<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                        

                                 FORM 10-Q/A


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 
     15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                          COMMISSION FILE NO. 0-20440


                            MEDICAL RESOURCES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


       DELAWARE                                          13-3584552
(STATE OF INCORPORATION)                                (IRS EMPLOYER
                                                     IDENTIFICATION NO.)
 
  155 STATE STREET, HACKENSACK, NJ                         07601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)                 (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:    (201) 488-6230
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.


                    Yes [X]         No  [   ]


     At July 31, 1998, 7,922,000 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the NASDAQ closing price of these shares on that date)
held by non-affiliates was $53,367,000

     The Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 is hereby amended and restated in its entirety by this Amendment No. 1
on Form 10-Q/A.

                      DOCUMENTS INCORPORATED BY REFERENCE

                         Not Applicable.
<PAGE>
 
                            MEDICAL RESOURCES, INC.
                                     INDEX
                                        

                                                                     Page

PART I.     FINANCIAL INFORMATION
           
Item 1.     Consolidated Financial Statements (Unaudited)
           
            Consolidated Balance Sheets at June 30, 1998 and 
              December 31, 1997                                       3-4
 
            Consolidated Statements of Operations for the three 
              and six months ended June 30, 1998 and 1997             5-6
 
            Consolidated Statements of Cash Flows for the six 
              months ended June 30, 1998 and 1997                     7-8
 
            Notes to Consolidated Financial Statements                9-17
 
Item 2.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations             18-26


PART II.   OTHER INFORMATION                                          27
<PAGE>
 
                            MEDICAL RESOURCES, INC.
                          CONSOLIDATED BALANCE SHEETS
                   AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE> 
<CAPTION> 
                                                                 June 30,           December 31,
                                                                  1998                 1997
                                                               --------            ------------
<S>                                                         <C>                 <C> 
                                  ASSETS                  
Current Assets:                                           
     Cash and cash equivalents                                  $ 14,085             $ 23,198
     Cash and short-term investments, restricted                   1,744                  600
     Accounts receivable, net                                     74,761               65,887
     Other receivables                                            10,497                5,430
     Prepaid expenses                                              6,004                7,027
     Income taxes recoverable                                      4,155                6,504
     Deferred tax assets, net                                      2,492                2,492
                                                               ----------           ---------
          Total current assets                                   113,738              111,138
                                                          
Property and equipment, net                                       57,072               64,343
Goodwill, net                                                    147,580              149,624
Other intangible assets, net                                       6,220                6,836
Other assets                                                       3,890                4,189
Deferred tax assets, net                                           2,353                2,353
Restricted cash                                                      473                  473
                                                               ----------           ---------
     Total assets                                              $ 331,326            $ 338,956
                                                               ==========           =========
</TABLE> 

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

                                       3
<PAGE>
 
                            Medical Resources, Inc.
                    Consolidated Balance Sheets (continued)
                   As of June 30, 1998 and December 31, 1997
                   (in thousands, except per share amounts)
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                               June 30,           December 31,
                                                                                 1998                 1997
                                                                               --------            ----------- 
                   Liabilities and Stockholders' Equity
<S>                                                                          <C>                <C> 
Current Liabilities:
     Senior Notes due 2001 through 2005, classified as current                  $ 78,000             $ 78,000
     Notes and mortgages payable, classified as current                            2,725                3,206
     Capital lease obligations, classified as current                              7,671                9,555
     Current portion of notes and mortgages payable                               14,842               13,313
     Current portion of capital lease obligations                                  9,507               10,311
     Borrowings under line of credit                                              10,591                3,744
     Accounts payable                                                             11,925               13,141
     Accrued expenses                                                             25,978               28,018
     Common stock subject to redemption                                            5,509                9,734
     Other current liabilities                                                     2,882                  290 
                                                                               ---------             --------
        Total current liabilities                                                169,630              169,312

Notes and mortgages payable, less current portion                                 20,294               21,539
Obligations under capital leases, less current portion                            11,739               16,361
Other long term liabilities                                                          515                  178 
                                                                               ---------             --------
        Total liabilities                                                        202,178              207,390

Minority interest                                                                  5,370                4,662

Stockholders' equity:
     Common stock, $.01 par value; authorized 50,000 shares,
        7,687 issued and outstanding at June 30, 1998 and
        7,296 issued and outstanding at December 31, 1997                             77                   73
     Series C Convertible Preferred Stock, $1,000 per share stated
         value; 16 and 18 shares issued and outstanding at               
         June 30, 1998 and December 31, 1997, respectively (liquidation
         preference of 3% per annum)                                              16,016               18,242
     Additional paid-in capital                                                  143,770              138,810
     Accumulated deficit                                                         (36,085)             (30,221)
                                                                               ---------             --------
        Total stockholders' equity                                               123,778              126,904 
                                                                               ---------             --------
Total liabilities and stockholders' equity                                     $ 331,326            $ 338,956 
                                                                               =========            =========
</TABLE> 

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

                                       4

<PAGE>
 
                            Medical Resources, Inc.
                     Consolidated Statements of Operations
               For the Three Months ended June 30, 1998 and 1997
                   (in thousands, except per share amounts)
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                             Three Months Ended June 30,
                                                                           -----------      --------------
                                                                               1998               1997
                                                                           -----------      --------------
<S>                                                                     <C>                <C> 
Net service revenues                                                         $ 46,626          $ 37,877
Imaging center operating costs:
   Technical services payroll and related expenses                              9,928             7,937
   Medical supplies                                                             2,920             2,494
   Diagnostic equipment rental and maintenance                                  4,491             2,448
   Independent contractor fees                                                  2,046             1,514
   Administrative expenses                                                      8,292             5,793
   Other center level costs                                                     2,084             1,727
Provision for uncollectible accounts receivable                                 3,686             1,932
Corporate general and administrative                                            2,599             1,543
Stock-option based compensation                                                   114             2,305
Depreciation and amortization                                                   6,158             4,288
Unusual charges                                                                 1,640                - 
                                                                           -----------      --------------
     Operating income                                                           2,668             5,896
Interest expense, net                                                           3,426             1,847 
                                                                           -----------      --------------
     Income (loss) from continuing operations before minority
       interest and income taxes                                                 (758)            4,049
Minority interest (benefit)                                                       462              (428)
                                                                           -----------      --------------

     Income (loss) from continuing operations before income taxes              (1,220)            4,477
Provision for income taxes                                                        222             1,849 
                                                                           -----------      --------------
     Income (loss) from continuing operations                                  (1,442)            2,628
Income from discontinued operations, net of tax                                   592               155 
                                                                           -----------      --------------
     Net income (loss)                                                           (850)            2,783
Charges related to convertible preferred stock                                   (139)               - 
                                                                           -----------      --------------
     Net income (loss) applicable to common
        stockholders                                                           $ (989)          $ 2,783 
                                                                            ===========     ==============
Income (loss) per common share applicable to common
  stockholders:
  Basic -
     Continuing operations                                                     $(0.22)           $ 0.39
     Discontinued operations                                                     0.08              0.02 
                                                                           -----------      --------------
       Net income (loss) per common share                                     $ (0.14)           $ 0.41 
                                                                            ===========     ==============

  Diluted -
     Continuing operations                                                    $ (0.22)           $ 0.36
     Discontinued operations                                                     0.08              0.02 
                                                                           -----------      --------------
       Net income (loss) per common share                                     $ (0.14)           $ 0.38 
                                                                            ===========     ==============
</TABLE> 

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

                                       5
<PAGE>
 
<TABLE> 
<CAPTION> 
                                             Medical Resources, Inc.
                                      Consolidated Statements of Operations
                                  For the Six Months ended June 30, 1998 and 1997
                                     (in thousands, except per share amounts)
                                                   (unaudited)

                                                                               Six Months ended June 30,
                                                                               -------------------------
                                                                               1998               1997
                                                                              ------            -------
<S>                                                                      <C>               <C> 
Net service revenues                                                         $ 93,648          $ 64,718
Imaging center operating costs:
   Technical services payroll and related expenses                             21,510            12,590
   Medical supplies                                                             5,919             3,884
   Diagnostic equipment rental and maintenance                                  8,724             4,131
   Independent contractor fees                                                  4,349             2,825
   Administrative expenses                                                     16,920            10,248
   Other center level costs                                                     3,915             2,606
Provision for uncollectible accounts receivable                                 7,307             3,753
Corporate general and administrative                                            5,815             2,689
Stock-option based compensation                                                   228             2,305
Depreciation and amortization                                                  12,635             7,079
Unusual charges                                                                 5,400                - 
                                                                              --------           --------
     Operating income                                                             926            12,608
Interest expense, net                                                           6,912             2,733 
                                                                              --------           --------
     Income (loss) from continuing operations before minority
       interest and income taxes                                               (5,986)            9,875
Minority interest (benefit)                                                       643              (193)
                                                                              --------           --------

     Income (loss) from continuing operations before income taxes              (6,629)           10,068
Provision for income taxes                                                        301             4,078 
                                                                              --------           --------
     Income (loss) from continuing operations                                  (6,930)            5,990
Income from discontinued operations, net of tax                                 1,341               395 
                                                                              --------           --------
     Net income (loss)                                                         (5,589)            6,385
Charges related to convertible preferred stock                                   (274)               - 
                                                                              --------           --------
     Net income (loss) applicable to common
        stockholders                                                         $ (5,863)          $ 6,385 
                                                                             ==========         =========   
Income (loss) per common share applicable to common
  stockholders:
  Basic -
     Continuing operations                                                    $ (0.99)           $ 0.91
     Discontinued operations                                                     0.19              0.06 
                                                                              --------           --------
       Net income (loss) per common share                                     $ (0.80)           $ 0.97 
                                                                             ==========         =========   

  Diluted -
     Continuing operations                                                    $ (0.99)           $ 0.86
     Discontinued operations                                                     0.19              0.06 
                                                                              --------           --------
       Net income (loss) per common share                                     $ (0.80)           $ 0.92 
                                                                             ==========         =========   

</TABLE> 
The accompanying notes are an integral part of the consolidated financial 
statements.

                                       6

<PAGE>
 
                            Medical Resources, Inc.
                     Consolidated Statements of Cash Flows
                For the Six Months ended June 30, 1998 and 1997
                                (in thousands)
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                          Six Months ended June 30,
                                                                          ------------------------
                                                                            1998             1997
                                                                           ------           ------   
<S>                                                             <C>                      <C> 
Cash flows from operating activities:
Net income (loss)                                                        $ (5,589)         $ 6,385 
Adjustments to reconcile net income to net cash
   provided by operating activities:
      Depreciation and amortization                                        12,969            7,341
      Provision for uncollectible accounts receivable                       7,455            3,762
      Deferred income tax provision                                             -              649
      Stock-option based compensation                                         228            2,305
      Expense incurred in connection with warrants and notes
        issued to preferred stockholders                                    3,334                -
      Other, net                                                              708             (425)
Changes in operating assets and liabilities:
   Accounts receivable                                                    (16,330)         (15,333)
   Other receivables                                                       (5,067)          (2,272)
   Prepaid expenses                                                         1,023           (2,014)
   Income taxes recoverable or payable                                      2,349             (886)
   Other assets                                                               336           (1,219)
   Accounts payable and accrued expenses                                   (3,244)           5,997
   Other current liabilities                                                2,592            1,331
   Other long-term liabilities                                                337           (2,686)
                                                                          ---------       ----------
      Total adjustments                                                     6,690           (3,450)
                                                                          ---------       ----------
        Net cash provided by operating activities                           1,101            2,935 
                                                                          ---------       ----------

Cash flows from investing activities:
Purchase of property and equipment, net of disposals                       (1,086)          (4,233)
Acquisition of diagnostic imaging centers, net of cash acquired                 -          (37,908)
Acquisition of temporary staffing offices, net of cash acquired                 -              176
Investment in Diagnostic Imaging Center Joint Venture                           -           (1,000)
Contingent consideration related to prior year acquisitions                (1,201)               -
Costs associated with refinancing of assets under capital leases                -           (1,461)
Sale (purchase) of short-term investments, net                                  -            5,848
Increase in restricted cash                                                (1,144)              - 
                                                                          ---------       ----------
      Net cash used in investing activities                                (3,431)         (38,578)
                                                                          ---------       ----------
</TABLE> 

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

                                       7

<PAGE>
 
                            Medical Resources, Inc.
               Consolidated Statements of Cash Flows (continued)
                For the Six Months ended June 30, 1998 and 1997
                                (in thousands)
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                                          Six Months ended June 30,
                                                                          -------------------------
                                                                            1998             1997
                                                                           ------           -----
<S>                                                                     <C>            <C> 
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs                               -           77,113
Proceeds from sale/leaseback transactions                                       -            7,856
Repurchase of Common Stock subject to redemption                           (3,311)               -
Proceeds from borrowing under notes payable                                   103              309
Borrowings under line of credit                                             6,847            1,500
Proceeds from exercise of options and warrants                                128              308
Note and capital lease repayments in connection with
   acquisitions                                                                 -           (7,659)
Note and capital lease repayments in connection with
   Senior Notes transaction                                                     -          (13,764)
Note and capital lease repayments in connection with
   sale/leaseback transaction                                                   -           (2,314)
Principal payments under capital lease obligations                         (5,743)          (1,791)
Principal payments on notes and mortgages payable                          (4,807)          (3,427)
Other, net                                                                     -               (19)
                                                                        -------------    -------------
     Net cash (used in) provided by financing activities                   (6,783)          58,112 
                                                                        -------------    -------------
Net increase (decrease) in cash and cash equivalents                       (9,113)          22,469

Cash and cash equivalents at beginning of year                             23,198           15,346 
                                                                        -------------    -------------
Cash and cash equivalents at end of period                               $ 14,085         $ 37,815 
                                                                        =============    =============
</TABLE> 

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

                                       8
<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 set forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.      
 
  During July 1998, the Company's shareholders approved a reverse stock split
of the Company's outstanding shares of Common Stock. As a result of the
reverse stock split, each three outstanding shares of Common Stock were
automatically converted into one share of new Common Stock. The Company
effected the reverse stock split in order to meet the minimum bid price
requirement for continued listing on the Nasdaq Stock Market. The share data
included herein have been adjusted to reflect the impact of the reverse stock
split.
 
 The Company
 
  The Company operates and manages primarily fixed-site, free-standing
outpatient medical diagnostic imaging centers (herein referred to as
"centers"), and provides diagnostic imaging network management services to
managed care providers. The Company, through its wholly-owned subsidiary,
Dalcon Technologies, Inc., also develops and markets software products and
systems for the diagnostic imaging industry.
 
  Until August 1998, the Company, through the Per Diem and Travel Nursing
divisions of its wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley
Medical Resources Inc. ("StarMed"), provided temporary healthcare staffing of
registered nurses and other medical personnel to acute and sub-acute care
facilities nationwide. On August 18, 1998, the Company sold the stock of
StarMed to RehabCare Group, Inc. for gross proceeds of $33,000,000 (the
"StarMed Sale"). Due to the StarMed Sale, the results of operations of StarMed
are herein reflected in the Company's Consolidated Statements of Operations as
discontinued operations (see Note 6).
 
 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
 
                                       9
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
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:
 
  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 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 Physician 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 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 service
  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.
 
  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 and Restatement
 
  The Consolidated Statement of Operations for the three month and six month
periods ended June 30, 1997 have 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. In addition, certain prior year amounts have been reclassified to
conform to the current year presentation.
 
                                      10
<PAGE>

                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
 Comprehensive Income
     
  Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 requires an entity to report comprehensive income and its
components and increases financial reporting disclosures. This standard has no
impact on the Company's financial position, cash flows or results of operations
since the Company's comprehensive income is the same as its reported net income.
     

 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 three and six months ended June 30, 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 three and six months ended June 30, 1998 and 1997 were as follows (in
thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED  SIX MONTHS ENDED
                                                JUNE 30,           JUNE 30,
                                           -------------------------------------
                                             1998       1997     1998     1997
                                           ---------  -----------------  -------
   <S>                                     <C>        <C>      <C>       <C>
   BASIC EARNINGS (LOSS) PER SHARE
    INFORMATION
   Income (loss) from continuing
    operations...........................  $  (1,442) $  2,628 $ (6,930) $ 5,990
   Income from discontinued operations...        592       155    1,341      395
                                           ---------  -------- --------  -------
   Net income (loss).....................       (850)    2,783   (5,589)   6,385
   Charges related to convertible
    preferred stock......................       (139)      --      (274)     --
                                           ---------  -------- --------  -------
   Net income (loss) applicable to common
    stockholders.........................  $    (989) $  2,783 $ (5,863) $ 6,385
                                           =========  ======== ========  =======
   Weighted average number of common
    shares...............................      7,321     6,745    7,304    6,549
   Net income (loss) per share before
    discontinued operations..............  $   (0.22) $   0.39 $  (0.99) $  0.91
   Discontinued operations...............       0.08      0.02     0.19     0.06
                                           ---------  -------- --------  -------
   Basic earnings (loss) per share.......  $   (0.14) $   0.41 $  (0.80) $  0.97
                                           =========  ======== ========  =======
   DILUTED EARNINGS (LOSS) PER SHARE
    INFORMATION
   Income (loss) from continuing
    operations...........................  $  (1,442) $  2,628 $ (6,930) $ 5,990
   Income from discontinued operations...        592       155    1,341      395
                                           ---------  -------- --------  -------
   Net income (loss).....................       (850)    2,783   (5,589)   6,385
   Interest savings from conversion of
    convertible subordinated debentures..        --         23      --        43
   Charges related to convertible
    preferred stock......................       (139)      --      (274)     --
                                           ---------  -------- --------  -------
   Net income (loss) applicable to common
    stockholders after assumed
    conversions..........................  $    (989) $  2,806 $ (5,863) $ 6,428
                                           =========  ======== ========  =======
   Weighted average number of common
    shares...............................      7,321     6,745    7,304    6,549
   Incremental shares issuable on
    exercise of warrants and options.....        --        432      --       461
   Incremental shares issuable on
    conversion of convertible
    subordinated debentures..............        --        103      --       --
                                           ---------  -------- --------  -------
   Weighted average number of diluted
    common shares........................      7,321     7,280    7,304    7,010
                                           =========  ======== ========  =======
   Net income (loss) per share before
    discontinued operations..............  $   (0.22)     0.36 $  (0.99)    0.86
   Discontinued operations...............       0.08      0.02     0.19     0.06
                                           ---------  -------- --------  -------
   Diluted earnings (loss) per share.....  $   (0.14) $   0.38 $  (0.80) $  0.92
                                           =========  ======== ========  =======
</TABLE>

                                      11
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY
 
  As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $78,000,000 of Senior Notes. The
financial covenant defaults under the Senior Note agreements entitle the
lenders to exercise certain remedies including acceleration of repayment. In
addition, certain medical equipment notes, and operating and capital leases of
the Company, aggregating $14,575,000 at June 30, 1998 (the "Cross-Default
Debt"), 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 lenders or the holders of the Cross Default
Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Accordingly, the Company had a deficit in working capital of $55,892,000 at
June 30, 1998. 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. 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 have resulted from the outcome of this
uncertainty.
 
  Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998. There can be no assurance, however, that definitive
documents effecting the agreement in principle will be executed.
 
  In addition to reaching an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications, 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 by
approximately $5,000,000 per annum and (ii) sold the Company's temporary
healthcare staffing business, StarMed, for $33,000,000 in August 1998. Upon
execution of the definitive documents with respect to the Senior Notes, the
Senior Notes and the Cross Default Debt will no longer be in default and will
be shown as long-term debt in future financial statements of the Company.
 
3. UNUSUAL CHARGES
 
  During the three months ended June 30, 1998, the Company recorded $1,640,000
of unusual charges consisting of (i) $1,240,000 for penalties associated with
delays in the registration of the Company's Common Stock issuable upon
conversion of convertible preferred stock and (ii) $400,000 for defense costs
relating to shareholder and employee lawsuits.
 
                                      12
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
 
  During the six months ended June 30, 1998, the Company recorded $5,400,000
of unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a
non-cash charge related to the issuance of 117,000 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, (ii) $713,000 for defense costs relating to
shareholder and employee lawsuits, (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 penalties associated with the failure to register the
Company's Common Stock and waivers or amendments of the financial covenants
under its Senior Notes, and the outcome of certain litigation.
 
4. ACCOUNTS RECEIVABLE, NET
 
  Accounts receivable, net, is comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                          JUNE 30,  DECEMBER 31,
                                                            1998        1997
                                                          --------  ------------
   <S>                                                    <C>       <C>
   Management fee receivables (net of contractual
    allowances)
     Due from unaffiliated physicians (Type I revenues).. $ 39,477    $ 35,540
     Due from affiliated physicians (Type III revenues)..    7,198       8,585
   Patient and third party payor accounts receivable
    (Type II revenues)...................................   34,678      27,284
   Temporary staffing service accounts receivable........   15,533      13,400
                                                          --------    --------
   Gross accounts receivable.............................   96,886      84,809
   Less: Allowance for doubtful accounts.................  (22,125)    (18,922)
                                                          --------    --------
                                                          $ 74,761    $ 65,887
                                                          ========    ========
</TABLE>
 
  Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors.
Contractual allowances amounted to approximately $30,415,000 and $20,094,000
for the three months ended June 30, 1998 and 1997, respectively, and
approximately $59,265,000 and $31,093,000 for the six months ended June 30,
1998 and 1997, respectively.
 
5. COMMITMENTS AND CONTINGENCIES
 
  Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning certain related party transactions that have since been
investigated by a 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.
 
                                      13
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
 
  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), 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.
 
  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
 
                                      14
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
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.
 
  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 these proceedings.
    
  In 1996, Lavina Orsi and Pompeo Orsi 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. 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 liablity 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.  The 
Company believes it has meritorious defenses to all claims against it and 
therefore is of the opinion that the Company will not incur any material 
settlement cost, net of insurance proceeds (if any).  Accordingly, the Company 
has made no accrual for any costs associated with such litigation under SFAS 
No. 5.     
    
  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. Accordingly, the
Company has made no accrual for any costs associated with such litigation under
SFAS No. 5.    

  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. During 1997, the Company entered into an agreement to set the
purchase price per common share related to certain shares covered a repurchase
agreement to the then current market price in exchange for additional time to
obtain registration of such shares. The increased amount of such repurchase
obligation of $1,696,000 was charged to retained earnings and shown as an
increase in Common Stock subject to redemption on the Consolidated Balance
Sheet. As of June 30, 1998 and December 31, 1997, the Company had reflected
$5,509,000 and $9,734,000, respectively, 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 six months, ended June 30, 1998, the
Company paid $3,311,000 to sellers who exercised their rights to have shares
of Common Stock repurchased. The Company expects to pay an additional
$5,509,000 during the remainder of 1998 ($3,696,000 of which was due and
payable on June 3, 1998 (the "June 1998 Repurchase Obligation") but has not
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 lenders 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"). Any such Price
Protection payments will be charged to stockholders' equity. Based upon the
closing sales price of the Company's Common Stock on September 1, 1998 ($4.00
per share), such shortfall would be approximately $3,351,000, excluding Price
Protection obligations related to the shares which have repurchase
obligations, 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
 
                                      15
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
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. Contingent consideration associated with acquisitions is
recorded as additional purchase price when resolved.
 
  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 failed
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998.
 
  On June 18, 1998 2,500 shares of Series C Preferred Stock were converted
into 373,000 shares of Common Stock. Accordingly, as of June 30, 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) $62.10 or (ii) the average of
the daily closing bid prices for the Common Stock for the (5) five consecutive
trading days ending five (5) trading days prior to the date of conversion.
 
  As a result of the Company's continued failure to register the RGC
Conversion Shares, the Company: (i) issued warrants to RGC to acquire 389,000
shares of Common Stock at an exercise prices ranging from $34.86 to $38.85 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 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 (the Company is currently in discussions
with RGC to extend such date), 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 any
extended 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.
 
                                       16
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
6. DISCONTINUED OPERATIONS
 
  On August 18, 1998, the Company sold the stock of StarMed to RehabCare
Group, Inc. for gross proceeds of $33,000,000 (the "StarMed Sale"). Due to the
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 were used as follows: (i)
$13,786,000 to repay StarMed's outstanding third-party debt (in accordance
with the terms of sale) (ii) $2,000,000 was placed in escrow to be available,
for a specified period of time, to fund indemnification obligations that may
be incurred by the Company (part or all of this amount may be payable to the
Company over time) and (iii) an additional $2,000,000 was placed into escrow
to be applied as a partial repayment of the Company's $78,000,000 of Senior
Notes. The remaining net proceeds of approximately $13,400,000 increased the
Company's consolidated cash balances. For accounting purposes, a pretax gain
from the StarMed Sale of approximately $5,000,000 is expected to be reported
in the third quarter of 1998.
 
  The following table shows summary balance sheets for StarMed as of June 30,
1998 and December 31, 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                           JUNE 30, DECEMBER 31,
                                                             1998       1997
                                                           -------- ------------
   <S>                                                     <C>      <C>
                           ASSETS
   Current Assets:
     Cash and cash equivalents............................ $ 6,022    $   455
     Accounts receivable, net.............................  14,934     12,657
     Other current assets.................................     613        279
                                                           -------    -------
       Total current assets...............................  21,569     13,391
   Property and equipment, net............................     458        428
   Goodwill, net..........................................   9,993     10,442
   Other assets...........................................     118        218
                                                           -------    -------
       Total assets....................................... $32,138    $24,479
                                                           =======    =======
            LIABILITIES AND STOCKHOLDER'S EQUITY
   Current Liabilities:
     Current notes and mortgages payable.................. $   492    $   850
     Borrowings under line of credit......................  10,591      3,744
     Debt due parent......................................   4,000      4,000
     Accounts payable and accrued expenses................   2,110      2,229
                                                           -------    -------
       Total current liabilities..........................  17,193     10,823
   Notes and mortgages payable, less current portion......   2,702      2,827
   Debt due parent........................................   6,352      6,279
   Equity.................................................   5,891      4,550
                                                           -------    -------
       Total liabilities and stockholder's equity......... $32,138    $24,479
                                                           =======    =======
</TABLE>
 
                                      17 
<PAGE>
 
                            MEDICAL RESOURCES, INC.
 
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
 
  The following table shows summary statements of operations for StarMed for
the three and six month periods ended June 30 (in thousands):
 
<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED  SIX MONTHS ENDED
                                                JUNE 30,           JUNE 30,
                                           ------------------- -----------------
                                             1998      1997      1998     1997
                                           --------- --------- -------- --------
   <S>                                     <C>       <C>       <C>      <C>
   Net service revenues..................  $  20,490 $  12,801 $ 40,307 $ 25,947
   Office level operating costs and
    provisions for uncollectible accounts
    receivable...........................     16,400    10,408   32,197   21,148
   Corporate general and administrative..      3,056     1,822    5,912    3,488
   Depreciation and amortization.........        163       132      334      263
                                           --------- --------- -------- --------
     Operating income....................        871       439    1,864    1,048
   Interest expense, net.................        223        73      406      116
                                           --------- --------- -------- --------
   Income before income taxes............        648       366    1,458      932
   Provision for income taxes............         56       211      117      537
                                           --------- --------- -------- --------
   Net income............................  $     592 $     155 $  1,341 $    395
                                           ========= ========= ======== ========
</TABLE>
 
  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 material adverse 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, recission 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.
 
7. SUBSEQUENT EVENT
 
  In July 1998, the Company decided to sell or close approximately eight
imaging centers. These centers will be sold or closed during the third and
fourth quarters of 1998. In most cases, the Company decided to sell or close
these centers due to general competitive pressures and their close proximity
to other imaging centers of the Company which have more advanced imaging
equipment. The Company expects to incur a charge of between $3,000,000 and
$4,000,000 during the third quarter of 1998 related to these imaging centers.
Such charge will consist of (i) the write-off of fixed assets and other assets
of between $2,000,000 and $2,600,000 and (ii) reserve for costs to exit
facility and equipment leases of between $1,000,000 and $1,400,000.
 
                                      18
<PAGE>
      
ITEM 2. 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 for the Diagnostic Imaging segment 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 the three months and six
months ended June 30, 1998 were $25,869,000 and $50,283,000,  respectively, or
55% and 54% 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
Physician 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 the three months and six
months ended June 30, 1998 were $17,450,000  and $36,618,000, respectively, or
37% and 39% 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 physicians 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 the three months and six months ended June 30, 1998 were
$3,307,000  and $6,747,000, respectively, or 8% and 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 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.     

                                      19

<PAGE>
 
QUARTER ENDED JUNE 30, 1998 COMPARED TO THE QUARTER ENDED JUNE 30, 1997

  For the quarter ended June 30, 1998, total Company net service revenues were
$46,626,000 versus $37,877,000 for the quarter ended June 30, 1997, an increase
of $8,749,000 or 23%.

  The increase in net service revenues is due primarily to the timing of various
1997 acquisitions which contributed $12,479,000 of the increase. Revenues at
imaging centers that were operated by the Company for all of 1997 decreased
$4,100,000 or 16%, to $20,992,000 for the quarter ended June 30, 1998 from
$25,092,000 for the same period in 1997, primarily as a result of higher
contractual allowances, as a percentage of gross billings, in the 1998 second
quarter, and a modality mix change toward lower priced procedures. Aggregate
procedure volumes for these imaging centers were relatively constant in the
second quarter of 1998 as compared to the second quarter of 1997.

  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 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 intends to attempt 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 volumes, the
Company's results could be materially and adversely affected.

  Diagnostic Imaging revenue derived from personal injury claims, mainly
involving automobile accidents, represented approximately 18% of the Diagnostic
Imaging business net service revenues for the quarter ended June 30, 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 for the three months ended June 30, 1998 were $29,761,000
compared to $21,913,000 for the three months ended June 30, 1997, an increase of
$7,848,000 or 36% due to an increase in operating costs of $8,466,000 related to
centers acquired during 1997. Operating costs at imaging centers operated by the
Company for all of 1997 decreased $618,000, or 5%, to $12,653,000 for the three
months ended June 30, 1998 from $13,271,000 for the three months ended June 30,
1997.

  Center operating margins, which represent net service revenue less operating
costs as a percent of net revenue, decreased for the quarter ended June 30, 1998
to 36% from 42% for the quarter ended June 30, 1997 due primarily to higher
contractual allowances and generally higher payroll and administrative costs.
    
  The provision for uncollectible accounts receivable for the quarter ended June
30, 1998 was $3,686,000 an increase of $1,754,000 from second quarter 1997
provision of $1,932,000. The Company's provision for uncollectible accounts
receivable for the second quarter of 1998 represented 8% of related net service
revenues, compared to the second quarter of 1997 provision, which represented 5%
of related net service revenues. The increase in the provision for uncollectible
accounts receivable, as a percentage of net service revenues, was due to an
increase in the estimated rate of bad debts, primarily related to personal
injury claim receivables. If and to the extent that personal injury claim
receivables decline as a percentage of total net service revenues over time, and
provided the Company improves its cash collections of outstanding accounts
receivables on an ongoing basis, this provision should fall below 8% of net
service revenues in the future. Although outstanding accounts receivables
increased during the second quarter of 1998, cash collections from mid-June
through early August of this year have improved and, during this period,
outstanding accounts receivable has decreased slightly.     

  Corporate general and administrative expense for the three months ended June
30, 1998 was $2,599,000, an increase of $1,056,000 from the $1,543,000 recorded
for the three months ended June 30, 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. The
second quarter of 1998 benefited from lower general and administrative expense
as a result of the Company's workforce reduction and follow-on attrition program
implemented at the end of the first quarter of 1998. 

  Results for the second quarter of 1998 and 1997 include non-cash charges of
$114,000 and $2,305,000, respectively, for compensation expense resulting from
stock options granted in 1996 and early 1997 that were approved by the Company's
stockholders in May 1997. Such

                                      20
<PAGE>
 
compensation expense represents the difference between the exercise price of the
options and the market price of the Company Common Stock on the date of plan
approval, attributable to vested shares.

  Depreciation and amortization expense for the second quarter of 1998 was
$6,158,000, compared to $4,288,000 for the second quarter of 1997, or an
increase of $1,870,000.  The increase was due primarily to higher equipment
depreciation resulting from 1997 acquisitions and increased goodwill
amortization.

   During the second quarter of 1998, the Company recorded $1,640,000 of unusual
charges consisting of (i) $1,240,000 for penalties associated with delays in the
registration of the Company's Common Stock issuable upon conversion of
convertible preferred stock, and (ii) $400,000 for the estimated net costs
associated with the resolution of the shareholder and employee lawsuits.

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

  Net interest expense for the three months ended June 30, 1998 was $3,426,000
as compared to $1,847,000 for the three months ended June 30, 1997, an increase
of $1,579,000.  This increase was primarily attributable to debt assumed in
connection with the Company's 1997 acquisitions and additional borrowings under
the Company's Senior Notes.

  The Company's income for the quarter ended June 30, 1998 was decreased by
$462,000 attributable to minority interests, as compared to an increase in the
Company's income of $428,000 for the quarter ended June 30, 1997.

  The provision for income taxes for the three months ended June 30, 1998
decreased $1,627,000 to $222,000 as compared to $1,849,000 for the comparable
period last year.   The provision for income taxes for the three months ended
June 30, 1998 consists entirely of estimated state income taxes.  During the
second quarter of 1998, a benefit for income taxes has not been recorded 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 June
30, 1998 was $1,442,000 compared to net income from continuing operations for
the quarter ended June 30, 1997 of $2,628,000.

    The net loss applicable to common stockholders (used in computing loss per
common share) in the second quarter of 1998 includes charges of $139,000 as a
result of the accretion of the Company's preferred stock.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

  For the six months ended June 30, 1998, total Company's net service revenues
were $93,648,000 versus $64,718,000 for the six months ended June 30, 1997, an
increase of $28,930,000 or 45%.

  The increase is due to the timing of various 1997 acquisitions which were
responsible for $35,093,000 of the increase.  Offsetting this increase were
centers that were operated by the Company for all of 1997 which decreased
$7,340,000, or 15%, to $42,223,000 for the six months ended June 30, 1998 from
$49,563,000 for the same period in 1997, primarily as a result of higher
contractual allowances, as a percentage of gross billings, in the 1998 second
quarter, and a modality mix change toward lower priced procedures.  Aggregate
procedure volumes for these imaging centers were relatively constant in the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997.

  Operating costs for the six months ended June 30, 1998 were $61,337,000
compared to $36,284,000 for the six months ended June 30, 1997, an increase of
$25,053,000 or 69%.  Primarily, this is due to an increase in operating costs of
$22,718,000 related to centers acquired during 1997.  Operating costs at imaging
centers operated by the Company for all of 1997 increased $2,335,000, or 9%, to
$28,524,000 for the six months ended June 30, 1998 from $26,189,000 for the six
months ended June 30, 1997, primarily as a result of increased payroll costs.

                                      21
<PAGE>
 
  Center operating margins, which represent net service revenue less imaging
center and staffing operating costs as a percent of net revenue, decreased for
the six months ended June 30, 1998 to 35% from 44% for the six months ended June
30, 1997, due primarily to higher contractual allowances and generally higher
payroll and administrative costs.

  The provision for uncollectible accounts receivable for the six months ended
June 30, 1998 was $7,307,000, an increase of $3,554,000 from six months ended
1997 provision of $3,753,000. The Company's provision for uncollectible accounts
receivable for the six months ended 1998 was 8% of related net service revenues,
compared to the first six months of 1997, which represented 6% of related net
service revenues. The increase in the provision for uncollectible accounts
receivable, as a percentage of net service revenues, was due to an increase in
the estimated rate of bad debts, primarily related to personal injury claim
receivables. If and to the extent that personal injury claim receivables decline
as a percentage of total net service revenues over time, and provided the
Company improves its cash collections of outstanding accounts receivables on an
ongoing basis, this provision should fall below 8% of net service revenues in
the future. Although outstanding accounts receivables increased during the
second quarter of 1998, cash collections from mid-June through early August of
this year have improved and, during this period, outstanding accounts receivable
has decreased slightly.

  Corporate general and administrative expense for the six months ended June 30,
1998 was $5,815,000, an increase of $3,126,000 from the $2,689,000 recorded for
the six months ended June 30, 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. 

  Results for the six months ended June 30, 1998 and 1997 include non-cash
charges of $228,000 and $2,305,000, respectively, for compensation expense
resulting from stock options granted in 1996 and early 1997 that were approved
by the Company's stockholders in May 1997. Such compensation expense represents
the difference between the exercise price of the options and the market price of
the Company Common Stock on the date of plan approval, attributable to vested
shares.

  Depreciation and amortization expense for the first six months of 1998 was
$12,635,000 compared to $7,079,000 for the first six months of 1997, or an
increase of $5,556,000 attributable almost entirely to the Company's Diagnostic
Imaging business. The increase was due primarily to higher equipment
depreciation resulting from 1997 acquisitions and increased goodwill
amortization.

   During the six months ended June 30, 1998, the Company recorded $5,400,000 of
unusual charges consisting of (i) $3,467,000 ($1,194,000 of which was a non-cash
charge related to the issuance of 117,000 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, (ii) $713,000 for the estimated net costs associated with the
resolution of the shareholder and employee lawsuits, (iii) $883,000 for costs
associated with the investigation of related party transactions 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 penalties associated with the failure to register the Company's Common
Stock and waivers or amendments of the financial covenants under its Senior
Notes, and the outcome of certain litigation.

  Net interest expense for the six months ended June 30, 1998 was $6,912,000 as
compared to $2,733,000 for the six months ended June 30, 1997, an increase of
$4,179,000. 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 six months ended June 30, 1998 was decreased by
$643,000 attributable to minority interests, as compared to an increase in the
Company's income of $193,000 for the six months ended June 30, 1997.

  The provision for income taxes for the six months ended June 30, 1998
decreased $3,777,000 to $301,000 as compared to $4,078,000 for the comparable
period last year. The provision for income taxes for the six months ended June
30, 1998 consists entirely of estimated state income taxes. During the first six
months of 1998, a benefit for income taxes has not been recorded due to the
uncertainty regarding the recognition of the full amount of the Company's
deferred tax assets.

                                      22
<PAGE>
 
  The Company's net loss from continuing operations for the six months ended
June 30, 1998 was $6,930,000 compared to net income from continuing operations
for the six months ended June 30, 1997 of $5,990,000.

  The net loss applicable to common stockholders (used in computing loss per
common share) in the first half of 1998 includes charges of $274,000 as a result
of the accretion of the Company's preferred stock.

  In July 1998, the Company decided to sell or close approximately eight imaging
centers. These centers will be sold or closed during the third and fourth
quarters of 1998. In most cases, the Company decided to sell or close these
centers due to general competitive pressures and their close proximity to other
imaging centers of the Company which have more advanced imaging equipment. The
Company expects to incur a charge of between $3,000,000 and $4,000,000 during
the third quarter of 1998 related to these imaging centers. Such charge will
consist of (i) the write-off fixed assets and other assets of between $2,000,000
and $2,600,000 and (ii) reserve for costs to exit facility and equipment leases
of between $1,000,000 and $1,400,000.

RESULTS OF DISCONTINUED OPERATIONS

 QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997

   Net service revenues for Starmed increased to $20,490,000 in the second
quarter of 1998 from $12,801,000 in the second quarter of 1997, an increase of
$7,689,000 or 60%.  Internal growth in the staffing business, consisting
primarily of the opening of new Per Diem division offices, accounted for
$6,386,000 of the increase in revenues.  Revenues at Per Diem division offices
acquired during 1997 accounted for $1,303,000 of the increase.

   Operating costs for StarMed for the three months ended June 30, 1998 were
$16,400,000 compared to $10,408,000 for the three months ended June 30, 1997, an
increase of $5,992,000 or 58%.  Internal growth in the staffing business
accounted for $4,986,000 of the increase in operating costs.  Increased costs at
Per Diem division offices acquired during 1997 accounted for $1,006,000 of the
additional operating costs.

   Net earnings related to StarMed increased to $592,000 in the second quarter
of 1998 from $155,000 in the second quarter of 1997.

 SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

   Net service revenues for StarMed increased to $40,307,000 for the six months
ended June 30, 1998 from $25,947,000 for the six months ended June 30, 1997, an
increase of  $14,360,000 or 55%.  Internal growth in the staffing business,
consisting primarily of the opening of new Per Diem division offices, accounted
for $11,483,000 of the increase in revenues.  Revenues at Per Diem division
offices acquired during 1997 accounted for $2,877,000 of the increase.

   Operating costs for StarMed for the six months ended June 30, 1998 were
$32,197,000 compared to $21,148,000 for the six months ended June 30, 1997, an
increase of $11,049,000 or 52%.  Internal growth in the staffing business
accounted for $8,940,000 of the increase in operating costs.  Increased costs at
Per Diem division offices acquired during 1997 accounted for $2,109,000 of the
additional operating costs.

   Net earnings related to StarMed increased to $1,341,000 for the six months
ended June 30, 1998 from $395,000 for the six months ended June 30, 1997.

                                      23
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

  During the six months ended June 30, 1998, the Company's primary source of
cash flow was from reductions in the Company's cash balances of $9,113,000 and
borrowings under the Company's lines of credit of $6,847,000. The primary use
of cash was the repayment of principal amount of capital lease obligations and
notes and mortgages payable of $10,550,000, 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 $3,311,000. Operating
activities provided cash of $1,101,000 during the six months ended June 30,
1998. Cash flow from operating activities was adversely effected by an
increase of $8,874,000 in accounts receivable, net of allowance for bad debts.
The increase in accounts receivable is the result of difficulties experienced
in integrating the billing and collection systems of the centers acquired
during 1997. By July of 1998, the Company completed the planned conversion of
over 77% of its centers to the Company's proprietary radiology information
system, ICIS, and 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. The Company expects that
these efforts will result in an improved collection rate of accounts
receivable and cash flows. From mid-June through early August of this year,
cash collections have improved and, during this period, outstanding accounts
receivable has decreased slightly. 

  During the six months ended June 30, 1997, the Company's primary source of
cash flow was from financing activities, as a result of net proceeds from the
Senior Notes of $77,113,000. The primary use of cash was to fund acquisitions
which totaled approximately $38,732,000 and to fund the repayment of certain
notes and capital lease obligations of $28,955,000. Operating activities
provided cash of $2,935,000 during the first half of 1997.

                                      24

<PAGE>
 
  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.

  As a result of its net loss for 1997 and the late filing of its 1997 Annual
Report on Form 10-K, the Company is currently in default of certain financial
covenants under the agreements for its $78,000,000 of Senior Notes. The
financial covenant defaults under the Senior Note agreements entitle the
lenders to exercise certain remedies including acceleration of repayment. In
addition, certain medical equipment notes, and operating and capital leases of
the Company, aggregating $14,575,000 at June 30, 1998 (the "Cross-Default
Debt"), 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 lenders or the holders of the Cross Default
Debt 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 Cross Default Debt were shown as current liabilities on the
Company's Consolidated Balance Sheets at June 30, 1998 and December 31, 1997.
Accordingly, the Company had a deficit in working capital of $55,892,000 at
June 30, 1998. 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. 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 have resulted from the outcome of this
uncertainty. 

  Management has reached an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications. Under the terms of the agreement in principle, the Senior Note
lenders have agreed to waive all existing covenant defaults and to modify the
financial covenants applicable over the remaining term of the Senior Notes. In
consideration for these waivers and covenant modifications, the Company has
agreed to increase the effective blended interest rate on the Senior Notes
from 7.87% to 9.00%, and issue to the Senior Note lenders warrants to acquire
375,000 shares of the Company's Common Stock at an exercise price of $7.67 per
common share. In addition, the Company has agreed to prepay $2,000,000 of
principal outstanding on the Senior Notes (without premium) and to pay a fee
to the Senior Note lenders of $500,000. The agreement in principle is subject
to the execution of definitive documents, which are expected to be completed
during September 1998. 
 
                                      25

<PAGE>
 
  In addition to reaching an agreement in principle with the Senior Note
lenders with respect to existing covenant defaults and certain covenant
modifications, 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 by
approximately $5,000,000 per annum and (ii) sold the Company's temporary
healthcare staffing business, StarMed, for $33,000,000 in August 1998. Upon
execution of the definitive documents with respect to the Senior Notes, the
Senior Notes and the Cross Default Debt will no longer be in default and will
be shown as long-term debt beginning with the September 30, 1998 Consolidated
Balance Sheet. 

  The Company has a working capital deficit of $55,892,000 at June 30, 1998
compared to a working capital deficit of $58,174,000 at December 31, 1997. The
deficit in both periods 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 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 June 30, 1998 and December
31, 1997, the Company had reflected $5,509,000 and $9,734,000, respectively,
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 six months, ended June 30, 1998, the Company paid $3,311,000 to sellers
who exercised their rights to have shares of Common Stock repurchased. The
Company expects to pay an additional $5,509,000 during the remainder of 1998
($3,696,000 of which was due and payable on June 3, 1998 (the "June 1998
Repurchase Obligation") but has not 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 lenders 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"). Any such Price
Protection payments will be charged to stockholders' equity. Based upon the
closing sales price of the Company's Common Stock on September 1, 1998 ($4.00
per share), such shortfall would be approximately $3,351,000, excluding Price
Protection obligations related to the shares which have repurchase
obligations, 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. Contingent consideration
associated with acquisitions is recorded as additional purchase price when
resolved. 

  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
 
                                      26

<PAGE>
 
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. 

  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 failed
to register the Conversion Shares prior to October 1997 with such penalties
continuing until July 23, 1998. 

  On June 18, 1998 2,500 shares of Series C Preferred Stock were converted
into 373,220 shares of Common Stock. Accordingly, as of June 30, 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) $62.10 or (ii) the average of
the daily closing bid prices for the Common Stock for the (5) five consecutive
trading days ending five (5) trading days prior to the date of conversion.

  As a result of the Company's continued failure to register the RGC
Conversion Shares, the Company: (i) issued warrants to RGC to acquire 389,000
shares of Common Stock at an exercise prices ranging from $34.86 to $38.85 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 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 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 (the Company is currently in discussions with RGC to extend
such date), 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 any extended 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. 

  In addition to matters discussed above, the Company is subject to litigation
that may require additional future cash outlays. 

  During 1997, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of June 30, 1998, the Company's debt,
including capitalized lease obligations, totaled $155,369,000. The aggregate
estimated amounts of principal, interest and capital lease obligations due in
each of the years ended December 31, 1998 through 2002 on such debt, including
payments associated with the StarMed Sale, is $49,125,000 ($37,980,000 of
which has been paid through August 31, 1998), $25,713,000, $27,647,000,
$32,373,000 and $24,177,000, respectively. The Company does not expect to
incur significant additional debt in the near future and expects to rely on
its existing cash balances, of approximately $18,242,000 at August 31, 1998,
and its ability to enter into operating leases to fund expansions and
equipment replacement at its centers. 
 
                                      27

<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 June 30, 1998 and December 31, 1997, the
Company's cash and cash equivalents were $14,085,000 and $23,198,000,
respectively. As a result of improvements in the Company's billing and
collection systems, the Company expects its cash flow from operations,
including changes in accounts receivable, to increase from the level achieved
in the six months ending June 30, 1998. Assuming that the Company executes
definitive documents with respect to the Senior Notes consistent with the
agreement in principle, management believes that the positive cash flow from
operations, the Company's existing cash balances, and net cash proceeds from
the StarMed Sale will provide it with sufficient funds available to finance
its needs through 1998. 
    
  In order to meet one of Nasdaq's alternative listing requirements, the
Company effected a one-for-three reverse stock split of its Common Stock on
July 24, 1998. On July 28, 1998, the Nasdaq Qualifications Listing Panel
notified the Company that the Company had complied with Nasdaq's continued
listing qualifications and that the Common Stock would continue to be listed
on The Nasdaq Stock Market. The share data included in this Report  has
been adjusted to reflect the impact of the 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.      

SEASONALITY AND INFLATION

  The Company believes that its imaging business is generally unaffected by
seasonality. 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. Notwithstanding
the foregoing, general inflationary expectations and growing health care cost
containment pressures in the future may cause the Company not to 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.
 
  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. If the Company determines that
certain of its suppliers will not be year 2000 compliant, then the Company
will endeavor to find alternative suppliers; however, there can be no
assurance that the Company will be able to find alternative suppliers. 
 
  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
 
                                      28

<PAGE>
 
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.
 
 
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
    
  Statements contained in this Report 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 and by the recent decline
in the Company's share price; the ability of the Company and its Senior Note
Lenders to finalize and execute definitive documents, in general, and consistent
with their agreement-in-principle, which cure all existing loan covenant
defaults and which modify the financial covenants applicable over the remaining
term of the Senior Notes; 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 extent of Medicare reimbursement
reductions effected by the Health Care Financing Administration (HCFA) in line
with its recent proposals; 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.      

                                      29

<PAGE>
 
II. OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------


a.  Exhibits
    --------

    None.
 
b.  Reports on Form 8-K
    -------------------


       On April 8, 1998, the Company filed a Current Report on Form 8-K,
     reporting under Item 5 that the Company's Board of Directors voted to adopt
     the recommendations contained in the report of a Special Committee of two
     outside directors elected to the Board in December 1997 and appointed to
     investigate certain events and review the Company's policies regarding
     related party transactions.

       On April 16, 1998, the Company filed a Current Report on Form 8-K,
     reporting under Item 5 that the Company was unable to file its Annual
     Report on Form 10-K for the fiscal year ended December 31, 1997 by the
     April 15, 1998 extended due date for such filing.

       On May 20, 1998, the Company filed a Current Report on Form 8-K,
     reporting under Item 5 that (i) Peter J. Powers had resigned as a director
     of the Company effective May 13, 1998 and (ii) the Company would report a
     loss for the year ended December 31, 1997 and that it expected to report a
     loss for the quarter ended March 31, 1998.



                                   SIGNATURES
                                   ----------
                                        


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


 
                           Medical Resources, Inc.

                           /s/  Duane C. Montopoli                          
                           -----------------------     
                           Duane C. Montopoli
                           Chief Executive Officer
                             (Principal Executive Officer)


                           /s/  Geoffrey A. Whynot                              
                           ---------------------------
                           Geoffrey A. Whynot
                           Chief Financial Officer and Senior
                             Vice President  Finance
                             (Principal Accounting Officer)


Date: September 29, 1998