<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                       ----------------------------------
                             WASHINGTON, D. C. 20549
                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1997
                                               ------------------

                         Commission file number 0-20440
                                                --------

                             MEDICAL RESOURCES, INC.
                             -----------------------
             (Exact Name of registrant as specified in its charter)

        Delaware                                       13-3584552
 ----------------------                            -------------------
(State of Incorporation)                            (I.R.S. Employer
                                                   Identification No.)

155 State Street Hackensack, New Jersey                    07601
----------------------------------------                ----------  
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number including area code:   (201) 488-6230
                                                     ---------------

                               Title of Each Class
                               -------------------
                     Common Stock (Par value $.01 per share)

        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 past 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

        Indicate the number of shares outstanding of each class of the
registrant's classes of common stock, as of the latest practical date.

          Class                        Outstanding at November 1, 1997
          -----                        -------------------------------

    Common stock, par value
       $.01 per share                         22,666,383
<PAGE>
 
                             MEDICAL RESOURCES, INC.

                                      INDEX

                                                                  Page

PART I.   FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements (Unaudited)

          Consolidated Balance Sheets at September 30, 1997
            and December 31, 1996                                   3

          Consolidated Statements of Income for the
           nine months ended September 30, 1997 and 1996            5

          Consolidated Statements of Income for the
            three months ended September 30, 1997 and 1996          6

          Consolidated Statements of Cash Flows for the
           nine months ended September 30, 1997 and 1996            7

          Consolidated Statements of Changes in Stockholders'
            Equity                                                 11

          Notes to Consolidated Financial Statements               12

Item 2.   Management's Discussion and Analysis or Plan of
          Operation                                                34


PART II.  OTHER INFORMATION

Item 2.   Changes in Securities                                    43

Item 6.   Exhibits and reports on Form 8-K                         45


          Exhibit 11.  Computation of Shares Used For Earnings
                       Per Share Calculation                       47

                                       2
<PAGE>
 
                        MEDICAL RESOURCES, INC.
                      CONSOLIDATED BALANCE SHEETS

                                           SEPTEMBER 30,  DECEMBER 31,
                                              1997           1996
                                           ------------   -----------
                                           (UNAUDITED)
ASSETS

Current assets:
    Cash and cash equivalents              $ 25,156,066  $ 15,346,254
    Short-term investments                        ---       1,662,600
    Restricted short-term investments             ---       4,500,000
    Accounts receivable, net                 77,343,077    39,878,380
    Other receivables                        14,373,729     2,290,825
    Other current assets                      3,250,000           ---
    Prepaid expenses                          7,026,504     3,715,092
    Deferred tax assets, net                  1,888,000     3,354,000
                                            -----------   -----------
         Total current assets               129,037,376    70,747,151

Medical diagnostic and office
   equipment, net                            58,434,042    24,397,077
Goodwill, net                               163,042,965    62,638,656
Other assets                                  4,686,331     3,334,839
Deferred tax assets, net                      1,784,089     2,351,089
Restricted cash                               1,359,328     1,045,000
                                            -----------   -----------
   Total assets                            $358,344,131  $164,513,812
                                            ===========   ===========


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

                                  3
<PAGE>
 
                        MEDICAL RESOURCES, INC.
                      CONSOLIDATED BALANCE SHEETS

                                           SEPTEMBER 30,   DECEMBER 31,
                                               1997           1996
                                           ------------   ------------
                                            (UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current installments on notes and
  mortgage payable                         $  7,356,228  $  6,728,668
Current installments on capital
  lease obligations                           7,916,173     5,991,626
Accounts payable and
  accrued expenses                           30,990,241    13,070,370
Line of credit                                2,550,000
Income taxes payable                          2,580,020     2,063,860
Other current liabilities                     2,941,517       116,847
                                            -----------   -----------
      Total current liabilities              54,334,179    27,971,371

Senior notes payable                         78,000,000         ---
Notes and mortgage payable,
   less current installments                 18,768,564    12,637,926
Obligations under capital leases,
   less current installments                 24,273,750     8,373,681
Convertible debentures                                      6,988,089
Other long term liabilities                   2,510,316       108,076
Minority interest                             9,891,737     2,050,695
                                           ------------   -----------
     Total liabilities                      187,778,546    58,129,838
                                           ------------   -----------

Stockholders' equity:
   Common stock, $.01 par value;
     authorized 50,000,000 shares,
     22,220,548 issued and outstanding
     at September 30, 1997 and
     18,593,900 issued and 18,326,400
     outstanding at December 31, 1996           222,205       185,939
   Common stock to be issued; 600,000
     shares at December 31, 1996                  ---       1,721,250
   Series C Convertible Preferred Stock,
     $1,000 stated value; 18,000 shares issued
     and outstanding at September 30, 1997
     (liquidation preference of 3% per annum)18,106,500         ---
   Additional paid-in capital               137,307,185   102,927,874
   Unrealized appreciation of investments         ---          25,889
   Retained earnings                         14,929,695     2,955,530
   Less, 267,500 common shares in
     Treasury at December 31, 1996               ---      ( 1,432,508)
                                            -----------   -----------
     Total stockholders' equity             170,565,585   106,383,974
                                            -----------   -----------
Total liabilities and stockholders'
   equity                                  $358,344,131  $164,513,812
                                            ===========   ===========



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

                                  4
<PAGE>
 
                        MEDICAL RESOURCES, INC.
                  CONSOLIDATED STATEMENTS OF INCOME
                             (unaudited)

                                                 NINE MONTHS ENDED
                                                  SEPTEMBER 30,
                                                 1997          1996
                                              ----------- -------------
Net service revenues                        $151,285,525  $ 61,550,102
Imaging center and staffing
operating costs:
  Technical services payroll and
    related expenses                          55,686,009    23,748,392
  Medical supplies                             6,240,389     2,691,629
  Diagnostic equipment maintenance             4,532,932     1,981,878
  Independent contractor fees                  4,293,357     1,201,589
  Administrative expenses                     15,319,156     7,683,767
  Other costs                                  7,284,459     1,902,212
Provision for uncollectible accounts
  receivable                                   7,184,669     3,081,638
Corporate general and administrative          12,112,070     5,231,759
Depreciation and amortization                 12,587,695     4,744,997
                                              ----------   -----------
     Operating income                         26,044,789     9,282,242
Interest expense, net                          5,418,993     2,082,133
                                              ----------   -----------
Income before minority interest and
  income taxes                                20,625,796     7,200,109
Minority interest                            (   499,815)      198,923
                                             -----------   -----------
Income before income taxes                    21,125,611     7,001,186
Provision for income taxes                     9,044,946     2,251,315
                                             -----------   -----------
Net income                                  $ 12,080,665  $  4,749,871
                                             ===========   ===========



Per share data

Primary:

Primary net income per share                $        .55  $        .49
                                             ===========   ===========


Fully diluted:

Fully diluted net income per share          $        .52  $        .47
                                             ===========   ===========




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

                                  5
<PAGE>
 
                             MEDICAL RESOURCES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)

                                                 THREE MONTHS ENDED
                                                    SEPTEMBER 30,
                                                 1997          1996
                                            ------------  ------------

Net service revenues                        $ 58,893,327  $ 24,773,606
Imaging center and staffing operating costs:
  Technical services payroll and
    related expenses                          21,918,090     9,350,171
  Medical supplies                             2,356,464       988,007
  Diagnostic equipment maintenance             1,146,764       742,322
  Independent contractor fees                  1,353,550       707,517
  Administrative expenses                      5,984,174     3,172,040
  Other costs                                  3,256,802       763,411
  Provision for uncollectible accounts
    receivable                                 2,535,795     1,319,803
Corporate general and administrative           5,018,621     1,798,785
Depreciation and amortization                  5,246,290     2,004,321
                                             -----------   -----------
     Operating income                         10,076,777     3,927,229
Interest expense, net                          2,565,548       794,550
                                             -----------   -----------
Income before minority interest and
  income taxes                                 7,511,229     3,132,679
Minority interest                            (   306,383)      134,641
                                             -----------   -----------
Income before income taxes                     7,817,612     2,998,038
Provision for income taxes                     3,530,175     1,152,295
                                             -----------   -----------

Net income                                  $  4,287,437  $  1,845,743
                                             ===========   ===========



Per share data

Primary:

Primary net income per share                $        .18  $        .16
                                             ===========   ===========




Fully diluted:

Fully diluted net income per share          $        .17  $        .15
                                             ===========   ===========


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

                                  6
<PAGE>
 
                             MEDICAL RESOURCES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                               NINE MONTHS ENDED
                                                  SEPTEMBER 30,
                                               ------------------
                                                1997        1996
                                               ------------------

Cash flows from operating activities:

  Net income                               $ 12,080,665  $ 4,749,871
                                             ----------   ----------
Adjustments to reconcile net income
  to net cash provided by
  operating activities:
        Gain on sale of medical diagnostic
          and office equipment                                (3,933)
     Depreciation and amortization           12,587,695    4,744,997
     Provision for uncollectible accounts
      receivable                              7,184,669    3,081,638
     Minority interest in income  of
        joint ventures and limited
        partnerships, net of distributions  (   684,416)      40,523
     Deferred income tax provision            2,033,000      140,183
Changes in operating assets and liabilities:
  Accounts receivable                       (29,395,780)  (9,125,463)
  Other receivables                         (13,372,301)  (1,064,053)
  Prepaid expenses                          ( 2,950,129)  (1,194,525)
  Other assets                                  530,957   (  588,148)
  Accounts payable and accrued
     expenses                                 4,201,047    2,192,113
  Income taxes payable                          516,160    1,106,843
  Other current liabilities                   2,752,740    ( 500,871)
  Other long term liabilities                 1,197,789    ( 753,826)
                                              ----------    ---------
     Total adjustments                      (15,398,569)  (1,924,522)
                                             ----------   ----------
       Net cash provided by
          operating activities              ( 3,317,904)   2,825,349
                                             ----------   ----------







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

                                  7
<PAGE>
 
                             MEDICAL RESOURCES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                NINE MONTHS ENDED
                                                  SEPTEMBER 30,
                                                ------------------
                                                 1997        1996
                                                ------------------

Cash flows from investing activities:
  Purchase of MRI-CT, Inc.                       ---       ( 463,130)
  Purchase of NurseCare Plus, Inc.               ---      (1,263,992)
  Purchase of Americare Imaging
     Centers, Inc.                               ---      (1,500,000)
  Purchase of Access Imaging Center, Inc.        ---      (1,300,000)
  Purchase of WeCare - Allied Health
     Care, Inc.                                  ---      (1,049,618)
  Purchase of Centereach Resources, Inc.         ---      (3,100,000)
  Purchase of NMR of America, Inc.
     net of cash acquired                        ---       2,188,879
  Purchase of National Healthcare
     Solutions, Inc.                       (    50,000)        ---
  Purchase of Melbourne center             ( 1,125,000)        ---
  Purchase of southern California centers  ( 1,021,351)        ---
  Purchase of Advanced Diagnostic
    Imaging, Inc.                          ( 4,962,465)        ---
  Purchase of West Palm Beach center       ( 2,000,000)        ---
  Purchase of Rancho Cucamonga center      ( 2,603,615)        ---
  Purchase of Capstone Management
    Group, Inc.                            ( 6,292,958)        ---
  Purchase of ATI Centers, Inc.            (12,764,619)        ---
  Purchase of Maryland centers             ( 2,828,872)        ---
  Purchase of Wesley Medical Resources,
    Inc., net of cash acquired                 225,920         ---
  Investment in Mid-Manhattan Resources    ( 1,000,500)        ---
  Purchase of O'Connor centers             ( 2,207,430)        
  Purchase of Hollywood center             ( 1,532,053)        ---
  Purchase of Novick centers               ( 3,828,010)        ---
  Purchase of Jupiter center               ( 2,074,000)        ---
  Purchase of Presgar centers              ( 6,016,650)        ---
  Purchase of Germantown center            (   947,624)        ---
  Purchase of Port Charlotte center        (    93,000)        ---
  Purchase of Katz centers                 ( 1,969,887)        ---
  Investment in other assets               ( 3,250,000)        ---
  Purchase of Dalcon Technologies          (   614,425)        ---
  Purchase of medical diagnostic and
    office equipment                       ( 4,541,627)   (1,034,904)
  Refinancing of assets under capital
    leases                                 ( 1,461,470)        ---
  Proceeds from sale of equipment               ---           12,600 
  Sales of short-term investments,net        5,822,383         ---
                                           -----------    ------------
    Net cash used in
      investing activities                 (57,137,253)   (7,510,165)
                                           -----------    ------------

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

                                  8
<PAGE>
 
                             MEDICAL RESOURCES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                             NINE MONTHS ENDED
                                               SEPTEMBER 30,
                                          --------------------------
                                              1997           1996
                                          ------------  ------------

Cash flows from financing activities:
 Common Stock issuance costs                  ---         (  262,325)
 Note and capital lease repayments
    in connection with acquisitions       ( 13,260,689)        ---
 Note and capital lease repayments in
    connection with Senior Notes
    transaction                           ( 13,764,215)        ---
 Note and capital lease repayments in
    connection with sale leaseback
    transactions                          (  4,831,283)        ---
 Principal payments under capital
    lease obligations                     (  2,273,549)   (3,524,675)
 Principal payments on notes and
    mortgage payable                      (  3,800,215)   (1,341,499)
 Proceeds from Senior notes,
    net of issuance costs                   77,113,080         ---
 Proceeds from borrowings                      308,512     1,229,096
 Borrowings under line of credit             2,550,000     4,058,753
 Proceeds from sale/leaseback
    medical diagnostic equipment             9,865,556
 Proceeds from convertible debentures,net                  6,532,965
 Redemption of convertible debentures      (    19,000)        ---
 Proceeds from issuance of
    preferred stock, net                    16,965,000         ---
 Purchase of treasury stock                      ---      (   50,625)
 Proceeds from exercises of options          1,411,772       649,667
                                           -----------    ----------
    Net cash provided by
      financing activities                  70,264,969     7,291,357
                                           -----------    ----------
Net increase in cash
  and cash equivalents                       9,809,812     2,606,541
Cash and cash equivalents
    at beginning of year                    15,346,254     3,934,677
                                           -----------    ----------
Cash and cash equivalents
    at September 30,                      $ 25,156,066   $ 6,541,218
                                           ===========    ==========




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

                                  9
<PAGE>
 
                             MEDICAL RESOURCES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                NINE MONTHS ENDED
                                                  SEPTEMBER 30,
                                             --------------------------
                                                 1997           1996
                                             ----------- --------------


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:
      Income taxes                          $ 3,242,000   $ 1,387,000
      Interest                              $ 5,240,000   $ 1,656,000

SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:

    Capital lease obligations assumed
     in connection with acquisitions        $36,240,000   $ 5,802,000
    Note payable obligations assumed
     in connection with acquisitions        $21,911,000    15,482,000
    Capital lease obligations incurred
     for use of equipment                   $ 1,703,000   $ 2,192,000
    Conversion of subordinated debentures
     to Common Stock                        $ 6,997,000   $ 5,862,000
    Issuance of Common Stock in connection
     with acquisitions                      $24,940,000   $42,984,000
    Issuance of warrants in connection
     with acquisitions                      $ 2,025,000   $   360,000
    Issuance of notes payable in connection
     with acquisitions                      $ 2,500,000   $ 2,135,000







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

                                 10
<PAGE>
 
                             MEDICAL RESOURCES, INC.
            CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
                  For the Nine Months Ended September 30, 1997

<TABLE> 
<CAPTION> 



                                                                           Series C
                                                                 Common    Convertible
                                                      Common    Stock to   Preferred  
                                          Total       Stock    Be Issued     Stock    
                                       -----------------------------------------------
<S>                                  <C>             <C>       <C>          <C>
Balance at December 31, 1996         $ 106,383,974   $ 185,939 $ 1,721,250            
Purchase of Jacksonville center
 for 215,000 shares of
 Common Stock                            1,951,770                                   
Purchase of West Palm Beach center
 for 56,670 shares of
 Common Stock                              600,000          42                        
Purchase of Rancho Cucamonga center
 for 44,016 shares of
 Common Stock                              500,000         440                        
Purchase of Capstone Management Group
 Inc. for 397,204 shares of
 Common Stock                            5,000,000       3,972                        
Purchase of  Maryland centers
 for 119,166 shares of
  Common Stock                           1,500,000       1,192                        
Purchase of Wesley
 for 137,222 shares
 of Common Stock                         2,000,000       1,372                        
Purchase of New York centers
 for 152,356 shares of
 Common Stock                            2,546,250         874                        
Conversion of debentures                 6,635,422      12,707                        
Sale of investments                        (25,889)                                  
Exercise of stock options and warrants   1,411,772       2,922                        
Warrants issued in connection with          -
 acquisitions                            2,025,000                                   
Common Stock issued in
 connection with Ft. Myers acquisition         -         6,000  (1,721,250)            
Issuance of shares for forgiveness
 of debt                                   150,000          88                        
Purchase of Hollywood center
 for 37,539 shares of
 Common Stock                               674,289        375                        
Purchase of Coral Way center
 for 92,243 shares of
 Common Stock                             1,650,000        922                        
Purchase of Jupiter center
 for 7,337 shares of
 Common Stock                               125,000         73                        
Purchase of O'Connor center
 for 43,415 shares of
 Common Stock                               693,000        434                        
Purchase of Port Charlotte center
 for 75,281 shares of
 Common Stock                             1,340,000        753                        
Purchase of Katz centers
 for 102,715 shares of
 Common Stock                             1,750,000      1,028                        
Purchase of Dalcon Technologies, Inc.
 for 107,166 shares of
 Common Stock                             1,934,332      1,072                        
Fort Myers Earnout                        2,675,000      2,000                        
Preferred shares                         16,965,000                         18,000,000 
Accretion to liquidation value              -                                  106,500 
Net income                               12,080,665                                   
                                      -------------------------------------------------
                                      $ 170,565,585  $ 222,205    $ -      $18,106,500 
                                      =================================================
<CAPTION>

                                          Additional   Retained    Treasury      Unrealized
                                           Paid-In     Earnings     Shares     Appreciation of
                                           Capital     (Deficit)    at Cost     Investments
                                       --------------------------------------------------------
<S>                                      <C>           <C>         <C>           <C>
Balance at December 31, 1996             $ 102,927,874 $ 2,955,530 $ (1,432,508)   $ 25,889
Purchase of Jacksonville center
 for 215,000 shares of
 Common Stock                                  800,408               1,151,362
Purchase of West Palm Beach center
 for 56,670 shares of
 Common Stock                                 318,812                  281,146
Purchase of Rancho Cucamonga center
 for 44,016 shares of
 Common Stock                                499,560
Purchase of Capstone Management Group
 Inc. for 397,204 shares of
 Common Stock                              4,996,028
Purchase of  Maryland centers
 for 119,166 shares of
 Common Stock                              1,498,808
Purchase of Wesley
 for 137,222 shares
 of Common Stock                           1,998,628
Purchase of New York centers
 for 152,356 shares of
 Common Stock                              2,545,376
Conversion of debentures                   6,622,715
Sale of investments                                                                   (25,889)
Exercise of stock options and warrants     1,408,850
Warrants issued in connection with          -
 acquisitions                              2,025,000
Common Stock issued in
 connection with Ft. Myers acquisition     1,715,250
Issuance of shares for forgiveness
 of debt                                     149,912
Purchase of Hollywood center
 for 37,539 shares of
 Common Stock                                673,914
Purchase of Coral Way center
 for 92,243 shares of
 Common Stock                              1,649,078
Purchase of Jupiter center
 for 7,337 shares of
 Common Stock                                124,927
Purchase of O'Connor center
 for 43,415 shares of
 Common Stock                                692,566
Purchase of Port Charlotte center
 for 75,281 shares of
 Common Stock                              1,339,247
Purchase of Katz centers
 for 102,715 shares of
 Common Stock                              1,748,973
Purchase of Dalcon Technologies, Inc.
 for 107,166 shares of
 Common Stock                              1,933,260
Fort Myers Earnout                         2,673,000
Preferred shares                                     
Accretion to liquidation value                           (106,500)
Net income                                             12,080,665
                                 -------------------------------------------------------------
                                       $ 137,307,185 $ 14,929,695        $ -          $ -
                                 =============================================================
</TABLE>

                                       11
<PAGE>
 
                             MEDICAL RESOURCES INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.  GENERAL
-----------

     The accompanying unaudited consolidated financial statements of Medical
Resources, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for an entire year. The unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto contained in the Company's Annual Report
for the year ended December 31, 1996.

Reclassification
----------------

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

Revenue Recognition
-------------------

     The Company has entered into three forms of agreements (defined as Type I,
Type II, and Type III as described below) to provide equipment, premises,
comprehensive management, administration and technical imaging services to
independent contractor interpreting physicians for the provision of medical
services with respect to the private practice of magnetic resonance scanning,
computerized tomography scanning, radiography and fluoroscopy, ultrasound,
x-ray, mammography and other radiological modalities mutually agreed upon. In
accordance with the agreements, as part of the Company's administrative duties,
the Company provides billing and collection services on behalf of the
interpreting physicians for the diagnostic imaging services performed.

     Type I
     ------

        Under Type I agreements, interpreting physicians are required to pay to
the Company a charge per procedure performed. These charges are specified in a
schedule included by attachment to the Type I agreement and represent the
Company's net service revenue, net of contractually determined discounts. Under
the Type I agreements, the Company bears the risk of amounts being uncollectible
equivalent to

                                       12
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------------------

the proportionate relationship of its charge per procedure, including
LOP Type procedures (see Note 2) and the total charge to the referring
physician's patient.  The Company has established and recognized
reserves for potential uncollectibles.

     Type II
     -------

        Certain of the subsidiaries of the Company have entered into independent
contractor agreements with unaffiliated professional corporations to provide
radiological services. Fees paid to radiologists, based on cash collections, at
these centers are reflected as a component of independent contractor fees in the
accompanying statements of operations. The Company has entered directly into
agreements, under its Type II structure, with third party payers that provide
for payment to the Company at amounts which differ from its established rates.
Services rendered to Medicare and medical beneficiaries are provided under a
prospective payment system which establishes a reimbursement rate by modality.
These rates vary depending upon the type of image rendered. The Company has also
entered into payment agreements, under its Type II structure, with certain
commercial insurance carriers, health maintenance organizations and preferred
provider organizations. The basis for payment to the Company under these
agreements includes contractually determined discounts from established rates.
Accordingly, net service revenue for these acquired centers consists of patient
billings adjusted for contractual allowances which have been negotiated with
various third party payers. Under Type II agreements, the Company bears the risk
of uncollectibles and has established and recognized reserves for potential
uncollectibles.

     Type III
     --------

        For centers developed by NMR of America, Inc., a company which the
Company acquired in August 1996 ("NMR"), Type III agreements have been entered
into with physicians engaging in business as professional associations
("Physicians") pursuant to which the Company maintains and operates imaging
systems in offices operated by the Physicians. The agreements had terms of up to
six years and are renewable at the option of the Company for a period of one
year. All Type III agreements are currently operating under one year extensions.
Under the agreements, Physicians have agreed to be obligated to contract for
radiological services at the centers and to sublease each facility. The Company
is obligated to make necessary leasehold improvements, provide furniture and
fixtures and perform certain administrative functions relating to the provision
of technical aspects of the centers operations for which Physicians pay a
quarterly fee composed of a fixed sum based on the cost of the respective
imaging system installed, including related financing costs, a charge per
invoice

                                       13
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

processed and a charge based upon system usage for each NMR-installed imaging
system in operation. These fees, net of an allowance based upon Physicians
ability to pay after Physicians have fulfilled their obligations under facility
subleases and radiological service contracts as set forth above, and the
recognition of contractual allowances, which have been negotiated with various
third party payers, and uncollectibles for all procedures, including LOP Type
services (see Note 2) constitute the Company's net service revenues for sites
developed by NMR. The fixed and determinable usage fees charged to the
Physicians amount to approximately $4,980,000 per annum.

     Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third party payers and others for services
rendered based on contractually established rates which include prospective
contractual adjustments. These adjustments are recognized at the time the
services are rendered and adjusted in future periods, if required, as final
settlements are determined. Revenues derived from Medicare and Medicaid are
subject to audit. The Company is aware of no pending audits.

     The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Revenues are recognized on an accrual basis as
earned.

New Accounting Standards
--------------------------

     In February 1997, Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("Statement No. 128"), was issued which
established standards for computing and presenting earnings per share.
Statement No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods.
Had Statement No. 128 been used the Company would have reported the
following unaudited earnings per share for the nine month periods
ended:

                                     September 30,      September 30,
                                        1997               1996
                                     -------------     ---------------
Earnings per share:
Basic                                   $ .59              $ .50
Fully Diluted                           $ .52              $ .47

Weighted Average Number 
of shares used in computation:
Basic                                20,347,888         9,429,052
Fully Diluted                        23,083,790        10,863,852




                                 14
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

     In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting and Disclosure of Stock Based Compensation" ("Statement No. 123")
was issued. It encourages but does not require companies to recognize stock
awards based on their fair value at the date of grant. The Company currently
follows, and expects to continue to follow, the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

2.  ACCOUNTS RECEIVABLE, NET
----------------------------

        Accounts receivable, net is comprised of the following:

                                               September 30,   December 31,
                                                     1997           1996
                                               -------------  ---------------

        Management and use receivables
          Due from unaffiliated physicians      $50,156,226     $23,569,802
          Due from affiliated physicians         12,321,701       9,195,387
        Patient accounts receivable              43,350,388      17,481,493
        Less: Allowance for doubtful accounts
              and contractual adjustment        (28,485,238)    (10,368,302)
                                                -----------     ----------- 
                                                $77,343,077     $39,878,380
                                                ===========     ===========
                                                 

        Contractual adjustments, representing standard fee reductions negotiated
with the third party payers, amounted to approximately $25,270,000 for the year
ended December 31, 1996, and $56,607,000 for the nine months ended September 30,
1997.

        The Company's aged accounts receivable are as follows at:

                                       September 30,      December 31,
                                           1997               1996
                                       -------------       -----------

        up to 1 year                   $ 96,108,045       $ 43,121,992
        up to 2 years                     5,388,411          4,104,147
        over 2 years                      4,331,859          3,020,543
                                        -----------        -----------
                                        105,828,315         50,246,682
        Less: Allowance for
          doubtful accounts
          and contractual
          adjustments                   (28,485,238)       (10,368,302)
                                        -----------        -----------
                                       $ 77,343,077       $ 39,878,380
                                        ===========        ===========


                                       15
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        A significant financial instrument is accounts receivable, which is
concentrated among third party medical reimbursement organizations, principally
insurance companies. Approximately 20% of the Company's imaging revenue was
derived from the delivery of services of which the timing of payment is
substantially contingent upon the timing of settlement of pending litigation
involving the recipient of services and third parties (Letter of Protection or
"LOP-type" accounts receivable). The Company undertakes certain measures to
identify and document the individual's obligation to pay for services rendered
regardless of the outcome of pending litigation. By its nature, the realization
of a substantial portion of these receivables is expected to extend beyond one
year from the date the service was rendered. The Company anticipates that a
material amount of its accounts receivable will be outstanding for periods in
excess of twelve months in the future. The Company considers the aging of its
accounts receivable in determining the amount of allowance for doubtful
accounts. Credit losses associated with the receivables are provided for in the
consolidated financial statements and have historically been within management's
expectations. For LOP-type receivables, the Company provides for uncollectible
accounts at substantially higher rates than any other revenue source.

        "LOP-type" services are rendered at substantially all of the Company's
imaging centers, but only in the case of Type II agreements are such account
receivables reflected directly in the Company's financial records. This is as a
result of the structure in terms of the Company's Type I and Type III agreements
as described in Note 1 "Revenue Recognition."

3.  ACQUISITIONS
----------------

     On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., ("MRI-CT") comprised primarily of four diagnostic
imaging centers in the city of New York. The acquisition was consummated
pursuant to an Asset Purchase Agreement dated December 21, 1995 by and among the
Company and MRI-CT. Pursuant to the Agreement, a wholly owned subsidiary of the
Company acquired all of the business assets of MRI-CT for a combination of
$533,000 cash, 194,113 shares of the Company's Common Stock valued at $914,000
and a $88,000 note payable bearing interest at prime due January 9, 2001. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to $1,540,000 and is being amortized on a
straight-line basis over 20 years.

     On January 12, 1996, the Company consummated the acquisition of the common
stock of NurseCare Plus, Inc. ("NurseCare") a California corporation based in
Oceanside, California, which provides supplemental health care staffing services
for clients including hospitals, clinics and home health agencies in southern
California.

                                      16
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

The NurseCare acquisition was consummated pursuant to a Stock Purchase Agreement
dated January 11, 1996 by and among StarMed Staffing, Inc. the Company's wholly
owned subsidiary ("StarMed") and NurseCare. Pursuant to the NurseCare Agreement,
StarMed acquired from NurseCare all of the common stock of NurseCare for
$2,514,000, payable in $1,264,000 cash and a note payable for $1,250,000 bearing
interest at prime plus one percent due January 12, 1999. The excess of the
purchase price and direct acquisition costs over the fair value of net assets
acquired amounted to $2,087,000 and is being amortized on a straight-line basis
over 20 years.

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

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

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

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

                                 17
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

     On August 30, 1996, the Company consummated the acquisition of NMR. NMR is
engaged directly and through limited partnerships in the operation of eighteen
diagnostic imaging centers. Pursuant to the acquisition agreement, NMR was
merged into a wholly owned subsidiary of the Company and each issued and
outstanding share of NMR common stock was converted into 0.6875 shares of the
Company's common stock resulting in the issuance of 4,456,000 shares of the
Company's common stock valued at $39,350,000. The excess of the purchase price
and direct acquisition costs, including $200,000 in fees and 120,000 warrants,
with an exercise price of $9.00, valued at $360,000 for financial advisory
services issued to 712 Advisory Services, Inc., an affiliate of the Company's
Chairman of the Board (the "Affiliate"), over the fair value of net assets
acquired amounted to $35,286,000 and is being amortized on a straight-line basis
over 20 years. Mr. Neil H. Koffler, a director of the Company, is also an
employee of the Affiliate.

     On November 25, 1996 the Company consummated the acquisition of two
diagnostic imaging centers in Garden City and East Setauket, New York ("Smith
Garden"). Pursuant to the acquisition agreement, the Company acquired certain of
the assets and liabilities for $1,900,000 cash and 533,175 shares of the
Company's Common Stock valued at $4,500,000. The excess of the purchase price
and direct acquisition costs (including $60,000 in financial advisory fees paid
to the Affiliate) over the fair value of net assets acquired amounted to
$6,042,000 and is being amortized on a straight-line basis over 20 years.

     On December 16, 1996, the Company acquired the Imaging Center of the
Ironbound in Newark, New Jersey from TME, Inc. for $216,000 in cash and 18,868
shares of the Company's Common Stock valued at $200,000. The shares issued in
connection with such acquisition are subject to registration rights. The excess
of the purchase price and direct acquisition costs over the fair value of net
assets acquired amounted to $440,000 and is being amortized on a straight-line
basis over 20 years.

     Each of the above acquisitions consummated in 1996 (the "1996
Acquisitions") were accounted for under the purchase method of accounting. The
operations of these acquisitions are included in the unaudited consolidated
financial statements from the date of purchase.

     On January 10, 1997, the Company, through its wholly owned subsidiary,
StarMed, acquired the assets of National Health Care Solutions, Inc. a medical
staffing company in Detroit, Michigan for approximately $50,000 in cash. The
excess of the purchase price and direct acquisition costs over the fair value of
net assets acquired amounted to approximately $299,000 and is being amortized on
a straight-line basis over 20 years.

     On January 16, 1997, the Company acquired a diagnostic imaging center
located in Melbourne, Florida (the "Melbourne Center") for approximately
$1,125,000 in cash. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to approximately
$1,250,000 and is being amortized on a straight-line basis over 20 years.

                                       18
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

     On January 28, 1997, the Company acquired two diagnostic imaging centers in
southern California; a multi-modality imaging center in San Clemente, California
and an imaging facility in Oceanside, California for approximately $1,025,000
payable in cash and contingent consideration based on the centers achieving
certain financial objectives during the one year period subsequent to the
closing of the transaction. Contingent consideration of up to $2,000,000 is
payable in shares of the Company's Common Stock within 90 days of the end of the
measurement period. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to approximately
$1,820,000 and is being amortized on a straight-line basis over 20 years.

    On February 28, 1997, the Company acquired a diagnostic imaging center
located in Jacksonville, Florida for 215,000 shares of the Company's Common
Stock valued at $2,300,000 and contingent consideration based on the center
achieving certain financial objectives during the one year period subsequent to
the closing of the transaction. The shares of the Company's Common Stock issued
in connection with the acquisition are subject to registration rights.
Contingent consideration of up to $1,850,000 is payable in shares of the
Company's Common Stock within 90 days of the end of the measurement period. The
excess of the purchase price and direct acquisition costs, including 32,000
warrants, with an exercise price of $10.31, valued at $96,000 issued to the
Affiliate for financial advisory services, over the fair value of net assets
acquired amounted to approximately $1,960,000 and is being amortized on a
straight-line basis over 20 years.

     On March 10, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $6,000,000 in cash consideration. ADI owned interests
in and operated nine diagnostic imaging centers in the Northeast. As part of the
transaction, the Company has acquired an option to purchase an additional center
located in the Northeast. The excess of the purchase price and direct
acquisition costs, including 137,000 warrants, with an exercise price of $10.60,
valued at $411,000 issued to the Affiliate for financial advisory services, over
the fair value of net assets acquired amounted to approximately $15,980,000 and
is being amortized on a straight-line basis over 20 years.

     On March 10, 1997, the Company acquired a diagnostic imaging center located
in West Palm Beach, Florida (the "Palm Beach Center") for approximately
$2,000,000 in cash and 56,670 shares of the Company's Common Stock valued at
approximately $600,000. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection of the issuance price ($10.59 per share) compared to the market price
at effectiveness of the registration statement. The Company may satisfy any
deficiency in such price by the issuance of additional shares of Common Stock.
The excess of the purchase price and direct acquisition costs, including 57,000
warrants, with an exercise price of $10.64, valued at $171,000 issued to the
Affiliate for financial advisory services, over the fair value of net assets
acquired amounted to approximately $2,440,000 and is being amortized on a
straight-line basis over 20 years.

                                       19
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------
     On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California for approximately $2,605,000 in cash and 44,016
shares of the Company's Common Stock valued at $500,000. The shares of the
Company's Common Stock are subject to registration rights. The excess of the
purchase price and direct acquisition costs, including 55,000 warrants valued at
$165,000 issued to the Affiliate for financial advisory services, over the fair
value of net assets acquired amounted to approximately $3,520,000 and is being
amortized on a straight-line basis over 20 years.

     Effective May 1, 1997, the Company acquired Capstone Management Group, Inc.
("Capstone") for approximately $5,330,000 in cash and 397,204 shares of the
Company's Common Stock valued at $5,000,000 and contingent consideration based
on the centers achieving certain financial objectives during the one year period
subsequent to the transaction. The shares of the Company's Common Stock issued
in connection with the acquisition are subject to registration rights and price
protection ($17.925 per share) compared to the market price at effectiveness.
The Company must satisfy any deficiency in cash. In the event that the shares
are not registered by December 26, 1997, the seller may sell up to $1,000,000 of
Company Common Stock back to the Company with the shares valued at the greater
of the then market value of the Company's Common Stock or $17.925 per share. The
seller has an identical right to sell up to $1,000,000 of Company Common Stock
back to the Company at March 3, 1998, and another right to sell shares back to
the Company with respect to all remaining shares if the registration statement
is not declared effective by June 3, 1998. Contingent consideration based upon
future cash flow is payable within 90 days of the end of the measurement period.
Capstone owned and operated ten diagnostic imaging centers, nine of which are
located in the northeast and one located in Ohio. The excess of the purchase
price and direct acquisition costs, including 160,000 warrants, with an exercise
price of $12.59, valued at $480,000 issued to the Affiliate for financial
advisory services, over the fair value of net assets acquired amounted to
approximately $17,125,000 and is being amortized on a straight-line basis over
20 years.

     On May 7, 1997, the Company acquired ATI Centers, Inc. ("ATI") for
approximately $12,900,000 in cash consideration and contingent consideration
based on the centers achieving certain financial objectives during the one year
period subsequent to the closing of the transaction. Contingent consideration of
up to $1,500,000 is payable within 90 days of the end of the measurement period.
The estimated fair value of assets acquired amounted to approximately $3,629,000
consisting of approximately $3,605,000 of fixed assets and $24,000 of other
assets. Liabilities of $3,982,000 were assumed consisting of approximately
$1,875,000 in capital lease obligations, $1,170,000 in rates payable and
$937,000 in accounts payable and accrued expenses. ATI owned and operated eleven
diagnostic imaging centers in New Jersey and Pennsylvania. The excess of the
purchase price and direct acquisition costs, including 168,000 warrants, with an
exercise price of $11.06, valued at $504,000 issued to the Affiliate for
financial advisory services, over the fair value of net assets acquired amounted
to approximately $13,255,000 and is being amortized on a straight-line basis
over 20 years.

                                       20
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

     On May 7, 1997, the Company acquired two diagnostic imaging centers located
in Maryland (the "Maryland Centers") for approximately $2,830,000 in cash and
119,166 shares of the Company's Common Stock valued at $1,500,000. The shares of
the Company's Common Stock issued in connection with the acquisition are subject
to registration rights and price protection of the issuance price ($12.59 per
share) compared to the market price at effectiveness of the registration
statement. The Company may satisfy any price deficiency by the issuance of
additional shares of Common Stock or by the payment of cash. The excess of the
purchase price and direct acquisition costs, including 66,000 warrants, with an
exercise price of $12.59, valued at $198,000 issued to the Affiliate for
financial advisory services, over the fair value of net assets acquired amounted
to approximately $4,070,000 and is being amortized on a straight-line basis over
20 years.

     On June 11, 1997, the Company, through StarMed, acquired the assets of
Wesley Medical Resources, Inc. a medical staffing company in San Francisco,
California for 137,222 shares of the Company's Common Stock valued at $2,000,000
and contingent consideration based on the company achieving certain financial
objectives during the three year period subsequent to the transaction. The
shares issued in connection with the acquisition are subject to registration
rights. Contingent consideration based upon future cash flow is payable within
90 days of the end of the measurement period. The excess of the purchase price
and direct acquisition costs, including $145,000 in financial advisory fees paid
to the Affiliate, over the fair value of net assets acquired amounted to
approximately $2,720,000 and is being amortized on a straight-line basis over 20
years.

     On June 24, 1997 the Company announced it had invested $1,000,500 in a
joint venture for a multi-modality imaging center located in Mid- town
Manhattan, New York. The Company will own approximately 51% of the center which
is expected to open in February 1998. The Company paid $25,000 in financial
advisory fees to the Affiliate, which will be amortized on a straight line basis
over 20 years, beginning with the commencement of business at the center.

     On June 30, 1997, the Company acquired three diagnostic imaging centers in
New York for approximately $4,130,000 in cash and 152,356 shares of the
Company's Common Stock valued at $2,745,000. The shares of the Company's Common
Stock issued in connection with the acquisition are subject to registration
rights. In the event that the registration statement is not declared effective
by December 30, 1997, the sellers may sell the shares back to the Company for
$2,745,000. The excess of the purchase price and direct acquisition costs,
including $205,000 in financial advisory fees paid to the Affiliate, over the
fair value of net assets acquired amounted to approximately $8,125,000 and is
being amortized on a straight-line basis over 20 years.

                                       21
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        On July 31, 1997, the Company acquired Medical Imaging of Hollywood,
Inc. a diagnostic imaging center in Hollywood, Florida for approximately
$1,532,000 in cash and 37,539 shares of the Company"s stock valued at $674,000
plus the assumption of indebtedness and additional consideration based on the
center's performance. The shares of the Company's Common Stock issued in
connection with the acquisition are subject to registration rights and price
protection of the issuance price ($18.00 per share) compared to the market price
at effectiveness of the registration statement. The Company may satisfy any
price deficiency by the issuance of additional registered shares of Common Stock
or by the payment of cash. In the event that the registration statement is not
declared effective by January 1, 1998, the seller may sell the shares back to
the Company for $674,000. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $1,646,000 and is being amortized on a straight - line basis over
20 years.

        On August 1, 1997, the Company acquired Coral Way MRI, Inc. a diagnostic
imaging center in Miami, Florida for 92,243 shares of the Company's stock valued
at $1,650,000 plus the assumption of indebtedness and additional consideration
based on the center's performance. The shares of the Company's Common Stock
issued in connection with any additional consideration are subject to
registration rights. The excess of the purchase price and direct acquisition
costs over the fair value of net assets acquired amounted to approximately
$2,126,000 and is being amortized on a straight line basis over 20 years.

        On August 13, 1997, the Company acquired MRI of Jupiter, Inc. a
diagnostic imaging center in Jupiter, Florida for approximately $2,000,000 in
cash and 7,337 shares of the Company's stock valued at $125,000 plus additional
consideration based on the center's performance. The shares of the Company's
Common Stock issued in connection with the acquisition are subject to
registration rights and price protection of the issuance price ($17.00 per
share) compared to the market price at effectiveness of the registration
statement. The Company may satisfy any price deficiency by the issuance of
additional registered shares of Common Stock or by the payment of cash. In the
event that the registration statement is not filed by February 28, 1998, the
seller may sell the shares back to the Company for $125,000. The excess of the
purchase price and direct acquisition costs, including $74,000 in financial
advisory fees paid to the Affiliate , over the fair value of net assets acquired
amounted to approximately $ 1,558,000 and is being amortized on a straight -
line basis over 20 years.

                                       22
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        On August 21, 1997, the Company acquired four diagnostic imaging centers
(Presgar Centers) on the west coast of Florida for approximately $5,550,000 in
cash and up to $3,700,000 in notes convertible into the Company's Common Stock,
of which $1,200,000 in principal amount is contingent upon the occurrence of
certain events, plus the assumption of indebtedness. The excess of the purchase
price and direct acquisition costs, including $442,000 in financial advisory
fees paid to the Affiliate , over the fair value of net assets acquired amounted
to approximately $10,674,000 and is being amortized on a straight - line basis
over 20 years.

        On August 29, 1997, the Company acquired a controlling interest in a
limited partnership and a limited liability company which each operate an
imaging center located in San Jose, California for approximately $2,007,000 in
cash and 43,415 shares of the Company's stock valued at $ 693,000, plus the
assumption of indebtedness and additional consideration based on each center's
performance. The shares of the Company's Common Stock issued in connection with
the acquisition are subject to registration rights and price protection of the
issuance price ($15.96 per share) compared to the market price at effectiveness
of the registration statement. The Company may satisfy any price deficiency by
the issuance of additional registered share of Common Stock or by the payment of
cash. In the event that the registration statement is not declared effective by
February 28, 1998, the seller may sell the shares back to the Company at their
issuance price. The excess of the purchase price and direct acquisition costs,
including $ 258,000 in financial advisory fees paid to the Affiliate , over the
fair value of net assets acquired amounted to approximately $ 5,755,000 and is
being amortized on a straight - line basis over 20 years.

        On September 4, 1997, the Company acquired Germantown MRI Center a
diagnostic imaging center located in Germantown, Pennsylvania for approximately
$805,000 in cash plus the assumption of indebtedness . The excess of the
purchase price and direct acquisition costs, including $ 49,000 in financial
advisory fees paid to the Affiliate , over the fair value of net assets acquired
amounted to approximately $ 822,000 and is being amortized on a straight - line
basis over 20 years.

        On September 5, 1997, the Company acquired MRI Imaging Center of
Charlotte County a diagnostic imaging center in Port Charlotte, Florida for
75,281 shares of the Company's stock valued at $1,340,000 plus the assumption of
indebtedness and contingent consideration based on the center's performance. The
shares of the Company Common Stock issued in connection with any contingent
consideration are subject to registration rights. The excess of the purchase
price and direct acquisition costs, including $93,000 in financial advisory fees
paid to the Affiliate , over the fair value of net assets acquired amounted to
approximately $ 1,729,000 and is being amortized on a straight - line basis over
20 years.

                                       23
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        On September 16, 1997, the Company acquired one diagnostic imaging
center located in Bronx, New York and one diagnostic imaging center located in
Queens, New York for approximately $1,750,000 in cash and 102,715 shares of the
Company's stock valued at $1,750,000 plus the assumption of indebtedness. The
shares of the Company's Common Stock issued in connection with the acquisition
are subject to registration rights and price protection of the issuance price
($17.00 per share) compared to the market price at effectiveness of the
registration statement. The Company may satisfy any price deficiency by the
issuance of additional shares of Common Stock or by the payment of cash. The
excess of the purchase price and direct acquisition costs, including $133,000 in
financial advisory fees paid to the Affiliate , over the fair value of net
assets acquired amounted to approximately $2,711,000 and is being amortized on a
straight - line basis over 20 years.

        On September 24, 1997, the Company acquired Dalcon Technologies, Inc.
located in Nashville, Tennessee a leading software developer and provider of
radiology information systems for $644,778 in cash and 107,166 shares of the
Company's stock valued at $1,934,332. The shares of the Company's Common Stock
issued at the closing are subject to registration rights. The excess of the
purchase price and direct acquisition costs over the fair value of net assets
acquired amounted to approximately $ 2,100,000 and is being amortized on a
straight line basis over 20 years.

   Each of the above acquisitions consummated in 1997 (the "1997 Acquisitions")
were accounted for under the purchase method of accounting. The operations of
these acquisitions are included in the unaudited consolidated financial
statements from the date of purchase.

     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. Any contingent consideration paid
will be accounted for as an incremental component of goodwill which will be
amortized over the acquisitions remaining goodwill life.

                               24
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

   The fair value of each warrant issued to the Affiliate for financial advisory
services has been accounted for as a component of each acquisition's purchase
price and the value has been estimated on the date of grant using the
Black-Scholes option-pricing model based on the following assumptions:

                                                       1997    1996
                                                       ----    ----

   Dividend yield                                        0%      0%
   Expected volatility                                  52%     52%
   Expected life (years)                                 2       2

     The risk-free interest rates for 1997 and 1996 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were utilized. The
weighted average interest rate in 1997 and 1996 amounted to 6.01% and 5.93%,
respectively. The weighted average fair value of options and warrants granted
during the periods ended September 30, 1997 and 1996 amounted to $3.00 and
$2.34.

     The following unaudited consolidated proforma data reflects the 1996
Acquisitions and 1997 Acquisitions as if they had occurred at the beginning of
each of the periods presented (000s):

                             Nine Months            Three Months
                          Ended September 30,    Ended September 30,
                          ------------------------------------------
                           1997       1996          1997     1996
                           ----       ----          ----     ----

Revenues, net             $167,791   $104,452     $ 62,736 $ 37,163
Operating income          $ 30,225   $ 21,033     $ 11,009 $  7,328
Income before taxes       $ 24,411   $ 17,903     $  8,519 $  6,229
Fully diluted net income
 per share                $   0.57   $   0.88     $   0.18 $   0.26


4.  DEBT FINANCING
------------------

     On February 20, 1997, the Company completed a $52,000,000 private placement
of Senior Notes (the "Senior Notes") to a group of insurance companies led by
the John Hancock Mutual Life Insurance Company ("John Hancock"). The notes bear
interest at an annual rate of 7.77%, are subject to annual sinking fund payments
commencing February 2001 and have a final maturity in February 2005. The Senior
Notes are guaranteed by substantially all of the Company's diagnostic imaging
subsidiaries and collateralized by certain partnership interests owned through
subsidiaries by the Company. In addition, the agreement relating to the issuance
of the Senior Notes imposes certain affirmative and negative covenants on the
Company and its restricted subsidiaries. The Company used a portion of the
proceeds from the Senior Notes to retire capital lease obligations totaling
$8,274,330 and notes payable totaling $5,489,885. The difference between the

                                   25
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

amount used to retire capital lease obligations and the carrying value of such
obligations was approximately $1,461,000. In accordance with Financial
Accounting Standards Board Interpretation 26 ("FIN 26") "Accounting for the
Purchase of a Leased Asset by the Lessee During the Term of the Lease," the book
value of the related assets have been increased by this amount, not to exceed
the fair value of the assets, which will be amortized over the remaining useful
life of the assets. In connection with the Senior Note transaction, the Company
paid $225,000 plus expenses to the Affiliate for financial advisory services.

     The difference between the amount used to retire notes payable and the
carrying value of the related note obligations was approximately $185,000. Due
to the immaterial level of this amount, such amount has been classified as a
component of corporate general and administrative expenses during the quarter
ended March 31, 1997. The interest rates under the capital lease obligations and
notes payable ranged from 4.9% to 18.5%. As a result of these retirements, the
Company's monthly cash flow and interest savings during 1997 approximate
$567,847 and $1,079,001, respectively, before income taxes. The balance of the
proceeds of the Senior Notes is being used to fund acquisitions and for general
corporate purposes.

     On June 26, 1997, the Company completed a $26,000,000 private placement of
additional Senior Notes (the "Additional Senior Notes") to a group of insurance
companies led by the John Hancock Mutual Life Insurance Company. The Additional
Senior Notes bear interest at an average annual rate of 8.08%, and otherwise
have the same terms as the Senior Notes. In connection with the Additional
Senior Note transaction, the Company paid $112,500 plus expenses to the
Affiliate for financial advisory services.

5.  CONVERTIBLE SUBORDINATED DEBENTURES AND LINE OF CREDIT
----------------------------------------------------------

     On May 30, 1995 the Company issued at par $4,350,000 aggregate principal
amount of 11% Convertible Subordinated Debentures due 2000 (the "1995
Debentures"). The 1995 Debentures are convertible into Common Stock of the
Company at any time by the holder at a conversion price of $4.00 per share. The
1995 Debentures automatically converted to Common Stock when, on June 20, 1997,
the market price of the Common Stock exceeded $6.00 per share for a 15
consecutive day period.

    On February 7, 1996, the Company issued at par $6,533,000 aggregate
principal amount of 10.5% Convertible Subordinated Debentures due 2001 (the
"1996 Debentures"). The 1996 Debentures are convertible into Common Stock of the
Company at a conversion price of $6.00 per share. The Company called for the
redemption of the 1996 Debentures at the conversion price of $6.00 per share on
or before March 27, 1997. As of June 30, 1997 all of the 1996 Debentures have

                                 26
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

converted. The unamortized portion of the debenture issuance costs of $342,000
has been included as a component of additional paid-in capital in the
Stockholders' equity section of the accompanying September 30, 1997 balance
sheet. In connection with the private placements of the 1995 Debentures and the
1996 Debentures, the Company paid $247,500 and $356,650, respectively, in
placement agent fees and expenses to an investment banking firm. Mr. Gary L.
Fuhrman, a director of the Company, is an executive officer and director of such
investment banking firm.

     Under the terms of the merger agreement with NMR, the Company assumed the
obligations of NMR under NMR's 8% Convertible Subordinated Debentures due 2001
including payment of principal and interest (the "NMR Debentures"). The Company
called for redemption of the NMR Debentures at the conversion price of $6.54 per
share on or before March 27, 1997. As of June 30, 1997, all of the NMR
Debentures had been either redeemed or converted into the Common Stock of the
Company. The unamortized portion of the debenture issuance costs of $32,387 has
been recorded as a component of additional paid-in capital in the Stockholders'
equity section of the accompanying September 30, 1997 balance sheet.

     On March 31, 1997, StarMed obtained a revolving line of credit from a third
party financing corporation. The $6 million line bears interest at a rate of
prime plus 1.5% (10.0% at September 30, 1997), has a two year term and is
collateralized by substantially all of StarMed's accounts receivable. $2,550,000
was outstanding under the line at September 30, 1997.

6.  CONVERTIBLE PREFERRED STOCK
-------------------------------

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

        The Convertible Preferred Shares convert into the Company's Common Stock
at the lesser of (i) $20.70 per Common Share or (ii) the value per Common Share
determined by dividing the stated value of the Convertible Preferred Shares,
plus 3% per annum to the date of conversion, by the average of the daily closing
bid prices for the Company's Common Stock for the five (5) consecutive trading
day period ending five (5) trading days prior to the date of conversion. If the
average closing price of the Company's Common Stock (the "Closing Price") for
any ten (10) consecutive trading days does not exceed $12.25 (the "Floor
Price"), the Holder of the Convertible Preferred Shares may not convert into
Common Stock, such restriction to be for

                                       27
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

no more than thirty (30) days in the aggregate. If the Closing Price does not
exceed the Floor Price for 30 consecutive calendar days, the Convertible
Preferred Shares are redeemable, in whole or in part, at the option of the
Company for 110% of the stated value plus 3% per annum. The Holders are subject
to volume restrictions which prohibit the sale of more than 25% of the daily or
weekly trading volume in any such period, unless certain circumstances exist.
The liquidation preference of each Convertible Preferred Share is $1,000 plus 3%
per annum. Holders of the Convertible Preferred Shares are entitled to limited
voting rights.

        In connection with the Convertible Preferred Shares placement, the
Company paid $967,500 in financial advisory fees and expenses to an investment
banking firm. Mr. Gary L. Fuhrman, a director of the Company, is an executive
officer and director of such investment banking firm (See Note 10).

7.  LEASES
----------

     The Company has entered into agreements for the sale and leaseback of
medical diagnostic equipment at certain of its imaging centers. The Company has
lease renewal and fair market value purchase options under the agreements. The
leases are being accounted for as operating leases in accordance with the
Statement of Financial Accounting Standards No. 13 ("SFAS No. 13").

     The book values of the equipment totaling $11,105,556 have been removed
from the balance sheet, and the gains realized on the sale/leaseback
transactions have been deferred and are being amortized as a reduction to rental
expense over the term of the leases. Operating rent payments on these
transactions are approximately $2,349,000 annually.

8.  SEGMENT INFORMATION
-----------------------

     The Company operates in three industry segments-diagnostic imaging
services, temporary staffing services and radiology information systems. The
operations of the diagnostic imaging services segment involves operating and
managing diagnostic imaging centers. The operations of the temporary staffing
segment involves providing temporary staffing of registered nurses, technicians
and other medical industry personnel to acute and sub acute care facilities. The
operations of the radiology information systems segment involves developing
software and providing radiology information systems. The operating results and
identifiable assets of the radiology information system segment were immaterial
for the period ending September 30, 1997 and have been included in the
diagnostic imaging services segment.

                                28
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

     The following table presents selected financial information by industry
segment as of and for the periods ended September 30 (000s):

                                  9 MONTHS  9 MONTHS 3 MONTHS 3 MONTHS
                                   ENDED     ENDED    ENDED    ENDED
                                    1997      1996     1997     1996
                                  --------  -------- -------- ------
Net Revenues:
  Diagnostic imaging centers      $109,803  $ 41,342 $ 43,357 $ 17,068
  Temporary staffing services       41,483    20,208   15,536    7,706
                                   -------   -------  -------  -------
    Total                         $151,286  $ 61,550 $ 58,893 $ 24,774
                                   =======   =======  =======  =======

Operating income:
  Diagnostic imaging centers      $ 24,004  $  8,849 $  9,083 $  3,738
  Temporary staffing services        2,041       433      994      189
                                   -------   -------  -------  -------
     Total                        $ 26,045  $  9,282 $ 10,077 $  3,927
                                   =======   =======  =======  =======

Identifiable assets:
  Diagnostic imaging centers      $344,126  $125,885 $344,126 $125,885
  Temporary staffing services       14,218    11,000   14,218   11,000
                                   -------   -------  -------  -------
        Total                     $358,344  $136,885 $358,344 $136,885
                                   =======   =======  =======  =======

Depreciation and amortization:
  Diagnostic imaging centers      $ 12,161  $  4,408 $  5,083 $  1,875
  Temporary staffing services          427       337      163      129
                                   -------   -------  -------  -------
        Total                     $ 12,588  $  4,745 $  5,246 $  2,004
                                   =======   =======  =======  =======

Capital expenditures:
  Diagnostic imaging centers      $  4,469 $     982 $    257 $    189
  Temporary staffing services           73        53       52       20
                                   -------   -------  -------  -------
        Total                     $  4,542  $  1,035 $    309 $    209
                                   =======   =======  =======  =======

9.  COMMITMENTS AND CONTINGENCIES
---------------------------------

  In 1996, an individual and his spouse brought an action in the Supreme Court
of the State of New York, King's County against Advanced MRA Imaging Associates
in Brooklyn, New York, a wholly owned subsidiary of the Company ("MRA Imaging"),
for damages aggregating $12.5 million. The plaintiff alleges negligent
operations, improper supervision and hiring practices and failure to operate the
premises in a safe manner, as a result of which the individual suffered physical
injury. The Company's general liability and professional negligence insurance
carriers have been notified, and it has been agreed that the general liability
insurer 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

                              29
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

parties to this matter are engaged in discovery. The Company's legal counsel
believes that it is more probable than not that the plaintiffs will not recover
the damages sought. The Company has made no provision in the financial
statements for this matter. In the event the plaintiffs prevail, this matter may
have a material adverse effect on the Company's financial condition,results of
operations and cash flow.

The health care industry is highly regulated at the federal, state and local
levels. 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 consolidated financial results of the
Company by limiting reimbursement levels, requiring the Company to obtain
certificates of need in order to expand, limiting the types of contracts which
may be entered into with physicians who refer patients, increasing the
limitation on referrals by physicians to facilities in which they have an
investment or a compensation arrangement and other means.

10. RELATED PARTIES
-------------------

     The Company pays an annual financial advisory fee to 712 Advisory Services,
Inc., an affiliate (the "Affiliate") of the Company's Chairman of the Board. Mr.
Neil H. Koffler, a director of the Company, is also an employee of the
Affiliate. Such fees amounted to $169,500 and $102,000 for the nine months ended
September 30, 1997 and 1996, respectively. During the nine months ended
September 30, 1997, for financial advisory services rendered by the Affiliate to
the Company in connection with the issuance of the Senior Notes, the Additional
Senior Notes and certain of the 1997 Acquisitions, the Company also paid to the
Affiliate transaction related financial advisory fees and expenses of $1,761,500
and issued to the Affiliate warrants to purchase 675,000 shares of the Company's
Common Stock. In connection with the Company's October 1996 Common Stock
offering and certain of the 1996 Acquisitions, the Company paid to the Affiliate
transaction related financial advisory fees and expenses of $363,000 and issued
to the Affiliate warrants to purchase 120,000 shares of the Company's Common
Stock. All such warrants referred to above have been recorded, at their fair
value, as a component of each transaction's purchase price (See Note 3).

                                       30
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

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

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

        To oversee this review, the Board formed a committee of the Board of
Directors (the "Committee") consisting of directors who are not officers,
directors, employees, stockholders or otherwise affiliates of the Affiliate. The
Committee retained, on behalf of the Company, outside counsel with which neither
the Company nor any of its directors has or had any current or prior
relationship, to assist and advise the Committee in the conduct of the review.
The Chairman, on behalf of the Affiliate, expressed its position as to the
propriety of the related-party transactions and fees, but nevertheless advised
the Committee that the Affiliate would return to the Company any sums that the
Committee deemed improper. Thereafter, in response to expressions of
dissatisfaction with the Committee and its ongoing review, as well as disclosure
related thereto, by certain members of management who questioned, among other
things, the Committee's ability to conduct an independent review, the Board
determined, and the Company has announced, that it is seeking to add to the
Board two new independent directors. The new directors, who will retain other
independent counsel of their choice, are expected to assume ultimate
responsibility for the review. The Company's Chairman and the Affiliate
thereafter restated that although they believe that all related-party
transactions and financial advisory fees are and were proper, they nevertheless
have agreed to abide by the findings of the Company's independent review and to
return to the Company any sums that the Committee deemed improper.

        In September 1997, the Company acquired, for $3.25 million, a limited
partnership interest in Dune Jet Services, L.P. ( the "Partnership"), a Delaware
limited partnership formed for the purposes of acquiring and operating an
airplane for the partners' business uses and for third-party charter flights
(the "Aircraft"). The general partner of the Partnership is Dune Jet Services,
Inc. ("DJ Services"), a Delaware corporation, the sole stockholder of which is
the Company's Chairman. In October 1997, following discussions among management
(members of which expressed objections to such aquisition), the Committee, and
members of the Board, including the Chairman, the Company's interest in the
Partnership was repurchased at cost plus interest (See Note 11).

                                       31
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        In order to incentivize officers, directors, employees and consultants
to the Company, the Company from time to time grants options at fair market
value to such individuals. As of September 30, 1997, stock options to purchase
1,578,666 shares of the Company's Common Stock have been issued to board members
who are also associated with or affiliated with the Affiliate, including the
Chairman, of which 765,000 of the foregoing options were granted during 1997 and
are subject to stockholder approval. During 1996, the Company also granted
options to purchase 15,000 shares of the Company's Common Stock to an individual
employed by an affiliate of the Affiliate for consulting services rendered to
the Company. The exercise price of options and warrants referred to above were
no less than the fair market value of the Company's Common Stock on date of
grant.

     During July 1997, for financial advisory services rendered to the Company
in connection with a private placement of convertible preferred stock resulting
in gross proceeds to the Company of $18,000,000, the Company paid $967,500 in
fees and expenses to an investment banking firm. Mr. Gary L. Fuhrman, a director
of the Company, is an executive officer and director of such investment banking
firm. (See Note 6).

11. SUBSEQUENT EVENTS
---------------------

        On October 3, 1997, the Company acquired six diagnostic imaging centers
located in Ohio for aggregate consideration of $6,925,000 payable in cash and
$1,750,000 in notes convertible into Company Common Stock plus the assumption of
indebtedness.

        The following unaudited consolidated proforma data reflects the 1996
Acquisitions, the 1997 Acquisitions and the above acquisitions as if they had
occurred at the beginning of each of the periods presented:

                                Nine Months         Three Months
                            Ended September 30,   Ended September 30,
                             1997        1996       1997       1996
                           --------    --------   --------   ------

Revenues, net               $171,794    $108,455  $ 64,071  $ 38,498
Operating  Income           $ 31,570    $ 22,379  $ 11,457  $  7,776
Income before taxes         $ 25,657    $ 19,149  $  8,934  $  6,644
Fully diluted net income
 per share                  $   0.60    $   0.93  $   0.18  $   0.27


        In October 1997, the Company's interest in the Partnership was
repurchased at cost plus interest (See Note 10).

                                 32
<PAGE>
 
MEDICAL RESOURCES, INC.

Notes to Consolidated Financial Statements (continued)
------------------------------------------

        On November 2, 1997, Lawrence Ramaekers was appointed as the Acting
Chief Executive Officer of the Company and the Company retained Jay Alix &
Associates to provide interim management services.

        On November 5, 1997, ZP Investments, Inc., ZP Investments, Inc., Wyoming
Valley Physicians Imaging Center, L.P., Camp Hill Physicians Imaging Center,
L.P., Wexford Radiology, P.C., Sanoy Medical Group, Ltd., Reading Open Imaging,
P.A., Yonas Zegeye, M.D., and Hirut Seleshi, parties who had agreed to sell to
the Company five related imaging centers located in Pennsylvania, brought action
in the Court of Chancery of the State of Delaware, New Castle County, against
the Company and five recently formed subsidiaries of the Company, seeking
specific performance of the acquisition agreements and unspecified breach of
contract damages. The plaintiffs allege that the Company and the subsidiaries
failed to consummate the acquisitions in accordance with the terms of the
acquisitions agreements. The aggregate purchase price for the acquisitions is
$8.4 million in cash and $5.6 million payable in shares of Company Common Stock
based upon the average price for the five business days preceding September 21,
1997 (approximately 320,000 shares). The Company is reviewing the plaintiffs'
complaint and analyzing its alternatives.

        On November 7, 1997, William D. Farrell resigned from his position as
President and Chief Operating Officer of the Company and as Director. On that
same date, Gary I. Fields resigned from his position as Senior Vice President
and General Counsel.

        On November 7, 1997, William D. Farrell and Gary I. Fields, the
Company's former President and Chief Operating Officer and the Company's former
Senior Vice-President and General Counsel, respectively, 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. 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,
interests and costs and reinstatement of the plaintiffs to their positions with
the Company. The Company denies having terminated Messrs. Farrell's and Fields'
employment, constructively or otherwise, and intends to defend vigorously
against such allegations.

        On November 8, 1997, Dennis T. Currier was appointed as the Chief
Financial Officer of the Company. Mr. Currier replaced John P. O'Malley III, who
was removed from his position as Executive Vice President and Chief Financial
Officer on that date.

        On November 10, 1997, the Company filed a Current Report on Form 8-K 
with the Securities and Exchange Commission detailing certain of the events 
described in Notes 10 and 11. The foregoing description is qualified in its 
entirety by reference to such Form 8-K.

                                       33
<PAGE>
 
MEDICAL RESOURCES, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

RESULTS OF OPERATIONS
---------------------

Revenue Recognition
-------------------

     The Company has entered into three forms of agreements (defined as Type I,
Type II, and Type III as described below) to provide equipment, premises,
comprehensive management, administration and technical imaging services to
independent contractor interpreting physicians for the provision of medical
services. In accordance with the agreements, as part of the Company's
administrative duties, the Company provides billing and collection services on
behalf of the interpreting physicians for the diagnostic imaging services
performed.

     Type I
     ------

        Under Type I agreements interpreting physicians are required to pay to
the Company a charge per procedure performed. These charges are specified in a
schedule included by attachment to the Type I agreement and represent the
Company's net service revenue, net of contractually determined discounts. Under
the Type I agreements, the Company bears the risk of amounts being uncollectible
equivalent to the proportionate relationship of its charge per procedure,
including LOP Type procedures (see Note 2) and the total charge to the referring
physician's patient. The Company has established and recognized reserves for
potential uncollectibles.

     Type II
     -------

        Certain of the subsidiaries of the Company have entered into independent
contractor agreements with unaffiliated professional corporations to provide
radiological services. Fees paid to radiologists, based on cash collections, at
these centers are reflected as a component of independent contractor fees in the
accompanying statements of operations. The Company has entered directly into
agreements, under its Type II structure, with third party payers that provide
for payment to the Company at amounts which differ from its established rates.
Services rendered to Medicare and medical beneficiaries are provided under a
prospective payment system which establishes a reimbursement rate by modality.
These rates vary depending upon the type of image rendered. The Company has also
entered into payment agreements, under its Type II structure, with

                                       34
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
        (continued)

certain commercial insurance carriers, health maintenance organizations and
preferred provider organizations. The basis for payment to the Company under
these agreements includes contractually determined discounts from established
rates. Accordingly, net service revenue for these acquired centers consists of
patient billings adjusted for contractual allowances which have been negotiated
with various third party payers. Under Type II agreements, the Company bears the
risk of uncollectibles and has established and recognized reserves for potential
uncollectibles.

     Type III
     --------

     For centers which NMR developed, Type III agreements have been entered
into with physicians engaging in business as professional associations
("Physicians") pursuant to which the Company maintains and operates imaging
systems in offices operated by the Physicians. The agreements had terms of up to
six years and are renewable at the option of the Company for a period of one
year. All Type III agreements are currently operating under one year extensions.
Under the agreements, Physicians have agreed to be obligated to contract for
radiological services at the centers and to sublease each facility. The Company
is obligated to make necessary leasehold improvements, provide furniture and
fixtures and perform certain administrative functions relating to the provision
of technical aspects of the centers operations for which Physicians pays a
quarterly fee composed of a fixed sum based on the cost of the respective
imaging system installed, including related financing costs, a charge per
invoice processed and a charge based upon system usage for each NMR-installed
imaging system in operation. These fees, net of an allowance based upon
Physicians ability to pay after Physicians have fulfilled their obligations
under facility subleases and radiological service contracts as set forth above,
and the recognition of contractual allowances, which have been negotiated with
various third party payers, and uncollectibles for all procedures, including LOP
Type services (see Note 2) constitute the Company's net service revenues for
sites developed by NMR. The fixed and determinable usage fees charged to the
Physicians amount to approximately $4,980,000 per annum.

     Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third party payers and others for services
rendered based on contractually established rates which include prospective
contractual adjustments. These adjustments are recognized at the time the
services are rendered and adjusted in future periods, if required, as final
settlements are determined. Revenues derived from Medicare and Medicaid are
subject to audit. The Company is aware of no pending audits.

     The Company also recognizes revenue from temporary nurse staffing and
radiology information systems. Revenues are recognized on an accrual basis as
earned.

                                       35
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
        (continued)

Three and nine months ended September 30, 1997 compared to three and nine months
ended September 30, 1996.

     The following discussion and analysis provides information which management
believes is relevant to an assessment an understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the unaudited financial statements appearing in Item 1.

        The Company's net service revenues for the three and nine months ended
September 30, 1997 were $58,893,327 and $151,285,525 versus $24,773,606 and
$61,550,103 for the three and nine months ended September 30, 1996 or an
increase of $34,119,721 and $89,735,422 increase, respectively. Management fee
and use revenue for the three and nine months ended September 30, 1997 increased
$18,112,131 and $42,108,237 to $28,887,579 and $70,096,852, respectively from
$10,775,448 and $27,988,615, respectively for the three and nine months ended
September 30, 1996. This increase is primarily attributable to revenue generated
by 1996 Acquisitions ($5,064,732 and $18,444,444, respectively), 1997
Acquisitions ($13,635,606 and $23,278,593) and increased volume at centers owned
prior to January 1, 1996 (($588,207) and $385,200, respectively). Diagnostic
imaging patient revenue increased $8,214,927 and $26,407,940 for the three and
nine months ended September 30, 1997 from $6,186,276 and $13,100,526 for the
three and nine months periods ended September 30, 1996 to $14,401,203 and
$39,508,466, respectively. This increase is primarily attributable to revenue
generated by the 1996 Acquisitions ($2,398,053 and $14,923,545 respectively),
and the 1997 Acquisitions ($6,032,886 and $12,027,959, respectively) offset by
decreased volume at centers owned prior to January 1, 1996 (($216,012)and
($543,564) respectively). Staffing revenues for the three and nine months ended
September 30, 1997 were $15,536,000 and $41,483,000 as compared to $7,706,000
and $20,208,000 for the three and nine months ended September 30, 1996. This
increase of $7,830,000 and $21,275,000, respectively is due to the opening of
additional per diem offices and StarMed acquisitions.

     Technical services payroll and related expenses amounted to $21,918,090 and
$55,686,009 for the three and nine months ended September 30, 1997 compared to
$9,350,171 and $23,748,392 for the three and nine months ended September 30,
1996, an increase of $12,567,919 and $31,937,612, respectively. Of this increase
$7,433,798 and $17,410,708 is attributable to costs incurred at imaging centers
acquired during 1996 and 1997 and $5,134,121 or 41% and $14,526,904 or 46% is
attributable to the opening of new per diem offices and the staffing operations.

     Medical supplies amounted to $2,356,464 and $6,240,389 for the three and
nine months ended September 30, 1997 as compared to $988,007 and $2,691,629 for
the three and nine months ended September 30, 1996, an increase of $1,368,457
and $3,548,760, respectively. This increase is primarily due to costs incurred
at imaging centers acquired during 1996 and 1997.

                                       36
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
        (continued)

     Diagnostic equipment maintenance expense increased $404,442 and $2,551,054
for the three and nine months ended September 30, 1997 from $742,322 and
$1,981,878 for the three and nine months ended September 30, 1996 to $1,146,764
and $4,532,932, respectively. This increase is primarily due to costs incurred
at imaging centers acquired during 1996 and 1997.

     Independent contractor fees for the three and nine months ended September
30, 1996 were $707,517 and $1,201,589 as compared to $1,353,550 and $4,293,357
for the same periods in 1997. This increase of $646,033 and $3,091,768 is
attributable to fees paid to radiologists at centers acquired during 1996 and
1997.

     Administrative costs which include facility rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately $2,812,134 and $7,635,389 from
$3,172,040 and $7,683,767 for the three and nine months ended September 30, 1996
to $5,984,174 and $15,319,156 for the three and nine months ended September 30,
1997. These increases are primarily due to costs incurred at imaging centers
acquired during 1996 and 1997.

     Other costs increased by $2,493,391 and $5,382,247 for the three and nine
months ended September 30, 1997 to $3,256,802 and $7,284,459 as compared to
$763,411 and $1,902,212 for the same periods in the prior year primarily due an
increase in accounting and legal fees for acquired centers.

     Provision for uncollectible accounts receivable increased $1,215,992 or
92.1% and $4,103,031 or 133.1% from $1,319,803 and $3,081,638 for the three and
nine months ended September 30, 1996 to $2,535,795 and $7,184,669 for the three
and nine months ended September 30, 1997. This increase is due to the
significant increase in imaging revenues which have a higher bad debt experience
than staffing revenues. The imaging segment provision for uncollectible accounts
consists of $2,490,125 or 5.7% and $7,130,493 or 6.5% of revenue for the three 
and nine months ended September 30, 1997 as compared to $1,291,803 or 7.6% and
$3,047,890 or 7.4% of revenue in 1996. The decrease in the imaging provision as
a percentage of revenue is primarily due to changes in payor mix caused by the
acquisition of centers during 1996 and 1997 which generate less personal injury
revenues than the Company's mature centers. The staffing segment's provision for
uncollectible accounts receivable was immaterial for the three and nine months
ended September 30, 1997 and 1996. 

                                       37
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
        (continued)

     Corporate general and administrative expense increased by $3,219,836 or
179.0% and $6,880,311 or 131.5% from $1,798,785 and $5,231,759 for the three and
nine months ended September 30, 1996 to $5,018,621 and $12,112,070 for the
current periods. This increase is primarily due to the expanded business
development activities during 1996 and 1997 and the resulting growth. Corporate
general and administrative expense for the nine months ended September 30, 1997
includes a non-recurring charge of approximately $185,000 relating to the
repayment of certain notes payable in connection with the Senior Note
transaction (see Note 4).

     Depreciation and amortization expense was $5,246,290 and $12,587,695 for
the three and nine months ended September 30, 1997 compared to $2,004,321 and
$4,744,997 for the three and nine months ended September 30, 1996 or an increase
of $3,241,969 (161.7%) and $7,842,698 (165.3%), respectively. The imaging center
segment accounted for $3,207,000 or 98.9% and $7,753,000 or 98.9% of the
increase in aggregate depreciation and amortization expense primarily due to the
depreciation expense relating to acquired assets and increased goodwill
amortization expense incurred in connection with the acquisitions.

     Interest expense, net for the three and nine months ended September 30,
1997 was $2,565,548 and $5,418,993, respectively compared to $794,550 and
$2,082,133 for the comparable periods last year, an increase of $1,770,998 or
222.9% and $3,336,860 or 160.3%. The increase is primarily due to increases in
interest on the debt assumed as part of the 1996 and 1997 Acquisitions, the
Senior Notes and higher outstanding balances under convertible debentures offset
by scheduled reductions in outstanding principal balances and an increase in
interest income earned on invested cash balances.

      Minority interest was ($306,383) and ($499,815) for the three and nine
months ended September 30, 1997 compared to $134,641 and $198,923 for the same
periods last year. The decrease of $441,024 and $698,738 is primarily due to the
acquisition of entities which operate limited partnerships with minority
investors such as the NMR centers in August 1996 and the ADI centers in March
1997.

     The provision for income taxes increased $2,377,880 or 206.4% and
$6,793,631 or 301.8% from $1,152,295 and $2,251,315 for the three and nine
months ended September 30, 1996 to $3,530,175, and $9,044,946 for the same
periods in 1997. The Company's effective tax rate for the nine months ended
September 30, 1997 increased to 42.8% from 32.2% at September 30, 1996. This
increase is due to certain of the Company's existing and acquired centers which
give rise to non-deductible goodwill amortization and due to non-deductible
business meals and entertainment expense incurred by the Company's StarMed
subsidiary.

                                 38
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
        (continued)

     For the reasons described above, the Company's net income for the three and
nine months ended September 30, 1997 increased by $2,441,694 or 132.3% and
$7,330,794 or 154.3% to $4,287,437 and $12,080,665 from $1,845,743 and
$4,749,871 for the three and nine months ended September 30, 1996.

        The Company believes that the legal and professional fees which have
been expended and which it expects to expend in connection with the independent
review of related-party transactions and related activities and the provision of
interim management services are expected to have a material adverse impact on
net income for the fourth quarter of 1997 (See Notes 10 and 11).

LIQUIDITY AND CAPITAL RESOURCES

     The Company had net income of $12,080,665 for the nine months ended
September 30, 1997 versus net income of $4,749,871 for the comparable period in
1996. At September 30, 1997, the Company's working capital totaled $74,703,197
which includes cash and cash equivalents totaling $25,156,066. Cash provided by
operating activities during the nine months ended September 30, 1997 resulted
from operating cash flows of $33,201,613, offset by a $36,519,517 net increase
in the Company's operating assets and liabilities. The significant increase in
operating assets and liabilities relates primarily to accounts receivable, net
($29,395,780) which increased primarily due to (i) higher StarMed receivables
caused by a significant revenue increase during the nine months ended September
30, 1997 in comparison to prior quarters; and (ii) increases at imaging centers
acquired during the nine months ended September 30, 1997 and 1996.

     Investing activities used $57,137,253 in cash during the first nine months
of 1997. The Company used $53,268,034 in cash to acquire additional imaging
centers during the nine months ended September 30, 1997. The Company purchased
$4,541,627 of equipment and leasehold improvements primarily for imaging
centers. The Company intends to continue to evaluate hardware and software
upgrades for imaging equipment and expects to acquire such upgrades where deemed
advisable. The Company's net investments from sales and purchases of short-term
investments and marketable securities totaled $5,822,383 during the nine months
ended September 30, 1997. The Company invests substantially all of its excess
cash balances in institutional funds.

                                       39
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
(continued)

Financing activities provided the Company with net cash totaling $70,264,969.
This increase is comprised of $77,113,080 and $9,865,556 in net proceeds from
the issuance of the Senior Notes and Additional Senior Notes and sales of
diagnostic equipment, respectively offset by normal repayments of debt and
capital lease obligations totaling $3,800,215 and $2,273,549, respectively,
during the nine months ended September 30, 1997. In addition, the Company repaid
$13,764,215 and $13,260,689 of outstanding notes payable and capital lease
obligations in conjunction with the Senior Notes transaction and certain
acquisitions during the nine months ended September 30, 1997. The Company may
refinance certain of its assets using sale/leaseback transactions structures as
operating leases during the remainder of 1997.

     The Company has four revolving lines of credit from a third party financing
corporation. In May 1996, the Company obtained two $4 million lines and in
October 1996, a $4 million line. The lines bear interest at prime plus 1.5% (10%
at September 30, 1997) and have a two year term. The Company also has a $7
million capital lease line of credit, which bears interest at the 30-day T-bill
rate plus 398 basis points. As of September 30, 1997 no amounts were outstanding
under the foregoing lines of credit. The Company has agreed that in order to
draw on the foregoing lines it must pledge adequate collateral. Through its
StarMed Staffing subsidiary, the Company has a $6 million line which bears
interest at prime plus 1.5% (10.0% at September 30, 1997), has a two year term
and is collateralized by substantially all of StarMed's accounts receivable. At
September 30, 1997, $2,550,000 was outstanding under this line.

        In addition, the Company believes that there are opportunities to
acquire additional diagnostic imaging centers, as well as companies which own
multiple imaging centers. The Company reviews proposals to acquire additional
centers and evaluates these opportunities on the basis of the price at which it
believes the centers can be acquired, relevant demographic characteristics,
competitive factors, physician referral patterns, location and other factors.
The Company's acquisition strategy, based upon its assessment of strategic
markets and opportunities, has resulted in the acquisition of 62 imaging centers
in 22 separate transactions subsequent to December 31, 1996. The Company intends
to pursue the acquisition of additional centers if its analysis of these factors
indicate the Company would receive a favorable rate of return from investing in
these centers and if the Company is able to finance the costs of such
acquisitions. Any centers that are acquired can be expected to involve the
payment of the purchase price in either cash, notes or shares of common stock or
a combination thereof. The Company is presently seeking additional long-term
capital through the issuance of debt or equity securities or through bank or
similar financing. No assurance can be given that such capital will be available
on terms acceptable to the Company. The unavailability of capital would
adversely affect the Company's ability to acquire additional centers.

                                       40
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
(continued)

        In connection with certain of the Company's 1997 Acquisitions in which
the Company issued shares of its Common Stock as partial consideration therefor,
the Company granted rights to have such shares registered for resale pursuant to
the federal securities laws. In connection with certain of such acquisitions,
the Company has granted specific remedies to the sellers in the event the
registration statement covering the relevant shares is not declared effective by
the Securities and Exchange Commission ("SEC") within an agreed-upon period of
time, including the right to require the Company to repurchase the shares issued
to such seller. In the event the Company is unable to register such shares by
the required dates, the Company would become obligated to repurchase such shares
issued in connection with such acquisition if the sellers exercise the
repurchase rights which are in effect at the time. If registration is not
effected by January 1, 1998, the Company may be required to repurchase up to
approximately $4.42 million of its Common Stock issued in connection with such
acquisitions. In addition, the Company has agreed with the sellers in certain of
such acquisitions to pay (in additional shares and/or cash) to the sellers an
amount equal to the shortfall in the value of the issued shares in the event the
market value of such shares at the relevant effective date of the registration
statement is less than the market value of such shares as of the closing of the
acquisition or, in other cases, as of the execution of the relevant acquisition
agreement. Based upon the closing sales price of the Company's Common Stock on
November 11, 1997 ($9.375 per share), such shortfall would be approximately
$5.25 million, which amount may be reduced by up to $1.67 million to the extent
certain sellers exercise their repurchase rights referred to above. The Company
has filed a registration statement with the SEC covering the shares of Common
Stock issued in connection with certain of such acquisitions. Effectiveness of
the registration statement is dependent upon, among other matters, the
completion of audits of certain acquired facilities. The Company is using its
best efforts to cause the registration statement to be declared effective prior
to the date the Company would otherwise become obligated to repurchase any
shares from such sellers. There can be no assurance that the registration
statement will be declared effective by the SEC by such date.

     Subject to matters referred to above, the Company believes that the
existing cash and cash equivalents, and cash generated from operating activities
will be sufficient to meet the needs of its current operations, including
anticipated capital expenditures and scheduled debt repayments, for the next
twelve months and on a long term basis.

OTHER
-----

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

                                       41
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.  Management's Discussion and Analysis or Plan of Operation
(continued)

     The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Management is aware
of inflationary expectations and growing health care costs, and believes that
the Company may not be able to raise the prices for its diagnostic imaging
procedures by an amount sufficient to offset cost inflation. The Company has
responded to these concerns in the past by increasing the volume of its
business. In addition, current discussions within 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.

     Statements contained in this quarterly report which are not historical
facts are forward-looking statements. In addition, the Company, from time to
time, makes forward-looking public statements concerning its expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties,
and here can be no assurance that other factors will not affect the accuracy of
such forward-looking statements. While it is impossible to identify all such
factors, factors which could cause actual results to differ materially from
those estimated by the Company include, but are not limited to, risks associated
with the acquisition of existing imaging centers, management of growth,
government regulation, limitations and delays in reimbursement, the Company's
ability to obtain and retain favorable arrangements with third party payers, as
well as operating risks, general conditions in the economy and capital markets,
and other factors which may be identified from time to time in the Company's
Securities and Exchange Commission filings and other public announcements.

New Accounting Standards
------------------------

     In February 1997, Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("Statement No. 128"), was issued which
established standards for computing and presenting earnings per share.
Statement No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods.
Had Statement No. 128 been used the Company would have reported the
following unaudited earnings per share for the nine month periods
ended:

                                        September 30,    September 30,
                                           1997             1996
                                        -------------    -------------

Earnings per share:
Basic                                  $ .59            $ .50
Fully Diluted                          $ .52            $ .47

Weighted Average Number 
  of shares used in computation:
Basic                                  20,347,888      9,429,052
Fully Diluted                          23,083,790     10,863,852


                                       42
<PAGE>
 
MEDICAL RESOURCES, INC.

                           PART II. OTHER INFORMATION
                           --------------------------

ITEM 2.c.    CHANGES IN SECURITIES
             ---------------------

     The following is a list of equity securities sold by the Company during the
nine months ended September 30, 1997 which, pursuant to the exemption covered
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), were not registered under the Securities Act.

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

     On March 10, 1997, the Company issued to The Magnet of Palm Beach, Ltd.
56,670 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center in West Palm Beach, Florida.

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

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

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

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

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

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

                               43
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.c.    Changes in Securities  (Continued)
             ---------------------

        On July 21, 1997, the Company completed a private placement of
$18,000,000 of a newly designated Series C Convertible Preferred Stock (the
"Preferred Stock") to one institutional investor, RGC International Investors,
LDC. The face amount of the Preferred Stock accrues at a rate of 3% per annum
from the closing date to the conversion date. The Preferred Stock is convertible
from time to time into the Company's Common Stock at a price equal to the lesser
of (i) an amount equal to 100% of the average of the closing bid prices of the
Company's Common Stock for the five consecutive trading days ending on the fifth
trading day preceding a notice of conversion and (ii) $20.70. The Company has
agreed to file a registration statement under the Securities Act of 1933
covering the shares of Common Stock issuable upon conversion of the Preferred
Stock issued in the private placement. Subject to certain limitations, the
Company may require the conversion of all the outstanding Preferred Stock
beginning 180 days following the date such registration statement is declared
effective by the Securities and Exchange Commission.

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

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

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

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

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

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

                                       44
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 2.c.    Changes in Securities  (Continued)
             ---------------------

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

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

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

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
           --------------------------------

      a.  Exhibits
          --------

          Exhibit 11.  Computation of Shares Used For Earnings Per
                       Share Calculation

      b.  Reports on Form 8-K
          -------------------

          On July 2, 1997, the Company filed a Current Report on Form 8-K
          dated June 26, 1997, reporting under Item 5, that the Company
          completed a $26,000,000 private placement of Senior Notes.

          On July 9, 1997, the Company filed a Current Report on Form
          8-K dated June 30, 1997, reporting under Item 5, that the
          Company completed the acquisition of substantially all the
          business assets of Brooklyn Medical Imaging Center, Meadows
          Medical Management, Inc. and The Staten Island Medical
          Imaging, Inc.

          On July 24, 1997, the Company filed a Current Report on Form 8-K
          dated July 21, 1997, reporting under Item 5, that the Company
          completed a $18,000,000 private placement of preferred stock.

                                       45
<PAGE>
 
MEDICAL RESOURCES, INC.

Item 6.    Exhibits and Reports on Form 8-K (Continued)
           ---------------------------------

           On August 13, 1997, the Company filed a Current Report on Form
           8-K/A amending Items 5 and 7 of the Current Report on Form 8-K
           dated May 30, 1997 and filed June 16, 1997 relating to the
           Company's acquisitions of Capstone, the Maryland Centers, the
           Melbourne Center and the Palm Beach Center and including the
           related financial statements with respect to such entities.

           On September 3, 1997, the Company filed a Current Report on Form
           8-K/A amending Item 7 of the Current Report on Form 8-K dated
           January 9, 1996 and filed on January 24, 1996, as amended on
           Forms 8-K/A filed on March 19, 1996 and June 27, 1997, relating
           to the Company's acquisition of substantially all of the business
           assets of MRI-CT, Inc. and the stock of NurseCare Plus, Inc. and
           including the related financial statements with respect to such
           entities.

           On September 3, 1997, the Company filed a Current Report on Form
           8-K/A amending Item 7 of the Current Report on Form 8-K dated
           April 30, 1996 and filed on May 5, 1996, as amended on Forms
           8-K/A filed on July 19, 1996 and June 27, 1997, relating to the
           Company's acquisition of substantially all of the business assets
           of Americare Imaging Center, Inc., MRI Associates of Tarpon
           Springs, Inc. and Access Imaging Center, Inc. and the stock of
           NurseCare Plus, Inc. and including the related financial
           statements with respect to such entities.

           On September 3, 1997, the Company filed a Current Report on form
           8-K/A amending Item 7 of the Current Report on Form 8-K dated
           August 30, 1996 and filed on September 13, 1996, as amended on
           Forms 8-K/A filed on June 27, 1997 and September 3, 1997,
           relating to the Company's merger with NMR and including the
           related financial statements with respect to NMR.

                                       46
<PAGE>
 
MEDICAL RESOURCES, INC.

EXHIBIT 11.  COMPUTATION OF SHARES USED FOR EARNINGS PER SHARE
CALCULATION.

                                             NINE MONTHS ENDED
                                               SEPTEMBER 30,
                                          --------------------------
                                              1997          1996
                                          ------------- ------------

Primary earnings per share information:

Net income per consolidated statements
 of operations                             $ 12,080,665  $ 4,749,871
Add:- Interest savings from proceeds 
      of conversion of outstanding warrants 
      and exercise of stock options, net of 
      minority interest and income taxes
     Net income used to compute primary     -----------   ----------
     earnings per share                    $ 12,080,665  $ 4,749,871
                                            ===========   ==========


Weighted average number of
 outstanding shares                          20,347,888    9,429,052
Add:- Incremental shares issuable
      on conversion of outstanding
      warrants and exercise of
      stock options                           1,445,835      216,714
    - Incremental shares issuable
      on conversion of convertible
      Preferred stock                           254,198
Weighted average number of shares
 used to compute primary earnings           -----------   ----------
 per share                                   22,047,921    9,645,766
                                            ===========   ==========


Primary earnings per share:
---------------------------
Primary net income per share               $        .55  $       .49
                                            ===========   ==========
















                                 47
<PAGE>
 
MEDICAL RESOURCES, INC.

EXHIBIT 11.  COMPUTATION OF SHARES USED FOR EARNINGS PER SHARE
CALCULATION.

                                                  NINE MONTHS ENDED
                                                    SEPTEMBER 30,
                                              -------------------------
                                                  1997           1996
                                              ------------   ----------
Fully diluted earnings per share information:

Net income per consolidated statements
 of operations                                $12,080,665  $ 4,749,871
Add:- Interest savings from proceeds of 
      conversion of outstanding warrants 
      and exercise of stock options, net 
      of minority
      interest and income taxes                                311,000
                                              -----------  -----------

Net income used to compute fully
     diluted earnings per share               $12,080,665  $ 5,060,871
                                              ===========  ===========


Weighted average number of
 outstanding shares                            20,347,888    9,429,052
Add:- Incremental shares issuable
      on conversion of outstanding
      warrants and exercise of
      stock options                             2,459,962      284,956
    - Incremental shares issuable on
      conversion of convertible
      subordinated debentures                                1,149,844
    - Incremental shares issuable on
      conversion of convertible notes              21,742
    - Incremental shares issuable
      on conversion of convertible
      Preferred stock                             254,198
                                              -----------  -----------
 Weighted average number of shares
 used to compute fully diluted
 earnings per share                            23,083,790   10,863,852
                                               ==========   ==========


Fully diluted earnings per share:
---------------------------------
Fully diluted net income per share             $      .52  $       .47
                                               ==========  ===========




                                48
<PAGE>
 
MEDICAL RESOURCES, INC.

EXHIBIT 11.  COMPUTATION OF SHARES USED FOR EARNINGS PER SHARE
CALCULATION.

                                                  QUARTER ENDED
                                                  SEPTEMBER 30,
                                            ------------------------
                                                1997          1996
                                            ------------   ---------
 Primary earnings per share information:

Net income per consolidated statements
 of operations                             $  4,287,437  $ 1,845,743
Add:  Interest savings from proceeds
      of conversion of outstanding
      warrants and exercise of stock
      options, net of minority
      interest and income taxes            ------------  ------------
     Net income used to compute primary
     earnings per share                    $  4,287,437  $ 1,845,743
                                           ============  ===========



Weighted average number of
 outstanding shares                          21,520,736   10,919,915
Add:- Incremental shares issuable
      on conversion of outstanding
      warrants and exercise of
      stock options                           2,124,277      347,383
    - Incremental shares issuable
      on conversion of convertible
      Preferred stock                           754,305
Weighted average number of shares           -----------  -----------
 used to compute primary earnings
 per share                                   24,399,318   11,267,298
                                            ===========   ==========


Primary earnings per share:
---------------------------
Primary net income per share               $        .18  $       .16
                                            ===========   ==========



                                 49
<PAGE>
 
MEDICAL RESOURCES, INC.

EXHIBIT 11.  COMPUTATION OF SHARES USED FOR EARNINGS PER SHARE
CALCULATION.

                                                    QUARTER ENDED
                                                    SEPTEMBER 30,
                                             --------------------------
                                                  1997           1996
                                             -------------   ----------

Fully diluted earnings per share information:

Net income per consolidated statements
 of operations                                $ 4,287,437  $ 1,845,743
Add:- Interest savings from proceeds of 
      conversion of outstanding warrants 
      and exercise of stock options, net 
      of minority interest and income taxes                    114,545
                                              -----------  -----------
Net income used to compute fully
     diluted earnings per share               $ 4,287,437  $ 1,960,288
                                              ===========  ===========


Weighted average number of
 outstanding shares                            21,520,736   10,919,915
Add:- Incremental shares issuable
      on conversion of outstanding
      warrants and exercise of
      stock options                             2,460,607      443,175
    - Incremental shares issuable on
      conversion of convertible
      subordinated debentures                                1,330,000
    - Incremental shares issuable on
      conversion of convertible notes              64,516
    - Incremental shares issuable
      on conversion of convertible
      Preferred stock                             754,305
                                              -----------   ----------
 Weighted average number of shares
 used to compute fully diluted
 earnings per share                            24,800,164   12,693,090
                                              ===========  ===========


Fully diluted earnings per share:
---------------------------------
Fully diluted net income per share             $      .17  $       .15
                                              ===========  ===========





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<PAGE>
 
                              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 hereunto duly authorized.

                                         Medical Resources, Inc.


                                        By /s/ Lawrence Ramaekers
                                          ----------------------------------
                                           Lawrence Ramaekers
                                           Acting Chief Executive Officer
 



                                        By /s/ Dennis T. Currier
                                          ---------------------------------- 
                                           Dennis T. Currier
                                           Chief Financial Officer
                                           (Principal Accounting Officer)

Date: November 14, 1997





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