<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, 1999

                           Commission File No. 0-20440

                             MEDICAL RESOURCES, INC.
             (Exact Name of Registrant as Specified in its Charter)

              DELAWARE                             13-3584552
      (State of Incorporation)          (IRS Employer Identification No.)

125 STATE STREET, SUITE 200, HACKENSACK, NJ                            07601
  (Address of Principal Executive Office)                            (Zip Code)

       Registrant's Telephone Number, Including Area Code: (201) 488-6230

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

            Yes /X/                                         No /_/

      At October 29, 1999, 9,756,087 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the OTC Bulletin Board closing price of these shares on
that date) held by non-affiliates was $7,333,327.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable.

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

<PAGE>

                             Medical Resources, Inc.
                                      Index

<TABLE>
<CAPTION>

                                                                          Pages
                                                                          -----
<S>  <C>                                                                  <C>

PART I.      FINANCIAL INFORMATION
Item 1.      Consolidated Financial Statements (Unaudited)
             Consolidated Balance Sheets at September 30, 1999 and
               December 31, 1998........................................      3
             Consolidated Statements of Operations for the three months
               ended September 30, 1999 and 1998........................      4
             Consolidated Statements of Operations for the nine months
               ended September 30, 1999 and 1998........................      5
             Consolidated Statements of Cash Flows for the nine months
               ended September 30, 1999 and 1998........................      6
             Notes to Consolidated Financial Statements.................   7-13
Item 2.      Management's Discussion and Analysis of Financial Condition
               and Results of Operations................................  14-24
PART II.     OTHER INFORMATION..........................................     25

</TABLE>

<PAGE>

                             Medical Resources, Inc.
                           Consolidated Balance Sheets
                 As of September 30, 1999 and December 31, 1998
                    (in thousands, except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                      September 30,     December 31,
                                                                                          1998              1999
                                                                                      -------------     ------------
<S>                                                                                     <C>              <C>

                                  ASSETS

 Current Assets:
   Cash and cash equivalents ....................................................       $   7,269        $  20,997
   Cash and short-term investments, restricted ..................................             800            1,182
   Accounts receivable, net .....................................................          55,870           54,451
   Other receivables ............................................................           9,157            8,140
   Prepaid expenses .............................................................           3,317            3,819
   Income taxes recoverable .....................................................           1,577            2,322
                                                                                        ---------        ---------
     Total current assets .......................................................          77,990           90,911
 Property and equipment, net ....................................................          35,038           50,791
 Goodwill and other intangible assets, net ......................................         114,143          141,079
 Other assets ...................................................................           2,587            3,133
                                                                                        ---------        ---------
     Total assets ...............................................................       $ 229,758        $ 285,914
                                                                                        =========        =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Senior notes due 2001 through 2005, classified as current ....................       $  75,000        $      --
   Notes and mortgages payable, classified as current ...........................           1,685               --
   Capital lease obligations, classified as current .............................           4,841               --
   Current portion of notes and mortgages payable ...............................           7,186           11,019
   Current portion of capital lease obligations .................................           8,313            9,355
   Accounts payable .............................................................           9,548           10,946
   Accrued expenses and other current liabilities ...............................          29,306           23,356
   Accrued shareholder settlement costs .........................................              --            5,250
                                                                                        ---------        ---------
      Total current liabilities .................................................         135,879           59,926
Notes and mortgages payable, less current portion ...............................          15,900           92,556
Obligations under capital leases, less current portion ..........................           4,218           15,101
Other long term liabilities .....................................................           1,367            1,061
                                                                                        ---------        ---------
     Total liabilities ..........................................................         157,364          168,644
Minority interest ...............................................................           5,724            5,047
Stockholders' equity:
  Common stock, $.01 par value; authorized 50,000 shares; 9,756 shares issued
    and outstanding at September 30, 1999 and 9,336 shares issued and outstanding
    at December 31, 1998 ........................................................              98               93
  Series C Convertible Preferred Stock, $1,000 per share stated value; 14 shares
    issued and outstanding at September 30, 1999 and 15 shares issued and
    outstanding at December 31, 1998; (liquidation preference 3% per annum) .....          15,213           15,547
  Additional paid-in capital ....................................................         145,527          146,165
  Accumulated deficit ...........................................................         (94,168)         (49,582)
                                                                                        ---------        ---------
    Total stockholders' equity ..................................................          66,670          112,223
                                                                                        ---------        ---------
Total liabilities and stockholders' equity ......................................       $ 229,758        $ 285,914
                                                                                        =========        =========

</TABLE>

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


                                       3
<PAGE>

                             Medical Resources, Inc.
                      Consolidated Statements of Operations
                      For the Three Months Ended September
                        30, 1999 and 1998 (in thousands,
                            except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                  For the Three Months
                                                                   Ended September 30,
                                                                  ----------------------
                                                                    1999          1998
                                                                  --------      --------

<S>                                                               <C>           <C>
Net service revenues ........................................     $ 37,551      $ 44,176
Cost of services ............................................       27,085        27,797
                                                                  --------      --------
  Gross profit ..............................................       10,466        16,379
Provision for doubtful accounts .............................        4,949         3,377
Corporate general and administrative expenses ...............        3,178         3,055
Equipment leases ............................................        2,860         1,835
Depreciation and amortization ...............................        5,547         6,109
Loss on impairment of goodwill and other assets .............       29,825            --
Loss on sale and closure of centers .........................        1,150         3,489
Other unusual charges .......................................        1,012           890
                                                                  --------      --------
  Operating loss ............................................      (38,055)       (2,376)
Interest expense, net .......................................        2,834         3,484
Minority interest ...........................................           82           176
                                                                  --------      --------
  Loss from continuing operations before income taxes .......      (40,971)       (6,036)
Provision for income taxes ..................................           90           160
                                                                  --------      --------
  Loss from continuing operations ...........................      (41,061)       (6,196)
Discontinued operations:
  Gain on sale of discontinued operations, net of tax of $250           --         3,905
  Income from discontinued operations, net of tax of $0 .....           --           465
                                                                  --------      --------
  Net loss ..................................................      (41,061)       (1,826)
Charges related to convertible preferred stock ..............         (106)         (116)
                                                                  --------      --------
  Net loss applicable to common stockholders ................     $(41,167)      $(1,942)
                                                                  ========      ========
Basic and diluted income (loss) per common share:
  Continuing operations .....................................     $  (4.22)     $  (0.82)
  Discontinued operations ...................................           --          0.57
                                                                  --------      --------
    Net loss per common share ...............................     $  (4.22)     $  (0.25)
                                                                  ========      ========

</TABLE>

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


                                       4
<PAGE>

                             Medical Resources, Inc.
                      Consolidated Statements of Operations
                       For the Nine Months Ended September
                        30, 1999 and 1998 (in thousands,
                            except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                     For the Nine Months
                                                                      Ended September 30,
                                                                   ------------------------
                                                                      1999           1998
                                                                   ---------      ---------

<S>                                                                <C>            <C>
Net service revenues .........................................     $ 120,159      $ 137,824
Cost of services .............................................        80,182         86,129
                                                                   ---------      ---------
   Gross profit ..............................................        39,977         51,695
Provision for doubtful accounts ..............................         9,096         10,684
Corporate general and administrative expenses ................         9,165          9,098
Equipment leases .............................................         7,130          4,840
Depreciation and amortization ................................        16,862         18,744
Loss on impairment of goodwill and other assets ..............        29,825             --
Loss on sale and closure of centers ..........................         1,150          3,489
Other unusual charges ........................................         1,726          6,290
                                                                   ---------      ---------
  Operating loss .............................................       (34,977)        (1,450)
Interest expense, net ........................................         8,463         10,396
Minority interest ............................................           706            819
                                                                   ---------      ---------
  Loss from continuing operations before income taxes ........       (44,146)       (12,665)
Provision for income taxes ...................................           440            461
                                                                   ---------      ---------
  Loss from continuing operations ............................       (44,586)       (13,126)
Discontinued Operations:
  Gain on sale of discontinued operations, net of tax of $250             --          3,905
  Income from discontinued operations, net of tax of $117 ....            --          1,806
                                                                   ---------      ---------
  Net loss ...................................................       (44,586)        (7,415)
Charges related to convertible preferred stock ...............          (326)          (390)
                                                                   ---------      ---------
  Net loss applicable to common stockholders .................     $ (44,912)     $  (7,805)
                                                                   =========      =========

Basic and diluted income (loss) per common share:
  Continuing operations ......................................     $   (4.71)     $   (1.82)
  Discontinued operations ....................................            --           0.77
                                                                   ---------      ---------
    Net loss per common share ................................     $   (4.71)     $   (1.05)
                                                                   =========      =========

</TABLE>


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

                                       5
<PAGE>

                             Medical Resources, Inc.
                      Consolidated Statements of Cash Flows
              For the Nine Months Ended September 30, 1999 and 1998
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                               For the Nine Months
                                                                               Ended September 30,
                                                                             -----------------------
                                                                               1999          1998
                                                                             --------      --------
<S>                                                                          <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...............................................................     $(44,586)     $ (7,415)
                                                                             --------      --------
Adjustments to reconcile net loss to net cash provided by operating
  activities:
  Depreciation and amortization ........................................       16,862        18,744
  Provision for uncollectible accounts receivable ......................        9,096        10,684
  Issuance of warrants and notes to preferred stockholders .............           --         3,644
  Loss on impairment of goodwill and other long lived assets ...........       29,825            --
  Gain on sale of discontinued business ................................           --        (3,905)
  Other, net ...........................................................          803         1,701
Changes in operating assets and liabilities:
  Accounts receivable ..................................................      (11,505)      (18,895)
  Other receivables ....................................................       (1,017)       (3,922)
  Prepaid expenses .....................................................          485           139
  Income taxes recoverable or payable ..................................          745         2,309
  Other assets .........................................................          526           864
  Accounts payable and accrued expenses ................................        2,621        (4,919)
  Other liabilities ....................................................          306         2,125
                                                                             --------      --------
    Total adjustments ..................................................       48,747         8,569
                                                                             --------      --------
      Net cash provided by operating activities ........................        4,161         1,154
                                                                             --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of disposals ...................       (2,444)       (2,591)
Net proceeds from sale of discontinued business ........................           --        28,814
Sale of diagnostic imaging centers, net of cash sold ...................          781            --
Change in restricted cash ..............................................          382        (1,416)
Contingent consideration related to prior year acquisitions ............           --        (2,833)
Other, net .............................................................           --           473
                                                                             --------      --------
    Net cash provided by (used in) investing activities ................       (1,281)       22,447
                                                                             --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes and mortgages payable ......................       (9,934)      (10,666)
Principal payments under capital lease obligations .....................       (7,084)       (8,241)
Other borrowings .......................................................        1,515         6,950
Retirement of debt in connection with sale of discontinued business ....           --       (13,786)
Repurchase of Common Stock subject to redemption .......................           --        (4,775)
Other, net .............................................................       (1,105)          128
                                                                             --------      --------
    Net cash used in financing activities ..............................      (16,608)      (30,390)
                                                                             --------      --------
Net decrease in cash and cash equivalents ..............................      (13,728)       (6,789)
Cash and cash equivalents at beginning of year .........................       20,997        23,198
                                                                             --------      --------
Cash and cash equivalents at end of period .............................     $  7,269      $ 16,409
                                                                             ========      ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for -
   Cash refunded by income taxes, net ..................................     $     93      $    972
   Cash paid for interest ..............................................       (8,469)      (12,588)

</TABLE>

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


                                       6
<PAGE>

                             MEDICAL RESOURCES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

GENERAL

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

      The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information, 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
interim periods are not necessarily indicative of the results that may be
expected for an entire year.

      The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission (the "SEC") for the year ended December 31,
1998.

COST OF SERVICES

      Cost of services as shown on the Consolidated Statement of Operations for
the three and nine month periods ended September 30, 1999 and 1998 consist of
the following (in thousands):

<TABLE>
<CAPTION>

                                    Three Months Ended      Nine Months Ended
                                      September 30,           September 30,
                                   -------------------     -------------------
                                    1999        1998        1999        1998
                                   -------     -------     -------     -------

<S>                                <C>         <C>         <C>         <C>
Operations payroll and related     $10,191     $10,310     $29,649     $31,820
Equipment maintenance expense        2,266       2,884       6,687       8,566
Contract radiology fees ......       2,109       2,046       6,575       6,393
Medical supplies .............       2,579       2,368       7,837       8,287
Facilities rent and related ..       3,315       3,022       9,453       8,665
Other center level costs .....       6,387       6,777      19,385      21,774
                                   -------     -------     -------     -------
  Total Diagnostic Imaging ...      26,847      27,407      79,586      85,505
Dalcon Technologies, Inc. ....         238         390         596         624
                                   -------     -------     -------     -------
  Total Company ..............     $27,085     $27,797     $80,182     $86,129
                                   =======     =======     =======     =======

</TABLE>

RECLASSIFICATION

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


                                       7
<PAGE>

EARNINGS PER SHARE

      The computations of basic earnings per share and diluted earnings per
share for the three and nine months ended September 30, 1999 and 1998 were as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                              Three Months Ended           Nine Months Ended
                                                                September 30,                September 30,
                                                            ----------------------      ----------------------
                                                              1999          1998          1999          1998
                                                            --------      --------      --------      --------
<S>                                                         <C>           <C>           <C>           <C>
Basic and diluted earnings (loss) per share information:
Loss from continuing operations .......................     $(41,061)     $ (6,196)     $(44,586)     $(13,126)
Income from discontinued operations ...................           --         4,370            --         5,711
                                                            --------      --------      --------      --------
Net loss ..............................................      (41,061)       (1,826)      (44,586)       (7,415)
Charges related to convertible preferred stock ........         (106)         (116)         (326)         (390)
                                                            --------      --------      --------      --------
Net loss applicable to common stockholders ............     $(41,167)     $ (1,942)     $(44,912)     $ (7,805)
                                                            ========      ========      ========      ========
Weighted average number of common shares ..............        9,756         7,687         9,545         7,433
                                                            ========      ========      ========      ========
Basic and diluted income (loss) per common share:
  Continuing operations ...............................     $  (4.22)     $  (0.82)     $  (4.71)     $  (1.82)
  Discontinued operations .............................           --          0.57            --          0.77
                                                            --------      --------      --------      --------
Net income (loss) per common share ....................     $  (4.22)     $  (0.25)     $  (4.71)     $  (1.05)
                                                            ========      ========      ========      ========

</TABLE>

2.    BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING
      LIQUIDITY

      As of September 30, 1999, the Company failed to meet certain of the
financial covenants under its $75,000,000 of Senior Notes indebtedness.
Management and the holders of the Senior Notes are engaged in discussions to
resolve this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. Although in the past, the Company has been
successful in obtaining necessary waivers and amendments from the holders of the
Senior Notes, there can be no assurance that the holders of the Senior Notes
will provide the Company with an amendment or waiver of the defaults. In
addition, certain medical equipment notes, and operating and capital leases of
the Company contain provisions which allow the creditors or lessors to
accelerate their debt or terminate their leases and seek certain other remedies
if the Company is in default under the terms of agreements such as the Senior
Notes.

      In the event that the holders of the Senior Notes or the other creditors
or lessors elect to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have a
material adverse effect on the Company, its operations and its financial
condition. Furthermore, if such obligations were to be accelerated, in whole or
in part, there can be no assurance that the Company would be successful in
identifying or consummating financing necessary to satisfy the obligations which
would become immediately due and payable. As a result of the uncertainty related
to the defaults and corresponding remedies described above, the Senior Notes and
the other loans and capital leases are shown as current liabilities on the
Company's Consolidated Balance Sheets at September 30, 1999. Accordingly, the
Company has a deficit in working capital of $57,889,000 at September 30, 1999.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. In addition to continuing to negotiate with the holders of the
Senior Notes in an attempt to obtain waivers or amendments of the aforementioned
defaults, the Company has taken various actions in response to this situation,
including the following: (i) the Company continues to consider certain strategic
alternatives and other transactions, including mergers or debt and equity
financing transactions, and (ii) in order to improve future profitability and
enhance cash flow, during the third quarter the Company identified four centers
that it will sell or close and expects to identify additional centers that it
may sell or close during the fourth quarter.


                                       8
<PAGE>

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

3.    LOSS ON IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS, AND LOSS ON
      SALE AND CLOSURE OF CENTERS

     During the third quarter of 1999, the Company recorded a $29,825,000
non-cash loss on the impairment of goodwill and other long-lived assets. This
loss consists of the write-off of goodwill of $21,763,000, other intangibles of
$508,000 and fixed assets of $7,554,000. The impairment relates primarily to
eleven of the Company's diagnostic imaging centers that are under-performing.
The Company has recorded impairment losses for these centers because the sum of
their expected future cash flows, determined based on an assumed continuation of
current operating methods and structures, is less than the carrying value of the
related long-lived assets. The Company's assessment of future cash flows for
these centers reflects the recent negative trends in the diagnostic imaging
business including continued erosion of reimbursement rates and further
expansion of capacity through the opening of new competing centers in certain of
the Company's markets. Due to these trends, the Company has determined that its
plans for operating improvements in these centers will likely not be adequate to
cause these centers to be sufficiently successful in the future to recover the
value of recorded goodwill and other long-lived assets.

     During the third quarters of 1999 and 1998, the Company also recorded
losses on the sale and closure of diagnostic imaging centers of $1,150,000 and
$3,489,000, respectively. The 1999 loss consists of (i) $730,000 for the
estimated equipment removal, facility restoration and related costs and (ii)
$420,000 for legal and professional fees and employee termination costs. In
addition, the Company remains obligated under certain facility leases related to
such centers aggregating $68,000 per month until such time as the facilities are
subleased, or the lease expires. The 1998 loss consists of (i) $1,602,000 for
the estimated costs to exit equipment lease and maintenance agreements and
facility lease agreements, (ii) $1,481,000 for the write-off of fixed assets,
goodwill and other intangibles and other assets, and (iii) $406,000 for
estimated equipment removal, facility restoration and related costs.

     During the fourth quarter, the Company expects to identify additional
centers (including certain of the eleven centers described above) that it may
sell or close and may incur additional losses associated with such sales or
closures.

4.    OTHER UNUSUAL CHARGES

      During the third quarters of 1999 and 1998, the Company recorded other
unusual charges of $1,012,000 and $890,000, respectively. The 1999 charge
consists of (i) $531,000 of defense costs associated with the shareholder class
action lawsuit and other related litigation (the shareholder class action
lawsuit was settled during the third quarter), (ii) $215,000 of costs associated
with the investigation of possible strategic alternatives by the Company, (iii)
$208,000 of severance costs and (iv) $58,000 of other costs. The 1998 charge
consists of (i) $380,000 for professional fees attributable to obtaining the
waiver and amendment under the Company's Senior Note obligations, (ii) $360,000
for penalties associated with the delay in the effectiveness of the Company's
Registration Statement and (iii) $150,000 for defense costs associated with the
shareholder class action lawsuit and other related litigation.

      During the nine month periods ended September 30, 1999 and 1998, the
Company recorded other unusual charges of $1,726,000 and $6,290,000,
respectively. The 1999 charge consists of (i) $1,245,000 of defense costs
associated with the shareholder class action lawsuit and other related
litigation (the shareholder class action lawsuit was settled during the third
quarter), (ii) $215,000 of costs associated with the investigation of possible
strategic alternatives by the Company, (iii) $208,000 of severance costs and
(iv) $58,000 of other costs. The 1998 charge consists of (i) $3,827,000
($1,194,000 of which was a


                                       9
<PAGE>

non-cash charge related to the issuance of 117,000 common stock warrants) for
penalties associated with the delay in the effectiveness the Company's
Registration Statement, (ii) $863,000 for defense costs associated with the
shareholder class action lawsuit and other related litigation, (iii) $883,000
for costs associated with the investigation of related party transactions which
was concluded in April 1998, (iv) $380,000 for professional fees attributable to
obtaining the waiver and amendment under the Company's Senior Note obligations
and (v) $337,000 for management termination benefits and related costs.

4.    ACCOUNTS RECEIVABLE, NET

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

<TABLE>
<CAPTION>

                                                                               September 30,  December 31,
                                                                                   1999          1998
                                                                                 --------      --------
<S>                                                                              <C>           <C>
Diagnostic Imaging:
   Management fee receivables (net of contractual allowances) -
     Due from unaffiliated physicians (Type I revenues) ....................     $ 28,053      $ 33,810
     Due from affiliated physicians (Type III revenues) ....................       16,440         5,436
   Patient and third party payor accounts receivable (Type II revenues) ....       27,407        28,884
                                                                                 --------      --------
                                                                                   71,900        68,130
Dalcon Technologies, Inc. ..................................................          973           346
                                                                                 --------      --------
Accounts receivable before allowance for doubtful accounts .................       72,873        68,476
Less: Allowance for doubtful accounts ......................................      (17,003)      (14,025)
                                                                                 --------      --------
Total accounts receivable, net .............................................     $ 55,870      $ 54,451
                                                                                 ========      ========

</TABLE>

      During the third quarter of 1999, certain of the Company's imaging centers
changed their legal structure such that the centers' revenue recognition method
changed from Type I to Type III. This change had no effect on reported operating
earnings and only a minor effect on reported net service revenues.

      Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances, recorded as a reduction in deriving net service revenues, were
approximately $32,841,000 and $32,849,000 for the three months ended September
30, 1999 and 1998, respectively, and approximately $104,337,000 and $92,114,000
for the nine months ended September 30, 1999 and 1998, respectively.

5.    COMMITMENTS AND CONTINGENCIES

      Between November 1997 and January 1998, several lawsuits were commenced
against the Company, certain of the Company's Directors and certain officers
concerning certain related party transactions that have since been investigated
by a Special Committee of the Board of Directors ("Special Committee"). The
complaints in each action assert that the Company and the named defendants
violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934,
alleging that the Company omitted and/or misrepresented material information in
its public filings, including that the Company failed to disclose that it had
entered into acquisitions that were not in the best interest of the Company,
that it had paid unreasonable and unearned acquisition and financial advisory
fees to related parties, and that it concealed or failed to disclose adverse
material information about the Company. Each action seeks unspecified
compensatory damages, with interest, and the costs and expenses incurred in
bringing the action. On February 9, 1998, the above-mentioned class actions were
consolidated for all purposes in federal district court in New Jersey. On June
30, 1998, the lead plaintiffs in the consolidated class actions served their
Consolidated Class Action Complaint, asserting that the Company and the named
defendants violated Section 10(b) of the Exchange Act, and that certain named
defendants violated Sections 20(a) and 20A of the Exchange Act.


                                       10
<PAGE>

      The Special Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Special Committee recommended and 712
Advisory Services, Inc., a financial advisory firm and affiliate of the
Company's then Chairman of the Board ("712 Advisory"), agreed to reimburse the
Company approximately $1,424,000 in fees for transactions completed after June
1, 1997, to reimburse $112,500 of the retainer paid to 712 Advisory for 1997, to
waive payment of an additional $112,500 of fees accrued by the Company for the
third and fourth quarters of 1997, and to pay a substantial amount of the
expenses associated with the Special Committee's investigations. All such
amounts have been paid or reimbursed to the Company. In addition, the Special
Committee recommended and 712 Advisory agreed to allow the Company to terminate
its relationship with 712 Advisory.

      The Special Committee reported to the directors that it had determined
that: (i) there was no evidence of any federal or state crimes or securities law
violations in connection with the related party transactions in question; (ii)
all related-party matters were disclosed in public filings; (iii) 712 Advisory
performed acquisition advisory services fully consistent with the expectations
and understanding of the committee of outside directors that had approved 712
Advisory's acquisition fees; and (iv) the acquisition advisory fees paid to 712
Advisory in connection with the Company's acquisitions in 1997 were within the
range of customary acquisition advisory fees paid to investment bankers on
transactions of similar size.

      On December 18, 1998, attorneys for the plaintiffs in the pending class
actions reached an agreement in principle with the Company and certain of the
other defendants to settle all of the pending class actions.

      On August 9, 1999, the federal district court in the District of New
Jersey approved the Stipulation of Settlement settling all of the consolidated
class action lawsuits pending against the Company in consideration primarily of
(i) a payment of $2,750,000 to be provided from the Company's insurer (the
"Insurance Proceeds") and (ii) the issuance of $5,250,000 of convertible
subordinated promissory notes (the "Convertible Subordinated Notes"). The
$5,250,000 of Convertible Subordinated Notes bear interest at the rate of 8% per
annum, are due on the earlier of August 1, 2005 or when the Company's presently
outstanding Senior Notes are paid in full, and may be prepaid in cash by the
Company at any time after issuance subject to the payment of a prepayment
premium which begins at 8% and decreases over time. Additionally, the
Convertible Subordinated Notes are convertible into shares of the Company's
Common Stock beginning February 15, 2000 at a price of $2.62 per share.

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

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


                                       11
<PAGE>

Answer to the Amended Complaint, and asserted a counterclaim against Messrs.
Farrell and Fields for breach of fiduciary duties. The action is in the early
stages of discovery, and the Company intends to defend vigorously against the
allegations.

      On June 2, 1998, Mr. Ronald Ash filed a complaint against the Company, its
wholly-owned subsidiaries, StarMed Staffing, Inc. and Wesley Medical Resources,
Inc. (the latter hereinafter referred to as "Wesley", and both companies
collectively, "StarMed"), and certain officers and directors of the Company in
the United States District Court for the Northern District of California. On
June 24, 1997, the Company, acquired the assets of Wesley, a medical staffing
company in San Francisco, California, from Mr. Ash and another party for 45,741
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 Ash complaint, among
other things, alleges that the defendants omitted and/or misrepresented material
information in the Company's public filings and that they concealed or failed to
disclose adverse material information about the Company in connection with the
sale of Wesley to the Company by the plaintiff. The plaintiff seeks damages in
the amount of $4.25 million or, alternatively, rescission of the sale of Wesley.

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

      In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that the
outcome of such other litigation will not have a material adverse effect on the
Company's financial position, cash flows or results of operations. Accordingly,
the Company has made no accrual for any costs associated with such litigation.

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

      During 1997, the Company issued 18,000 shares of Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
to RGC International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. Pursuant to the Preferred Stock agreements, the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement not later than
October 1997 or such other mutually agreed upon date and provided for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed to
register the Conversion Shares prior to such date.

      As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 share of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000), and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000 due and payable, as amended, in eleven monthly
payments beginning on December 1, 1998 and ending on October 1, 1999. Pursuant
to an agreement with


                                       12
<PAGE>

RGC, entered into as of May 1, 1998, the exercise price of certain December 1998
RGC Warrants to acquire 77,667 shares of Common Stock was reduced to $2.73 per
share, and the exercise price of all of the January 1998 RGC Warrants was
reduced to $2.73 per share. The principal amount of and interest accrued on the
RGC Penalty Notes may be converted, at the option of the Company or RGC in
certain circumstances, into additional shares of Series C Preferred Stock or
Common Stock.

      In addition, as a result of the Company's failure to register the RGC
Conversion Shares prior to September 15, 1998, RGC holds the right to demand a
one-time penalty amount equal to 10% of the stated value of the outstanding
Series C Preferred Stock (which penalty amount is presently $1,427,500) payable,
at the option of RGC, in cash or additional shares of Common Stock (the
"Registration Default Penalty"). As of the date hereof, RGC has not demanded the
Registration Default Penalty. Purchasers of Common Stock could experience
substantial dilution upon conversion of the Series C Preferred Stock, the RGC
Penalty Notes and the exercise of December 1997 RGC Warrants and January 1998
RGC Warrants.

      During May 1999, RGC converted an additional 623 shares of Series C
Preferred Stock into 420,169 shares of Common Stock.

6.    DISCONTINUED OPERATIONS

      On August 18, 1998, the Company sold 100% of its stockholdings in StarMed
(the "StarMed Sale") for net cash proceeds at closing of $15,028,000, plus the
elimination of $13,786,000 of StarMed's outstanding third party debt. Due to the
StarMed Sale, the results of operations of StarMed for 1998 are herein reflected
in the Company's Consolidated Statements of Operations as discontinued
operations.

      The following table shows the summary statement of operations for StarMed
for the three and nine months ended September 30, 1998 (in thousands):

<TABLE>
<CAPTION>

                                                                  Three Months         Nine Months
                                                               Ended September 30,  Ended September 30,
                                                                      1998                 1998
                                                               -------------------  -------------------
                                                                      (a)                   (a)
<S>                                                                 <C>                   <C>
Net service revenues ........................................       $10,780               $51,087
Office level operating costs and provisions
  for uncollectible accounts receivable .....................         8,371                40,568
Corporate general and administrative ........................         1,482                 7,394
Depreciation and amortization ...............................            80                   414
                                                                    -------               -------
    Operating income ........................................           847                 2,711
Interest expense, net .......................................           382                   788
                                                                    -------               -------
Income before income taxes ..................................           465                 1,923
Provision for income taxes ..................................            --                   117
                                                                    -------               -------
Income after income taxes ...................................       $   465               $ 1,806
                                                                    =======               =======

</TABLE>

(a)   Amounts reflect results through August 18, 1998, the date of the sale of
      StarMed.


                                       13
<PAGE>

ITEM  2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS

RESULTS OF CONTINUING OPERATIONS

REVENUE RECOGNITION

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

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

            Type I--Pursuant to facility service agreements with Interpreting
      Physician(s) or Physician Group, the Company receives a technical fee for
      each diagnostic imaging procedure performed at a center, the amount of
      which is dependent upon the type of procedure performed. The fee included
      in revenues is net of contractual allowances. The Company and the
      Interpreting Physician(s) or Physician Group proportionally share in any
      losses due to uncollectible amounts from patients and third party payors,
      and the Company has established reserves for its share of the estimated
      uncollectible amount.

            Type II--The Company bills patients and third party payors directly
      for services provided and pays the Interpreting Physician(s) either (i) a
      fixed percentage of fees collected for services performed at the center,
      or (ii) a contractually fixed amount based upon the specific diagnostic
      imaging procedures performed. Revenues are recorded net of contractual
      allowances and the Company accrues the Interpreting Physician(s) fee as an
      expense on the Consolidated Statements of Operations. The Company bears
      the risk of loss due to uncollectible amounts from patients and third
      party payors, and the Company has established reserves for the estimated
      uncollectible amount.

            Type III--Pursuant to a facility service agreement, the Company
      receives, from an affiliated physician association, a fee for the use of
      the premises, a fee per procedure for acting as billing and collection
      agent, and a fee for administrative and technical service performed at the
      centers. The affiliated physician association contracts with and pays
      directly the Interpreting Physician(s). The Company's fee, net of an
      allowance based upon the affiliated physician association's ability to pay
      after the association has fulfilled its obligations (i.e., estimated
      future net collections from patients and third party payors less
      Interpreting Physician(s) fees and, in certain instances, facility lease
      expense), constitutes the Company's net service revenues. Since the
      Company's net service revenues are dependent upon the amount ultimately
      realized from patient and third party receivables, the Company's revenue
      and receivables have been reduced by an estimate of patient and third
      party payor contractual allowances, as well as an estimated provision for
      uncollectible amounts.

      Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. No such audits have been initiated and the Company is not aware of any
pending audits.


                                       14
<PAGE>

      The Company also recognizes revenue from the licensing and/or sale of
software and hardware comprising radiology information systems which the Company
has developed. Such revenues are recognized on an accrual basis as earned.

      For the three months ended September 30, 1999, the fees received or
retained by the Company under the three types of agreements with Interpreting
Physician(s) described above, expressed as a percentage of gross billings net of
contractual allowances for the imaging services provided, range from 78% to 93%
for the Type I agreements, 80% to 93% for the Type II agreements and 80% to 87%
for the Type III agreements. These agreements generally have terms ranging from
one to ten years.

QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1998

      For the quarter ended September 30, 1999, total Company net service
revenues were $37,551,000 compared to $44,176,000 for the quarter ended
September 30, 1998, a decrease of $6,625,000 or 15%. The decrease in net service
revenues was due principally to a decline in personal injury claims business as
a result of regulatory changes in New Jersey, an ongoing decline in
reimbursement rates of managed care payors and a decline in net revenues of the
Company's Dalcon Technologies subsidiary. Net service revenues in the third
quarter of 1999 were also adversely affected by temporary service interruptions
related to the installation of six new MR units and six new CT units during the
quarter. Despite the decline in personal injury claims business and the impact
of the temporary service interruptions, third quarter procedure volumes remained
constant on a same center basis compared to the third quarter of 1998. Relating
to the decline in personal injury claims business, net service revenues from
such business comprised approximately 10% of diagnostic imaging net revenues in
the third quarter of 1999, down from approximately 14% in the third quarter of
1998. Management believes this decrease is permanent in nature and resulted
principally from the effects of the recent legislation in New Jersey aimed at
reducing auto insurance costs.

      In general, healthcare providers have been experiencing gradual
reimbursement rate declines over the past two years and this is expected to
continue through 2000 due to factors such as the expansion of managed care in
the United States and budgetary pressures placed on U.S. government agencies.
The Company will attempt to mitigate the impact of any further decline in
reimbursement rates by decreasing its costs and increasing patient referral
volumes. Nevertheless, if the rate of decline in reimbursement rates were to
materially increase, or if the Company is unsuccessful in reducing its costs or
increasing its volumes over time, the Company's results could be materially and
adversely affected.

      With respect to procedure volumes, the domestic diagnostic imaging
industry has experienced a growth rate in MR and CT procedures of approximately
7% and 6%, respectively, during each of the past five years, and management
believes such growth will continue in the near future. However, management
believes that this growth in procedures is being largely offset in a number of
the Company's markets by an increase in capacity. This increase in capacity is
the result of the opening of competing new centers as well as the upgrade of
equipment which reduces the time it takes for procedures to be performed. If the
supply of imaging centers continues to increase, the Company's future procedure
volumes and net revenues could be materially adversely affected over time.

      Management believes that in order to remain competitive in the
marketplace, it must maintain high quality, up-to-date medical equipment.
Accordingly, under the Company's equipment replacement program, the Company has
replaced or upgraded fourteen MRI systems and eleven CT systems in its centers
through October 31, 1999. In addition, the Company expects to replace or upgrade
additional equipment during the remainder of 1999 and in 2000. Over time, the
Company expects to achieve increased volumes due to this equipment replacement
program. While the Company intends to finance new diagnostic equipment via
operating leases, there can be no assurance that such financing will remain
available over the course of the planned equipment upgrade program.
Consequently, if such financing or alternate financing were to become
unavailable, the Company's future procedure volumes and net revenues could be
materially adversely affected over time.


                                       15
<PAGE>

      Costs of services for the three months ended September 30, 1999 were
$27,085,000 compared to $27,797,000 for the three months ended September 30,
1998, a decrease of $712,000 or 3%. This decrease was due to center-level cost
reduction initiatives implemented since the beginning of 1998.

      Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, decreased for the quarter ended
September 30, 1999 to 28% from 37% for the quarter ended September 30, 1998.
This was due primarily to the impact of the decline in revenue described above.

      The provision for uncollectible accounts receivable for the quarter ended
September 30, 1999 was $4,949,000, or 13% of related net service revenues,
compared to the third quarter 1998 provision of $3,377,000, or 8% of related net
service revenues. The increase in the provision for uncollectible accounts
receivable, as a percentage of net service revenues, was due principally to the
Company experiencing higher than expected denials related to its billings during
1999. Although the Company will continue to aggressively pursue collections of
denied claims, it cannot be reasonably assured that they will be ultimately
collected and, therefore, the Company believes it is prudent to provide a
reserve for a large portion of such claims.

      Corporate general and administrative expense for the three months ended
September 30, 1999 was $3,178,000, as compared to $3,055,000 for the three
months ended September 30, 1998.

      Equipment lease expense for the three months ended September 30, 1999 was
$2,860,000, as compared to $1,835,000 for the three months ended September 30,
1998 due to the equipment replacement program described above.

      Depreciation and amortization expense for the quarter was $5,547,000,
compared to $6,109,000 for the third quarter of 1998, or a decrease of $562,000.
The decrease was due to lower diagnostic equipment depreciation, which was
primarily the result of the Company entering into operating leases during late
1998 and the first nine months of 1999 in connection with the equipment
replacement program described above.

      During the third quarter of 1999, the Company recorded a $29,825,000
non-cash loss on the impairment of goodwill and other long-lived assets. This
loss consists of the write-off of goodwill of $21,763,000, other intangibles of
$508,000 and fixed assets of $7,554,000. The impairment relates primarily to
eleven of the Company's diagnostic imaging centers that are under-performing.
The Company has recorded impairment losses for these centers because the sum of
their expected future cash flows, determined based on an assumed continuation of
current operating methods and structures, is less than the carrying value of the
related long-lived assets. The Company's assessment of future cash flows for
these centers reflects the recent negative trends in the diagnostic imaging
business including continued erosion of reimbursement rates and further
expansion of capacity through the opening of new competing centers in certain of
the Company's markets. Due to these trends, the Company has determined that its
plans for operating improvements in these centers will likely not be adequate to
cause these centers to be sufficiently successful in the future to recover the
value of recorded goodwill and other long-lived assets.

      During the third quarters of 1999 and 1998, the Company also recorded
losses on the sale and closure of diagnostic imaging centers of $1,150,000 and
$3,489,000, respectively. The 1999 loss consists of (i) $730,000 for the
estimated equipment removal, facility restoration and related costs and (ii)
$420,000 for legal and professional fees and employee termination costs. In
addition, the Company remains obligated under certain facility leases related to
such centers aggregating $68,000 per month until such time as the facilities are
subleased, or the lease expires. The 1998 loss consists of (i) $1,602,000 for
the estimated costs to exit equipment lease and maintenance agreements and
facility lease agreements, (ii) $1,481,000 for the write-off of fixed assets,
goodwill and other intangibles and other assets, and (iii) $406,000 for
estimated equipment removal, facility restoration and related costs.

      During the fourth quarter, the Company expects to identify additional
centers (including certain of the eleven centers described above) that it may
sell or close and may incur additional losses associated


                                       16
<PAGE>

with such sales or closures.

      During the third quarters of 1999 and 1998, the Company recorded other
unusual charges of $1,012,000 and $890,000, respectively. The 1999 charge
consists of (i) $531,000 of defense costs associated with the shareholder class
action lawsuit and other related litigation (the shareholder class action
lawsuit was settled during the third quarter), (ii) $215,000 of costs associated
with the investigation of possible strategic alternatives by the Company, (iii)
$208,000 of severance costs and (iv) $58,000 of other costs. The 1998 charge
consists of (i) $380,000 for professional fees attributable to obtaining the
waiver and amendment under the Company's Senior Note obligations, (ii) $360,000
for penalties associated with the delay in the effectiveness of the Company's
Registration Statement and (iii) $150,000 for defense costs associated with the
shareholder class action lawsuit and other related litigation.

      Net interest expense for the three months ended September 30, 1999 was
$2,834,000 as compared to $3,484,000 for the three months ended September 30,
1998, a decrease of $650,000. This decrease was primarily attributable to the
retirement of notes payable and capitalized lease obligations.

      The Company's loss for the quarter ended September 30, 1999 was increased
by $82,000 attributable to minority interests, as compared to an increase in the
Company's loss of $176,000 for the quarter ended September 30, 1998.

      The provision for income taxes for the three months ended September 30,
1999 was $90,000 as compared to $160,000 for the comparable period last year.
The provision for income taxes for the three months ended September 30, 1999 and
1998 consists entirely of estimated state income taxes. For both quarters, a
benefit for income taxes related to the Company's losses has not been recorded
due to the uncertainty regarding the realization of the full amount of the
Company's deferred tax assets.

      The Company's net loss from continuing operations for the quarter ended
September 30, 1999 was $41,061,000 compared to $6,196,000 for the quarter ended
September 30, 1998.

      The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended September 30, 1999 and 1998 includes charges
of $106,000 and $116,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998

      For the nine months ended September 30, 1999, total Company net service
revenues were $120,159,000 compared to $137,824,000 for the nine months ended
September 30, 1998, a decrease of $17,665,000 or 13%. The decrease in net
service revenues was due principally to a decline in personal injury business as
a result of regulatory changes in New Jersey, an ongoing decline in
reimbursement rates of managed care payors and a decline in net revenues of the
Company's Dalcon Technologies subsidiary.

      Costs of services for the nine months ended September 30, 1999 were
$80,182,000 compared to $86,129,000 for the nine months ended September 30,
1998, a decrease of $5,947,000 or 7%. This decrease was due to center-level cost
reduction initiatives implemented since the beginning of 1998 and the closure or
sale of eight imaging centers during 1998 and early 1999.

      Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, decreased for the nine months
ended September 30, 1999 to 33% from 38% for the nine months ended September 30,
1998. This was due primarily to the impact of the decline in revenue described
above.

      The provision for uncollectible accounts receivable for the nine months
ended September 30, 1999 was $9,096,000, or 8% of related net service revenues,
compared to the same period of 1998 provision of $10,684,000, or 8% of related
net service revenues.


                                       17
<PAGE>

      Corporate general and administrative expense for the nine months ended
September 30, 1999 was $9,165,000 as compared to $9,098,000 for the nine months
ended September 30, 1998.

      Equipment lease expense for the nine months ended September 30, 1999 was
$7,130,000, as compared to $4,840,000 for the nine months ended September 30,
1998 due to the equipment replacement program described above.

      Depreciation and amortization expense for the nine months ended September
30, 1999 was $16,862,000, compared to $18,744,000 for the same period of 1998,
or a decrease of $1,882,000. The decrease was due to lower diagnostic equipment
depreciation, which was primarily the result of the Company entering into
operating leases during late 1998 and the first nine months of 1999 in
connection with the equipment replacement program described above.

      During the nine months ended September 30, 1999, the Company recorded a
$29,825,000 non-cash loss on the impairment of goodwill and other long-lived
assets. See further discussion above.

      During the nine months ended September 30, 1999 and 1998, the Company also
recorded losses on the sale and closure of diagnostic imaging centers of
$1,150,000 and $3,489,000, respectively. See further discussion above.

      During the nine month periods ended September 30, 1999 and 1998, the
Company recorded other unusual charges of $1,726,000 and $6,290,000,
respectively. The 1999 charge consists of (i) $1,245,000 of defense costs
associated with the shareholder class action lawsuit and other related
litigation (the shareholder class action lawsuit was settled during the third
quarter), (ii) $215,000 of costs associated with the investigation of possible
strategic alternatives by the Company, (iii) $208,000 of severance costs and
(iv) $58,000 of other costs. The 1998 charge consists of (i) $3,827,000
($1,194,000 of which was a non-cash charge related to the issuance of 117,000
common stock warrants) for penalties associated with the delay in the
effectiveness the Company's Registration Statement, (ii) $863,000 for defense
costs associated with the shareholder class action lawsuit and other related
litigation, (iii) $883,000 for costs associated with the investigation of
related party transactions which was concluded in April 1998, (iv) $380,000 for
professional fees attributable to obtaining the waiver and amendment under the
Company's Senior Note obligations and (v) $337,000 for management termination
benefits and related costs.

      Net interest expense for the nine months ended September 30, 1999 was
$8,463,000 as compared to $10,396,000 for the nine months ended September 30,
1998, a decrease of $1,933,000. This decrease was primarily attributable to the
retirement of notes payable and capitalized lease obligations.

      The Company's loss for the nine months ended September 30, 1999 was
increased by $706,000 attributable to minority interests, as compared to an
increase in the Company's loss of $819,000 for the nine months ended September
30, 1998.

      The provision for income taxes for the nine months ended September 30,
1999 was $440,000 as compared to $461,000 for the comparable period last year.
The provision for income taxes for the nine months ended September 30, 1999 and
1998 consists entirely of estimated state income taxes.

      The Company's net loss from continuing operations for the nine months
ended September 30, 1999 was $44,586,000 compared to $13,126,000 for the nine
months ended September 30, 1998.

      The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended September 30, 1999 and 1998 includes charges
of $326,000 and $390,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.


                                       18
<PAGE>

STARMED SALE

      On August 18, 1998, the Company sold 100% of its stockholdings in StarMed
(the "StarMed Sale") for net cash proceeds at closing of $15,028,000, plus the
elimination of $13,786,000 of StarMed's outstanding third party debt. Due to the
StarMed Sale, the results of operations of StarMed for 1998 are herein reflected
in the Company's Consolidated Statements of Operations as discontinued
operations.

LIQUIDITY AND CAPITAL RESOURCES

      During the nine months ended September 30, 1999, the Company's primary
source of cash flow was comprised of $4,161,000 from operations, a reduction in
the Company's cash balances of $13,728,000, and other borrowings of $1,515,000.
The primary use of cash was repayment of principal amount of capital lease
obligations and notes and mortgages payable totaling $17,018,000.

      During the nine months ended September 30, 1998, the Company's primary
source of cash flow was comprised of proceeds from sale of the Company's StarMed
Staffing subsidiary of $28,814,000, $1,154,000 from operations, a reduction in
the Company's cash balances of $6,789,000, and borrowings under the Company's
line of credit of $6,950,000. The primary uses of cash was repayment of
principal amount of capital lease obligations and notes and mortgages payable of
$18,907,000, retirement of debt in connection with sale of discontinued business
of $13,786,000, and repurchase of Common Stock subject to redemption as a result
of the exercise of puts provided by the Company in connection with 1997
acquisitions of $4,775,000.

FINANCIAL RESOURCES AND LIQUIDITY

      As of September 30, 1999, the Company failed to meet certain of the
financial covenants under its $75,000,000 of Senior Notes indebtedness.
Management and the holders of the Senior Notes are engaged in discussions to
resolve this matter. In the event the parties are unable to reach agreement, the
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. Although in the past, the Company has been
successful in obtaining necessary waivers and amendments from the holders of the
Senior Notes, there can be no assurance that the holders of the Senior Notes
will provide the Company with an amendment or waiver of the defaults. In
addition, certain medical equipment notes, and operating and capital leases of
the Company contain provisions which allow the creditors or lessors to
accelerate their debt or terminate their leases and seek certain other remedies
if the Company is in default under the terms of agreements such as the Senior
Notes.

      In the event that the holders of the Senior Notes or the other creditors
or lessors elect to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have a
material adverse effect on the Company, its operations and its financial
condition. Furthermore, if such obligations were to be accelerated, in whole or
in part, there can be no assurance that the Company would be successful in
identifying or consummating financing necessary to satisfy the obligations which
would become immediately due and payable. As a result of the uncertainty related
to the defaults and corresponding remedies described above, the Senior Notes and
the other loans and capital leases are shown as current liabilities on the
Company's Consolidated Balance Sheets at September 30, 1999. Accordingly, the
Company has a deficit in working capital of $57,889,000 at September 30, 1999.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. In addition to continuing to negotiate with the holders of the
Senior Notes in an attempt to obtain waivers or amendments of the aforementioned
defaults, the Company has taken various actions in response to this situation,
including the following: (i) the Company continues to consider certain strategic
alternatives and other transactions, including mergers or debt and equity
financing transactions, and (ii) in order to improve future profitability and
enhance cash flow, during the third quarter the Company identified four centers
that it will sell or close and expects to identify additional centers that it
may sell or close during the fourth quarter.


                                       19
<PAGE>

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

      Prior to 1998, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of September 30, 1999, the Company's debt,
including capitalized lease obligations, totaled $117,143,000. Cash available to
the Company for general corporate use declined from $13,479,000 at December 31,
1998 to $4,844,000 as of September 30, 1999. These balances exclude cash held by
non-wholly owned affiliates as of the indicated dates, since such cash amounts
are not readily available to the Company for general corporate purposes.
However, some portion of such excluded cash is expected to be available to
satisfy that portion of the Company's remaining 1999 short term debt which is
attributable to non-wholly owned affiliates.

      Other than operating lease obligations to finance new diagnostic
equipment, the Company does not expect to incur significant additional debt in
the near future. Additionally, due to expected proceeds from the sale of certain
centers and due to improvements made and being made to the Company's billing and
collections systems and procedures, the Company expects average monthly cash
flows during the fourth quarter of 1999 to improve from the level achieved
during the first nine months of 1999. Provided that the Company is able to
complete the sale of certain of its centers and its cash collections show
improvement, and assuming that the Company reaches satisfactory resolution with
the Senior Note holders regarding the current financial covenant defaults,
management believes that existing available cash balances plus expected cash
flow from operations will be adequate to fund the Company's expected cash
requirements.

OTHER OBLIGATIONS OF THE COMPANY

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

      During 1997, the Company issued 18,000 shares of Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
to RGC International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. Pursuant to the Preferred Stock agreements, the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement not later than
October 1997 or such other mutually agreed upon date and provided for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed to
register the Conversion Shares prior to such date.

      As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 share of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000), and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000 due and payable, as amended, in eleven monthly
payments beginning on December 1, 1998 and ending on October 1, 1999. Pursuant
to an agreement with RGC, entered into as of May 1, 1998, the exercise price of
certain December 1998 RGC Warrants to acquire


                                       20
<PAGE>

77,667 shares of Common Stock was reduced to $2.73 per share, and the exercise
price of all of the January 1998 RGC Warrants was reduced to $2.73 per share.
The principal amount of and interest accrued on the RGC Penalty Notes may be
converted, at the option of the Company or RGC in certain circumstances, into
additional shares of Series C Preferred Stock or Common Stock.

      In addition, as a result of the Company's failure to register the RGC
Conversion Shares prior to September 15, 1998, RGC holds the right to demand a
one-time penalty amount equal to 10% of the stated value of the outstanding
Series C Preferred Stock (which penalty amount is presently $1,427,500) payable,
at the option of RGC, in cash or additional shares of Common Stock (the
"Registration Default Penalty"). As of the date hereof, RGC had not demanded the
Registration Default Penalty. Purchasers of Common Stock could experience
substantial dilution upon conversion of the Series C Preferred Stock, the RGC
Penalty Notes and the exercise of December 1997 RGC Warrants and January 1998
RGC Warrants.

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

COMMON STOCK

      On April 22, 1999, due to the Company's failure to meet the continued
listing requirements of the Nasdaq National Market and the Nasdaq SmallCap
Market, the Company's Common Stock was delisted by Nasdaq. The Company's Common
Stock is now traded on the OTC Bulletin Board, an electronic quotation service
for NASD Market Makers. There can be no assurance that the Company's Common
Stock will continue to trade on the OTC Bulletin Board. It is the Company's
intention to again seek to be listed on Nasdaq or a national securities exchange
if and when the Company satisfies the requirements for listing.

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

SEASONALITY AND INFLATION

      The Company believes that its business is only moderately affected by
seasonality. The third quarter is typically the slowest quarter of the year
because the months of July and August are the principal vacation months of the
year. The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Notwithstanding the
foregoing, general inflation trends and continuing reimbursement rate pressures
in the future may cause the Company not to be able to raise prices for its
diagnostic imaging procedures by an amount sufficient to offset the negative
effects of increasing costs. While the Company has responded to these concerns
in the past by attempting to increase the volume of its business, there can be
no assurance that the Company will be able to increase its volume of business in
the future. These trends, if continued over time, could have a material adverse
effect on the financial results of the Company.

IMPACT OF YEAR 2000 ON COMPANY'S COMPUTER SOFTWARE

      The Company is preparing for the impact of the arrival of the Year 2000 on
its business, as well as on the businesses of its customers, suppliers and
business partners. The "Year 2000 Problem" is a term used to describe the
problems created by systems that are unable to accurately interpret dates after
December 31, 1999. These problems are derived predominately from the fact that
certain computer hardware and many software programs historically recorded a
date's "year" in a two-digit format (i.e., "98" for 1998) and therefore may
recognize the year "00" as 1900 instead of the Year 2000. The Year 2000 Problem
creates potential risks for the Company, including the inability to recognize or
properly treat dates occurring on or after January 1, 2000, which may result in
computer system failures or miscalculations of critical financial or operational
information as well as failures of equipment controlling date-sensitive
microprocessors or influencing patient care.


                                       21
<PAGE>

      In addition to its internal systems, the Company relies heavily on third
parties in operating its business. Such third parties include (1) vendors who
supply software, hardware and other equipment to the Company, (2) intermediaries
that process claims and payments on behalf of various payors, (3) insurance
companies, HMO's and other private payors, (4) utilities which provide
electricity, water, natural gas and telephone services and (5) vendors of
medical supplies and pharmaceuticals used in patient care.

      The Company began formulating a plan in 1998 to address the Year 2000
Problem and to ensure that all relevant systems had been subject to a full Year
2000 review and, if necessary, remediation, replacement or upgrade. Under the
plan, the Company has focused on (i) internal financial, operational and medical
software and equipment and (ii) the Year 2000 compliance of all third party
suppliers and intermediaries doing business with the Company. In connection with
its Year 2000 compliance activities, the Company has contacted all outside
vendors and intermediaries with which the Company has material relationships and
engaged in discussions which will continue throughout 1999 in furtherance of the
Company's stated goal of minimizing any adverse impact related to the Year 2000
Problem.

      The Company has completed its assessment of all material financial and
billing computer systems. In connection with this review, the Company upgraded
its financial accounting systems to Year 2000 compliant systems in January 1999.
This system is currently being tested to verify Year 2000 compliance, and such
testing should be completed by November 30, 1999. The Company's ICIS billing and
collection system has been upgraded in June 1999, and is fully installed and
tested. The costs and expenses incurred or expected to be incurred relating to
Year 2000 compliance for these systems is currently not expected to be material.
Software sold by the Company's wholly-owned subsidiary, Dalcon Technologies,
Inc. is Year 2000 compliant and fully installed and tested at substantially all
300 sites supported by Dalcon. Computer equipment at Dalcon Technologies, Inc.
has been inventoried and testing is underway for Year 2000 compliance. This
testing is substantially completed.

      The Company has completed its review of all diagnostic imaging equipment
in operation at the Company's centers. Each piece of diagnostic equipment in
operation has computer systems and applications, and in many cases, embedded
computer processors. The Company is in communication with all of the
manufacturers of such equipment and believes that a majority of the equipment is
either currently Year 2000 compliant or can be upgraded (either through software
modifications or hardware replacement) to become Year 2000 compliant. The
Company expects all necessary upgrades or other remediation to be completed no
later than December 1999. In the event that certain diagnostic imaging equipment
is not Year 2000 compliant and no upgrade or remediation is available, the
Company expects to provide for the replacement of such equipment prior to
December 1999.

      With regard to third parties, the Company has initiated a program to
determine whether the computer applications of its significant payors and
suppliers will be upgraded in a timely manner. Compliance letters have been sent
to all such payors and suppliers, and follow up will continue throughout 1999.
Approximately 15% of the Company's revenues are derived from the Medicare
program, which is administered by the Health Care Financing Administration
(HCFA). HCFA employs more than 60 carriers and intermediaries to process
Medicare fee-for-service claims throughout the nation. There are several hundred
different computer systems involved in the everyday work of HCFA, its carriers
and intermediaries.

      HCFA has announced the establishment of target dates to complete testing
of its mission critical systems and to certify to the Secretary of Health and
Human Services that its mission critical systems will be Year 2000 compliant.
There can be no assurance that HCFA will meet the established timetable or that
it will have its mission critical systems, which most directly affect the
Company, Year 2000 compliant in time to prevent disruptions to the Medicare
payments received by the Company. Moreover, HCFA has announced the delayed
implementation of certain new regulations as well as the possible postponement
of scheduled rate increases while its resources are redirected towards Year 2000
compliance. While certain members of Congress have taken strong exception to
HCFA's announcement to delay rate increases, it is possible that rate increases,
which were scheduled to take effect on October 1, 1999, could be delayed until
after December 31, 1999.


                                       22
<PAGE>

      The Company estimates that costs and expenses associated with completing
the outlined Year 2000 compliance plan will range from $500,000 to $900,000. The
Company presently believes that it will substantially complete its internal Year
2000 compliance program prior to January 1, 2000, and that there should be no
material adverse impact at such time related to Year 2000 Problems associated
with the Company's systems or software. Based on communications with its vendors
and suppliers, the Company also believes that each third party or intermediary
with whom the Company has a material relationship is currently Year 2000
compliant or scheduled to be Year 2000 compliant by January 1, 2000.

      Despite the Company's best efforts, there can be no assurance that (i) the
Company's assessments regarding the Year 2000 Problem are correct; (ii) the
Company will be able to successfully complete its Year 2000 review and implement
such upgrades and/or remediation as is necessary or (iii) third parties or
suppliers with whom the Company does business will avoid Year 2000 Problems
which might adversely affect the Company business or operations. While the
Company has developed contingency plans to address such failures or unexpected
problems (such plans include identification of alternative suppliers or
intermediaries), there can be no assurance that such contingency plans will be
adequate to resolve these problems.

      The Year 2000 Problem involves substantial risk to the Company. The
Company believes today that the likely worst case scenario regarding the Year
2000 Problem will involve (1) malfunctions in clinical computer software and
hardware at certain of the imaging centers operated and/or managed by the
Company, (2) malfunctions in biomedical equipment at certain of the imaging
centers operated and/or managed by the Company, (3) temporary disruptions in
delivery of medical supplies and utility services at certain of the imaging
centers operated and/or managed by the Company and (4) temporary disruptions in
payments, especially payments from Medicare and other government programs. The
Company expects these events will result in increased expense as the affected
facilities refer tests and other procedures to other parties, access alternative
suppliers and increase staffing to assure adequate patient care. These events
may also cause lost revenue for procedures which certain of the imaging centers
operated and/or managed by the Company are unable to perform.

      The foregoing assessment is based on information currently available to
the Company. The Company will revise its assessment as it implements its Year
2000 compliance plan. The Company can provide no assurances that applications
and equipment believed to be Year 2000 compliant will not experience
difficulties or the Company will not experience difficulties obtaining resources
needed to make modifications to or replace the Company's affected systems and
equipment. Failure by the Company or third parties, on which it relies to
resolve Year 2000 issues, could have a material adverse effect on the Company's
results of operations and its ability to provide health care services as
described more fully herein.

RECENT EVENTS

      On November 10, 1999, Duane C. Montopoli resigned as the Company's
President and CEO. Mr. Montopoli will continue to serve the Company as a
consultant and will remain on the Board of Directors. In connection with Mr.
Montopoli's resignation, the Board of Directors has appointed Messrs.
Christopher J. Joyce and Geoffrey A. Whynot, the Company's Senior Vice
President-Legal Affairs & Administration and Senior Vice President-Finance &
CFO, respectively, as Co-Chief Executive Officers of the Company. Messrs. Joyce
and Whynot will retain their current responsibilities in addition to the new
responsibilities they are assuming as Co-Chief Executive Officers.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

      Statements contained in this Report that are not historical facts are
forward- looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results may differ
materially


                                       23
<PAGE>

from that projected or suggested herein due to certain risks and uncertainties
including, without limitation: the ability of the Company to reach agreement
with the holders of its $75,000,000 of Senior Notes regarding a waiver or
appropriate modification of financial covenant defaults; the ability of the
Company to obtain debt or equity financing necessary to satisfy debt and lease
obligations if such obligations were to be accelerated; the ability of the
Company to generate net positive cash flows from operations; the ability of the
Company, to obtain financing (and any required consents and approvals) to fund
its operations as needed; the payment timing and ultimate collectibility of
accounts receivable from different payer groups (including personal injury
type); the impact of a changing mix of managed care and personal injury claim
business on contractual allowance provisions, net revenues and bad debt
provisions; the potential dilution that would result from the conversion of the
Company's Series C Convertible Preferred Stock into common shares at current
share prices; the availability of lease financing, in general and on reasonable
terms, for the replacement or upgrade of the Company's diagnostic equipment as
required to remain competitive; and the effects of federal and state laws and
regulations on the Company's business over time. Additional information
concerning certain risks and uncertainties that could cause actual results to
differ materially from that projected or suggested may be identified from time
to time in the Company's Securities and Exchange Commission filings and the
Company's public announcements.


                                       24
<PAGE>

II.   OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      a.    EXHIBITS

                  None

      b.    REPORTS ON FORM 8-K

                  None

SIGNATURES

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

                                        MEDICAL RESOURCES, INC.

                                              /S/ CHRISTOPHER J. JOYCE
                                        ---------------------------------------
                                                Christopher J. Joyce
                                           CO-CHIEF EXECUTIVE OFFICER AND
                                                   GENERAL COUNSEL



                                              /S/ GEOFFREY A. WHYNOT
                                        ---------------------------------------
                                                Geoffrey A. Whynot
                                           CO-CHIEF EXECUTIVE OFFICER AND
                                               CHIEF FINANCIAL OFFICER
                                           (PRINCIPAL ACCOUNTING OFFICER)



Date: November 15, 1999



                                       25