications for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act, and will be governed by the final
adjudication of such issue.

II-7
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED IN THE CITY OF HACKENSACK, STATE OF NEW JERSEY ON
JULY 23, 1998.

MEDICAL RESOURCES, INC.

/s/ Duane C. Montopoli
By: _________________________________
DUANE C. MONTOPOLI PRESIDENT AND
CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON JULY 23, 1998.

SIGNATURE CAPACITY IN WHICH SIGNED

/s/ D. Gordon Strickland Chairman of the Board of Directors
- - -------------------------------------
D. GORDON STRICKLAND

/s/ Gary N. Siegler Director
- - -------------------------------------
GARY N. SIEGLER

/s/ Gary Fuhrman Director
- - -------------------------------------
GARY FUHRMAN

/s/ John Josephson Director
- - -------------------------------------
JOHN JOSEPHSON

/s/ Sally W. Crawford Director
- - -------------------------------------
SALLY W. CRAWFORD

/s/ Peter B. Davis Director
- - -------------------------------------
PETER B. DAVIS

/s/ Duane C. Montopoli President and Chief Executive
- - ------------------------------------- Officer (Principal Executive
DUANE C. MONTOPOLI Officer)

/s/ Geoffrey A. Whynot Chief Financial Officer (Principal
- - ------------------------------------- Financial/Accounting Officer)
GEOFFREY A. WHYNOT

<PAGE>

Exhibit 5.1

July 23, 1998

Medical Resources, Inc.
155 State Street
Hackensack, New Jersey 07601

Gentlemen:

You have requested my opinion as counsel for Medical Resources, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, and the public offering by certain selling stockholders
(the "Selling Stockholders") of up to 16,127,332 shares of the Company's common
stock (the "Shares").

I have examined the Company's Amendment No. 4 to Form S-3 on Form S-1
Registration Statement in the form to be filed with the Securities and Exchange
Commission on or about July 23, 1998 (the "Registration Statement"). I further
have examined the Certificate of Incorporation of the Company as certified by
the Secretary of State of the State of Delaware, the By-laws, the minute books
and other agreements of the Company as a basis for the opinion hereafter
expressed.

Based on the foregoing examination, I am of the opinion that the shares
that are currently outstanding have been validly issued and are fully paid and
non-assessable, and other shares to be issued as contemplated in the Prospectus
forming a part of the Registration Statement will be, upon issuance by the
Company in the manner described in the Registration Statement, the Shares will
be upon issuance validly issued, fully paid and non-assessable.

I consent to the filing of this opinion as an exhibit to the Registration
Statement.

Very truly yours,

/s/ Christopher J. Joyce, Esq.
-------------------------------------
Senior Vice President - Legal Affairs
and Administrator

<PAGE>

EXHIBIT 10.14

EXECUTION COPY
--------------

- - --------------------------------------------------------------------------------

STOCK PURCHASE AGREEMENT

by and between

MEDICAL RESOURCES, INC.,

as Seller,

and

REHABCARE GROUP, INC.,

and

HEALTHCARE STAFFING SOLUTIONS, INC.,

as Buyer

---------------------
Dated as of

July 8, 1998
---------------------

- - --------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

PAGE

ARTICLE I. DEFINITIONS

1.1. Definitions............................................................ 1

ARTICLE II. SALE OF SHARES

2.1. Purchase and Sale of the Shares........................................ 5
2.2. Closing................................................................ 6

ARTICLE III. REPRESENTATIONS AND WARRANTIES OF SELLER

3.1. Corporate Organization, Etc............................................ 7
3.2. Capitalization of Companies............................................ 8
3.3. Company Subsidiaries................................................... 8
3.4. Authority Relative to this Agreement................................... 8
3.5. Consents and Approvals; No Violations.................................. 9
3.6. Financial Statements................................................... 9
3.7. Absence of Certain Changes............................................. 10
3.8. Compliance with Law.................................................... 10
3.9. Contracts and Commitments.............................................. 10
3.10. No Undisclosed Liabilities............................................ 11
3.11. No Default............................................................ 11
3.12. Litigation............................................................ 11
3.13. Taxes................................................................. 12
3.14. Employee Benefit Plans; ERISA......................................... 12
3.15. Title to Properties................................................... 14
3.16. Patents, Trademarks, Etc.............................................. 14
3.17. Insurance............................................................. 15
3.18. Environmental Matters................................................. 15
3.19. Employee and Labor Matters............................................ 16
3.20. Brokers and Finders................................................... 16
3.21. Year 2000 Compliance.................................................. 16

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF BUYER

4.1. Corporate Organization; Etc............................................ 17
4.2. Authority Relative to this Agreement................................... 17
4.3. Consents and Approvals; No Violations.................................. 17
4.4. Available Funds........................................................ 18
4.5. Brokers and Finders.................................................... 18

ARTICLE V. COVENANTS

5.1. Conduct of the Business Pending the Closing............................ 18
5.2. Access to Information.................................................. 20
5.3. Disclosure Supplements................................................. 21
5.4. Consents and Approvals................................................. 22
5.5. Filings................................................................ 22
5.6. Covenant to Satisfy Conditions......................................... 22
5.7. Further Assurances..................................................... 23
5.8. Employee Benefit Matters............................................... 23

i
<PAGE>

5.9. Elimination of Indebtedness............................................ 23
5.10. Assumption of Certain Liabilities..................................... 23
5.11. Section 338(h)(10) Election........................................... 24
5.12. Insurance............................................................. 24

ARTICLE VI. CONDITIONS TO SELLER'S OBLIGATIONS

6.1. Representations and Warranties True.................................... 24
6.2. Performance............................................................ 25
6.3. Certificates........................................................... 25
6.4. No Injunction or Proceeding............................................ 25
6.5. HSR Act................................................................ 25
6.6. Lender Consent......................................................... 25

ARTICLE VII. CONDITIONS TO BUYER'S AND PARENT'S OBLIGATIONS

7.1. Representations and Warranties of Seller True.......................... 25
7.2. Performance by Seller.................................................. 25
7.3. Certificates........................................................... 25
7.4. No Injunction or Proceeding............................................ 26
7.5. HSR Act................................................................ 26
7.6. Receipt of 1996 Audit.................................................. 26

ARTICLE VIII. TERMINATION AND ABANDONMENT; INDEMNIFICATION

8.1. Termination............................................................ 26
8.2. Procedure and Effect of Termination.................................... 27
8.3. Survival of Representations, Warranties and Covenants.................. 27
8.4. Indemnification........................................................ 28
8.5. Tax Matters............................................................ 31

ARTICLE IX. MISCELLANEOUS

9.1. Amendment and Modifications............................................ 33
9.2. Extension; Waiver...................................................... 33
9.3. Representations and Warranties; Etc.................................... 33
9.4. Entire Agreement; Assignment........................................... 34
9.5. Validity............................................................... 34
9.6. Notices................................................................ 34
9.7. Governing Law.......................................................... 35
9.8. Specific Performance................................................... 35
9.9. Publicity.............................................................. 36
9.10. Arbitration........................................................... 36
9.11. Descriptive Headings.................................................. 37
9.12. Counterparts.......................................................... 37
9.13. Expenses.............................................................. 37
9.14. Parties in Interest................................................... 37
9.15. Interpretation........................................................ 38

ii
<PAGE>

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of July 8,
1998, is by and between Medical Resources, Inc., a Delaware corporation
("Seller"), and Healthcare Staffing Solutions, Inc., a Massachusets corporation
("Buyer") and RehabCare Group, Inc., a Delaware corporation ("Parent").

WHEREAS, Seller owns all of the issued and outstanding shares of
common stock, par value $.01 per share of StarMed Staffing, Inc. ("StarMed"), a
Delaware corporation, and all of the issued and outstanding shares of common
stock, no par value, of Wesley Medical Resources, Inc. ("Wesley"), a California
corporation (collectively, the "Shares"); and

WHEREAS, Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, the Shares, all in accordance with and subject to the terms and
conditions of this Agreement; and

NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements herein contained,
Buyer and Seller hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1. Definitions. The terms defined in this Article I, whenever used
-----------
herein, shall have the following meanings for all purposes of this Agreement.

"Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under the Exchange Act.

"Agreement" shall have the meaning set forth in the preamble hereto.

"Audited Financial Statements" shall have the meaning set forth in
Section 3.6 hereof.

"Buyer" shall have the meaning set forth in the preamble hereto.

"Buyer Disclosure Schedule" shall have the meaning set forth in
Article IV hereof.

"Buyer Indemnified Parties" shall have the meaning set forth in
Section 8.4(a) hereof.

"Buyer Material Adverse Effect" shall have the meaning set forth in
Section 4.1 hereof.
<PAGE>

"Closing" shall have the meaning set forth in Section 2.2(a) hereof.

"Closing Date" shall have the meaning set forth in Section 2.2(a)
hereof.

"Code" shall have the meaning set forth in Section 3.14(a) hereof.

"Companies" shall mean StarMed and Wesley.

"Company Financial Statements" shall have the meaning set forth in
Section 3.6 hereof.

"Company Subsidiaries" shall mean the Subsidiaries of StarMed and
Wesley.

"Confidentiality Agreement" shall have the meaning set forth in
Section 5.2 hereof.

"Contracts" shall have the meaning set forth in Section 3.9 hereof.

"Credit Facility" shall have the meaning set forth in Section 5.1(e).

"Damages" shall have the meaning set forth in Section 8.4(a) hereof.

"Deductible Amount" shall have the meaning set forth in Section 8.4(c)
hereof.

"Dispute" shall have the meaning set forth in Section 9.10(a) hereof.

"DOJ" shall have the meaning set forth in Section 3.5 hereof.

"Encumbrance" shall mean any lien, encumbrance, security interest,
charge, mortgage, option, pledge or restriction on transfer of any nature
whatsoever (except, in the case of the Shares, for restrictions relating to
applicable securities laws).

"Environmental Claim" means any claim, action, demand, order, or
written notice by or on behalf of, any Governmental Entity or Person alleging
potential liability arising out of, based on or resulting from the violation of
any Environmental Law or permit.

"Environmental Laws" shall mean all Federal, state, and local laws and
regulations relating to Releases or threatened Releases of Hazardous Materials
or otherwise relating to the

-2-
<PAGE>

generation, treatment, storage, transport or handling of Hazardous Materials.

"Escrow Agent" shall mean IBJ Schroder Bank & Trust Company or another
bank or trust company mutually agreed between Buyer and Seller prior to the
Closing Date.

"Escrow Agreement" shall mean the escrow agreement among Buyer, Seller
and the Escrow Agent substantially in the form of Exhibit A hereto.
---------

"Escrow Deposit" shall mean the Letter of Credit.

"ERISA" shall have the meaning set forth in Section 3.14(a) hereof.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

"FTC" shall have the meaning set forth in Section 3.5 hereof.

"Final Determination" shall have the meaning set forth in Section
9.10(e) hereof.

"GAAP" shall mean United States generally accepted accounting
principles as in effect on the date or for the period with respect to which such
principles are applied.

"Governmental Entity" shall have the meaning set forth in Section 3.5
hereof.

"Hazardous Materials" means all substances defined as hazardous
substances in the Comprehensive Environmental Response, Compensation and
Liability Act.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.

"Indemnified Party" shall have the meaning set forth in Section 8.4(g)
hereof.

"Indemnifying Party" shall have the meaning set forth in Section
8.4(g) hereof.

"Insurance Policies" shall have the meaning set forth in Section 3.17
hereof.

"Intellectual Property Rights" shall have the meaning set forth in
Section 3.16(b) hereof.

"L/C Procedures Agreement" shall mean the L/C procedures agreement
between Seller and Parent substantially in the form of Exhibit B hereto.
---------

-3-
<PAGE>

"Letter of Credit" shall mean the Letter of Credit (as defined in the
L/C Procedures Agreement).

"Material Adverse Effect" shall have the meaning set forth in Section
3.1 hereof.

"Multiemployer Plan" has the meaning set forth in Section 3(37) of
ERISA.

"Multiple Employer Plan" means a plan with two or more contributing
sponsors, at least two of which are not under common control, within the meaning
of Section 4063 of ERISA.

"Notice of Arbitration" shall have the meaning set forth in Section
9.10(b) hereof.

"Parent" has the meaning set forth in the Preamble hereto.

"Permits" shall have the meaning set forth in Section 3.11 hereof.

"Person" shall mean any individual, corporation, partnership, trust or
other entity.

"Plans" shall have the meaning set forth in Section 3.14(a) hereof.

"Purchase Price" shall have the meaning set forth in Section 2.1
hereof.

"Release" shall have the meaning set forth in the Comprehensive
Environmental Response, Compensation and Liability Act.

"Representative" shall mean, with respect to any Person, each of such
Person's directors, officers, employees, representatives and agents, and each of
the heirs, executors and assigns of any of the foregoing.

"Selling Indemnified Parties" shall have the meaning set forth in
Section 8.4(b) hereof.

"Single Employer Plan" means a defined benefit pension plan which is
subject to Title IV of ERISA and which is not a Multiemployer Plan.

"Seller" shall have the meaning set forth in the preamble hereto.

"Seller Disclosure Schedule" shall have the meaning set forth in
Article III hereof.

-4-
<PAGE>

"Senior Notes" shall mean the Senior Notes of Seller issued pursuant
to the Note Purchase Agreements dated as of February 20, 1997 and June 26, 1997
among Seller and the purchasers listed on Exhibit A thereto.

"Shares" shall have the meaning set forth in the preamble hereto.

"StarMed" shall have the meaning set forth in the preamble hereto.

"Straddle Period" shall have the meaning set forth in Section 8.5(a)
hereof.

"Subsidiary" of a Person shall mean a corporation, partnership, joint
venture, association, limited liability company or other entity of which such
Person owns, directly or indirectly, more than 50% of the outstanding voting
stock or other ownership interest.

"Taxes" shall have the meaning set forth in Section 3.13(c) hereof.

"Tax Claim" shall have the meaning set forth in Section 8.5(c) hereof.

"Tax Return" shall have the meaning set forth in Section 3.13(c)
hereof.

"Termination Date" shall have the meaning set forth in Section 8.1(b).

"338(h)(10) Election" shall have the meaning set forth in Section 5.11
hereof.

"Unaudited Financial Statements" shall have the meaning set forth in
Section 3.6 hereof.

"Wesley" shall have the meaning set forth in the preamble hereto.

ARTICLE II.

SALE OF SHARES

2.1. Purchase and Sale of the Shares. Buyer and Seller hereby agree
-------------------------------
that upon the terms and subject to the satisfaction or waiver, if permissible,
of the conditions hereof, Seller shall sell, transfer and deliver to Buyer, and
Buyer shall purchase from Seller, free and clear of all Encumbrances, the Shares
for a purchase price equal to Thirty Three Million Dollars ($33,000,000) (the
"Purchase Price").

-5-
<PAGE>

2.2. Closing. (a) Subject to the satisfaction or waiver of the
-------
conditions set forth in Articles VI and VII hereof, the closing of the purchase
and sale of the Shares and the other transactions contemplated hereby (the
"Closing") shall be held at 10:00 a.m. on the third business day following the
satisfaction of such conditions (or such other place as the parties may mutually
agree). The date on which the Closing actually occurs is hereinafter referred to
as the "Closing Date."

(b) At the Closing, Seller shall deliver the following to Buyer:

(i) Stock certificate(s) with appropriate transfer stamps, if
any, affixed thereto, representing the Shares with appropriate stock powers
duly endorsed in blank or accompanied by other duly executed instruments of
transfer;

(ii) All other documents required to be delivered by Seller on
or prior to the Closing Date pursuant to this Agreement or otherwise
required from Seller in connection herewith;

(iii) The resignations of such members of the boards of
directors of each of the Companies as Buyer shall have requested in writing
no less than two business days prior to the Closing Date;

(iv) The stock books, stock ledgers, minute books and corporate
seals of each of the Companies; provided, that any of the foregoing items
shall be deemed to have been delivered pursuant to this Section 2.2(b)(iv)
if such item has been delivered to or is otherwise located at any offices
of the Companies;

(v) The Escrow Agreement;

(vi) The L/C Procedures Agreement;

(vii) The certificates contemplated by Section 7.3 hereof as
Buyer shall have requested in writing no less than two business days prior
to the Closing Date; and

(viii) All other documents required to be delivered by Seller on
or prior to the Closing Date pursuant to this Agreement or otherwise
reasonably required by Buyer in connection herewith as Buyer shall have
requested in writing no less than two business days prior to the Closing
Date.

(i) The Purchase Price less $2,000,000;

-6-
<PAGE>

(ii) The Letter of Credit to the Escrow Agent in accordance with
the Escrow Agreement;

(iii) The Escrow Agreement;

(iv) The L/C Procedures Agreement;

(v) The certificates contemplated by Section 6.3 hereof as
Seller shall have requested in writing no less than two business days prior
to the Closing Date; and

(vi) All other documents required to be delivered by Buyer on or
prior to the Closing Date pursuant to this Agreement or otherwise
reasonably required by Seller in connection herewith as Seller shall have
requested in writing no less than two business days prior to the Closing
Date.

(d) All payments to be made by Buyer or Parent pursuant to this
Section 2.2 shall be made by wire transfer of immediately available funds to
such bank account or bank accounts designated at least two business days prior
to the Closing Date by Seller.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES OF SELLER

Except as set forth in the Disclosure Schedule delivered by Seller to
Buyer concurrently with the execution and delivery by Seller of this Agreement
(the "Seller Disclosure Schedule"), Seller hereby represents and warrants to
Buyer and Parent as follows:

3.1. Corporate Organization, Etc. Each of Seller, the Companies
---------------------------
and each of the Company Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to conduct its
business as it is now being conducted and to own, lease and operate its property
and assets, except where the failure to be so organized, existing and in good
standing or to have such power or authority will not, in the aggregate, either
(i) have a material adverse effect on the business, operations, assets or
financial condition or results of operations of the Companies and the Company
Subsidiaries taken as a whole or (ii) materially impair the ability of Seller to
perform any of its obligations under this Agreement (either of such effects, a
"Material Adverse Effect"). Each of Seller, the Companies and each of the
Company Subsidiaries is qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which ownership of
property or the conduct of its business requires such qualification or license,
except where the failure to be so qualified or licensed will not have a Material
Adverse Effect.

-7-
<PAGE>

True and complete copies of the Articles of Incorporation and By-Laws of the
Companies, as presently in effect, have been heretofore delivered to Buyer.

3.2. Capitalization of Companies . The authorized capital stock
---------------------------
of each of the Companies and the Company Subsidiaries is as set forth in Section
3.2 of Seller Disclosure Schedule. All the Shares are issued and outstanding as
of the date of this Agreement. All of the Shares are duly authorized, validly
issued, fully paid and non-assessable and free of any preemptive rights in
respect thereto. There are no outstanding (a) securities convertible into or
exchangeable for the capital stock of the Companies or the Company Subsidiaries,
(b) options, warrants or other rights to purchase or subscribe for capital stock
of the Companies or the Company Subsidiaries, or (c) contracts, commitments,
agreements, understandings or arrangements of any kind relating to the issuance
of any capital stock of the Companies or the Company Subsidiaries, any such
convertible or exchangeable securities or any such options, warrants or rights,
pursuant to which, in any of the foregoing cases, either of the Companies or the
Company Subsidiaries is subject or bound. There are no voting trusts,
stockholders' agreements or other similar instruments restricting or relating to
the rights of the holders of Shares to vote, transfer or receive dividends with
respect to the Shares.

3.3. Company Subsidiaries. Section 3.3 of Seller Disclosure
--------------------
Schedule lists each of the Company Subsidiaries. All issued and outstanding
shares of capital stock of each of the Company Subsidiaries are duly authorized,
validly issued, fully paid and nonassessable, and are owned, directly or
indirectly, by one of the Companies, free and clear of all Encumbrances and any
preemptive rights in respect thereto. True and complete copies of the
Certificate of Incorporation and By-Laws of each of the Company Subsidiaries
have been heretofore delivered to Buyer.

3.4. Authority Relative to this Agreement. Seller has all
------------------------------------
requisite corporate authority and power to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all required corporate action on
the part of Seller and no other corporate proceedings on the part of Seller are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Seller and, assuming this Agreement has been duly authorized,
executed and delivered by Buyer, this Agreement constitutes a valid and binding
agreement of Seller, enforceable against Seller in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, including the effect of statutory and
other laws regarding fraudulent conveyances and preferential

-8-
<PAGE>

transfers and subject to the limitations imposed by general equitable principles
(regardless whether such enforceability is considered in a proceeding at law or
in equity).

3.5. Consents and Approvals; No Violations. Neither the
-------------------------------------
execution and delivery of this Agreement by Seller nor the consummation of the
transactions contemplated hereby by Seller will (a) violate any provision of the
certificate of incorporation or by-laws (or other comparable governing
documents) of Seller, the Companies or the Company Subsidiaries, (b) require any
consent, waiver, approval, license, authorization or permit of, or filing with
or notification to, any Federal, state, local or foreign government, executive
official thereof, governmental or regulatory authority, agency or commission,
including courts of competent jurisdiction, domestic or foreign (a "Governmental
Entity"), except for (i) filings with the Federal Trade Commission (the "FTC")
and with the Antitrust Division of the United States Department of Justice (the
"DOJ") pursuant to the HSR Act, and the rules and regulations promulgated
thereunder and (ii) such consents, waivers, approvals, authorizations, permits,
filings or notifications which, if not obtained or made, will not, in the
aggregate, have a Material Adverse Effect, (c) result in a violation or breach
of, or constitute (with or without notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration or any
obligation to repay) under, any of the terms, conditions or provisions of any
indenture, mortgage, note, bond, encumbrance, license, government registration,
contract, lease, franchise, permit, agreement or other instrument or obligation
to which any of Seller, the Companies or the Company Subsidiaries is a party or
by which Seller, the Companies or the Company Subsidiaries or any of their
respective properties or assets may be bound, except such violations, breaches
and defaults which, in the aggregate, will not have a Material Adverse Effect or
(d) violate any order, writ, judgment, injunction, decree, statute, ordinance,
rule or regulation of any Governmental Entity applicable to Seller, the
Companies or the Company Subsidiaries or by which any of their respective
properties or assets may be bound, except such violations which, in the
aggregate, will not have a Material Adverse Effect.

3.6. Financial Statements. Seller has previously furnished to
--------------------
Buyer the (i) unaudited combined balance sheets of the Companies, the related
combined statements of earnings, changes in stockholders equity and cash flows
of the Companies for the three months ended March 31, 1998 (the "Unaudited
Financial Statements") and (ii) the audited combined balance sheet of the
Companies and the related audited combined statements of earnings, changes in
stockholders equity and cash flows of the Companies (including any related
notes) for the fiscal year ended December 31, 1997, together with the report
thereon of the independent public accountants of the Companies (the "Audited
Financial Statements" and, together with the

-9-
<PAGE>

Unaudited Financial Statements, the "Company Financial Statements"). Each of the
balance sheets included in the Company Financial Statements, in all material
respects, fairly presents the combined financial position of the Companies as of
its date, and the other related statements included in the Company Financial
Statements, in all material respects, fairly present the combined results of
operations and changes in combined financial position of the Companies for the
periods presented therein, all in conformity with GAAP, applied on a consistent
basis during the periods involved, except as otherwise noted therein, and
except, in the case of the Unaudited Financial Statements, for the absence of
notes thereto and for customary year-end adjustments which are not material to
the financial position or results of operations of the Companies taken as a
whole.

3.7. Absence of Certain Changes. Since March 31, 1998, the
--------------------------
Companies and the Company Subsidiaries taken as a whole have not (a) suffered
any change in its business, operations or financial position, except such
changes which, in the aggregate, are not reasonably likely to have a Material
Adverse Effect, (b) conducted their respective businesses in any material
respect not in the ordinary and usual course consistent with past practice or
(c) except in the ordinary course of business and consistent with past practice,
(i) incurred any long-term indebtedness or issued any debt securities or
assumed, guaranteed or endorsed the obligations of any other Person, (ii)
declared, set aside for payment or paid any dividend or other distribution
(whether in cash, stock, property or any combination thereof) in respect of the
capital stock of the Companies, or redeemed or otherwise acquired any shares of
capital stock of the Companies or the Company Subsidiaries, (iii) sold,
transferred or otherwise disposed of, any of their material property or assets,
(iv) created any material Encumbrance on any of their material property or
assets, (v) increased in any manner the rate or terms of compensation of any of
their directors, officers or other employees, (vi) paid or agreed to pay any
pension, retirement allowance or other employee benefit not required by any
existing Plan or other agreement or arrangement to any such director, officer or
employee, whether past or present, or (vii) entered into or amended any
employment, bonus, severance or retirement contract.

3.8. Compliance with Law. The business of the Companies and the
-------------------
Company Subsidiaries is not being conducted in violation of any applicable
order, writ, judgment, injunction, decree, statute, ordinance, rule or
regulation of any Governmental Entity, except such violations which, in the
aggregate, will not have a Material Adverse Effect.

3.9. Contracts and Commitments. Section 3.9 of Seller Disclosure
-------------------------
Schedule sets forth, as of the date of this Agreement, a list of all written
Insurance Policies, collective bargaining agreements, employment, consulting or
similar agreements, real

-10-
<PAGE>

and personal property leases involving annual payments in excess of $25,000
other agreements, including any oral agreements, requiring annual payments in
excess of $25,000 guarantees, indentures, mortgages and notes or other debt
instruments evidencing indebtedness and agreements containing covenants not to
compete (collectively, the "Contracts") to which the Companies or the Company
Subsidiaries is a party. Neither the Companies nor the Company Subsidiaries is
in breach or default and, to the knowledge of Seller, no other party to any of
the Contracts is as of the date of this Agreement in breach or default (and no
event has occurred which with notice or the lapse of time or both would
constitute a default or violation) under any of the Contracts, except such
defaults which, in the aggregate, will not have a Material Adverse Effect.

3.10. No Undisclosed Liabilities. None of the Companies and the
--------------------------
Company Subsidiaries has any liabilities (whether absolute, accrued, contingent
or otherwise), except (i) as and to the extent set forth in the Company
Financial Statements (including the notes thereto), (ii) such immaterial
contractual liabilities as are not required to be disclosed pursuant to Section
3.9 hereof to which any of the Companies or the Company Subsidiaries is a party,
and (iii) such liabilities which were incurred in the ordinary course of
business or which, in the aggregate, are not material to the Companies and the
Company Subsidiaries taken as a whole.

3.11. No Default. Neither the Companies nor any of the Company
----------
Subsidiaries is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation) of
any term, condition or provision of (i) its Articles of Incorporation or By-Laws
(or other comparable governing documents) or (ii) any order, writ, judgment,
injunction, decree, statute, ordinance, rule or regulation of any Governmental
Entity applicable to the Companies and the Company Subsidiaries, except such
defaults and violations which, in the aggregate, will not have a Material
Adverse Effect. The Companies and the Company Subsidiaries have all
governmental permits, licenses and authorizations necessary for the conduct of
their businesses in all material respects as presently conducted (the "Permits")
and are in compliance with the terms of the Permits, except for such Permits the
absence of which would not have a Material Adverse Effect or any non-compliance
which will not have a Material Adverse Effect.

3.12. Litigation. As of the date of this Agreement, there is no
----------
action, suit or proceeding pending, or, to the knowledge of Seller, action, suit
or proceeding threatened, against the Companies or the Company Subsidiaries or
any properties or rights of the Companies or the Company Subsidiaries, before
any Governmental Entity which (a) involves a claim in excess of $50,000 or (b)
seeks material injunctive relief. As of the date of this Agreement, neither of
the Companies nor any of the Company Subsidiaries has received notice

-11-
<PAGE>

that it is subject to any outstanding injunction, writ, judgment, order or
decree of any Governmental Entity which will have a Material Adverse Effect.

3.13. Taxes. (a) The Companies and the Company Subsidiaries
-----
have, within the time and manner prescribed by law, (i) filed with the
appropriate taxing authorities (or joined in the filing of) all Tax Returns
required to be filed by it in respect of any Taxes other than those Tax Returns
the failure of which to file would not have a Material Adverse Effect, and each
such Tax Return was complete and accurate in all material respects and (ii) paid
in full all Taxes shown to be due and payable thereon.

(b) (i) No deficiencies for any Taxes have been asserted in writing
or, to the knowledge of Seller, verbally proposed or assessed against either of
the Companies or any of the Company Subsidiaries which remain unpaid and which
in the aggregate are material to the business or financial condition of the
Companies and the Company Subsidiaries taken as a whole, or which are not being
contested in good faith by appropriate proceedings; (ii) the Companies have
adequately reserved for all material Taxes payable by the Companies or any of
the Company Subsidiaries for which no Tax Return has yet been filed; (iii)
neither the Companies nor any of the Company Subsidiaries is a "foreign person"
for purposes of Section 1445 of the Internal Revenue Code of 1986, as amended
(the "Code"); and (iv) neither of the Companies is a party to any tax sharing
agreement with Seller or any corporate subsidiary of Seller relating to federal
income taxes of the "affiliated group," as defined under Section 1504(a) of the
Code, that includes Seller.

(c) For purposes of this Agreement, (i) "Taxes" shall mean all U.S.
Federal, state, local or foreign and other taxes, assessments, duties and
similar charges of any kind imposed by any taxing authority, including interest,
penalties and additions thereto, and (ii) "Tax Return" shall mean any return,
report, information return or other document (including any related or
supporting information) with respect to Taxes.

3.14. Employee Benefit Plans; ERISA. (a) Section 3.14(a) of
-----------------------------
Seller Disclosure Schedule sets forth a complete and correct list of all
"employee benefit plans", as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), maintained by the Companies
or any of the Company Subsidiaries or to which the Companies or any of the
Company Subsidiaries has any obligation or liability, contingent or otherwise;
and all bonus or other incentive compensation, deferred compensation, salary
continuation, disability, stock award, stock option, stock purchase, severance,
parachute or other material employee benefit policies or arrangements which the
Companies or any of the Company Subsidiaries maintains or to which the Companies
or any of the Company Subsidiaries has any

-12-
<PAGE>

obligation or liability (contingent or otherwise) (collectively referred to as
the "Plans").

(b) None of the Plans is a Multiemployer Plan or a Multiple Employer
Plan. None of the Companies or any of the Company Subsidiaries has any present
liability due to a complete or partial withdrawal from a Multiemployer Plan or
Multiple Employer Plan or due to the termination or reorganization of a
Multiemployer Plan, and no events have occurred and no circumstances exist that
could reasonably be expected to result in any such liability to the Companies or
any of the Company Subsidiaries.

(c) None of the Plans is a Single Employer Plan and none of the
Companies or any of the Company Subsidiaries has any outstanding liability under
Section 4062 of ERISA to the Pension Benefit Guaranty Corporation ("PBGC") or to
a trustee appointed under Section 4042 of ERISA, and no events have occurred and
no circumstances exist that could reasonably be expected to result in any such
liability to the Companies or any of the Company Subsidiaries.

(d) Each Plan that is intended to qualify under Section 401(a) of the
Code, and the trust maintained pursuant thereto, has been determined to be so
qualified and exempt from taxation under Section 501(a) of the Code, and nothing
has occurred with respect to the operation of any such Plan that could
reasonably be expected to adversely affect such qualification or tax-exempt
status.

(e) All contributions (including all employer contributions and
employee contributions) required to have been made by the Companies and the
Company Subsidiaries under the Plans or by law to any funds or trusts
established thereunder or in connection therewith have been made by the due date
thereof (including any valid extension), and all contributions for any period
ending on or before the Closing Date which become due (including any valid
extension) will have been paid by the Closing Date.

(f) There has been no violation of ERISA or the Code with respect to
the filing of applicable reports, documents or notices regarding the Plans with
any governmental authority or the furnishing of required reports, documents or
notices to the participants or beneficiaries of the Plans, except for such
violations as would not result in a Material Adverse Effect.

(g) True, correct and complete copies of the following documents,
with respect to each of the Plans, have been made available to Buyer by the
Companies, if applicable: (i) all plans and related trust documents, and
amendments thereto; (ii) the most recent Forms 5500; (iii) summary plan
descriptions; and (iv) and any written agreements, policies or practices.

-13-
<PAGE>

(h) The Plans have been maintained and administered in all respects
in accordance with their terms and applicable laws, which include but are not
limited to all the provisions of ERISA and the Code, except for such violations
as would not result in a Material Adverse Effect.

(i) There are no pending or, to the knowledge of the Companies and
the Company Subsidiaries, threatened actions, claims or proceedings against or
relating to any Plan, the assets of any of the trusts under such plans or the
plan sponsor or the plan administrator, or against any fiduciary of the Plans
with respect to the operation of such plans (other than routine benefit claims).

(j) To the knowledge of the Companies or the Company Subsidiaries,
none of the Companies or the Company Subsidiaries or any "party in interest" or
"disqualified person" with respect to the Plans has engaged in a "prohibited
transaction", as defined in Section 4975 of the Code or Section 406 of ERISA, or
taken any action, or failed to take any action, which could reasonably result in
any material liability under ERISA or the Code.

3.15. Title to Properties. The Companies and the Company
-------------------
Subsidiaries have good and valid title to all of the material assets and
properties (real and personal) which they own, and such assets and properties
are owned free and clear of all Encumbrances, except for (i) Encumbrances to
secure indebtedness reflected on the Company Financial Statements or
indebtedness incurred in the ordinary course of business and consistent with
past practice after the date thereof, (ii) mechanics', materialmens' and other
Encumbrances which have arisen in the ordinary course of business and (iii)
Encumbrances which, in the aggregate, are not reasonably likely to impair, in
any material respect, the continued use of such asset or property.

3.16. Patents, Trademarks, Etc. (a) Seller has previously
------------------------
delivered to Buyer a true and complete list of all Intellectual Property Rights
filed by, or issued or registered to, the Companies or the Company Subsidiaries
and all material intellectual property license agreements to which the Companies
or the Company Subsidiaries are a party. With respect to registered trademarks,
such list sets forth a list of all jurisdictions in which such trademarks are
registered or applied for and all registration and application numbers.

(b) (i) The Companies or the Company Subsidiaries own or possess
adequate licenses or other valid rights to use all United States and foreign
patents, trademarks (registered or unregistered), trade names, service marks,
copyrights and applications and registrations therefor, trade secrets and other
intellectual property and proprietary rights, whether or not subject to
statutory registration or protection, which are

-14-
<PAGE>

material to the conduct of the business of the Companies and the Company
Subsidiaries taken as a whole (the "Intellectual Property Rights"), (ii) as of
the date of this Agreement, the validity of the Intellectual Property Rights and
the title or rights to use thereof of the Companies or the Company Subsidiaries
are not being questioned in any litigation to which the Companies or the Company
Subsidiaries is a party, nor to the knowledge of Seller, is any such litigation
threatened, (iii) as of the date of this Agreement, none of the Companies or the
Company Subsidiaries has received notice that is a party to any litigation in
connection with which a Person has alleged that the conduct of the business of
the Companies or the Company Subsidiaries infringed or infringes with any valid
patents, trademarks, trade name, service marks or copyrights of others, nor, to
the knowledge of Seller, is any such litigation threatened, and (iv) to the
knowledge of Seller, (A) no Person is materially infringing upon or violating
any of the Intellectual Property Rights and (B) no material claim is pending or
threatened to that effect.

3.17. Insurance. The Companies and the Company Subsidiaries
---------
maintain policies of fire and casualty, liability and other forms of insurance
in such amounts, with such deductibles and against such risks and losses as are
reasonable for their business, assets and properties. All material insurance
policies (the "Insurance Policies") with respect to the property, assets,
operations and business of the Companies and the Company Subsidiaries are in
full force and effect and all premiums due and payable thereon have been paid in
full, and no notice of cancellation or termination has been received with
respect to any such policy which has not been replaced on substantially similar
terms prior to the date of such cancellation. As of the date of this Agreement,
there are no pending material claims under the Insurance Policies by the
Companies as to which the insurers have denied liability. Seller makes no
representation or warranty that such insurance will be continued or is
continuable after the Closing.

3.18. Environmental Matters. To Seller's knowledge (a) the
---------------------
Companies and the Company Subsidiaries are in compliance with all applicable
Environmental Laws, except where failure to be in compliance would not have a
Material Adverse Effect; (b) there is no Environmental Claim pending or
threatened against the Companies or any of the Company Subsidiaries which would
have a Material Adverse Effect; and (c) no person or party has any reasonable
basis for any action or proceeding against the Companies or any of the Company
Subsidiaries relating to the violation by the Company or any of the Company
Subsidiaries of any Environmental Law which could have a Material Adverse Effect
and none of the Companies and the Company Subsidiaries has received oral or
written notice of, nor does Seller have any reason to believe there is, any
existing or pending violation, citation, claim or complaint relating to the
violation of any Environmental Law by the Companies or the Company Subsidiaries,

-15-
<PAGE>

which violation is reasonably likely to have a Material Adverse Effect.

3.19. Employee and Labor Matters. Neither the Companies nor any
--------------------------
of the Company Subsidiaries is a party to any collective bargaining or other
labor union contract applicable to persons employed by them, no collective
bargaining agreement is being negotiated by the Companies or any of the Company
Subsidiaries, and none of Seller, the Companies or the Company Subsidiaries
knows of any activities or proceedings of any labor union to organize any of the
employees of the Companies and the Company Subsidiaries. As of the date hereof,
(i) the Companies and the Company Subsidiaries are in compliance in all material
respects with all applicable laws relating to employment and employment
practices, wages, hours, and terms and conditions of employment, (ii) there are
no material charges with respect to or relating to the Companies or any of the
Company Subsidiaries pending before the Equal Employment Opportunity Commission
or any state, local or foreign agency responsible for the prevention of unlawful
employment practices, and (iii) there is no labor dispute, strike or work
stoppage against the Companies or the Company Subsidiaries, pending or, to
Seller's knowledge, threatened which may interfere with the business activities
of the Companies and the Company Subsidiaries taken as a whole, except where
such non-compliance, charge, dispute, strike or work stoppage would not have a
Material Adverse Effect. As of the date hereof, to the knowledge of Seller,
neither the Companies and the Company Subsidiaries nor their respective
representatives or employees has committed any unfair labor practices in
connection with the operation of the business of the Companies and the Company
Subsidiaries, and there is no charge or complaint against the Companies or the
Company Subsidiaries, by the National Labor Relations Board or any comparable
state agency pending or threatened in writing, except where such unfair labor
practice, charge or complaint would not have a Material Adverse Effect.

3.20. Brokers and Finders. None of Seller, the Companies or the
-------------------
Company Subsidiaries or any of their respective officers, directors or employees
has employed any broker or finder or incurred any liability for any investment
banking fees, brokerage fees, commissions or finders' fees in connection with
the transactions contemplated by this Agreement, except for fees and expenses
payable to SBC Warburg Dillon Read Inc. for investment banking and other
advisory services which fees and expenses will be paid by Seller.

3.21. Year 2000 Compliance. To Seller's knowledge, the software
--------------------
package that the Companies are contemplating acquiring from HealthNet Systems,
Inc. for the Companies' per diem business pursuant to the proposal attached as
Section 3.21 of Seller Disclosure Schedule will be year 2000 compliant, which,
for purposes of this Agreement, shall mean that the data outside the range 1900-
1999 will be correctly processed, except where the

-16-
<PAGE>

failure to correctly process such data would not have a Material Adverse Effect.

ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF BUYER

Except as set forth in the Disclosure Schedule delivered by Buyer and
Parent to Seller concurrently with the execution and delivery by Buyer of this
Agreement (the "Buyer Disclosure Schedule"), each of Buyer and Parent jointly
and severally represents and warrants to Seller as follows:

4.1. Corporate Organization; Etc. Each of Buyer and Parent is a
---------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to conduct its business as it is now being conducted and to own,
lease and operate its property and assets except where the failure to be so
organized, existing and in good standing or to have such power or authority
would not, in the aggregate, either (i) have a material adverse effect on the
business, operations, assets or financial condition of Buyer or (ii) impair,
hinder or adversely affect the ability of Buyer to perform any of its
obligations under this Agreement or to consummate the transactions contemplated
hereby (either of such effects, a "Buyer Material Adverse Effect").

4.2. Authority Relative to this Agreement. Each of Buyer and
------------------------------------
Parent has all requisite corporate authority and power to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
required corporate action on the part of Buyer and Parent and no other corporate
proceedings on the part of Buyer or Parent are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Buyer and Parent and,
assuming this Agreement has been duly authorized, executed and delivered by each
of the other parties hereto, this Agreement constitutes a valid and binding
agreement of Buyer and Parent, enforceable against each of Buyer and Parent in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to or affecting creditors' rights generally, including the
effect of statutory and other laws regarding fraudulent conveyances and
preferential transfers and subject to the limitations imposed by general
equitable principles (regardless whether such enforceability is considered in a
proceeding at law or in equity).

4.3. Consents and Approvals; No Violations. Neither the
-------------------------------------
execution and delivery of this Agreement by Buyer or Parent

-17-
<PAGE>

nor the consummation of the transactions contemplated hereby by Buyer or Parent
will (a) violate any provision of the articles of incorporation or by-laws of
Buyer or Parent, (b) require any consent, waiver, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity, except
for (i) filings with the FTC and the DOJ pursuant to the HSR Act and (ii) such
consents, waivers, approvals, authorizations, permits, filings or notifications
which, if not obtained or made, will not, in the aggregate, have a Buyer
Material Adverse Effect or (c) result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration or any obligation to repay)
under, any of the terms, conditions or provisions of any indenture, mortgage,
note, bond, encumbrance, license, government registration, contract, lease,
franchise, permit, agreement or other instrument or obligation to which Buyer or
Parent is a party or by which Buyer or Parent or any of its properties or assets
may be bound, except such violations, breaches and defaults which, in the
aggregate, will not have a Buyer Material Adverse Effect or (d) violate any
order, writ, judgment, injunction, decree, statute, ordinance, rule or
regulation of any Governmental Entity applicable to Buyer or Parent or by which
any of its properties or assets may be bound, except such violations which, in
the aggregate, will not have a Buyer Material Adverse Effect.

4.4. Available Funds. As of the date of this Agreement, and as
---------------
of the Closing, Buyer or Parent will have sufficient funds available to satisfy
the obligation of Buyer to pay the Purchase Price and to pay all fees and
expenses of Buyer related to the transaction contemplated hereby.

4.5. Brokers and Finders. None of Buyer, Parent or any of their
-------------------
respective officers, directors or employees has employed any investment banker,
broker or finder or incurred any liability for any investment banking fees,
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated by this Agreement for which Seller, or in the event the Closing
does not occur, the Companies or Seller, has or could have any liability.

ARTICLE V.

COVENANTS

5.1. Conduct of the Business Pending the Closing. Except as
-------------------------------------------
contemplated by this Agreement, as set forth in Section 5.1 of Seller Disclosure
Schedule or with the prior written consent of Buyer or Parent, during the period
from the date of this Agreement to the Closing, Seller will cause the Companies
to, conduct their respective businesses and operations (including but not
limited to, the management of the payment and receipt of the Companies' and the
Company Subsidiaries' accounts payable and accounts receivable, respectively),
according to their ordinary

-18-
<PAGE>

and usual course of business consistent with past practice and will use all
reasonable efforts consistent therewith to preserve intact the Companies'
properties, assets and business organizations, to keep available the services of
the Companies' officers and employees and to maintain satisfactory relationships
with customers, suppliers, distributors and others having commercially
beneficial business relationships with the Companies, in each case in the
ordinary course of business consistent with past practice. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Closing, Seller shall use its reasonable best efforts to manage the
business of the Companies so as to avoid a material adverse change in March 31
Working Capital, and to have a combined cash balance on the Closing Date at the
Companies and the Company Subsidiaries of approximately $500,000. For purposes
of the previous sentence, March 31 Working Capital shall mean the combined
current assets (including for purposes of this definition only, cash of
$500,000), less the combined current liabilities (excluding (a) any amounts due
from the Companies or the Company Subsidiaries to Seller or any subsidiary of
Seller, (b) any short-term indebtedness for notes payable or borrowed money and
(c) any accrued income taxes for the 1998 tax year) of the Companies and the
Company Subsidiaries taken as a whole as of March 31, 1998, which the parties
acknowledge was approximately $13 million as of March 31, 1998 (which amount
reflects adjusted cash of $500,000). Buyer acknowledges that the foregoing does
not constitute a guarantee by Seller of any minimum combined working capital for
the Companies and the Company Subsidiaries. Seller will not, and will not permit
the Companies to, take any action with the purpose of causing any of the
conditions to Buyer's obligations set forth in Article VII hereof to not be
satisfied. Except as set forth in Section 5.1 of Seller Disclosure Schedule,
without limiting the generality of the foregoing, and except as otherwise
provided in this Agreement, Seller will not permit the Companies, prior to the
Closing, without the prior written consent of Buyer or Parent, to:

(a) issue, sell or pledge, or authorize or propose the issuance, sale
or pledge of (i) additional shares of capital stock of any class (including
Shares), or securities convertible into or exchangeable for any such shares, or
any rights, warrants or options to acquire any such shares or other convertible
securities or (ii) any other securities in respect of, in lieu of, or in
substitution for, Shares outstanding on the date hereof;

(b) declare or pay any dividend or distribution on any shares of the
capital stock of the Companies;

(d) propose or adopt any amendment to the Certificate of
Incorporation or By-Laws of the Companies;

-19-
<PAGE>

(e) except in the ordinary course of business consistent with past
practice or pursuant to the terms of StarMed's existing credit facility (the
"Credit Facility"), incur any long-term indebtedness or issue any debt
securities or assume, guarantee or endorse the obligations of any other Person;

(f) (i) increase in any manner the rate or terms of compensation or
benefits of any of its directors, officers or other employees, except as may be
allowed under existing employment agreements or such increases as are granted in
the ordinary course of business consistent with past practice, or (ii) pay or
agree to pay any pension, retirement allowance or other employee benefit not
required or permitted by any existing Plan or other agreement or arrangement to
any such director, officer or employee, whether past or present, or (iii) enter
into or amend any employment, bonus, severance or retirement contract or adopt
any employee benefit plan;

(g) (i) except in the ordinary course of business consistent with
past practice, sell, lease, transfer or otherwise dispose of, any of its
material property or assets or (ii) except for Encumbrances securing amounts
outstanding under the Credit Facility, create any Encumbrance on any of its
material property or assets;

(h) make any loans, advances or capital contributions, except
advances for travel and other normal business expenses to officers and employees
in an aggregate amount outstanding at any one time not to exceed $10,000;

(i) enter into other material agreements, commitments or contracts,
except agreements, commitments or contracts made in the ordinary course of
business consistent with past practice; or

(j) fail to maintain all its assets in good repair and condition,
except to the extent of wear or use in the ordinary course of business and
consistent with past practice or damage by fire or other unavoidable casualty;

(k) institute, settle or dismiss any action, claim, demand, lawsuit,
proceeding, arbitration or grievance by or before any Governmental Entity
threatened against, relating to or involving the Companies or the Company
Subsidiaries in connection with any business, asset or property of the Company
or the Company Subsidiaries other than in the ordinary course of business
consistent with past practices but not, in any individual case, in excess of
$50,000; or

(l) agree in writing to take any of the foregoing actions.

5.2. Access to Information. From the date of this Agreement to
---------------------
the Closing, Seller will, and will cause the Companies to (i) give Buyer and its
authorized Representatives

-20-
<PAGE>

reasonable access to all personnel, books, records, offices and other facilities
and properties of the Companies and the Company Subsidiaries, (ii) permit Buyer
to make such inspections thereof as Buyer may reasonably request and (iii) cause
its officers to furnish Buyer with such financial and operating data and other
information (other than detailed information with respect the identity, address
and social security number of nurses and nurse-practitioner personnel of the
Companies and the Company Subsidiaries) with respect to the business and
properties of the Companies and the Company Subsidiaries as Buyer may from time
to time reasonably request; provided, however, that any such access shall be
-------- -------
conducted at a reasonable time and in such a manner as not to interfere
unreasonably with the operation of the business of the Companies; provided
further that Buyer and its authorized Representatives shall not contact or hold
discussions with customers, suppliers or non-management employees of the
Companies of the Company Subsidiaries without the prior written consent of
Seller, such consent not to be unreasonably withheld. All such information and
access shall be subject to the terms and conditions of the letter agreement
dated April 7, 1998, between Parent and Seller (the "Confidentiality
Agreement"). Notwithstanding anything to the contrary in this Agreement, neither
the Companies nor the Company Subsidiaries shall be required to disclose any
information to Buyer, Parent or their authorized Representatives if doing so
could violate any agreement or federal, state, local or foreign law, rule or
regulation to which any of the Companies or the Company Subsidiaries is a party
or to which any of them is subject. Following the Closing, neither Buyer, nor
Parent will, nor will either of Buyer or Parent permit the Companies or any of
the Company Subsidiaries to, engage in any discussions or provide any oral or
written information to any of the plaintiffs or any other persons (or their
counsel or representatives) in any of the matters referred to in Section 5.10 of
Seller Disclosure Schedule, unless Buyer and Parent have received the prior
written consent of Seller or unless Buyer or Parent is compelled to do so as a
matter of law.

5.3. Disclosure Supplements. From time to time prior to the
----------------------
Closing, Seller will supplement or amend Seller Disclosure Schedule with respect
to any matter hereafter arising which, if existing or occurring at or prior to
the date of this Agreement, would have been required to be set forth or
described in Seller Disclosure Schedule or which is necessary to complete or
correct any information in Seller Disclosure Schedule or in any representation
or warranty of Seller which has been rendered inaccurate thereby. No such
supplement or amendment shall be given effect for purposes of determining (a)
the satisfaction of the conditions set forth in Article VII hereof, except as
explicitly set forth herein including as set forth in Article VII hereof and (b)
Buyer's right to indemnification pursuant to Section 8.4(a) hereof, except as
specifically set forth in Section 8.4(e) hereof.

-21-
<PAGE>

5.4. Consents and Approvals. (a) Each of the parties hereto
----------------------
shall use its reasonable best efforts to (i) obtain as promptly as practicable
all consents, authorizations, approvals and waivers required in connection with
the consummation of the transactions contemplated by this Agreement under any
federal, state, local or foreign law or regulation, (ii) lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties hereto to consummate the transactions contemplated hereby and
(iii) effect all necessary registrations and filings including, but not limited
to, filings under the HSR Act and submissions of information requested by any
Governmental Entity. The parties hereto further covenant and agree, with
respect to any threatened or pending preliminary or permanent injunction or
other order, decree or ruling or statute, rule, regulation or executive order
that would adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby, to respectively use their reasonable best
efforts to prevent the entry, enactment or promulgation thereof, as the case may
be.

(b) Each party hereto shall promptly inform the other of any material
communication from the FTC, the DOJ or any other Governmental Entity regarding
any of the transactions contemplated hereby. If any party hereto or any
Affiliate thereof receives a request for additional information or documentary
material from any such Governmental Entity with respect to the transactions
contemplated hereby, then such party shall endeavor in good faith to make, or
cause to be made, as soon as reasonably practicable and after consultation with
the other party, an appropriate response in compliance with such request. Buyer
or Parent shall advise Seller promptly in respect of any understandings,
undertakings or agreements (oral or written) that Buyer or Parent proposes to
make or enter into with the FTC, the DOJ or any other Governmental Entity in
connection with the transactions contemplated hereby.

5.5. Filings. Promptly after the execution of this Agreement,
-------
each of the parties hereto shall prepare and make or cause to be made any
required filings, submissions and notifications under the laws of any domestic
or foreign jurisdiction to the extent that such filings are necessary to
consummate the transactions contemplated hereby and will use its reasonable best
efforts to take all other actions necessary to consummate the transactions
contemplated hereby in a manner consistent with applicable law. Each of the
parties hereto will furnish to the other parties such necessary information and
reasonable assistance as such other parties may reasonably request in connection
with the foregoing.

5.6. Covenant to Satisfy Conditions. Seller will use its
------------------------------
reasonable best efforts to ensure that the conditions set forth in Articles VI
and VII hereof are satisfied, insofar as such matters are within the control of
Seller, and each of Buyer and Parent will use its reasonable best efforts to
ensure that

-22-
<PAGE>

the conditions set forth in Articles VI and VII hereof are satisfied, insofar as
such matters are within the control of Buyer or Parent.

5.7. Further Assurances. Upon the terms and subject to the
------------------
conditions herein provided, each of the parties hereto agrees to use its
reasonable best efforts to take or cause to be taken all action, to do or cause
to be done, and to assist and cooperate with the other party hereto in doing,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective, in the most expeditious manner practicable,
the transactions contemplated by this Agreement, including, but not limited to,
(i) the satisfaction of the conditions precedent to the obligations of any of
the parties hereto; (ii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the performance of the obligations hereunder or thereunder; and (iii) the
execution and delivery of such instruments, and the taking of such other actions
as the other party hereto may reasonably require in order to carry out the
intent of this Agreement.

5.8. Employee Benefit Matters. From and after the Closing, Buyer
------------------------
and its Affiliates shall continue the Plans as Plans of the Companies and the
Company Subsidiaries until such time as the employees of the Companies and the
Company Subsidiaries are integrated into the employee benefit plans that are
available to other employees of Buyer or its Affiliates, subject to the terms
and conditions specified in such plans and to such changes therein as may be
necessary to reflect the consummation of the transactions contemplated hereby.

5.9. Elimination of Indebtedness. At or prior to the Closing,
---------------------------
Seller will take all necessary steps to cause the Companies and the Company
Subsidiaries to eliminate all indebtedness for borrowed money of the Companies
and the Company Subsidiaries (including all intercompany obligations).

5.10. Assumption of Certain Liabilities. At the Closing, Seller
---------------------------------
hereby acknowledges and agrees that Seller shall remain liable for and,
following the Closing, shall pay, discharge or perform, as applicable, any and
all liabilities, obligations, claims and commitments of or against Seller, the
Companies or the Company Subsidiaries in respect of any of the matters set forth
in Section 5.10 of Seller Disclosure Schedule (the "Assumed Liabilities").
Buyer shall cause the Companies to furnish any information concerning the
Companies or the Company Subsidiaries reasonably requested by Seller in order to
enable Seller to satisfy its obligations hereunder, and shall not settle or
otherwise resolve any Assumed Liability without Seller's consent.

-23-
<PAGE>

5.11. Section 338(h)(10) Election. Buyer and Seller shall in a
---------------------------
timely manner take any and all actions necessary to make an election with
respect to the Companies under Section 338(h)(10) of the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder and any comparable provision of state, local or foreign tax law (the
"338(h)(10) Election"). The allocation of the "modified adjusted deemed sale
price" (within the meaning of Income Tax Regulation section 1.338(h)(10)-1(f))
among the assets of the Companies, shall be made in accordance with the fair
market value of such assets as shall be agreed to by Buyer and Seller no later
than 30 days following the Closing Date in a manner consistent with Section 338
of the Code. Buyer and Seller acknowledge that such allocation has been arrived
at by arm's length negotiation. Neither Buyer nor Seller shall take a position
in any return or examination or other administrative or judicial proceeding
(including any ruling request) relating to any tax that is inconsistent with
such allocation. Buyer shall be responsible for and control the preparation and
filing of the 338(h)(10) Election. Seller shall prepare, execute and deliver to
Buyer such documents or forms (including Section 338 Forms as defined below) as
Buyer shall request or as are required by applicable law for an effective
338(h)(10) Election. "Section 338 Forms" shall mean all returns, documents,
statements, schedules and other forms that are required to be submitted in
connection with a 338(h)(10) Election, including, without limitation, U.S.
Treasury Department Form 8023-A (together with any schedules or attachments
thereto).

5.12. Insurance. Seller shall cause the Companies to keep, or
---------
cause to be kept, all material insurance policies for the Companies and the
Company Subsidiaries existing on the date of this Agreement, or suitable
replacements therefor, in full force and effect through the close of business on
the Closing. Seller shall use its reasonable best efforts to cooperate with
Buyer and/or Parent in obtaining satisfactory "tail" coverage from Seller's
professional liability insurance carriers.

ARTICLE VI.

CONDITIONS TO SELLER'S OBLIGATIONS

The obligations of Seller to effect the transactions contemplated
hereby shall be subject to the fulfillment, or written waiver by Seller, at or
prior to the Closing, of each of the following conditions:

6.1. Representations and Warranties True. The representations
-----------------------------------
and warranties of Buyer and Parent contained herein qualified as to materiality
shall be true and correct and those not so qualified shall be true and correct
in all material respects as of the date hereof and at and as of the Closing Date
as though such representations and warranties were made at and as of such date
unless limited by their terms to a prior date.

-24-
<PAGE>

6.2. Performance. Buyer and Parent shall have performed and
-----------
complied in all material respects with all agreements, obligations, covenants
and conditions required by this Agreement to be performed or complied with by it
on or prior to the Closing.

6.3. Certificates . Buyer or Parent shall have furnished Seller
------------
with such certificates to evidence its compliance with the conditions set forth
in Sections 6.1 and 6.2 hereof as Seller may reasonably request.

6.4. No Injunction or Proceeding. No statute, rule, regulation,
---------------------------
executive order, decree, preliminary or permanent injunction or restraining
order shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits or restricts the consummation of the
transactions contemplated hereby.

6.5. HSR Act. All required waiting periods applicable to this
-------
Agreement and the transactions contemplated hereby under the HSR Act shall have
expired or been terminated.

6.6. Lender Consent. Seller shall have received consent of the
--------------
holders of its Senior Notes on terms reasonably satisfactory to Seller.

ARTICLE VII.
CONDITIONS TO BUYER'S AND PARENT'S OBLIGATIONS

The obligation of Buyer and Parent to effect the transactions
contemplated hereby shall be subject to the fulfillment, or written waiver by
Buyer, at or prior to the Closing of each of the following conditions:

7.1. Representations and Warranties of Seller True. The
---------------------------------------------
representations and warranties of Seller contained herein qualified as to
materiality shall be true and correct and those not so qualified shall be true
and correct in all material respects as of the date hereof and at and as of the
Closing Date as though such representations and warranties were made at and as
of such date unless limited by their terms to a prior date.

7.2. Performance by Seller. Seller shall have performed and
---------------------
complied in all material respects with all agreements, obligations, covenants
and conditions required by this Agreement to be performed or complied with by
Seller on or prior to the Closing.

7.3. Certificates. Seller shall have furnished Buyer or Parent
------------
with such certificates to evidence its compliance with the conditions set forth
in Sections 7.1 and 7.2 hereof as Buyer may reasonably request. Nothing herein
shall restrict the ability of Seller to provide a certificate pursuant to this
Section 7.3

-25-
<PAGE>

that sets forth therein exceptions, and the existence of any exceptions in the
certificate delivered pursuant to this Section 7.3 hereof shall not be deemed a
failure to meet the condition set forth in this Section 7.3; provided, however,
-------- -------
that the existence of the events described therein may result in the failure to
satisfy the conditions set forth in Section 7.1 or 7.2 hereof.

7.4. No Injunction or Proceeding. No statute, rule, regulation,
---------------------------
executive order, decree, preliminary or permanent injunction or restraining
order shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits or restricts the consummation of the
transactions contemplated hereby.

7.5. HSR Act. All required waiting periods applicable to this
-------
Agreement and the transactions contemplated hereby under the HSR Act shall have
expired or been terminated.

7.6. Receipt of 1996 Audit. Buyer shall have received the
---------------------
audited financial statements for the Companies for fiscal year 1996, together
with the report thereon of the Companies' independent public accountants, and
such financial statements shall not result in any Material Adverse Effect which
would have to be reflected on the Audited Financial Statements.

ARTICLE VIII.

TERMINATION AND ABANDONMENT; INDEMNIFICATION

8.1. Termination. This Agreement may be terminated at any time
-----------
prior to the Closing:

(a) by the consent of all the parties hereto;

(b) by Buyer, Parent or Seller if the Closing shall not have occurred
on or before August 20, 1998 (the "Termination Date"), except that Buyer, Parent
or Seller shall have the right, in their mutual discretion, to extend the time
period in this Section 8.1(b) for such time period (which shall in no event
exceed 45 days), and only for such time period, as shall be needed for such
parties to satisfy their respective obligations under the HSR Act, the
satisfaction of which shall at all times remain subject to each party's
obligations pursuant to Section 5.6 hereof; provided that the right to terminate
this Agreement pursuant to this Section 8.1(b) shall not be available to any
party whose failure to perform any of its obligations under this Agreement
results in the failure of the Closing to be consummated by such date;

(c) by Buyer, Parent or Seller, if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting any of the transactions contemplated hereby
and such order, decree,

-26-
<PAGE>

ruling or other action shall have become final and nonappealable; or

(d) by Buyer, Parent or Seller in the event of a material volitional
breach by the other party to this Agreement of any representation, warranty,
covenant or agreement contained herein, which breach is not cured within the
earlier of the Termination Date or thirty (30) days after written notice thereof
is given to the breaching party by the non-breaching party or is not waived by
the non-breaching party during such period.

8.2. Procedure and Effect of Termination. In the event of
-----------------------------------
termination of this Agreement pursuant to Section 8.1 hereof, by one party,
written notice thereof shall forthwith be given to the other party, and, except
as set forth below, this Agreement shall terminate and be void and have no
effect and the transactions contemplated hereby shall be abandoned. If this
Agreement is terminated as provided herein:

(a) Buyer and Parent will redeliver, and will cause its agents
(including, without limitation, attorneys and accountants) to redeliver, all
documents, work papers and other material of Seller or the Companies relating to
the transactions contemplated hereby, whether obtained before or after the
execution hereof;

(b) all information received by Buyer and Parent with respect to the
business, operations, assets or financial condition of the Companies or the
Company Subsidiaries shall remain subject to the Confidentiality Agreement; and

(c) except as otherwise expressly set forth herein, no party to this
Agreement shall have any liability hereunder to any other party, except (i) for
any breach by such party of the terms and provisions of this Agreement, (ii) as
stated in paragraphs (a) and (b) of this Section 8.2 and (iii) as provided in
the Confidentiality Agreement.

8.3. Survival of Representations, Warranties and Covenants. (a)
-----------------------------------------------------
The representations and warranties contained in Section 3.18 (Environmental
Matters) hereof shall survive the Closing and remain in full force and effect
until the fourth anniversary of the Closing Date, at which time they shall
terminate. The representations and warranties contained in Section 3.13 (Taxes)
hereof shall survive the Closing and remain in full force and effect until the
expiration of the applicable statute of limitations (including any extensions
thereof), at which time they shall terminate. All other representations and
warranties contained herein shall survive the Closing and remain in full force
and effect until December 31, 1999, at which time they shall terminate.

(b) All covenants and agreements contained herein shall survive the
Closing and remain in full force and effect

-27-
<PAGE>

until the first anniversary of the Closing Date, at which time they shall
terminate except that those covenants and agreements that by their terms are to
be performed in whole or in part subsequent to the Closing (including without
limitation Section 5.10), shall survive the Closing.

(c) The sole and exclusive remedy for any breach of any
representation, warranty, covenant or agreement shall be pursuant to Section 8.4
hereof contained herein, except in the case of actual fraud. Under no
circumstances, except in the case of actual fraud, shall Seller be liable to
Buyer for consequential, incidental or punitive damages.

8.4. Indemnification. (a) From and after the Closing, Seller
---------------
shall indemnify and hold harmless Buyer, Parent and the Companies and their
respective officers and directors (collectively, the "Buyer Indemnified
Parties") from and against any liabilities, costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages and
amounts paid in settlement (collectively, "Damages") arising from or in
connection with (i) any inaccuracy in any representation or the breach of any
warranty of Seller under this Agreement, (ii) the failure of Seller to duly
perform or observe any term, provision, covenant or agreement to be performed or
observed by Seller pursuant to this Agreement or (iii) any liability of the
Companies under Treasury Regulations (S) 1.1502-6 for federal income taxes of
the Seller or any other member of the "affiliated group" that includes Seller.

(b) From and after the Closing, each of Buyer and Parent jointly and
severally shall indemnify and hold harmless Seller and its Affiliates and
Representatives (collectively, the "Selling Indemnified Parties") from and
against any Damages to the extent they are the result of (i) any inaccuracy in
any representation or the breach of any warranty of Buyer or Parent under this
Agreement, (ii) the failure of Buyer or Parent to duly perform or observe any
term, provision, covenant or agreement to be performed or observed by Buyer or
Parent pursuant to this Agreement or (iii) any claim arising after the Closing
Date for which Seller is not obligated to indemnify Buyer or Parent or any
matter arising from the conduct of the business of the Companies after the
Closing Date.

(c) Notwithstanding anything herein to the contrary, except for
Damages incurred by the Buyer Indemnified Parties in connection with the
inaccuracy of any representation or the breach of any warranty of Seller
relating to Taxes or actual fraud by the Seller or Damages incurred by the
Seller Indemnified Parties relating to fraud by Buyer or Parent, no
indemnification shall be available to Buyer Indemnified Parties under Section
8.4(a)(i) hereof or to Seller Indemnified Parties under Section 8.4(b)(i) hereof
unless and until the aggregate amount of Damages that would otherwise be subject
to indemnification, exceeds $500,000 (in each case, the "Deductible Amount"), in
which case

-28-
<PAGE>

the party entitled to such indemnification shall be entitled to receive only the
amounts in excess of the Deductible Amount.

(d) Notwithstanding anything herein to the contrary, the maximum
aggregate liability of Seller to Buyer Indemnified Parties or of Buyer and
Parent to Seller Indemnified Parties under this Section 8.4 hereof shall not
exceed Ten Million Dollars ($10,000,000).

(e) Notwithstanding anything herein to the contrary, none of the
Buyer Indemnified Parties shall be entitled to indemnification by Seller for any
Damages arising from any matter of which Buyer or Parent had knowledge at or
prior to Closing by reason of Seller having delivered written notice thereto,
either in a supplemented disclosure schedule or an officer's certificate, at or
prior to Closing, if the conditions to Buyer's or Parent's obligation set forth
in Article VII fail to be satisfied at Closing by reason of the matters
disclosed in such supplemented disclosure schedule or officer's certificate and
Buyer or Parent waives its right not to Close unless Seller made a knowing
misrepresentation with respect to such matter on the date of this Agreement.

(f) Any calculation of Damages for purposes of this Section 8.4 shall
be (i) net of any insurance recovery made by the Indemnified Party (whether paid
directly to such Indemnified Party or assigned by the Indemnifying Party to such
Indemnified Party) and (ii) reduced to take account of any net Tax benefit
realized by the Indemnified Party arising from the deductibility of any such
Damages or Tax. Any indemnification payment hereunder shall initially be made
without regard to this paragraph and shall be reduced to reflect any such net
Tax benefit only after the Indemnified Party has actually realized such benefit.
For purposes of this Agreement, an Indemnified Party shall be deemed to have
"actually realized" a net Tax benefit to the extent that, and at such time as,
the amount of Taxes payable by such Indemnified Party is reduced below the
amount of Taxes that such Indemnified Party would have been required to pay but
for deductibility of such Damages. The amount of any reduction hereunder shall
be adjusted to reflect any final determination (which shall include the
execution of Form 870-AD or successor form) with respect to the Indemnified
Party's liability for Taxes and, if necessary, either Seller or Buyer or Parent,
as the case may be, shall make payments to the other to reflect such adjustment.
Any indemnity payment under this Agreement shall be treated as an adjustment to
the Purchase Price for Tax purposes, unless a final determination (which shall
include the execution of a Form 870-AD or successor form) with respect to the
Indemnified Party or any of its Affiliates causes any such payment not to be
treated as an adjustment to the Purchase Price for U.S. Federal income Tax
purposes.

(g) No action, claim or setoff for Damages subject to indemnification
under this Section 8.4 shall be brought or made:

-29-
<PAGE>

(i) with respect to claims for Damages resulting from a breach of any
covenant contained in this Agreement, or in any instrument of transfer or
assumption related hereto, after the date on which such covenant or instrument
shall terminate pursuant to Section 8.3 hereof; and

(ii) with respect to claims for Damages resulting from a breach of
any representation or warranty, after the date on which such representation or
warranty shall terminate pursuant to Section 8.3 hereof;

provided, however, that any claim notified in writing with reasonable
- - -------- -------
specificity by the party seeking indemnification (the "Indemnified Party") to
the party from which indemnification is sought (the "Indemnifying Party") within
the time periods set forth above shall survive (and be subject to
indemnification) until it is finally and fully resolved.

(h) Upon receipt by the Indemnified Party of notice of any action,
suit, proceedings, claim, demand or assessment against such Indemnified Party
which might give rise to a claim for Damages, the Indemnified Party shall give
written notice thereof to the Indemnifying Party indicating the nature of such
claim and the basis therefor; provided, however, that failure to give such
notice shall not affect the indemnification provided hereunder except to the
extent the Indemnifying Party shall have been actually prejudiced as a result of
such failure. A claim to indemnity hereunder may, at the option of the
Indemnified Party, be asserted as soon as Damages have been threatened by a
third party orally or in writing, regardless of whether actual harm has been
suffered or out-of-pocket expenses incurred, provided the Indemnified Party
shall reasonably determine that it may be liable or otherwise incur such
Damages. However, payments for Damages for third party claims shall not be
required except to the extent that the Indemnified Party has expended out-of-
pocket sums. The Indemnifying Party shall have the right, at its option, to
assume the defense of, at its own expense and by its own counsel, any such
matter involving the asserted liability of the Indemnified Party as to which the
Indemnifying Party shall have acknowledged its obligation to indemnify the
Indemnified Party. If any Indemnifying Party shall undertake to compromise or
defend any such asserted liability, it shall promptly notify the Indemnified
Party of its intention to do so, and the Indemnified Party agrees to cooperate
fully with the Indemnifying Party and its counsel in the compromise of, or
defense against, any such asserted liability; provided, however, that the
Indemnifying Party shall not settle any such asserted liability without the
written consent of the Indemnified Party (which consent will not be unreasonably
withheld); provided, further, however that the immediately preceding clause
shall not apply in the case of relief consisting solely of money damages at
least 80% of which shall be borne by the Indemnifying Party after taking into
account any limitation thereon. Notwithstanding an election to assume the
defense of such action or proceeding, such

-30-
<PAGE>

Indemnified Party shall have the right to employ separate counsel and to
participate in the defense of such action or proceeding, and the Indemnifying
Party shall bear the reasonable fees, costs and expenses of such separate
counsel (and shall pay such fees, costs and expenses at least quarterly), if (A)
the Indemnifying Party shall not have employed counsel reasonably satisfactory
to such Indemnified Party to represent such Indemnified Party within a
reasonable time after notice of the institution of such action or proceeding, or
(B) the Indemnifying Party shall authorize such Indemnified Party to employ
separate counsel at the Indemnifying Party's expense. In any event, the
Indemnified Party and its counsel shall cooperate with the Indemnifying Party
and its counsel and shall not assert any position in any proceeding inconsistent
with that asserted by the Indemnifying Party. All costs and expenses incurred in
connection with an Indemnified Party's cooperation shall be borne by the
Indemnifying Party. In any event, the Indemnified Party shall have the right at
its own expense to participate in the defense of such asserted liability.

8.5. Tax Matters. (a) Seller shall prepare and file all Tax
-----------
Returns with the appropriate federal, state, local and foreign governmental
agencies relating to the Companies for periods ending on or before the Closing
Date and shall pay all Taxes due with respect to such Tax Returns. Buyer shall
prepare and file, or cause to be prepared and filed, all Tax Returns required to
be filed by the Companies covering a Tax year commencing prior to the Closing
Date and ending after the Closing Date (a "Straddle Period") and shall cause the
Companies to pay the Taxes shown to be due thereon. Seller will furnish to
Buyer all information and records reasonably requested by Buyer for use in
preparation of any Tax Returns relating to a Straddle Period. Buyer shall allow
Seller to review, comment upon and reasonably approve without undue delay any
such Tax Returns at any time during the 45-day period immediately preceding the
filing of such Tax Return. Buyer and Seller agree to cause the Companies to
file all Tax Returns for any Straddle Period on the basis that the relevant
taxable period ended as of the close of business on the Closing Date, unless the
relevant taxing authority will not accept a Tax Return filed on that basis.

(b) Tax Cooperation. Seller shall reasonably cooperate, and shall
---------------
cause its respective Affiliates (including the Companies), officers, employees,
agents, auditors and Representatives reasonably to cooperate (including by
maintaining and making available to each other all relevant records), in
preparing and filing all Tax Returns and in resolving all disputes and audits
with respect to Taxes of the Companies for any Pre-Closing Tax Period and for
any Straddle Period.

(c) Procedures Relating to Indemnification of Tax Claims. (i) If a
----------------------------------------------------
claim shall be made by any Tax authority which, if successful, might result in
an indemnity payment to the Indemnified Parties pursuant to Section 8.5(a) or
(b) hereof, the Indemnified Parties shall notify the Indemnifying Parties

-31-
<PAGE>

promptly of such claim (a "Tax Claim"); provided, however, that the failure to
give such notice shall not affect the indemnification provided hereunder except
to the extent the Indemnifying Parties have actually been prejudiced as a result
of such failure.

(ii) (A) With respect to any Tax Claim relating to a taxable period
ending on or before the Closing Date, Seller shall have the right, at its own
expense, to control all proceedings and may make all decisions taken in
connection with such Tax Claim; provided that Buyer, and counsel of its own
choosing, shall have the right, at its own expense, to participate fully in all
aspects of the prosecution or defense of such Tax Claim; and provided further
that Seller shall not settle any such Tax Claim without the prior written
consent of Buyer, which consent shall not be unreasonably withheld; and provided
further that, notwithstanding anything in this Section 8.5(c)(ii)(A) to the
contrary, Seller shall have the exclusive right to make all decisions to grant
or deny any waiver or extension of the applicable statute of limitation. Buyer
shall deliver its consent, or any objections, within 15 business days of receipt
of any settlement proposal. Buyer and the Companies shall cooperate with Seller
in contesting any Tax Claim under this Section 8.5(c)(ii)(A), which cooperation
shall include the retention and, upon request of Seller, the provision of
records and information which are reasonably relevant to such Tax Claim and
making employees available to provide additional information or explanation of
any material provided hereunder. (B) Seller and Buyer shall jointly control all
proceedings with respect to any Tax Claim relating to any Straddle Period.

(iii) The party bearing the liability or obligation to indemnify for
any Taxes described under Section 8.5 shall be entitled to any refunds or
credits of such Taxes. Buyer shall cause the Companies to promptly forward to
Seller, or after Buyer's receipt reimburse Seller, for any refunds or credits
due Seller (pursuant to the terms of this Section 8.5(c)(iii) and Seller shall
promptly forward to the Companies or after Seller's receipt reimburse the
Companies, for any refunds or credits due Buyer (pursuant to the terms of this
Section 8.5(c)(iii)).

(d) Tax Sharing Agreements. Seller will cause any tax sharing
----------------------
agreement or similar arrangement with respect to Taxes involving the Companies
to be terminated as of the Closing Date, to the extent any such agreement or
arrangement relates to the Companies.

(e) Transfer Taxes. All transfer, documentary, sales, use,
--------------
registration and similar Taxes (including all applicable real estate transfer or
gains Taxes and stock transfer Taxes) and related fees (including any penalties,
interest and additions to Tax) incurred in connection with the sale of the
Shares or otherwise in connection with this Agreement, and the transactions
contemplated hereby shall be shared be borne by Buyer, and Seller

-32-
<PAGE>

and Buyer shall cooperate in timely preparing and filing all Tax Returns as may
be required to comply with the provisions of such Tax laws.

(f) Coordination With Section 8.4. In the event the provisions of
-----------------------------
this Section 8.5 and the provisions of Section 8.4 hereof conflict or otherwise
each apply by their terms, this Section 8.5 shall exclusively govern all matters
concerning Taxes; provided that paragraphs (c), (d) and (e) of this Section 8.5
shall apply in any event.

ARTICLE IX.
MISCELLANEOUS

9.1. Amendment and Modifications. This Agreement may be
---------------------------
amended, modified or supplemented at any time by the parties hereto. This
Agreement may be amended only by an instrument in writing signed on behalf of
all parties.

9.2. Extension; Waiver. At any time prior to the Closing, the
-----------------
parties hereto entitled to the benefits of the respective term or provision may
(i) extend the time for the performance of any of the obligations or other acts
of the other parties hereto, (ii) waive any inaccuracies in the representations
and warranties contained herein or in any document, certificate or writing
delivered pursuant hereto or (iii) waive compliance with any obligation,
covenant, agreement or condition contained herein. Any agreement on the part of
any party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of the parties entitled to the benefits
of such extended or waived term or provision.

9.3. Representations and Warranties; Etc. (a) Each of Buyer
-----------------------------------
and Parent hereby acknowledges and agrees that Seller is not making any
representation or warranty whatsoever, express or implied, including, without
limitation, in respect of the Companies or their respective assets, liabilities
and businesses, except those representations and warranties of Seller explicitly
set forth in this Agreement or in the Seller Disclosure Schedule or in any
certificate contemplated hereby and delivered by Seller in connection herewith.

(b) Except as set forth in the indemnification provisions of Section
8.4 hereof, Buyer, Parent and Seller agree that on and after the Closing Date
neither Seller, nor any of the respective officers, directors, partners,
employees, Affiliates, Representatives or agents, as the case may be, of Seller
(collectively, the "Selling Group"), shall have any liability or responsibility
to any Person, including, without limitation, Buyer, Parent or the Companies,
for (and each of them unconditionally releases the Selling Group from) any
liability or obligation of, or arising out of, or relating to, the Companies,

-33-
<PAGE>

Parent or Buyer of whatever kind or nature, whether contingent or absolute,
whether arising prior to, on or after, and whether determined or indeterminable
on, the Closing Date, and whether or not specifically referred to in this
Agreement, including, without limitation, liabilities and obligations (i)
relating to this Agreement and the transactions contemplated hereby, (ii)
arising out of or due to any inaccuracy of any representation or warranty or the
breach of any covenant, undertaking or other agreement of Seller contained in
this Agreement, Seller Disclosure Schedule or in any certificate contemplated
hereby and delivered by Seller in connection herewith and (iii) relating to any
information (whether written or oral), documents or materials furnished by
Seller or any of its Affiliates or any of their respective Representatives,
including the Confidential Information Memorandum prepared by SBC Warburg Dillon
Read Inc. and any information, documents or material made available to Buyer in
certain "data rooms", management presentations or any other form in expectation
of the transactions contemplated by this Agreement.

9.4. Entire Agreement; Assignment. This Agreement (a)
----------------------------
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof (other than the Confidentiality Agreement) and (b) shall not be
assigned by operation of law or otherwise; provided, however, that Buyer may
assign its rights and obligations to any wholly owned subsidiary of Buyer
(unless to do so would restrict or delay the consummation of the transactions
contemplated by this Agreement), but no such assignment shall relieve Buyer of
its obligations hereunder.

9.5. Validity. The invalidity or unenforceability of any
--------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, each of which shall remain in full force
and effect.

9.6. Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally, telecopied (which is confirmed) or sent by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses:

If to Buyer, to:

Healthcare Staffing Solutions, Inc.
Cross Point Tower II
900 Chelmsford Street
Lowell, Massachusetts 08152
Attention: Richard C. Stoddard
Telecopy: (978) 551-4037

-34-
<PAGE>

If to Parent, to:

RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
Attention: Gregory J. Eisenhauer
Telecopy: (314) 863-5244

With a copy to:

Thompson Coburn
One Mercantile Center
St. Louis, Missouri 63101-1693
Attention: Robert M. LaRose, Esq.
Telecopy: (314) 552-7000

If to Seller, to:

Medical Resources, Inc.
155 State Street
Hackensack, NJ 07601
Attention: Christopher J. Joyce, Esq.
Telecopy: (201) 488-8230

With a copy to:

Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: Steven J. Gartner, Esq.
Telecopy: (212) 728-8111

or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).

9.7. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.

9.8. Specific Performance. The parties hereto agree that if any
--------------------
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.

-35-
<PAGE>

9.9. Publicity. Except as otherwise required by law, for so
---------
long as this Agreement is in effect, none of Seller, Buyer, Parent or the
Companies shall issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without the express prior written approval of the other parties. Each
of Seller (on behalf of itself and the Companies), Buyer and Parent agree to
afford each other party a reasonable period of time to review and comment upon
any such press release or public announcement, subject at all times to any
requirement of law or rule or regulation of any stock exchange or automated
interdealer quotation system governing the timing of any such press release or
public announcement.

9.10. Arbitration (a) The parties hereto agree to submit any
-----------
dispute or controversy arising out of or in connection with or relating to this
Agreement or the breach or alleged breach thereof (a "Dispute"), including any
Dispute relating to any claim for Damages subject to indemnification pursuant to
Section 8.4 hereof, to final and binding arbitration pursuant to the provisions
set forth below. Nothing in this Section 9.10 shall prohibit Buyer, Parent or
Seller from instituting litigation to enforce any Final Determination (as
defined below). The parties hereby acknowledge and agree that, except as set
forth in this Section 9.10 or in the arbitration rules of the American
Arbitration Association as in effect from time to time, the arbitration
procedure and any Final Determination hereunder shall be governed by, and shall
be enforced pursuant to applicable New York law.

(b) In the event that either Buyer, Parent or Seller asserts that
there exists a Dispute, such party shall deliver a written notice to the other
party specifying the nature of the asserted Dispute and requesting a meeting to
attempt to resolve the same. If no such resolution is reached within twenty
days after the delivery of such notice, the party delivering such notice of
Dispute may, within 45 days after delivery of such notice, commence arbitration
hereunder by delivering to each other party involved therein a notice of
arbitration (a "Notice of Arbitration"). Such Notice of Arbitration shall
specify the matters as to which arbitration is sought, the nature of any
Dispute, the claims of each party to the arbitration and shall specify the
amount and nature of any Damages, if any, sought to be recovered as a result of
any alleged claim, and any other matters required by the arbitration rules of
the American Arbitration Association in effect from time to time to be included
therein, if any.

(c) Arbitration shall be conducted in the City of New York, New York
before a single arbitrator agreeable to both parties. In the event that the
parties fail to agree on a designee within 20 days from the delivery of a Notice
of Arbitration, then the arbitration shall proceed in the same

-36-
<PAGE>

location before a single arbitrator appointed by the American Arbitration
Association at the request of either party thereto.

(d) The costs and expenses of arbitration shall be borne equally by
each party.

(e) The arbitrator shall so conduct the arbitration that a final
result, determination, finding, judgment and/or award (the "Final
Determination") is made or rendered as soon as practicable, but in no event
later than 90 days after the delivery of the Notice of Arbitration nor later
than 10 days following completion of the arbitration.

(f) The Buyer and the Seller may enforce any Final Determination in
any state or federal court located in New York, New York. For the purpose of
any action or proceeding instituted with respect to any Final Determination,
each party hereto hereby irrevocably submits to the jurisdiction of such courts,
irrevocably consents to the service of process by registered mail or personal
service and hereby irrevocably waives, to the fullest extent permitted by law,
any objection which it may have or hereafter have as to personal jurisdiction,
the laying of the venue of any such action or proceeding brought in any such
court and any claim that any such action or proceeding brought in any court has
been brought in an inconvenient forum.

9.11. Descriptive Headings. The descriptive headings herein
--------------------
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.

9.12. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.

9.13. Expenses. Whether or not the transactions contemplated
--------
by this Agreement are consummated, and except as otherwise expressly set forth
herein, all legal and other costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.

9.14. Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and, except as set
forth in Sections 5.9 and 8.4 hereof, nothing in this Agreement, express or
implied, is intended by or shall confer upon any other Person or Persons any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement. Any Person who is a beneficiary of any of the aforementioned
provisions shall be entitled to enforce his rights thereunder; provided,
however, that, prior to the Closing, no action to enforce such rights may be
commenced by any such Person without the prior written consent of Seller.

-37-
<PAGE>

9.15. Interpretation. No reference in this Agreement to
--------------
"reasonable best efforts" or "all reasonable efforts" shall require a Person
obligated to use such efforts to incur out-of-pocket expenses or indebtedness
or, except as expressly provided herein, to institute litigation or to consent
generally to service of process in any jurisdiction.

-38-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

MEDICAL RESOURCES, INC.

By:
-----------------------------------
Name:
Title:

REHABCARE GROUP, INC.

By:
-----------------------------------
Name:
Title:

HEALTHCARE STAFFING SOLUTIONS, INC.

By:
-----------------------------------
Name:

Title:

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 26, 1998 (except Note 16 as to which the date
is July 8, 1998) in the Registration Statement (Form S-1 No.333-24865) and
related Prospectus of Medical Resources, Inc. for the Registration of
16,127,332 shares of its common stock

/s/ Ernst & Young LLP

Hackensack, New Jersey
July 20, 1998

<PAGE>

Exhibit 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the registration statement of Medical
Resources, Inc. on Form S-1 of our report dated March 28, 1997, on our
audit of the consolidated financial statements and financial statement
schedule of Medical Resources, Inc. and Subsidiaries (the "Company") as
of December 31, 1996 and for the year ended December 31, 1996. We also
consent to the reference to our firm under the caption "Experts".

/s/ PricewaterhouseCoopers LLP

Parsippany, New Jersey
July 23, 1998