<PAGE>
 
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                          COMMISSION FILE NO. 1-12461

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


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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 488-6230
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    COMMON STOCK (PAR VALUE $.01 PER SHARE)
                              TITLE OF EACH CLASS


     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 [  ]        No  [X]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [_]

     At May 26, 1998, 22,925,277 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the NASDAQ closing price of these shares on that date)
held by non-affiliates was $50,920,781.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                Not Applicable.


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<PAGE>
 
                                    PART I

ITEM 1. BUSINESS

GENERAL

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

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

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

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

     Dalcon is a developer and provider of software system applications to
diagnostic imaging center operators. Through its proprietary radiology
information system, ICIS, Dalcon provides the Company's imaging centers, as well
as imaging centers owned and/or operated by third-parties, with information
system development, service and support specifically designed for the
administration and operation of imaging centers, including patient scheduling,
registration, transcription, film tracking, billing, and insurance claim
processing. The Company purchased Dalcon in September 1997. By the end of June
1998, the substantial majority of the Company's imaging centers are expected to
be fully integrated and operating on Dalcon's ICIS system. In addition, in
February 1998, Dalcon entered into a multi-year
<PAGE>
 
agreement with HealthSouth Corporation, pursuant to which Dalcon is to install
its ICIS information system at all of HealthSouth's imaging centers not
currently using it.

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

     On March 31, 1998, the Company announced that it had retained SBC Warburg
Dillon Read ("Dillon Read") to assist the Company with respect to exploring
strategic alternatives for (and the possible sale of) its StarMed Temporary
Staffing and Per Diem business.

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

DIAGNOSTIC IMAGING SERVICES INDUSTRY

OVERVIEW

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

EQUIPMENT AND MODALITIES

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

     Magnetic Resonance Imaging.  MR is a sophisticated diagnostic imaging
system that utilizes a strong magnetic field in conjunction with low energy
electromagnetic waves which are processed by a computer to produce high
resolution images of body tissue.  A principal element of MR imaging is that the
atoms in various kinds of body tissue behave differently in response to a
magnetic field, enabling the differentiation of internal organs and normal and
diseased tissue.  Unlike CT and X-rays, MR does not utilize ionizing radiation
which can cause tissue damage in high doses.  As with other diagnostic imaging
technologies, MR is generally non-invasive.

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

     Ultrasound.  Ultrasound has widespread application, particularly for
procedures in obstetrics, gynecology and cardiology.  Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images 

                                      -2-
<PAGE>
 
of internal organs and the vascular system. A computer processes sound waves as
they are reflected by body tissue, providing an image that may be viewed
immediately on a computer screen or recorded continuously or in single images
for further interpretation.

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

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

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

IMAGING CENTER LOCATION AND OWNERSHIP STRUCTURE

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


<TABLE> 
<CAPTION> 
                                                                                                  OWNER-
                                                                           OPERATED               ------
LOCATION                           NAME                                   SINCE (1)              SHIP(2)       MODALITIES(3)
--------                           ----                                   ---------              -------       -------------
<S>                         <C>                                        <C>                      <C>       <C> 
Northeast Region (58)
  Englewood, NJ............ Englewood Imaging Center                   December 1979             100%     MR, CT, US, R, F, M
  Marlton, NJ.............. MRImaging of South Jersey                  July 1984                91.0%     MR
  Union, NJ................ Open MRI of Union                          August 1984              79.7%     MR
  Morristown, NJ........... MRImaging of Morristown                    December 1984            94.2%     MR
  Philadelphia, PA......... Academy Imaging Center                     January 1986             97.7%     MR, CT, US, NM, R, F, M
  Allentown, PA............ MRImaging of Lehigh Valley                 May 1986                 95.9%     MR
  Clifton, NJ.............. Clifton Medical Imaging Center             June 1987                 100%     MR, CT, US, NM, R, F, M
  Yonkers, NY.............. Inter-County Imaging                       September 1987           65.0%     MR, CT, US, R, F, M
  West Orange, NJ(4)....... Northfield Imaging                         January 1991              100%     MR, CT, US, NM, R, F, M
  Bel Air, MD.............. Colonnade Imaging Center                   November 1991            62.9%     MR, CT, US, NM, R, F, M
  Jersey City, NJ.......... M.R. Institute at Midtown                  July 1992                 100%     MR
  Brooklyn, NY............. Advanced MRA Imaging Associates            January 1993              100%     MR, CT, US, NM, R, F, M
  Seabrook, MD............. Seabrook Radiological Center               April 1995               87.1%     MR, CT
  Hackensack, NJ........... Hackensack Diagnostic Imaging              June 1995                 100%     MR, CT, US, R, F, M
  Bronx, NY................ Westchester Square Imaging                 January 1996              100%     MR, CT
  New York, NY............. MRI-CT Scanning of Manhattan               January 1996              100%     MR, CT, US, R, M
  Centereach, NY........... Open MRI of Centereach                     July 1996                 100%     MR
  Garden City, NY.......... Open MRI at Garden City                    November 1996             100%     MR
  East Setauket, NY........ Open MRI at Smith Haven                    November 1996             100%     MR
  Newark, NJ............... Imaging Center of the Ironbound            December 1996             100%     MR
  North Bergen, NJ......... The MRI Center at Palisades                March 1997                9.0%     MR
  Kearny, NJ............... West Hudson MRI Associates                 March 1997               25.0%     MR
  Cranford, NJ............. Cranford Diagnostic Imaging                March 1997               75.0%     MR, CT, US, M
  Montvale, NJ............. Montvale Medical Imaging                   March 1997               13.8%     MR, CT, US, R, F, M
  Randolph, NJ............. Morris-Sussex MRI                          March 1997               20.0%     MR
  Totowa, NJ............... Advantage Imaging at Totowa Road           March 1997               15.0%     MR
  Dedham, MA............... MRI of Dedham                              March 1997               35.0%     MR
  Seekonk, MA.............. RI-MASS MRI                                March 1997                5.0%     MR
  Chelmsford, MA........... MRI of Chelmsford                          March 1997               65.0%     MR
  Parlin, NJ............... Parlin Diagnostic Imaging                  May 1997                  100%     CT, US, R, F, M
  Vineland, NJ............. South Jersey MRI                           May 1997                  100%     MR
  Baltimore, MD............ Baltimore Open MRI                         May 1997                  100%     MR
  Silver Springs, MD....... Accessible MRI of Montgomery Cty           May 1997                  100%     MR
  Towson, MD............... Accessible MRI of Baltimore County         May 1997                  100%     MR, CT
  Trevose, PA.............. Bensalem Open MRI                          May 1997                  100%     MR
  Philadelphia, PA......... Callowhill Open MRI                        May 1997                  100%     MR
  Broomall, PA............. Mainline Open MRI                          May 1997                  100%     MR
</TABLE> 

                                      -3-
<PAGE>
 
<TABLE> 
<S>                         <C>                                       <C>                        <C>     <C> 
  Langhorn, PA............. Oxford Valley Diagnostic Center            May 1997                  100%     MR, CT, US, NM, R, F, M
  Springfield, PA.......... Springfield Diagnostic Imaging Center      May 1997                  100%     MR, CT, US, NM, R, F, M
  Philadelphia, PA......... Lansdowne Medical Center                   May 1997                  100%     R
  Havertown, PA............ Manoa Radiology                            May 1997                  100%     CT, US, NM, R, F, M
  Havertown, PA............ Haverford MRI                              May 1997                  100%     MR
  Broomall, PA............. Lawrence Park Radiology Center             May 1997                  100%     R
  Havertown, PA............ Pick & Levine Radiology                    May 1997                  100%     US, R, F, MM
  Philadelphia, PA......... Northeast Imaging                          May 1997                  100%     MR, CT, US, NM, R, F, M
  Philadelphia, PA......... South Phildelphia Radiology Center         May 1997                  100%     MR, CT, US, NM, R, F, M
  Philadelphia, PA......... Union Health Radiology                     May 1997                  100%     R, M
  Philadelphia, PA......... Juaniata Park                              May 1997                  100%     R
  Albany, NY............... Albany Open MRI                            May 1997                  100%     MR
  Syracuse, NY............. Syracuse Open MRI                          May 1997                  100%     MR
  Brooklyn, NY - Ave P..... Brooklyn Medical Imaging Center            June 1997                 100%     MR, CT, US, NM, R, F, M
  Brooklyn, NY - Midwood... Brooklyn Medical Imaging Center            June 1997                 100%     US, R, F, M
  Flushing, NY............. Meadows Mid-Queens Imaging Center          June, 1997                100%     MR, CT, US, R, M
  Staten Island, NY........ Staten Island Medical Imaging Center       June, 1997                100%     MR, CT
  Bronx, NY................ MRI of the Bronx                           September 1997            100%     MR, CT
  Flushing, NY............. MRI of Queens                              September 1997            100%     MR
  Philadelphia, PA......... Germantown MRI Center                      September 1997            100%     MR
  Philadelphia, PA......... Diamond Radiology                          September 1997            100%     R
Southeast (24)
  St. Petersburg, FL....... Magnetic Resonance Associates              July 1984                80.2%     MR
  Naples, FL............... Gulf Coast MRI                             June 1993                 100%     MR
  Fort Myers, FL........... Fort Myers MRI Central                     May 1995                  100%     MR, CT
  Fort Myers, FL........... Fort Myers MRI South                       May 1995                  100%     MR
  Cape Coral, FL........... Cape Coral MRI                             September 1996            100%     MR
  Naples, FL............... Naples MRI                                 September 1996            100%     MR
  Titusville, FL........... MRI of North Brevard                       September 1996            100%     MR
  Sarasota, FL............. Sarasota Outpatient MRI &                  September 1996            100%     MR, CT
                                Diagnostic Center
  Tampa, FL................ Americare MRI                              May 1996                  100%     MR
  Tampa, FL................ Americare Imaging                          May 1996                  100%     CT, US, R, F, M
  Clearwater, FL........... Access Imaging                             May 1996                  100%     MR, CT
  Melbourne, FL............ South Brevard Imaging                      January 1997              100%     MR
  Jacksonville, FL......... MRI Center of Jacksonville                 February 1997             100%     MR
  West Palm Beach, FL...... The Magnet of Palm Beach                   March 1997                100%     MR, CT, US, NM, R, F, M
  Monticello, AR (5)....... Monticello Center                          May 1997                  (5)      R
  Ocala, FL (5)............ Ocala Center                               May 1997                  (5)      R
  Miami, FL................ Coral Way MRI                              August 1997               100%     MR
  Sarasota, FL............. Gulf Side Open MRI                         August 1997               100%     MR
  Jupiter, FL.............. MRI of Jupiter                             August 1997               100%     MR, R
  Bradenton, FL............ Magnetic Imaging Center of Manatee         August 1997               100%     MR
  Hollywood, FL............ Open MRI of South Florida                  August 1997               100%     MR
  Tampa, FL................ Northside Imaging & Breast Care Center     August 1997               100%     MR
  Venice, FL............... Venice Imaging & MRI Center                August 1997               100%     MR, CT, US, R, F, M
  Port Charlotte, FL....... The MRI Center of Charlotte County         September 1997            100%     MR
Midwest (11)
  Chicago, IL.............. MRImaging of Chicago                       April 1987               87.2%     MR
  Chicago, IL.............. Open MRI of Chicago                        June 1992                79.6%     MR, CT, US, NM, R, F, M
  Oak Lawn, IL............. Oak Lawn MR & Imaging Center               January 1994              100%     MR, CT, US, R, F, M
  Des Plaines, IL.......... Golf MRI & Diagnostic Imaging Center       January 1995             75.0%     MR, CT, US, NM, R, F, M
  Libertyville, IL......... Libertyville Imaging Center                January 1995              100%     MR
  Chicago, IL.............. Central Diversey Imaging Center            January 1996              100%     MR
  Centerville, OH.......... Dayton Open MRI                            May 1997                  100%     MR
  Warren, OH............... Advanced Radiology/Access MRI              October 1997              100%     MR, CT, US, R, F, M
  Austintown, OH........... Austintown X-Ray                           October 1997              100%     CT, US, R, F, M
  Boardman, OH............. Boardman X-Ray/MRI                         October 1997              100%     MR, CT, US, R, F, M
  Youngstown, OH........... Western Reserve Imaging Center             October 1997              100%     CT, US, R, F, M
California (5)
  Long Beach, CA........... Pacific MRI                                January 1997              100%     MR
  San Clemente, CA......... OceanView Radiology Center                 January 1997              100%     MR, CT, US, R, F, M
  Rancho Cucamonga, CA..... Grove Diagnostic Imaging                   March 1997                100%     MR, CT, US, NM, R, F, M
  San Jose, CA............. Diagnostic Imaging Network                 August 1997               51%      MR, CT, US, NM, R, F, M
  San Jose, CA............. O'Connor MRI                               August 1997               60%      MR, CT
</TABLE> 

(1)  Operated by the Company or NMR of America, Inc. since such date.

                                      -4-
<PAGE>
 
(2)  Represents the Company's ownership interest in the respective centers.
(3)  Modalities are magnetic resonance imaging (MR), computerized tomography
     (CT), ultrasound (US), nuclear medicine (NM), radiology (R), fluorscopy (F)
     and mammography (M).
(4)  Includes the operation of the Livingston Breast Care mammography unit which
     is located at the Northfield Imaging Center.
(5)  The Company manages the operations of a radiology facility under the terms
     of a management agreement.

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

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

GROWTH STRATEGY AT EXISTING AND ACQUIRED CENTERS

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

     Expanding Imaging Services Offered.  The Company expands the imaging
services it offers by upgrading existing technology and adding new modalities at
selected centers.  In 1997 and to date in 1998, the Company upgraded technology
and expanded service modalities at 15 centers.  The Company's imaging centers
utilize state of the art imaging equipment for which new applications are
continually being developed.  New developments and system upgrades frequently
have the ancillary benefit of reducing imaging time and thus increasing capacity
of the centers' imaging equipment.  The development and improvement of
diagnostic quality "open" MR systems have expanded the public acceptance and
potential market for MR imaging services.  The Company currently operates 32
centers that provide MR imaging services using "open" systems and the Company
plans to expand this coverage in markets where it believes such expansion is
economically justified.

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

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

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

                                      -5-
<PAGE>
 
CENTER OPERATIONS AND IMAGING SERVICES PROVIDED BY THE COMPANY

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

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

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

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

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

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

     Sales And Marketing.  The Company develops and coordinates marketing
programs which center managers, sales representatives, affiliated Interpreting
Physicians and corporate managers utilize in an effort to 

                                      -6-
<PAGE>
 
establish and maintain profitable referring physician relationships and to
maximize reimbursement yields. These marketing programs identify and target
selected market segments consisting of area physicians with certain desirable
medical specialties and reimbursement yields. Corporate and center managers
determine these market segments based upon an analysis of competition, imaging
demand, medical specialty and/or payor mix of each referral from the local
market. The Company also directs marketing efforts at managed care 
organizations.

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

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

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

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

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

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

                                      -7-
<PAGE>
 
cost of providing the services, the Company may be deemed to be acting as a de
facto insurer. In some states, only certain entities, such as insurance
companies, HMOs and independent practice associations, are permitted to contract
for the financial risk of patient care. In such states, risk contracting in
certain cases has been deemed to be engaging in the business of insurance. The
Company believes that it is not in violation of any restrictions on risk bearing
or engaging in the business of insurance. If the Company is held to be
unlawfully engaged in the business of insurance, such finding could result in
civil or criminal penalties or require the restructuring of some or all of the
Company's operations, which could have a material adverse effect upon the
Company's business.

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

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

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

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

ACQUIRED CENTERS; COMMON STOCK REPURCHASE OBLIGATIONS.

     Since 1996, the Company has grown by aggressively acquiring imaging centers
and integrating their operations. The Company has acquired 92 imaging centers
through 27 acquisitions since January 1, 1996. When the Company acquires an
imaging center, it generally acquires assets relating to the provision of
technical, financial, administrative and marketing services which support the
provision of medical services performed by the Interpreting Physicians. Such
assets typically include equipment, furnishings, supplies, tradenames of the
center, books and records, contractual rights with respect to leases, managed
care and other agreements and, in most instances, accounts receivable. Other
than with respect to such accounts receivable for

                                      -8-
<PAGE>
 
services performed by the acquired company, the Company does not acquire any
rights with respect to or have any direct relationship, with patients. Patients
have relationships with referral sources who are the primary or specialty care
physicians for such patients. These physicians refer their patients to
diagnostic imaging centers which may include the Company's centers where
Interpreting Physicians, under independent contractor agreements, provide
professional medical services. The Company's acquired imaging centers do not
constitute either a radiology, primary care or specialty care medical practice.
In connection with an acquisition of a center, the Company will generally enter
into an agreement, as described above, with a Physician Group to act as an
independent contractor to perform medical services at the center.

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

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

     In 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.

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

TEMPORARY HEALTHCARE STAFFING INDUSTRY

OVERVIEW

     The demand for supplemental per diem staffing services in the healthcare
market is being driven by a variety of factors in the acute and sub-acute care
segments.  The increasing presence of managed care and the rapid evolution of
technology has dramatically reduced the average length of stay in acute care
hospitals.  The dynamics of this reduction in length of stay has made the task
of staffing a facility difficult.  Many hospitals are reducing the number of
full time staff and managing the peak periods by utilizing per diem nursing
services.  The attractiveness of utilizing per diem services is the ability to
monitor and regulate expenses more closely.  When a hospital adds full time
staff, it makes a commitment in salary and benefits which it can avoid with per
diem 

                                      -9-
<PAGE>
 
services. With the emphasis on outpatient care, the needs of the hospital's
admitted patients have increased which subsequently requires a high level of
critical care nursing skills. Due to the intense environment of critical care
units, turnover is a significant challenge for a hospital. The ability to
utilize per diem services to address the needs of these units is becoming
increasingly advantageous to hospitals. In addition, the number of nursing home
beds continues to increase each year in an attempt to meet the needs of the
country's aging population. The ability of nursing services to recruit and place
qualified nursing assistants and licensed practical nurses in these facilities
who are available on a day by day or part time basis is a great benefit to this
client base. Nursing homes, like hospitals, are regulated on a state by state
basis and are required to maintain a specific patient to caregiver ratio. Per
diem services provide experienced employees who are productive on their first
assignment, compared to new graduates who may require extensive orientation.

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

Temporary Healthcare Staffing Services Provided by StarMed

     Through its Per Diem and Travel Nursing divisions, StarMed provides
temporary staffing to acute and sub-acute care facilities nationwide.  StarMed's
Per Diem staffing division provides registered nurses, licensed practical
nurses, nursing assistants, therapists and medical transcriptionists on a daily
basis to healthcare facilities currently through 35 offices located in 16
states.  StarMed's Travel Nursing division operates from a central office in
Clearwater, Florida and provides registered nurses and operating room
technicians nationwide for periods ranging from eight to twenty-six weeks.
StarMed's travel nursing personnel are relocated from their place of residence
to the hospital location for the period of an assignment.  StarMed employs the
travel nursing staff under short-term employment agreements, provides
accommodations, travel reimbursements and other benefits central to employees
and bills the client on an hourly basis.

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

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

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

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

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

                                      -10-
<PAGE>
 
COMPETITION

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

     StarMed competes for client's business with other providers of temporary
staffing.  StarMed also competes for the limited number of available qualified
staff.  Within the temporary staffing industry, StarMed competes with several
companies which are larger and may possess greater financial resources than
StarMed.  Competition for hospital clients is generally based upon the ability
to provide qualified nurses and medical personnel on a timely basis at
competitive prices.  Location of assignment, nature of clinical
responsibilities, compensation and benefits are generally the principal factors
considered by nurses and medical personnel in deciding whether to accept a
temporary assignment.

GOVERNMENT REGULATION

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

Certificates Of Need, Licensing And Certification


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


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


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


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

                                      -11-
<PAGE>
 
     The Company may also have to comply with Federal certification
requirements. For example, the Company's centers which provide mammography
examinations must be certified by the Federal government. Further, additional
certification requirements may affect the Company's centers, but such
certification generally will follow specific standards and requirements that are
set forth in readily available public documents. Compliance with the
requirements often is monitored by annual on site inspections by representatives
of various government agencies. The Company believes that it currently has
obtained all necessary certifications, but the failure to obtain a necessary
certification could have a material adverse effect on the Company's imaging
business.


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

Medicare Anti-Kickback Provisions

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

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

Corporate Practice Of Medicine And Fee Splitting

     The laws of many states prohibit unlicensed, non-physician-owned entities
or corporations from performing medical services or physicians from splitting
fees with non-physicians. The Company is unlicensed for certain of its services.
The Company does not believe however, that it engages in the unlawful practice
of medicine or the delivery of medical services in any state where it is
prohibited, and is not licensed to practice medicine in states which permit such
licensure. Professional medical services, such as the interpretation of MRI
scans, are separately provided by independent contractor Interpreting Physicians
pursuant to agreements with the Company. The Company performs only
administrative and technical services and does not exercise control over the
practice of medicine by physicians or employ physicians to provide medical
services. However, in many jurisdictions, the laws restricting the corporate
practice of medicine and fee-splitting have been subject to limited judicial and
regulatory interpretation and, therefore,

                                      -12-
<PAGE>
 
there can be no assurance that, upon review, some of the Company's activities
would not be found to be in violation of such laws. If such a claim were
successfully asserted against it, the Company could be subject to civil and
criminal penalties and could be required to restructure its contractual
relationships. In addition, certain provisions of its contracts with
Interpreting Physicians, including the payment of management fees and
restrictive covenants could be held to be unenforceable. Such results or the
inability of the Company to restructure its contractual relationships could have
a material adverse effect upon the Company.

Stark Law Prohibition On Physician Referrals

     The Federal "Stark Law" as amended in 1993 provides that when a physician
has a "financial relationship" with a provider of "designated health services"
(including, among other activities, the provision of MR and other radiology
services which are provided by the Company), the physician will be prohibited
from making a referral of Medicaid or Medicare patients to the healthcare
provider, and the provider will be prohibited from billing Medicare or Medicaid,
for the designated health service. In August 1995, regulations were issued
pursuant to the Stark Law as it existed prior to its amendment in 1993 (when it
only applied to clinical laboratories). Draft regulations for the provisions of
the Stark Law applicable to MR and other radiology services were issued in
January, 1998. Submission of a claim that a provider knows, or should know, is
for services for which payment is prohibited under the amended Stark Law, could
result in refunds of any amounts billed, civil money penalties of not more than
$15,000 for each service billed, and possible exclusion from the Medicare and
Medicaid programs.


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

False Claims Act

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

State Laws

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

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

                                      -13-
<PAGE>

 
additional restrictions upon all or a portion of the Company's activities, which
might adversely affect the Company's business.

Regulations Affecting StarMed

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

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


EMPLOYEES

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

INSURANCE

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

ITEM 2.  PROPERTIES

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

ITEM 3.  LITIGATION

     As described below under ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, the Company and certain of its officers and directors have been
named as defendants in several actions filed in state and federal court arising
out of the events also described below under Item 13 and in the Company's
Current Report on Form 8-K filed by the Company on November 10, 1997, involving,
among other matters, allegations against the Company with respect to related-
party transactions and securities fraud.  

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

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

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


                                      -14-
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during the
last quarter of the year ended December 31, 1997.

                                      -15-
<PAGE>
 
                                    PART II

ITEM 5.  FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 Market Information and Stock Price

     The Company's Common Stock had been traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market, under
the symbol MRII, since November 3, 1995, and on the NASDAQ SmallCap Market prior
thereto.  Since April 20, 1998, the Company's Common Stock has traded under the
symbol MRIIE to reflect the fact that Nasdaq had commenced proceedings to
determine whether or not the Company's Common Stock should continue to be traded
on the Nasdaq Stock Market as a result of the Company's failure to file its
Annual Report on Form 10-K for the year ended December 31, 1997 in a timely
manner.  On May 14, 1998, representatives of the Company attended a hearing
before a Nasdaq Qualifications Hearing Panel to review the Company's failure to
comply with NASDAQ's ongoing listing requirements. On May 29, 1998, the Company
was advised that the Panel determined to continue the listing of the Company's
Common Stock on The Nasdaq Stock Market subject to certain conditions. The
Company must file its Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 on or before June 12, 1998 and must evidence compliance with either
Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative
requirements by July 24, 1998. Regarding the filing of the Form 10-Q, management
intends for the Company to be in a position to file the Quarterly Report by June
12th in order to satisfy the date-of-filing condition set by the Panel for 
continuing listing. Notwithstanding the foregoing, no assurance can be given at
this time that this filing deadline will be met.

     Based on the closing price for the Company's Common Stock on May 26, 1998 
($3-1/16) and the Company's net tangible assets as of December 31, 1997, the 
Company does not currently satisfy either Nasdaq's minimum net tangible assets 
requirement or one of the alternative requirements for continued listing, which 
include, among other things, a minimum bid price for the Common Stock of $5.00 
per share. In order to satisfy the continued listing requirements, on or before 
July 24, 1998, the Company intends to submit for shareholder approval a reverse 
stock split, if necessary, in order to meet or exceed the $5.00 minimum bid 
price. In event the Company does not satisfy either the minimum net tangible 
assets requirement or is unable to effect a reverse stock split sufficient to 
meet or exceed the $5.00 per share requirement, the Panel will consider moving 
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able to 
demonstrate compliance with the applicable maintenance criteria.  There can be 
no assurance that the Common Stock will meet the continued listed requirements 
for the Nasdaq Stock Market.

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

<TABLE>
<CAPTION>
                                                                   HIGH                  LOW
                                                                   ----                  ---    
1996                                                 
<S>                                                           <C>                  <C>
  First Quarter.......................................             $ 6 3/8               $ 4 5/8
  Second Quarter......................................             $10 1/4               $ 6
  Third Quarter.......................................             $ 9 1/4               $ 6 1/4
  Fourth Quarter......................................             $11 3/4               $ 7
1997                                                 
  First Quarter.......................................             $12 1/8               $ 9 5/8
  Second Quarter......................................             $17 1/8               $10 3/8
  Third Quarter.......................................             $20                   $15 1/8
  Fourth Quarter......................................             $20 5/8               $ 8 5/32
1998                                                 
  First Quarter.......................................             $11 1/16              $ 4 7/8
  Second Quarter (through May 26, 1998)...............             $ 6 1/4               $ 2 1/4
</TABLE>

     As of the close of business on May 26, 1998, the last reported sales price
per share of the Company's Common Stock was $3 1/16.

     There were 433 holders of record of the Company's Common Stock at the close
of business on May 26, 1998.  Such number does not include persons, whose shares
are held by a bank, brokerage house or clearing company, but does include such
banks, brokerage houses and clearing companies.

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

     The following is a list of securities sold by the Company during the period
covered by this Report on Form 10-K not previously included in the Company's
Quarterly Reports which, pursuant to the exemption provided under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), were not
registered under the Securities Act:

     On November 5, 1997, the Company granted to Jay Alix & Associates ("Jay
Alix") warrants to purchase 25,000 shares of Common Stock with an exercise price
of $18.125 per share, 25,000 shares of Common Stock with an exercise price of
$21.00 per share and 25,000 shares of Common Stock with an exercise price of
$25.00 per

                                      -16-
<PAGE>
 
share.  The Warrants have an 18-month term and were granted in connection with
the execution by Jay Alix of an interim management services agreement with the
Company.

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

     On December 30, 1997, the Company issued warrants to acquire 817,000 shares
of Common Stock at an exercise price equal to $11.62 per share to RGC
International, LDC.  The warrants were issued in lieu of certain monetary
penalties incurred by the Company as a result of its failure to comply with the
provisions of a registration rights agreement entered into in connection with
the sale by the Company of $18,000,000 of Series C Convertible Preferred Stock
to RGC International, LDC.  See ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL
RESOURCES."

ITEM 6. SELECTED FINANCIAL DATA

   The following selected consolidated historical financial data of the Company
is derived from the Company's consolidated financial statements for the periods
indicated and, as such, reflects the impact of acquired entities from the
effective dates of such transactions. The information in the table and the notes
thereto should be read in conjunction with "ITEM 7 -MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's
Consolidated Financial Statements and notes thereto.
<TABLE>
<CAPTION>
 
                                                                             For the Years Ended December 31,
                                                               --------------------------------------------------------
                                                                 1997        1996      1995         1994         1993
<S>                                                      <C>               <C>       <C>       <C>             <C>
(in thousands except supplemental and per share data)          
STATEMENT OF OPERATIONS DATA:                                  
Net service revenues...................................         $202,386   $ 93,785  $ 51,993      $  45,178   $45,242
Operating income (loss)................................          (19,136)    14,693     7,507          1,036       287
Income (loss) from continuing operations                       
 before extraordinary item.............................          (31,239)     7,254     4,143         (1,093)   (2,055)
Income (loss) from continuing operations                       
 Per common share:                                             
    Basic..............................................            (1.62)      0.64      0.54          (0.15)    (0.32)
    Diluted............................................            (1.62)      0.59      0.53          (0.15)    (0.32)            

SUPPLEMENTAL DATA:                                             
Number of consolidating imaging                                
 centers at end of period..............................               98         39        11              8         8
Total procedures at consolidated                               
 imaging centers.......................................          527,477    209,970   124,302        101,460    86,686
                                                               
BALANCE SHEET DATA                                             
Working capital surplus (deficit)                               $(58,174)  $ 42,775  $ 10,738       $  5,834   $ 3,365
Total assets...........................................          338,956    164,514    44,136         40,372    40,881
Long term debt and capital lease                               
 obligations (excluding current                                
 portion)..............................................           37,900     21,011    11,157         13,415    19,034
Convertible debentures.................................                -      6,988     4,350              -         -
Stockholders equity....................................          126,904    106,384    16,966         11,872    12,939
</TABLE>

Earnings per share amounts for prior periods, including related quarters, have
been restated to conform to the requirements of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share."

                                      -17-
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
       AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

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

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

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

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

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

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

                                      -18-
<PAGE>
 
          Revenues derived from Medicare and Medicaid are subject to audit by
such agencies. The Company is not aware of any pending audits.

          The fees received or retained by the Company under the three types of
agreements with Interpreting Physicians described above, expressed as a
percentage of  gross billings net of contractual allowances for the imaging
services provided, range from 78% to 93% for the Type I agreements, 80% to 93%
for the Type II agreements and 80% to 89% for the Type III agreements.  These
agreements generally have terms ranging from one to ten years.

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

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

     For the year ended December 31, 1997, total Company net service revenues
were $202,386,000 versus $93,785,000 for the year ended December 31, 1996, an
increase of $108,601,000 or 116%.

     Net service revenues for the Diagnostic Imaging segment increased
$79,650,000, or 123%, to $144,412,000 in 1997 from $64,762,000 in 1996, due
primarily to revenues of $60,849,000 contributed by centers acquired during
1997.  Revenues at imaging centers acquired during 1996 increased $20,585,000,
or 93%, to $42,617,000 in 1997 from $22,032,000 in 1996 primarily as a result of
the timing of the 1996 acquisitions, partially offset by an increase of
$5,896,000 in the estimated provision for uncollectible amounts related to Type
III centers.  Revenues at imaging centers that were operated by the Company for
all of 1997 and 1996 decreased $1,784,000, or 4%, to $40,946,000 in 1997 from
$42,730,000 in 1996, primarily as a result of higher contractual allowances in
1997 and relatively constant procedure volumes.

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

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

     Net service revenues for the Temporary Staffing segment increased to
$57,974,000 in 1997 from $29,023,000 in 1996, an increase of $28,951,000 or
100%.  Internal growth in the staffing business, consisting primarily of the
opening of new per diem offices, accounted for $5,442,000 of the increase in
revenues.  Increased revenues at per diem offices opened or acquired during 1996
accounted for

                                      -19-
<PAGE>
 
$16,861,000 of revenues and revenues of $6,648,000 were contributed by per diem
offices acquired during 1997.

     Imaging center and staffing operating costs for the year ended December 31,
1997 were $136,065,000 compared to $59,064,000 for the year ended December 31,
1996, an increase of $77,001,000 or 130%.

     Imaging center operating costs for the Diagnostic Imaging segment increased
$55,400,000, or 164%, to $89,234,000 in 1997 from $33,834,000 in 1996, due
primarily to operating costs of $35,079,000 related to centers acquired during
1997.  Operating costs at imaging centers acquired during 1996 increased
$18,155,000, or 149%, to $30,325,000 in 1997 from $12,170,000 in 1996, primarily
as a result of the timing of the 1996 acquisitions.  Operating costs at imaging
centers that were operated by the Company for all of 1997 and 1996 increased
$2,166,000, or 10%, to $23,830,000 in 1997 from $21,664,000 in 1996, primarily
as a result of higher payroll and related costs.

     Operating costs for the Temporary Staffing segment in 1997 were $46,831,000
compared to $25,230,000 for the year ended December 31, 1996, an increase of
$21,601,000 or 86%.  Internal growth in the staffing business, accounted for
$4,143,000 of the increase in operating costs.  Increased costs at per diem
offices opened or acquired during 1996 accounted for $11,812,000 of the higher
operating costs and operating costs of $5,646,000 were contributed by per diem
offices acquired during 1997.

     Center operating margins, which represent net service revenue less imaging
center and staffing operating costs as a percent of net revenue, decreased in
1997 to 33% from 37% in 1996. Center operating margins for the Diagnostic
Imaging segment decreased in 1997 to 38% from 48% in 1996 due primarily to
higher contractual allowance estimates, including a component related to the
ultimate collectibility of amounts related to the Company's Type III revenue, as
described above, and generally higher costs.  Center operating margins in the
Temporary Staffing business increased in 1997 to 19% from 13% due primarily to
improved profitability of per diem offices opened or acquired prior to 1997.

     The provision for uncollectible accounts receivable in 1997 was
$20,656,000, an increase of $15,873,000 from the 1996 provision of $4,783,000.
This increase was essentially entirely attributable to the Company's Diagnostic
Imaging segment.  The Company's Diagnostic Imaging segment provision for
uncollectible accounts receivable in 1997 was $20,364,000, or 14% of related net
service revenues, compared to the 1996 provision of $4,704,000 or 7% of related
net service revenues.  The increase in the provision for uncollectible accounts
receivable was due to the deterioration during 1997 in the aging of the
Company's accounts receivable and a reassessment by the Company of its expected
future collections based upon 1997 collection activity, including analyzing
collection experience of its personal injury receivables.  Accounts receivable
before allowances for uncollectibles aged over one-year increased to
$21,485,000, or 25% of total receivables in 1997, from $7,016,000, or 14% of
total receivables in 1996.

     Management expects its provision for uncollectible accounts receivable as a
percentage of Diagnostic Imaging segment revenues to approximate 7% for 1998.
An additional reserve of approximately 1% of net imaging revenues for
uncollectible patient and third party payors related to the Company's Type III
centers is expected to be reflected as a reduction in net revenues for 1998.

     Corporate general and administrative expense in 1997 was $20,246,000, an
increase of $12,467,000 from the $7,779,000 recorded in 1996.  This increase was
primarily due to higher payroll and related costs as a result of the expanded
business development activities and the resulting growth experienced during the
year in the Diagnostic Imaging segment. In March 1998, the Company announced a
workforce reduction and follow-on attrition program that is expected to result
in reduced payroll costs of approximately $5,000,000 per annum.

                                      -20-
<PAGE>
 
          During 1997, the Company recorded $2,536,000 of stock-option based
compensation expense.  This non-cash charge was related to stock option grants
to employees and directors during 1996 and early 1997 that were subsequently
approved by the Company's stockholders in May, 1997.

     Depreciation and amortization expense in 1997 was $19,334,000, compared to
$7,466,000 in 1996, or an increase of $11,868,000 attributable almost entirely
to the Company's Diagnostic Imaging business. The increase was due primarily
to higher equipment depreciation of $6,585,000 resulting from 1997 acquisitions
and increased goodwill amortization of $4,638,000.

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

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

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

     Net interest expense for 1997 was $9,167,000 as compared to $2,969,000 for
1996, an increase of $6,198,000.  This increase was primarily attributable to
higher outstanding debt, including the issuance of $78,000,000 of Senior Notes
during 1997, notes payable of $36,505,000 and capital lease obligations totaling
$26,612,000 assumed in connection with the Company's acquisitions.

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

     The provision for income taxes in 1997 was $2,300,000, as compared to
$4,162,000 in 1996.  During 1997, the income tax benefit calculated based upon
the Company's pre-tax loss was reduced by an income tax valuation allowance of
$10,700,000.  This valuation allowance was recorded due to uncertainty regarding
the realization of the full amount of the Company's net deferred income tax
assets.

                                      -21-
<PAGE>
 
     The Company's net loss for 1997 was $31,239,000 compared to net income for
1996 of $7,254,000.  The net loss applicable to common stockholders (used in
computing loss per common share) in 1997 includes charges of $1,938,000 related
to Common Stock subject to redemption and convertible preferred stock.  These
charges relate to price protection agreements provided in connection with the
Company's 1997 acquisitions of $1,696,000 and the accretion of the Company's
preferred stock of $242,000.


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

     For the year ended December 31, 1996, net service revenues amounted to
$93,785,000 versus $51,993,000 for the year ended December 31, 1995, an increase
of $41,792,000 or 80.4%. Management fee and use revenues for diagnostic imaging
services increased $8,270,000 from $31,174,000 for the year ended December 31,
1995 to $39,445,000 for the year ended December 31, 1996. This increase is
primarily attributable to an increase of $1,326,000 (4.5%) at centers which were
included in revenue for all of 1996 and 1995; $2,752,000 (169%) in revenue at a
center acquired during 1995 and $4,192,000 of revenue contributed by imaging
centers acquired during 1996.

     Diagnostic imaging patient service revenues increased $20,631,000 for the
year ended December 31, 1996 to $25,317,000 from $4,686,000 for the year ended
December 31, 1995. This increase is attributable to an increase of $615,000
(19%) at centers which were included in revenue for all of 1995 and 1996;
$2,670,000 (183%) at centers acquired during 1995 and; $22,032,000 of revenue
was contributed by centers acquired during 1996. Staffing segment revenues
increased $12,890,000 (80.3%) primarily due to internal growth and acquisitions.
Internal growth in the staffing segment consisting of the opening of new per
diem offices accounted for approximately $3,200,000 of the increase in staffing
revenue. Increased revenues at per diem offices opened during 1995, related
primarily to improved volume as these offices matured from their start up phase,
accounted for approximately $3,400,000 of the increase in staffing revenues. Per
diem staffing businesses acquired during 1996 contributed approximately
$6,300,000 in revenues during the year.

     Technical services payroll and related costs for the year ended December
31, 1996 amounted to $35,073,000 compared to $19,526,000 for the year ended
December 31, 1995, an increase of $15,547,000 or 80%. Of this increase
$6,356,000 or 41% is attributable to costs incurred at imaging centers acquired
during 1995 and 1996. $6,569,000 or 42% is attributable to the opening of new
per Diem offices and the staffing acquisitions. The remaining $2,622,000
increase is due to the maturation of per diem offices opened in 1995.

     Medical supplies amounted to $4,223,000 for the year ended December 31,
1996 as compared to $2,440,000 for the year ended December 31, 1995, an increase
of  $1,783,000 or 73%. Of this increase $1,725,000 or 97% is attributable to
centers acquired during 1995 and 1996.

     For the year ended December 31, 1996 diagnostic equipment maintenance
increased $1,626,000 or 99% to $3,274,000 from $1,648,000 for the year ended
December 31, 1995. This increase is primarily due to centers acquired during
1995 and 1996.

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

     Administrative costs which include facilities rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately

                                      -22-
<PAGE>
 
$5,853,000 or 96% from $6,084,000 for the year ended December 31, 1995 to
$11,937,000. This increase is primarily due to costs incurred at imaging centers
acquired during 1995 and 1996.

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

     Provision for uncollectible accounts receivable increased $1,405,000 or
41.6% from $3,378,000 from the year ended December 31, 1995 to $4,783,000 for
the year ended December 31, 1996. This increase is primarily due to the
$28,276,000 increase in imaging revenues that have higher bad debt experience
than the Company's staffing revenues. The 1996 imaging segment provision for
uncollectible accounts consists of $4,704,000 or 7.3% of revenue as compared to
$3,374,000 or 9.4% of revenue in 1995. The decrease in the provision for
uncollectible accounts receivable as a percentage of imaging revenues is due to
acquired companies having a more favorable collection experience due to
differences in payor mix. The Company's staffing segment provision for
uncollectibles for both 1996 and 1995 was not material.

     Corporate general and administrative expense increased by $2,801,000 or
56.3% from $4,978,000 for the year ended December 31, 1995 to $7,779,000 for the
year ended December 31, 1996. This increase is primarily due to the expanded
business development activities and the resulting growth experienced during the
year in the imaging and staffing segments, particularly following the
acquisition of NMR of America, Inc. ("NMR").

     Depreciation and amortization expense was $7,465,000 for the year ended
December 31, 1996 compared to $4,567,000 for the year ended December 31, 1995 or
an increase of $2,898,000 (63.5%). The imaging segment accounted for $2,690,000
or 92.8% of this increase in aggregate depreciation and amortization expense due
primarily to depreciation expense relating to acquired assets and increased
goodwill amortization incurred in connection with such acquisitions. Equipment
depreciation and amortization expense increased from $3,844,000 in 1995 to
$5,463,000 in 1996 while goodwill and other amortization increased from
$1,134,000 to $2,002,000 primarily due to the acquisition of NMR.

     Interest expense for the year ended December 31, 1996 was $2,968,000 as
compared to $1,829,000 for the prior year, an increase of $1,139,000 or 62.3%.
This increase is primarily attributable to an increase in interest on
convertible debentures and lines of credit outstanding during 1996 of $646,000
and increases in interest on debt assumed in acquisitions during 1996 totaling
$764,000 offset by decreases in interest expense relating to scheduled
reductions in outstanding principal balances.

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

          The provisions for income taxes increased $2,503,000 or 150.9% for the
year ended December 31, 1996 from $1,659,000 to $4,162,000. This increase is
attributable to the increased profitability of the Company's existing and
acquired businesses during 1996 and an increase in the Company's effective
income tax rate. The Company's provision for income taxes resulted in effective
tax rates of 36.6% in 1996 and 28.6% in 1995, respectively.

     The 1996 provision was higher than the statutory rate primarily due to
state and local income taxes, net of the Federal tax effect (6.1%), the impact
on non-deductible goodwill (2.3%) and meals and entertainment, offset by other
items amounting to (6.6%). In 1995, the effective tax rate was lower than

                                      -23-
<PAGE>
 
the statutory rate primarily due to a reduction in the deferred tax asset
valuation allowance (26.2%) offset by other items amounting to 10.7%.

          For the reasons described above, the Company's net income for the year
ended December 31, 1996 increased $5,564,000 or 329.2% from $1,690,000 for the
year ended December 31, 1995 to $7,254,000. The year ended December 31, 1995 net
income includes two non-recurring items relating to losses incurred upon the
sale of the Company's maternity apparel subsidiary.


LIQUIDITY AND CAPITAL RESOURCES

          During 1997, the Company's primary source of cash flow was from
financing activities, largely as a result of net proceeds from the Senior Notes
of $76,523,000, net proceeds from the issuance of convertible preferred stock of
$16,965,000, and other financing activities. The primary use of cash was to fund
acquisitions which totaled $73,121,000 and to fund the repayment of certain
notes and capital lease obligations of $13,764,000. Operating activities
resulted in a net use of cash of $5,322,000 during 1997 due primarily to
increases in accounts receivable.

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

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

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

     In the event that the Senior Note lenders 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

                                      -24-
<PAGE>
 
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 December 31, 1997 and the Company
has a deficit in working capital more fully described below. These matters raise
substantial doubt about the Company's ability to continue as a going concern. In
addition to continuing to negotiate with the Senior Note lenders in an attempt
to obtain waivers or amendments of the aforementioned defaults, the Company has
taken various actions in response to this situation, including the following:
(i) it effected a workforce reduction in March 1998 aimed at reducing the
Company's overall expense levels, and (ii) it has retained the investment
banking firm of SBC Warburg Dillon Read to assist the Company in exploring a
possible sale of the Company's StarMed temporary staffing subsidiary. The
financial statements do not include any further adjustments reflecting the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.

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

     The Company's average days sales outstanding (on an annualized basis) in
accounts receivable was 120 days for both December 31, 1997 and 1996. Days sales
outstanding was unchanged in 1997 as compared to 1996 due primarily to the
increase in reserves and write-offs during 1997.

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

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

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

                                      -25-
<PAGE>
 
certain acquisitions, the Company and the relevant sellers have agreed to a
maximum amount of contingent consideration and in other cases the parties have
agreed that any payment of such contingent consideration may be paid in cash or
shares of Common Stock, or a combination of both.

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

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

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

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

     In addition to matters discussed above, the Company will incur certain
unusual charges in 1998 (of at least $4,500,000) and is subject to litigation
that may require additional future cash outlays.

                                      -26-
<PAGE>
 
     On May 14, 1998, management appeared before the Nasdaq Qualifications
Hearing Panel.  This hearing resulted from the Company's failure to file timely
its Form 10-K for 1997 and was held to determine if the Company's Common Stock
should continue to be listed on The Nasdaq Stock Market. On May 29, 1998, the 
Company was advised that the Panel determined to continue the listing of the 
Company's Common Stock on The Nasdaq Stock Market subject to certain conditions.
The Company must file its Quarterly Report on Form 10-Q for the quarter ended 
March 31, 1998 on or before June 12, 1998 and must evidence compliance with 
either Nasdaq's minimum net tangible assets test or one of Nasdaq's alternative 
requirements by July 24, 1998. Regarding the filing of the Form 10-Q, management
intends for the Company to be in a position to file the Quarterly Report by June
12 in order to satisfy the date-of-filing condition set by the Panel for 
continued listing. Notwithstanding the foregoing, no assurance can be given at 
this time that this filing deadline will be met.

     Based on the closing price for the Company's Common Stock on May 26, 1998 
($3-1/16) and the Company's net tangible assets as of December 31, 1997, the 
Company does not currently satisfy either Nasdaq's minimum net tangible assets 
requirement or one of the alternative requirements for continued listing, which 
include, among other things, a minimum bid price for the Common Stock of $5.00 
per share. In order to satisfy the continued listing requirements, on or before 
July 24, 1998, the Company intends to submit for shareholder approval a reverse 
stock split, if necessary, in order to meet or exceed the $5.00 minimum bid 
price. In the event the Company does not satisfy either the minimum net tangible
assets requirement or is unable to effect a reverse stock split sufficient to 
meet or exceed the $5.00 per share requirement, the Panel will consider moving 
the Common Stock to The Nasdaq SmallCap Market, provided the Company is able to 
demonstrate compliance with the applicable maintenance criteria. There can be no
assurance that the Common Stock will meet the continued listing requirements for
The Nasdaq Stock Market.

     The Company's sources of liquidity consist of its cash balances and its
ability to enter into operating leases to fund expansions and equipment
replacement at its centers. At December 31, 1997 and April 30, 1998, the
Company's cash and cash equivalents were $23,198,000 and $8,406,000,
respectively. In addition, in March of 1998, the Company announced its intention
to explore strategic alternatives for (and the possible sale of) its StarMed
temporary staffing subsidiary, which the Company expects may result in cash
proceeds to Medical Resources, Inc. Assuming that the Company (i) reaches
satisfactory resolution with the Senior Note lenders regarding the financial
covenant defaults, and (ii) sells its Temporary Staffing and Per Diem business
over the next several months, while no assurance can be given, the Company
believes that it will have sufficient funds available to finance its working
capital requirements through 1998.

     In addition, management believes that there are and will continue to be
opportunities to acquire additional diagnostic imaging centers, as well as
companies which own multiple centers.  However, due to the Company's defaults
under its Senior Note agreement and its 1997 net loss, management is not
currently pursuing additional acquisitions.  Until such time as the Company has
access to additional financing, it will not be in a position to make such
acquisitions.

Seasonality and Inflation
-------------------------

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

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


Impact of Year 2000 On Company's Computer Software
--------------------------------------------------

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

                                      -27-
<PAGE>
 
          The Company has completed an assessment of its material financial and
billing computer systems.  The Company is in the process of upgrading these
systems to be Year 2000 compliant and expects to complete this process by late
1998 to early 1999.  The cost to be incurred related to Year 2000 compliance for
these systems is currently not expected to be material.

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

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

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

Recently Issued Accounting Pronouncements
-----------------------------------------

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

     SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997.  This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position or results of
operations.

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

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


Disclosure Regarding Forward Looking Statements
-----------------------------------------------

     Statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.  Investors are cautioned that
forward-looking statements are inherently uncertain.  Actual performance and
results may differ materially from that projected or suggested herein due to
certain risks and uncertainties including, without limitation: the ability of
the Company to effectively integrate the operations and information systems of
businesses acquired in 1997 and earlier; the ability of the

                                      -28-
<PAGE>
 
Company to generate net positive cash flows from operations; the payment timing
and ultimate collectibility of accounts receivable (including purchased accounts
receivable) from different payor groups (including Personal Injury-type); the
economic impact of involuntary share repurchases and other payments (including
price protection payments and penalty payments) caused by the delay in the
effectiveness of the Company's pending Registration Statement and by the recent
decline in the Company's share price; the ability of the Company to cure any
defaults under its debt agreements and/or other obligations, in general, and in
a manner that avoids significant common stock dilution; the impact of a changing
and increasing mix of managed care and personal injury claim business on
contractual allowance provisions, net revenues and bad debt provisions; the
ultimate economic impact of recent litigation including shareholder and former
management lawsuits against the Company and certain of its Directors; the
availability of debt and/or equity capital, on reasonable terms, to finance
operations as needed and to finance growth; and the effects of federal and state
laws and regulations on the Company's business over time.  Additional
information concerning certain risks and uncertainties that could cause actual
results to differ materially from that projected or suggested may be identified
from time to time in the Company's Securities and Exchange Commission filings
and the Company's public announcements.

                                      -29-
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Registrant's response to this item is incorporated herein by reference to
the consolidated financial statements and consolidated financial statement
schedule and the reports thereon of independent auditors, listed in Item
14(a)(l) and (2) and appearing after the signature page to this Annual Report on
Form 10-K.

ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

     On December 4, 1997, Coopers & Lybrand LLP ("Coopers & Lybrand") resigned
as auditor of the Company.

     In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 1996 and in the subsequent interim period (the
"Reporting Period"), there were no matters of disagreement with Coopers &
Lybrand on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which, if not resolved to
the satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to
make reference thereto in their report.  During the Reporting Period, Coopers &
Lybrand's report on the Company's financial statements did not contain an
adverse opinion or a disclaimer of opinion nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles.

     On December 8, 1997, the Company engaged Ernst & Young, LLP ("Ernst &
Young") to audit the financial statements of the Company.  Ernst & Young had
previously served as the Company's independent auditors for the fiscal years
ended December 31, 1994 and 1995.

                                      -30-
<PAGE>
 
                                   PART III
<TABLE> 
<CAPTION> 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

        The directors, executive officers and certain key employees of the
Company as of May 26, 1998 are as follows:

NAME                             AGE       POSITION
----                             ---       --------
<S>                             <C>        <C> 

Gary N. Siegler.............     36        Chairman of the Board and Director
D. Gordon Strickland........     51        Chairman of the Executive Committee and Director
Duane C. Montopoli..........     49        Chief Executive Officer, President and Director *
Geoffrey A. Whynot ..            39        Chief Financial Officer and Senior Vice
                                           President-Finance *
Christopher J. Joyce             34        Senior Vice President-Legal Affairs and
                                           Administration and Secretary *
Gregory Mikkelsen ..........     50        President and Chief Operating Officer of StarMed *
Gerald H. Allen.............     50        President of Company's Imaging Division *
Carl Larsen.................     43        Senior Vice President-Operations
Daniel F. Bafia.............     38        Senior Vice President-Operations
Michael J. Drumgoole .......     50        Senior Vice President-Sales and Marketing
Stephen M. Davis............     43        Director
Gary L. Fuhrman ............     36        Director
John H. Josephson...........     36        Director
Neil H. Koffler.............     31        Director
</TABLE> 

*  Executive Officer

     Gary N. Siegler has served as Chairman of the Board of Directors of the
Company since 1990.  Mr. Siegler is a co-founder and, since January 1989, has
been President of Siegler, Collery & Co., a New York-based investment firm
("Siegler Collery").  Mr. Siegler is principal member of the general partner of
The SC Fundamental Value Fund, L.P. ("Fundamental Value Fund"), a fund investing
in marketable securities, and an executive officer of SC Fundamental Value BVI,
Inc. ("Fundamental Value BVI"), the managing partner of the investment advisor
to an offshore fund investing in marketable securities.  Mr. Siegler serves as
the Chairman of the Board of Directors of National R.V. Holdings, Inc., a
manufacturer of motor homes and other recreational vehicles.

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

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

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

     Christopher J. Joyce was appointed Senior Vice President-Legal Affairs and
Administration and Secretary in April 1998. Previously, he was Executive Vice
President and General Counsel of Alliance Entertainment Corp., a publicly-traded
entertainment and music distribution company which filed for protection under
Chapter 11 of the United States Bankruptcy Code in July 1997.  From February
1992 to July 1995, Mr. Joyce served as Executive 

                                      -31-
<PAGE>
 
Vice President of Business Affairs and General Counsel of Independent National
Distributors, Inc., a privately-held independent music distribution company.
From September 1988 to February 1992, Mr. Joyce was an associate at the law firm
of Willkie Farr & Gallagher.

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

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

     Carl Larsen is Senior Vice President--Operations of the Company.  Prior to
Mr. Larsen's employment by the Company, Mr. Larsen managed a 13-site privately
operated radiology practice in New York from 1990 to 1996.  Mr. Larsen is a
licensed radiological technologist and, in prior positions, spent eight years in
hospital-based radiological administration and five years as a staff member at
the American College of Radiology.

     Daniel F. Bafia is Senior Vice President--Operations of the Company.  Mr.
Bafia joined the Company in 1992 and prior thereto had over 10 years' experience
developing and managing radiation therapy and diagnostic imaging centers for
public and private companies and hospitals.

     Michael J. Drumgoole is Senior Vice President--Sales and Marketing of the
Company and has held such position since 1993.  Mr. Drumgoole has over 20 years
in medical sales and has held various sales, sales training and sales management
positions within the healthcare industry.

     Stephen M. Davis has been a director of the Company since 1992.  For more
than the past five years, Mr. Davis has been a partner of the law firm Werbel &
Carnelutti, A Professional Corporation.  Mr. Davis is a director of National
R.V. Holdings, Inc.

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

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

     Neil H. Koffler has been a director of the Company since November 1995 and
is a member of the Company's Audit Committee.  Mr. Koffler has been employed by
Siegler Collery since 1989.  Mr. Koffler is a member of the general partner of
Fundamental Value Fund and an executive officer of Fundamental Value BVI.  Mr.
Koffler is a director of National R.V. Holdings, Inc.

     Peter J. Powers was appointed as a director of the Company in December 1997
and served as a member of the Board's Executive, Compensation and Audit
Committees. On May 13, 1998, Mr. Powers notified the Company that due to
constraints on his time, he was resigning as a director of the Company effective
on such date. Mr. Powers is the Chairman of High View Capital, which serves as a
parent company to High View Horizon, a joint venture with Horizon Asset
Management, a financial research firm. Prior to joining High View, Mr. Powers
served as the First Deputy Mayor of New York City under Mayor Rudolph Giuliani.

                                      -32-
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

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

<TABLE>
<CAPTION>
                                                                                
                                                                                       LONG TERM COMPENSATION
                                                                                       ----------------------
                                           ANNUAL COMPENSATION                                 Awards       
                                   -----------------------------------                       -----------        
<S>                  <C>           <C>          <C>        <C>                  <C>             <C>            <C>
Name                                                                                            Securities
and                                                        Other Annual         Restricted      Underlying     All Other
Principal                                                  Compensation         Stock           Options        Compensation($) (/3/)
Position                     Year    Salary($)   Bonus($)  (/1/)  Awards        SARs(#)(/2/)
 
Lawrence J. Ramaekers        1997  $119,510(/5/)   -0-     ___                   -0-            75,000(6)         -0-
  Former Acting
   President
  and Chief
   Executive
  Officer(/4/)
William D. Farrell           1997  $247,342     $150,000   ___                   -0-                   -0-     $6,016
  Former President           1996  $152,415     $150,000   ___                   -0-               140,000     $4,093
   and                       1995  $131,643     $ 60,000   ___                   -0-               135,000     $3,245
  Chief Operating                                                                                              
   Officer(/7/)                                                                                                  
John P. O'Malley,            1997  $626,550          -0-   ___                   -0-                   -0-        -0-
 III                         1996  $183,333          -0-   ___                   -0-               203,438        -0-
  Former Executive
   Vice
  President
   Finance and
  and Chief
   Financial
  Officer(/8/)
Gary I. Fields               1997  $106,542     $    ___    ___                  -0-                60,000        -0-
  Former Senior Vice;
  President and General
  Counsel (/7/)
Gregory Mikkelsen            1997  $179,867     $ 10,000    ___                  -0-                   -0-        -0-
  President and              1996  $ 68,955          -0-    ___                  -0-                50,000        -0-
   Chief Executive
   Officer of
    StarMed
</TABLE>

___________________

(/1/) The aggregate amount of all perquisites and other personal benefits
      paid to each Named Individual is not greater than either $50,000 or
      10% of the total of the annual salary and bonus reported for either
      such executive.

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

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

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

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

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

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

(/8/) Mr. O'Malley was appointed Executive Vice President - Finance and Chief
      Financial Officer in September 1996 and removed from such position on
      November 8, 199 7.

                                      -33-
<PAGE>
 
EMPLOYMENT AGREEMENTS

     The Company is a party to an employment agreement with Mr. Duane C.
Montopoli (the "Montopoli Employment Agreement").  The term of the Montopoli
Employment Agreement shall continue until terminated by either the Company or
Mr. Montopoli.  Pursuant to such Montopoli Employment Agreement, Mr. Montopoli
acts as President and Chief Executive Officer of the Company, and is entitled to
receive an annual base salary of $275,000.  Such annual salary may be increased
from time to time in the discretion of the Company's Board of Directors.  Mr.
Montopoli is also entitled to receive a bonus for each calendar year during his
term of employment provided he is employed on the last day of the calendar year.
The bonus' target amount for any year shall be equal to 50% of Mr. Montopoli's
base salary for such year and the actual amount of the bonus shall be determined
by the Company's Board of Directors within 60 days following the end of such
year.  In connection with the execution of the Montopoli Employment Agreement,
the Company granted to Mr. Montopoli ten-year options to purchase 600,000 shares
of Common Stock, 400,000 of which have an exercise price of $10.625 and 200,000
of which have an exercise price of $14.50.  Such options vest in five equal
annual installments beginning January 30, 1998, unless sooner accelerated by
certain "change of control" events.  The Montopoli Employment Agreement also
entitles Mr. Montopoli to receive a $1.0 million life insurance policy payable
to Mr. Montopoli's named beneficiaries.  Mr. Montopoli is prohibited from
competing with the Company for a period of 18 months following the termination
of the Montopoli Employment Agreement.

     The Company is a party to an employment agreement with Mr. William D.
Farrell dated January 1, 1997, which was scheduled to expire on December 31,
1999.  Pursuant to such employment agreement, Mr. Farrell acted as President and
Chief Operating Officer of the Company, for which he received an annual salary
of $225,000.  In addition, pursuant to such agreement, Mr. Farrell is prohibited
from competing with the Company for a period of one year following the
termination of the agreement.  On November 7, 1997, Mr. Farrell resigned from
his position as President and Chief Operating Officer of the Company.  The
Company is in litigation with Mr. Farrell relating, in part, to Mr. Farrell's
employment agreement.  See "Item 3 - Litigation" and "Item 13 - Certain
Relationships and Related Transactions."

     The Company is party to a non-competition and consulting agreement with Mr.
John P. O'Malley III which expires on August 30, 1998 entered into in connection
with the acquisition of NMR in August 1996 (the "NMR Acquisition").  Pursuant to
such consulting agreement, Mr. O'Malley receives $550,000 annually, and the
Company issued to Mr. O'Malley at the closing of the NMR Acquisition (i) five-
year warrants to purchase 50,000 shares of Common Stock at an exercise price of
$8.00 per share, and (ii) in exchange for his NMR employee stock options, four
separate five-year stock purchase warrants to purchase 10,313; 27,500; 41,250;
and 34,375 shares of Common Stock at exercise prices of $4.00, $3.36, $4.18 and
$4.73, respectively.  Subsequent to the closing of the NMR Acquisition, Mr.
O'Malley was appointed Senior Vice President - Finance and Chief Financial
Officer of the Company in September 1996 and he was removed from such position
on November 8, 1997 for failure to perform certain of his functions as Chief 
Financial Officer. The Company is in litigation with Mr. O'Malley relating, in
part, to Mr. O'Malley's consulting agreement.  See "ITEM 3 - LITIGATION" AND
"ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

                                      -34-
<PAGE>
 
     STOCK OPTION PLANS

1992 Stock Option Plan
----------------------

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

1995 Stock Option Plan
----------------------

     In March 1995, the Company adopted and approved the 1995 Stock Option Plan
(the "1995 Plan").  The 1995 Plan is designed to serve as an incentive for
retaining qualified and competent directors, employees and consultants.  The
1995 Plan provides for the award of options to purchase up to 400,000 shares of
Common Stock, of which 130,232 were subject to outstanding options as of April
1, 1998.  The 1995 Plan is administered by the Stock Option Committee of the
Board of Directors.  The Stock Option Committee has, subject to the provisions
of the 1995 Plan, full authority to select Company individuals eligible to
participate in the 1995 Plan, including officers, directors (whether or not
employees) and consultants.  The 1995 Plan provides for the awarding of
incentive stock options (as defined in Section 422 of the Internal Revenue Code
of 1986) and non-incentive stock options.  Options granted pursuant to the 1995
Plan have such vesting schedules and expiration dates as the Stock Option
Committee has established or shall establish in connection with each participant
in the 1995 Plan, which terms shall be reflected in an option agreement executed
in connection with the granting of the option.  In fiscal 1997, no options were
granted to under the 1995 Plan.

1996 Stock Option Plan
----------------------

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

1996 Stock Option Plan B
------------------------

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

                                      -35-
<PAGE>
 
1997 Stock Option Plan
----------------------

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

          OPTIONS AND WARRANTS GRANTED IN LAST FISCAL YEAR

The following table sets forth certain information concerning options and
warrants granted during fiscal 1997 to the Named Officers.
 
<TABLE>
<CAPTION>
                                                                                                      Potential
                                                                                                     realizable
                                                                                                      value at
                                                                                                   assumed annual
                                                                                                   rates of stock
                                                                                                        price
                                                                                                    appreciation
                                             Individual Grants                                           for
                                                    (1)                                            option term (2)
                                             ------------------                                    ---------------
 
                                             Percent of total                                                    
                                               options/SARs  
                                                granted to         Exercise or                                      
                             Options           employees in        base price     Expiration     
       Name                  Granted           fiscal year           ($/Sh)        date           5% ($)          10% ($)
       ----                  -------           ------------          ------        ----           ------          -------
<S>                        <C>              <C>                  <C>              <C>              <C>              <C>
Lawrence Ramaekers           25,000(/3/)        (/4/)               $18.125       5/2/99          $ 7,507         $ 40,798
                             25,000(/3/)        (/4/)               $ 21.00       5/2/99          $     0         $      0
                             25,000(/3/)        (/4/)               $ 25.00       5/2/99          $     0         $      0
William D. Farrell             ___               ___                   ___           ___             ---              ___
John P. O'Malley, III          ___               ___                   ___           ___             ___              ___
Gary I. Fields               25,000             (/4/)               $ 12.00       5/19/02         $82,884         $183,153
                             35,000             (/4/)               $ 14.00       5/19/02         $46,038         $186,414
Gregory Mikkelsen              ___               ___                   ___           ___             ___              ___
</TABLE> 
__________________
 
(1)    Due to the fact that the 1997 Plan was not presented to the Company's
       shareholders for approval within one year of the plan's adoption by the
       Company, all options granted pursuant to the 1997 Plan have lapsed and
       such grants are not deemed to be outstanding.
 
(2)    The 5% and 10% assumed annual rates of appreciation of the grant date
       market prices are mandated by rules of the Securities and Exchange
       Commission ("SEC") and do not reflect estimates or projections of future
       Common Stock prices. There can be no assurance that the amounts reflected
       in this table will be achieved.
       
(3)    Represents warrants to purchase 75,000 shares of Common Stock issued to
       J. Alix in connection with its engagement by the Company to provide
       interim management services to the Company. Mr. Ramaekers, a principal of
       J. Alix, was appointed Acting President and Chief Executive Officer of
       the Company on November 2, 1997 and served in such capacity until
       February 2, 1998.
 
(4)    After giving effect to the termination of all conditional options granted
       during 1997 under the Company's 1997 Stock Option Plan, no options or
       warrants were granted in 1997 to any of the Company's Named Officers,
       except Mr. Fields. Warrants were granted to J. Alix as described in
       footnote 3 above.

                                      -36-
<PAGE>


                                      -37-
<PAGE>
 
Option/Warrant Values

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

<TABLE> 
<CAPTION> 
                                                                     Value of unexercised
                                        Number of unexercised       in-the-money options at
                                     options at December 31, 1997   December 31, 1997 ($)(1)
                                     ---------------------------    ------------------------
                Shares
               Acquired              
                  in          Value                                                          
               Exercise     Realized                                
   Name           (#)          ($)      Exercisable Unexercisable Exercisable  Unexercisable 
   ----        --------     --------    ----------- ------------- -----------  -------------
<S>           <C>           <C>       <C>            <C>         <C>          <C> 
Lawrence J.        ___          ___      75,000(/2/)     ___           $0           ___
Ramaekers

William D.      52,500      $891,065     23,332          ___       $113,744         ___
Farrell

John P.        10,313(3)    $192,197    166,458(/4/)   26,667      $619,796      $23,334
O'Malley,
III

Gary I.            ___          ___         ___          ___          ___           ___
Fields

Gregory         8,100       $136,513      8,566        33,334          $0            $0
Mikkelsen       
</TABLE> 
________________________

(1)  On December 31, 1997 the last reported sales price for the Common Stock on
     the Nasdaq Market was $9.375.

(2)  Represents warrants to purchase 75,000 shares of Common Stock issued to J.
     Alix in connection with its engagement by the Company to provide interim
     management services to the Company.  Mr. Ramaekers, a principal of J. Alix,
     was appointed Acting President and Chief Executive Officer of the Company
     on November 2, 1997 and served in such capacity until February 2, 1998.

(3)  Represents shares underlying warrants issued to Mr. O'Malley, the former
     Executive Vice-President - Finance and Chief Financial Officer of NMR, in
     connection with the NMR Acquisition.  See "Executive Compensation -
     Employment Agreements."

(4)  Of such total amount of shares, 153,125 shares represent shares underlying
     warrants issued to Mr. O'Malley, the former Executive Vice-President -
     Finance and Chief Financial Officer of NMR, in connection with the NMR
     Acquisition.  See "Executive Compensation -Employment Agreements."

                                      -38-
<PAGE>
 
ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table set forth as of May 26, 1998 the number and
percentage of shares of Common Stock held by (i) each of the Named Officers and
directors of the Company, (ii) all persons who are known by the Company to be
the beneficial owners of, or who otherwise exercise voting or dispositive
control over, five percent or more of the Company's outstanding Common Stock and
(iii) all of the Company's present executive officers and directors as a group:


                                                                           
            Beneficial                   Common Stock        Percentage of 
               Owner                        Owned(1)          Outstanding  
            ----------                   ------------        -------------

Gary N. Siegler (2)(3)                    4,328,117              18.0%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022

Duane C. Montopoli (4)                     120,000                 *

Neil H. Koffler (5)                        965,980                4.1%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022

Gary L. Fuhrman (6)                        177,591                 *

John H. Josephson (7)                       44,375                 *

Stephen M. Davis (8)                        48,387                 *

D. Gordon Strickland                          0                   0%

Peter M. Collery (2)(9)                   3,092,002              13.5%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022

Fir Tree Partners (10)                    2,861,000              13.0%
1211 Avenue of the Americas
29th Floor
New York, New York  10036

StarMed Investors, L.P. (2)               1,441,087               6.3%
c/o Siegler, Collery & Co.
10 East 50th Street
New York, NY 10022

HHH Investments                           1,330,000               5.8%
Limited Partnership (11)
920 King Street
Wilmington, DE 19801

William D. Farrell                          24,832                 *

John P. O'Malley, III (12)                 170,981                 *

All executive officers and                5,087,050                20.6%
Directors as a group (9 in number)
(2)(3)(4)(5)(6)(7)(8)

------------------
 
*    Less than one percent.

(1)  Except as otherwise indicated, the persons named in the table have sole
     voting and investment power with respect to the shares of Common Stock
     shown as beneficially owned by them.

                                      -39-
<PAGE>
 
(2)  Messrs. Siegler and Collery, due to their joint ownership of Siegler
     Collery and other affiliates which control StarMed Investors, L.P. (which
     is included in the table), and certain other entities which beneficially
     own an aggregate of 1,444,216 shares of Common Stock are each deemed to
     beneficially own all of the shares of Common Stock owned of record by all
     such entities.

(3)  Includes 608,666 shares underlying outstanding options which are
     exercisable immediately or within 60 days, 202,898 shares owned by The Gary
     N. Siegler Foundation, a charitable foundation, and warrants to acquire
     525,000 shares of Common Stock held by 712 Advisory Services, Inc.  Mr.
     Siegler is deemed to beneficially own all of the shares of Common Stock
     owned of record by such entities.

(4)  Includes 120,000 shares underlying outstanding options which are
     exercisable immediately or within 60 days.

(5)  Includes 95,000 shares underlying outstanding options which are exercisable
     immediately or within 60 days, warrants to acquire 270,000 shares of Common
     Stock and an aggregate of 597,400 shares of Common Stock owned by
     Fundamental Value Fundand Fundamental Value BVI, Ltd., which shares Mr.
     Koffler (together with Messrs. Siegler and Collery) is deemed to
     beneficially own.

(6)  Includes 101,000 shares underlying outstanding options which are
     exercisable immediately or within 60 days.

(7)  Includes 40,000 shares underlying outstanding options which are exercisable
     immediately or within 60 days.

(8)  Includes 46,000 shares underlying outstanding options which are exercisable
     immediately or within 60 days.

(9)  Includes 51,000 shares underlying outstanding options which are exercisable
     immediately or within 60 days.

(10) Based solely upon information contained in a Schedule 13D, filed with the
     SEC.

(11) Based solely upon information contained in a Schedule 13D, as amended by
     Amendments Nos. 1, 2 and 3 thereto, filed with the SEC.  As disclosed in
     Amendment No. 3 to such Schedule 13D filed with the SEC on December 16,
     1997, the total in the table excludes (i) an aggregate of 382,524 shares of
     Common Stock owned by three corporations, the sole shareholders of which
     are the limited partners of HHH Investments Limited Partnership ("HHH"),
     (ii) 40,000 shares of Common Stock owned by The Francis D. Hussey, Jr.
     Pension Plan (the "Pension Plan") and (iii) 10,000 shares of Common Stock
     owned by Francis D. Hussey, Jr.  Mr. Hussey is the president of the general
     partner of HHH and is the trustee and a beneficiary of the Pension Plan.

(12) Includes 13,333 shares underlying outstanding options which are exercisable
     immediately or within 60 days and warrants to acquire 153,125 shares of
     Common Stock.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


     In 1997 and previous years, the Company paid an annual financial advisory
fee to 712 Advisory Services, Inc., a financial advisory firm and affiliate of
the Company's Chairman of the Board (the "Affiliate").  Mr. Neil 

                                      -40-

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

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

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

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

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

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

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

                                      -41-
<PAGE>
 
transactions.  The Committee engaged the law firm of Kaye, Scholer, Fierman,
Hays & Handler to advise and assist its examination.

     The Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report.

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

     The Committee also recommended and the Board of Directors has adopted a
number of measures to improve corporate governance, including new procedures
that sharply limit the circumstances in which related party transactions are
permissible, and expand the chief executive officer's role in selecting outside
advisors.  In addition, the Committee recommended and the Board of Directors has
determined to endeavor to reconfigure the Board to give outside directors a
majority of its seats and select a new chairman from the outside directors.

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

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

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

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

                                      -42-




<PAGE>
 
     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 Answer to the Amended Complaint, and asserted a counterclaim against
Messrs. Farrell and Fields for breach of fiduciary duties. The Company intends
to defend vigorously against the allegations.

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

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

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

                                      -43-
<PAGE>
 
and Gary N. Siegler, John P. O'Malley and William D. Farrell. On December 31,
1997, Allen H. Weingarten, who claims to be a Company stockholder, filed a
complaint on behalf of all persons who purchased Common Stock during the period
between March 19, 1997 and November 10, 1997. The Weingarten complaint names as
defendants the Company and William D. Farrell, John P. O'Malley and Gary N.
Siegler. On January 9, 1998, Roselle Sachs, who claims to be a Company
stockholder, filed a complaint on behalf of all persons who purchased Common
Stock during the period between May 15, 1997 and November 10, 1997. The Sachs
complaint names as defendants the Company and Gary N. Siegler, Stephen M. Davis,
Gary L. Fuhrman, Neil H. Koffler and William D. Farrell.

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

     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.

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

                                      -44-
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Exhibits and Financial Statements:

  1.   Financial Statements:

     The following consolidated financial statements and consolidated financial
statement schedule of Medical Resources, Inc. and the reports thereon of
independent auditors are filed as part of this Annual Report on Form 10-K and
are incorporated by reference in Item 8.

     (i)    Reports of Independent Auditors.
            
     (ii)   Consolidated Balance Sheets as of December 31, 1997 and 1996.
            
     (iii)  Consolidated Statements of Operations for the years ended December
            31, 1997, 1996 and 1995.
            
     (iv)   Consolidated Statements of Cash Flows for the years ended December
            31, 1997, 1996 and 1995.
            
     (v)    Consolidated Statements of Changes in Stockholders' Equity for the
            years ended December 31, 1997, 1996 and 1995.
            
     (vi)   Notes to Consolidated Financial Statements.

  2.   Financial Statement Schedule

     The following consolidated financial statement schedule of Medical
Resources, Inc. and subsidiaries is submitted herewith in response to Item
14(d)2:

                 Schedule II--Valuation and Qualifying Accounts

     All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.

  3.   Exhibits

     See the accompanying Exhibit Index which precedes the Exhibits filed with
this Annual Report on Form 10-K.

(b)  Reports on Form 8-K

  On November 10, 1997, the Company filed a Current Report on Form 8-K reporting
(i) under Item 5, that on November 5, 1997, parties that had agreed to sell five
related imaging centers located in Pennsylvania to the Company brought action
against the Company and five subsidiaries seeking specific performance of
acquisition agreements and breach of contract damages and (ii) under Item 6,
William D. Farrell's resignation as Director of the Company.

  On December 11, 1997, the Company filed a Current Report on Form 8-K reporting
(i) under Item 4, Coopers & Lybrand LLP's resignation as auditor of the Company
and the engagement of Ernst & Young, LLP to audit the financial statements of
the Company, and (ii) under Item 6, that D. Gordon Strickland and Peter J.
Powers were appointed to the Board of Directors of the Company.

  On December 24, 1997, the Company filed a Current Report on Form 8-K/A
reporting, amending Item 4 of the Current Report on Form 8-K dated December 4,
1997 and filed on December 11, 1997, Coopers & Lybrand LLP's resignation as
auditor of the Company and the engagement of Ernst & Young, LLP, filing as an
exhibit

                                      -45-
<PAGE>
 
Coopers & Lybrand LLP's letter addressed to the Securities and Exchange
Commission stating that it agrees with the statements made by the Company in
such Form 8-K.

  On January 7, 1998, the Company filed a Current Report on Form 8-K/A amending
Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and filed on
June 16, 1997, as amended on Form 8-K/A filed on August 13, 1997, relating to
the Company's acquisition of certain entities and including the related
financial statements with respect to such entities.

  On January 12, 1998, the Company filed a Current Report in Form 8-K, reporting
under Item 5 the creation of the Board of Director's Executive, Nominating and
Compensation Committees and the election of new directors to the Audit
Committee.

  On January 16, 1998, the Company filed a Current Report on Form 8-K/A amending
Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and filed on
June 16, 1997, as amended on Forms 8-K/A filed on August 13, 1997 and January 7,
1998.

  On February 23, 1998, the Company filed a Current Report on Form 8-K/A
amending Items 5 and 7 of the Current Report on Form 8-K dated May 30, 1997 and
filed on June 16, 1997, as amended on Forms 8-K/A filed on August 13, 1997,
January 7, 1998 and January 16, 1998.

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

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

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

                                      -46-
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE>
<C>        <S>
      3.1  Company's Certificate of Incorporation, as amended to date.*
      3.2  Company's By-Laws, as amended.*
      3.3  Certificate of Designations, Preferences and Rights of the Company's Series C Convertible Preferred
           Stock.**
      4.1  Common Stock Specimen Certificate.*
      4.2  Shareholder Rights Plan of the Company, dated September 15, 1996.***
     10.1  Note Purchase Agreement ($52,000,000 7.77% Senior Notes), dated as of February 20, 1997, between the
           Company and the Purchasers listed therein.****
     10.2  Note Purchase Agreement ($20,000,000 8.10% and $6,000,000 8.01% Senior Notes), dated as of June 26,
           1997, between the Company and the Purchasers listed therein.*****
     10.3  Securities Purchase Agreement, dated as of July 21, 1997, between the Company and RGC International
           Investors, LDC.**
     10.4  Registration Rights Agreement, dated as of July 21, 1997, between the Company and RGC International
           Investors, LDC.**
     10.5  $15,000,000 Promissory Note, dated December 29, 1997, payable to DVI Financial Services Inc. together
           with Warrant, dated 1997 to purchase 100,000 shares of Common Stock#
     10.6  1992 Stock Option Plan.*
     10.7  1995 Stock Option Plan of the Company.******
     10.8  1996 Stock Option Plan of the Company.*******
     10.9  1996 Stock Option Plan B of the Company. *******
    10.10  Warrant, dated December 30, 1997, to purchase 817,000 shares of Common Stock issued to RGC
           International, LDC.#
    10.11  Employment Agreement, dated January 30, 1998, between the Company and Duane C. Montopoli.
    10.12  Employment Agreement, dated March 23, 1998, between the Company and Geoffrey A. Whynot.
    10.13  Employment Agreement, dated April 6, 1998, between the Company and Christopher J. Joyce
       16  Letter re:  Change in Certifying Accountants.********
     21.1  List of Subsidiaries.#
     23.1  Consent of Independent Auditors - Ernst & Young LLP.#
     23.2  Consent of Independent Accountants - Coopers & Lybrand LLP.#
     27.1  Financial Data Schedule.#
</TABLE>


____________________

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

                                      -47-
<PAGE>
 
                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.

                                 By: /s/ DUANE C. MONTOPOLI
                                     ---------------------------

                                     CHIEF EXECUTIVE
                                     OFFICER (PRINCIPAL EXECUTIVE
                                       OFFICER)

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES SET FORTH BELOW AND ON JUNE 1, 1998.

<TABLE>
<CAPTION>

                            SIGNATURE                              CAPACITY IN WHICH SIGNED
                            ---------                              ------------------------                       
<S>                                                                <C>
/s/ GARY N. SIEGLER                                                Chairman of the Board of Directors
-----------------------------------------------------------------
GARY N. SIEGLER

/s/ D. GORDON STICKLAND                                            Chairman of the Executive Committee
-----------------------------------------------------------------
D. GORDON STRICKLAND

/S/ DUANE C. MONTOPOLI                                             Chief Executive Officer (Principal Executive
-----------------------------------------------------------------  Officer)
DUANE C. MONTOPOLI

/S/ GEOFFREY A. WHYNOT                                             Chief Financial Officer and Senior Vice
-----------------------------------------------------------------  President - Finance (Principal Accounting
GEOFFREY A. WHYNOT                                                 Officer)
 
/S/ STEPHEN M. DAVIS                                               Director
-----------------------------------------------------------------
STEPHEN M. DAVIS

/S/ GARY L. FUHRMAN                                                Director
-----------------------------------------------------------------
GARY L. FUHRMAN

/S/ JOHN H. JOSEPHSON                                              Director
-----------------------------------------------------------------
JOHN H. JOSEPHSON

/S/ NEIL H. KOFFLER                                                Director
-----------------------------------------------------------------
NEIL H. KOFFLER
</TABLE>

                                      -48-
<PAGE>
 
                         Report of Independent Auditors
                                        
To the Board of Directors and Stockholders of Medical Resources, Inc.

We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1995. Our audits also included the
financial statement schedule listed in the index at Item 14(a) for the years
then ended. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medical
Resources, Inc. and Subsidiaries at December 31, 1997 and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1995, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein for
1997 and 1995.

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


                                                /s/ ERNST & YOUNG LLP


Hackensack, New Jersey
May 26, 1998

                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS




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

We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and the
related consolidated statement of operations, stockholders' equity, and cash
flows and the financial statement schedule listed in the index at Item 14(a) for
the year ended December 31, 1996. These financial statements and the Schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.

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

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



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

Parsippany, New Jersey
March 28, 1997

                                      F-2
<PAGE>
                            MEDICAL RESOURCES, INC.
                          CONSOLIDATED BALANCE SHEETS
                       AS OF DECEMBER 31, 1997 AND 1996
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE> 
<CAPTION> 

                                                       December 31,     December 31,
                                                           1997             1996
                                                       -------------    -------------
                        Assets
<S>                                                     <C>             <C> 
Current Assets:
     Cash and cash equivalents                             $ 23,198         $ 15,346
     Short-term investments                                       -            1,663
     Cash and short-term investments, restricted                600            4,500
     Accounts receivable, net                                65,887           39,878
     Other receivables                                        5,430            2,291
     Prepaid expenses                                         7,027            3,715
     Income taxes recoverable                                 6,504                -
     Deferred tax assets, net                                 2,492            3,354 
                                                        -----------       ----------
          Total current assets                              111,138           70,747
                                                        -----------       ----------
Property and equipment, net                                  64,343           24,397
Goodwill, net                                               149,624           62,639
Other intangible assets, net                                  6,836            2,119
Other assets                                                  4,189            1,216
Deferred tax assets, net                                      2,353            2,351
Restricted cash                                                 473            1,045 
                                                        -----------       ----------
     Total assets                                         $ 338,956        $ 164,514 
                                                        ===========       ==========





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


                                      F-3
<PAGE>
 
                                    MEDICAL RESOURCES, INC.
                            CONSOLIDATED BALANCE SHEETS (CONTINUED)
                                AS OF DECEMBER 31, 1997 AND 1996
                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE> 
<CAPTION> 

                                                                    December 31,     December 31,
                                                                       1997             1996
                                                                    ------------     ------------

<S>                                                                  <C>               <C> 
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Senior Notes due 2001 through 2005, classified as current          $ 78,000              $ -
    Notes and mortgages payable, classified as current                    3,206                -
    Capital lease obligations, classified as current                      9,555                -
    Current portion of notes and mortgages payable                       13,313            6,729
    Current portion of capital lease obligations                         10,311            5,992
    Borrowings under line of credit                                       3,744                -
    Accounts payable                                                     13,141           10,903
    Accrued expenses                                                     28,018            2,167
    Income taxes payable                                                      -            2,064
    Common stock subject to redemption                                    9,734                -
    Other current liabilities                                               290              117 
                                                                    -----------       ----------

        Total current liabilities                                       169,312           27,972

Notes and mortgages payable, less current portion                        21,539           12,638
Obligations under capital leases, less current portion                   16,361            8,373
Convertible debentures                                                        -            6,988
Other long term liabilities                                                 178              108 
                                                                    -----------       ----------
        Total liabilities                                               207,390           56,079

Minority interest                                                         4,662            2,051

Stockholders' equity:
     Common stock, $.01 par value; authorized 50,000 shares,
        21,889 issued and outstanding at December 31, 1997 and
        18,594 issued and 18,326 outstanding at December 31, 1996           219              186
     Common stock to be issued; 600 shares                                    -            1,721
     Series C Convertible Preferred Stock, $1,000 per share stated
         value; 18 shares issued and outstanding (liquidation
        preference of 3% per annum)                                      18,242                -
     Additional paid-in capital                                         138,664          102,928
     Unrealized appreciation of investments                                   -               26
     Retained earnings (deficit)                                        (30,221)           2,956
     Less 268 common shares in Treasury, at cost                             -            (1,433)
                                                                    -----------       ----------
        Total stockholders' equity                                      126,904          106,384 
                                                                    -----------       ----------
Total liabilities and stockholders' equity                            $ 338,956        $ 164,514 
                                                                    ===========       ==========
</TABLE> 




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

                                      F-4
<PAGE>
 
                                      MEDICAL RESOURCES, INC.
                               CONSOLIDATED STATEMENTS OF OPERATIONS
                       FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                              (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
                                                              1997           1996           1995
                                                           ------------   -----------    -----------

<S>                                                     <C>               <C>            <C> 
Net service revenues                                         $ 202,386      $ 93,785       $ 51,993
Imaging center and staffing operating costs:
   Technical services payroll and related expenses              80,359        35,074         19,526
   Medical supplies                                              9,286         4,223          2,439
   Diagnostic equipment maintenance                              7,761         3,274          1,647
   Independent contractor fees                                   6,810         1,202            437
   Administrative expenses                                      22,902        11,937          6,084
   Other center level costs                                      8,947         3,354          1,430
Provision for uncollectible accounts receivable                 20,656         4,783          3,378
Corporate general and administrative                            20,246         7,779          4,978
Depreciation and amortization                                   19,334         7,466          4,567
Stock-option based compensation                                  2,536             -              -
Loss on impairment of goodwill and other long lived assets      12,962             -              -
Other unusual charges                                            9,723             -              -
                                                               -------        ------        --------
     Operating income (loss)                                   (19,136)       14,693          7,507
Interest expense, net                                            9,167         2,969          1,829 
                                                               -------        ------        --------

Income (loss) from continuing operations before
   minority interest and income taxes                          (28,303)       11,724          5,678
Minority interest (loss)                                           636           308           (124)
                                                               -------        ------        --------

Income (loss) from continuing operations before
   income taxes                                                (28,939)       11,416          5,802
Provision for income taxes                                       2,300         4,162          1,659 
                                                               -------        ------        --------

Income (loss) from continuing operations                       (31,239)        7,254          4,143
Discontinued operations, net of tax:
   Loss from operations of discontinued operations                  -             -          (1,077)
   Loss on sale of discontinued business                            -             -          (1,376)
                                                               -------        ------        --------

   Loss from discontinued operations                                -             -          (2,453)
                                                               -------        ------        --------

Net income (loss)                                              (31,239)        7,254          1,690
Charges related to restricted common stock and
   convertible preferred stock                                  (1,938)           -              - 
                                                               -------        ------        --------

Net income (loss) applicable to common
   stockholders                                              $ (33,177)      $ 7,254        $ 1,690 
                                                               -------        ------        --------

Income (loss) per common share applicable to common
  stockholders:
  Basic -
     Net income (loss) per share before discontinued
        operations                                             $ (1.62)       $ 0.64         $ 0.54
     Discontinued operations                                         -             -          (0.32)
                                                               -------        ------        --------
     Net income (loss) per share                               $ (1.62)       $ 0.64         $ 0.22 
                                                               -------        ------        --------

  Diluted -
     Net income (loss) per share before discontinued
        operations                                             $ (1.62)       $ 0.59         $ 0.53
     Discontinued operations                                         -             -          (0.31)
                                                               -------        ------        --------
     Net income (loss) per share                               $ (1.62)       $ 0.59         $ 0.22 
                                                               =======        ======        ========
</TABLE> 



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

                                      F-5
<PAGE>
 
                                      MEDICAL RESOURCES, INC.
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                           (IN THOUSANDS)
<TABLE> 
<CAPTION> 

                                                                  1997         1996          1995
                                                               -----------   ----------   -----------
<S>                                                             <C>         <C>            <C> 
Cash flows from operating activities:
Net income (loss)                                               $ (31,239)     $ 7,254       $ 1,690 
Adjustments to reconcile net income to net cash                ----------     ---------    ---------- 
    provided by (used in) operating activities:
      Depreciation and amortization                                19,334        7,466         4,567
      Provision for uncollectible accounts receivable              20,656        4,784         3,378
      Deferred income tax provision                                  (836)        (841)       (2,161)
      Stock-option based compensation expense                       2,536            -             -
      Expense incurred in connection with warrants
        issued to preferred stockholders                            2,051            -             -
      Loss on impairment of goodwill and other long lived assets   12,962            -             -
      Loss on sale of discontinued business                             -            -         1,376
      Other, net                                                      112           94           149
Changes in operating assets and liabilities:
   Accounts receivable                                            (30,270)     (14,386)       (6,309)
   Other receivables                                               (2,219)      (1,814)         (171)
   Prepaid expenses                                                (2,403)      (1,502)         (614)
   Income taxes recoverable or payable                             (7,568)       2,186          (323)
   Other assets                                                    (3,253)      (1,495)          (27)
   Accounts payable and accrued expenses                           16,560        2,081             4
   Other current liabilities                                         (315)      (1,510)          568
   Other long-term liabilities                                     (1,430)        (867)          208 
                                                                 ---------    ----------   ---------
      Total adjustments                                            25,917       (5,804)          645 
                                                                 ---------    ----------   ---------
        Net cash provided by (used in) operating activities        (5,322)       1,450         2,335 
                                                                 ---------    ----------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                 (5,429)      (1,070)         (877)
Acquisition of diagnostic imaging centers, net of cash acquired   (57,883)      (6,411)       (1,764)
Acquisition of temporary staffing offices, net of cash acquired       176       (2,314)            -
Acquisition of Dalcon Technologies, Inc., net of cash acquired       (615)           -             -
Investment in diagnostic imaging center joint venture              (1,000)
Costs associated with refinancing of assets under capital leases   (1,461)           -             -
Sale (purchase) of short-term investments, net                      6,109       (1,637)          600
Purchase of restricted short-term investments                           -       (4,500)            -
Increase in restricted cash                                             -         (600)            -
Change in net assets of discontinued business                           -            -         1,396
Other, net                                                              -         (171)            - 
                                                                 ---------    ----------   ---------
      Net cash used in investing activities                       (60,103)     (16,703)         (645)
                                                                 ---------    ----------   ---------
</TABLE> 


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

                                      F-6
<PAGE>
 
                                      MEDICAL RESOURCES, INC.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                        FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                           (IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                                                  1997         1996          1995
                                                               -----------   ----------   -----------
<S>                                                             <C>          <C>          <C> 
Cash flows from financing activities:
Proceeds from Senior Notes, net of issuance costs                  76,523            -             -
Proceeds from issuance of preferred stock, net                     16,965            -             -
Proceeds from sale/leaseback transactions                           9,866            -             -
Proceeds from borrowings under notes payable                        7,850        1,229             -
Borrowings under line of credit                                     3,744            -             -
Proceeds from common stock offering                                     -       25,944             -
Common stock issuance cost                                              -         (780)            -
Proceeds from exercise of options and warrants                      2,696        2,020             -
Note and capital lease repayments in connection with
   acquisitions                                                   (13,799)           -             -
Note and capital lease repayments in connection with
   Senior Notes transaction                                       (13,764)           -             -
Note and capital lease repayments in connection with
   sale/leaseback transactions                                     (4,822)           -             -
Principal payments under capital lease obligations                 (6,651)      (4,805)       (3,043)
Principal payments on notes and mortgages payable                  (5,312)      (2,968)       (1,119)
Proceeds from (redemption of) convertible debentures                  (19)       6,533         4,103
Purchase of treasury stock                                              -          (64)       (1,368)
Purchase of Maternity preferred stock                                   -            -          (269)
                                                                ---------   ----------    -----------
     Net cash provided by (used in) financing activities           73,277       27,109        (1,696)
                                                                ---------   ----------    -----------
Net increase (decrease) in cash and cash equivalents                7,852       11,856            (6)

Cash and cash equivalents at beginning of year                     15,346        3,935         3,941

Reclassification of prior year restricted cash                         -          (445)           - 
                                                                ---------   ----------    -----------

Cash and cash equivalents at end of year                         $ 23,198     $ 15,346       $ 3,935 
                                                                ---------   ----------    -----------
</TABLE> 




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

                                      F-7
<PAGE>
 
                                      MEDICAL RESOURCES, INC.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                        FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                           (IN THOUSANDS)


<TABLE> 
<CAPTION> 
                                                                  1997         1996          1995
                                                               -----------   ----------   -----------
<S>                                                             <C>          <C>         <C>  
Supplemental Disclosure of Cash Flow Information:

Cash paid during the year for -
          Income taxes                                           $ 11,091      $ 3,440       $ 1,982
          Interest                                                  7,201        2,639         1,894

Supplemental Schedule of Non-Cash Investing and
   Financing Activities:

Capital lease obligations and notes payable incurred for
     diagnostic imaging and computer equipment                     13,654        2,469         1,159
Capital lease obligations assumed in connection with
     acquisitions                                                  26,612        6,749             -
Notes payable obligations assumed in connection with
     acquisitions                                                  36,505       13,850             -
Conversion of subordinated debentures to Common
     Stock, net of issuance costs                                   6,636        5,735             -
Issuance of Common Stock in connection with
     acquisitions                                                  17,281       47,938         3,448
Common stock subject to redemption                                  9,734
Issuance of warrants in connection with acquisitions                3,853          975             -
Issuance of warrants to convertible preferred stockholders          2,051            -             -
Issuance of notes payable in connection with acquisitions           4,250        1,848             -
Tax benefit from exercise of stock options                          1,000            -             -
Maternity debt forgiveness treated as capital contribution              -            -         1,022
</TABLE> 






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

                                      F-8
<PAGE>
 
                            MEDICAL RESOURCES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)

<TABLE> 
<CAPTION> 
                                                             Common             Additional Retained  Treasury  Unrealized
                                                   Common   Stock to  Preferred  Paid-In   Earnings   Shares   Apprec. On
                                         Total     Stock    be Issued   Stock    Capital   (Deficit)  at Cost  Investments
                                                                                            
<S>                                    <C>        <C>      <C>        <C>       <C>       <C>        <C>      <C> 
Balance at January 1, 1995              $ 11,873       $ 71                       $ 18,360  $ (6,558)
Issuance of Common Stock related to
  acquisition of diagnostic imaging
  centers                                  3,448          6     1,721                1,721
Maternity debt  forgiveness treated as
  a capital contribution                   1,022                                     1,022
Maternity short period (1/1-1/31/95)         570                                                 570
Redemption by Maternity of its
  preferred stock                           (269)                                     (269)
Preferred stock buyout                         1                                         1
Purchase of  treasury shares              (1,368)                                                       (1,368)
Net income                                 1,690                                               1,690              
                                        --------   --------  ---------  --------  --------   --------   -------     ----------
Balance at December 31, 1995              16,967         77     1,721               20,835    (4,298)   (1,368)
Issuance of Common Stock related to
  acquisition of diagnostic imaging
  centers                                 47,938         56                         47,882
Warrants issued related to acquisition
  of diagnostic imaging centers              975                                       975
Net proceeds from public offering of
  3,680,000 shares of Common Stock        25,944         37                         25,907
Public offering issuance costs              (780)                                     (780)
Conversion of subordinated
  debentures into Common Stock.            5,735         12                          5,723
Exercise of stock options                  2,022          4                          2,018
Tax benefit from exercise of stock
  options                                    368                                       368
Unrealized appreciation on investment         26                                                                       26
Purchase of treasury shares                  (65)                                                          (65)
Net income                                 7,254                                               7,254              
                                        --------   --------  ---------  --------  --------   --------   -------     ----------
Balance at December 31,1996              106,384        186     1,721              102,928     2,956    (1,433)        26
Issuance of Common Stock related to
  acquisition of diagnostic imaging
  centers                                 10,673         12    (1,721)              10,949               1,433
Issuance of Common Stock related to
  acquisition of staffing offices          2,000          1                          1,999
Issuance of Common Stock related to
  acquisition of Dalcon Technologies       1,934          1                          1,933
Warrants issued related to acquisition
  of diagnostic imaging centers            3,853                                     3,853
Warrants issued in connection
  with preferred stock                     2,051                                     2,051
Warrants issued in connection
  with long-term borrowings                  337                                       337
</TABLE> 





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

                                      F-9
<PAGE>
 
                            MEDICAL RESOURCES, INC.
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (CONTINUED)
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)

<TABLE> 
<CAPTION> 
                                                             Common             Additional Retained  Treasury  Unrealized
                                                   Common   Stock to  Preferred  Paid-In   Earnings   Shares   Apprec. On
                                         Total     Stock    be Issued   Stock    Capital   (Deficit)  at Cost  Investments

<S>                                     <C>       <C>      <C>        <C>       <C>       <C>        <C>       <C> 
Conversion of debentures                   6,636         13                          6,623
Exercise of stock options and warrants     2,696          4                          2,692
Stock-option based compensation
  expense                                  2,536                                     2,536
Tax benefit from exercise of stock
  options                                  1,000                                     1,000
Common Stock issued in connection
  with acquisition earnout                 2,676          3                          2,673
Issuance of Convertible Preferred
  Stock                                   16,965                         18,000     (1,035)
Accretion of Convertible Preferred
  Stock                                        -                            242                 (242)
Increase in price protection related
  to certain restricted common stock      (1,696)                                             (1,696)
Other, net                                    99                                       125                            (26)
Net loss                                 (31,239)                                            (31,239)             
                                         --------   --------  -------  --------  ---------   --------  -------  ----------
Balance at December 31,1997              126,904        219        -     18,242    138,664   (30,221)       -          - 
                                         ========   ========  =======  ========  =========   ========  =======  ==========
</TABLE> 






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

                                      F-10
<PAGE>
 
                            MEDICAL RESOURCES, INC.
                            -----------------------
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                                        
1.  DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

The Company

     Medical Resources, Inc., (herein referred to as "MRI" and collectively with
its subsidiaries, affiliated partnerships and joint ventures, referred to herein
as the "Company"), is engaged in two operating segments: diagnostic imaging and
temporary staffing services.  The Company's diagnostic imaging segment operates
and manages primarily fixed-site, free-standing outpatient diagnostic imaging
centers (herein referred to as "centers"), and provides diagnostic imaging
network management services to managed care providers.  The Company's diagnostic
imaging segment also develops and sells radiology industry information systems
through its subsidiary, Dalcon Technologies, Inc.  The Company provides
temporary staffing services through its wholly owned subsidiary, StarMed
Staffing, Inc. (herein referred to as "StarMed"). StarMed provides temporary
staffing of registered nurses and other professional medical personnel to acute
and sub-acute care facilities nationwide.

Consolidation

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

Revenue Recognition

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

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

                                      F-11
<PAGE>
 
     Type I - The Company receives a technical fee for each diagnostic imaging
     procedure performed at a center, the amount of which is dependent upon the
     type of procedure performed.  The fee included in revenues is net of
     contractual allowances.  The Company and the Interpreting Physician
     proportionally share in any losses due to uncollectible amounts from
     patients and third party payors, and the Company has established reserves
     for its share of the estimated uncollectible amount.

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

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

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

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

Reclassification

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

Use of Estimates

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

Cash and Cash Equivalents

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



                                      F-12
<PAGE>
Short-Term Investments
 
     At December 31, 1996 the Company's short-term investments, consist of
certificates of deposits and treasury bills with maturities between three and
twelve months.  Such securities are classified as available-for-sale. Securities
available for sale are carried at fair value with unrealized gains and losses,
net of tax, reported as a separate component of shareholders' equity. Any
realized gains and losses are determined on the specific identification method.

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

Investments in Joint Ventures and Limited Partnerships

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

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

Property and Equipment

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

Goodwill and other intangible assets

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

                                            December 31,
                                         -------------------
                                           1997      1996
                                         --------  ---------
  Goodwill
       Gross intangible                 $157,362    $65,666
       Less accumulated amortization      (7,738)    (3,027)
                                        --------    -------
         Net                            $149,624    $62,639
                                        ========    =======
 
  Other intangibles
       Gross intangibles                $  9,484    $ 3,996
       Less accumulated amortization      (2,648)    (1,877)
                                        --------    -------

         Net                           $   6,836  $   2,119
                                      ==========  ==========

                                      F-13
<PAGE>
 
     Amortization expense for goodwill was $6,135,000, $1,497,000 and $386,000
in 1997, 1996 and 1995, respectively.  Amortization expense for other
intangibles was $1,151,000, $506,000 and $337,000 in 1997, 1996 and 1995,
respectively.

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

Earnings Per Share

     Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128,"Earnings per Share."
The adoption of SFAS No. 128 requires the presentation of Basic Earnings per
Share and Diluted Earnings per Share.  Basic earnings per share is based on the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is based on the weighted average number of common shares
outstanding during the year plus the potentially issuable common shares related
to outstanding stock options, warrants and convertible debt. Earnings per share
amounts for prior periods, including related quarters, have been restated to
conform to the requirements of SFAS No. 128. The computations of basic earning
per share and diluted earnings per share were as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
 
                                                              1997                 1996              1995
                                                              ----                 ----              ----
<S>                                                   <C>                   <C>                 <C>
Basic earnings per share information
------------------------------------
Income (loss) from continuing operations                         ($31,239)             $ 7,254           $4,143
Loss from discontinued operations                                      --                   --           (2,453)
                                                                 ---------             --------          -------           
Net income (loss)                                                 (31,239)               7,254            1,690
Charges related to restricted common stock and
  convertible preferred stock                                      (1,938)                   -                -
                                                                 --------              -------           ------
Net income (loss) applicable to common
  Stockholders                                                   ($33,177)             $ 7,254           $1,690
                                                                 ========              =======           ======
 
Weighted average number of common shares                           20,495               11,296            7,730
Net income (loss) per share before 
   discontinued operations                                         ($1.62)               $0.64            $0.54
Discontinued operations                                                --                   --            (0.32) 
                                                                 --------              -------           ------
Basic earnings per share                                           ($1.62)               $0.64            $0.22
 
 
 
Diluted earnings per share information
--------------------------------------
Income (loss) from continuing operations                         ($31,239)             $ 7,254           $4,143
Loss from discontinued operations                                      --                   --           (2,453)
                                                                 ---------             --------          -------           
Net income (loss)                                                 (31,239)               7,254            1,690
Interest savings from conversion of convertible
 subordinated debentures                                                -                  405                -
 
Charges related to restricted common stock and
  convertible preferred stock                                      (1,938)                   -                -
                                                                 --------              -------           ------
Net income (loss) applicable to common
  Stockholders after assumed conversions                         ($33,177)             $ 7,659           $1,690
                                                                =========              =======           ======
 
Weighted average number of common shares                           20,495               11,296            7,730
Incremental shares issuable on exercise of warrants
 and options                                                            -                  417               51
 
Incremental shares issuable on conversion
 of convertible subordinated debentures                                 -                1,213                -
                                                                ---------              -------           ------  
Weighted average number of diluted 
 common shares                                                     20,495               12,926            7,781
                                                                =========              =======           ======
</TABLE> 

                                      F-14
<PAGE>
 
<TABLE> 
<S>                                                     <C>             <C>             <C> 
Net Income (loss) per share
   before discontinued operations                       ($1.62)          $  0.59         $ 0.53
Discontinued operations                                      -                 -          (0.31)
                                                        -------          -------         ------
Diluted earnings (loss) per share                       ($1.62)          $  0.59         $ 0.22
                                                        =======          =======         ======
</TABLE>

Stock Options

     SFAS No. 123, Accounting for Stock-Based Compensation requires the Company
to choose between two different methods of accounting for stock options.  The
Statement defines a fair-value-based method of accounting for stock options but
allows an entity to continue to measure compensation cost for stock options
using the accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25).  The Company has elected to continue using the
accounting methods prescribed by APB No. 25 and will disclose the amount of the
proforma compensation expense, required to be disclosed under the SFAS No. 123.
See disclosure in Note 9 of the Notes to the Consolidated Financial Statements.

Income Taxes

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

Recent Accounting Pronouncements

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

     SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments for fiscal years beginning after
December 15, 1997. This new standard increases financial reporting disclosures,
but will have no impact on the Company's financial position, cash flows or
results of operations.

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

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


2.  BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING LIQUIDITY

     As a result of the 1997 net loss, the Company is currently in default of
certain financial covenants under the Company's $78,000,000 of Senior Notes.
Management and the Senior Note lenders are engaged in discussions to resolve
this matter. In the event the parties are unable to reach agreement, the

                                      F-15
<PAGE>
 
lenders are entitled, at their discretion, to exercise certain remedies
including acceleration of repayment. There can be no assurance that the Senior
Note lenders will provide the Company with an amendment or waiver of the
defaults. In addition, certain medical equipment notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek certain
other remedies if the Company is in default under the terms of agreements such
as the Senior Notes.

     In the event that the Senior Note holders or the other creditors or lessors
elect to exercise their right to accelerate the obligations under the Senior
Notes or the other loans and leases, such acceleration would have a material
adverse effect on the Company, its operations and its financial condition.
Furthermore, if such obligations were to be accelerated, in whole or in part,
there can be no assurance that the Company would be successful in identifying or
consummating financing necessary to satisfy the obligations which would become
immediately due and payable. As a result of the uncertainty related to the
defaults and corresponding remedies described above, the Senior Notes and the
other loans and capital leases are shown as current liabilities on the Company's
Consolidated Balance Sheets at December 31, 1997 and the Company has a deficit
in working capital of $58,174,000. These matters raise substantial doubt about
the Company's ability to continue as a going concern. In addition to continuing 
to negotiate with the Senior Note lenders in an attempt to obtain waivers or 
amendments of the aforementioned defaults, the Company has taken various actions
in response to this situation, including the following: (i) it effected a 
workforce reduction in March 1998 aimed at reducing the Company's overall 
expense levels, and (ii) it has retained the investment banking firm of SBC 
Warburg Dillon Read to assist the Company in exploring a possible sale of the 
Company's StarMed temporary staffing subsidiary.

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



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

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

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

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

                                      F-16
<PAGE>
 
4.  ACCOUNTS RECEIVABLE, NET

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

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

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




5.  SHORT-TERM INVESTMENTS
 
         The following is a summary of the investments in debt securities
classified as current assets, and which are available for sale (in thousands):
<TABLE>
<CAPTION>
 
                                     Unrealized   Fair
                                        Cost      Gains   Value
                                     -----------  -----  --------
<S>                                  <C>          <C>    <C>
December 31, 1996
   Available-for-sale:
     US Government obligations          $ 5,361     $26  $ 5,387
     Certificates of deposit                776       -      776
                                        -------     ---  -------
Total                                     6,137      26    6,163
     Less: Restricted Investments        (4,500)      -   (4,500)
                                        -------     ---  -------
                                        $ 1,637     $26  $ 1,663
                                        =======     ===  =======
 
</TABLE>
     As of December 31, 1997, there were no short-term investments available-
for- sale.

                                      F-17
<PAGE>
 
6.  PROPERTY AND EQUIPMENT

         Property and equipment stated at cost are set forth below (in
thousands):
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              1997                 1996
                                                                      --------------------  -------------------
 
<S>                                                                   <C>                   <C>
Diagnostic equipment                                                             $ 63,186             $ 33,938
Leasehold improvements                                                             18,684                9,352
Furniture and fixtures                                                             10,571                2,997
Land and buildings                                                                  4,987                  632
Construction in progress                                                                -                  270
                                                                                 --------             --------
                                                                                   97,428               47,189
Less:  accumulated depreciation and amortization                                  (33,085)             (22,792)
                                                                                 --------             --------
                                                                                 $ 64,343             $ 24,397
                                                                                 ========             ========
</TABLE>
                                                                                
     Depreciation and amortization expense related to property and equipment
amounted to $12,048,000, $5,463,000 and $3,844,000 for the years ended December
31, 1997, 1996 and 1995, respectively.

 

7. ACCRUED EXPENSES

Accrued expenses are comprised of the following (in thousands):
<TABLE>
<CAPTION>
 
                                December 31,
                               --------------
                                1997        1996
                               -------      -----
<S>                            <C>      <C>
Accrued professional fees      $ 5,875     $ 354
Accrued payroll and bonuses      4,242       792
Accrued interest                 2,749       323
Accrued radiologist fees         3,398       629
Other accrued expenses          11,754        69
                               -------   -------
                               $28,018   $ 2,167
                               =======   =======
</TABLE>

8.  DEBT

        Outstanding debt consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                      -------------------------------------
                                                                             1997                1996
                                                                      -------------------  ----------------
 
<S>                                                                   <C>                  <C>
Senior Notes due 2001 through 2005, classified as current due to
  financial covenant defaults                                                     $78,000           $     -
                                                                                  =======           =======
 
Revolving line of credit                                                          $ 3,744           $     -
                                                                                  =======           =======
 
Convertible debentures                                                            $     -           $ 6,988
                                                                                  =======           =======
 
Other notes and mortgages payable:
----------------------------------
Debt issued or assumed in connection with 1997 acquisitions                       $19,809           $     -
Debt issued or assumed in connection with 1996 acquisitions                         6,785            13,748
10.25% unsecured promissory note, monthly payments of $171
  including interest through December, 2002                                         8,000                 -
Other debt                                                                          3,464              5,619
                                                                                  --------            -------

</TABLE>

                                      F-18
<PAGE>
 
<TABLE>
<S>                                                                   <C>                    <C>
  Total other notes and mortgages payable                                           38,058             19,367
                                                                                  --------            -------
Less current installments                                                          (13,313)            (6,729)
Less debt shown as current due to financial covenant default                        (3,206)                 -
                                                                                  --------            -------
Total other notes and mortgages payable shown as long-term                        $ 21,539            $12,638
                                                                                  ========            =======
</TABLE>

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

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


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

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

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

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

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

     In August 1996, in connection with the NMR Acquisition the Company
     assumed NMR's existing equipment debt obligations, aggregating $13,235,700.
     These notes bear interest at rates ranging 

                                      F-19
<PAGE>
 
     from 7.0% to 11.5% and require monthly payments ranging from $623 to
     $38,095 including interest (an aggregate of $172,539 per month). The notes
     are payable over varying terms with the last note due in December 2000. The
     foregoing notes are collateralized by the respective centers' imaging
     equipment. As of December 31, 1997, the outstanding balance declined to
     $4,108,000 primarily as a result of the application of proceeds from the
     issuance of the Senior Notes.

     Other debt includes the following:

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

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

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

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

     1998                                      $13,313
     1999                                        7,209
     2000                                        9,285
     2001                                       20,795
     2002                                       18,061
     thereafter                                 47,395

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

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

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

                                      F-20
<PAGE>
 
9. STOCKHOLDERS' EQUITY

Authorized Stock

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

Shareholders' Rights Plan

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

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

Convertible Preferred Stock

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

     The Convertible Preferred Shares convert into the Company's Common Stock at
the lesser of (i) $20.70 per Common Share or (ii) the value per Common Share
determined by dividing the Stated Value of the Convertible Preferred Shares,
plus 3% per annum to the date of conversion, by the average of the daily closing
bid prices for the Company's Common Stock for the five (5) consecutive trading
day period ending five (5) trading days prior to the date of conversion.  If the
average closing price of the Company's Common Stock (the "Closing Price") for
any ten (10) consecutive trading days does not exceed $12.25 (the "Floor
Price"), the Company has the right to block conversion of the Convertible
Preferred Shares by RGC for up to thirty (30) days in the aggregate.  If the
Closing Price does not exceed the Floor Price for 30 consecutive calendar days,
the Convertible Preferred Shares are redeemable, in whole or in part, at the
option of the Company for 110% of the stated value plus 3% per annum. RGC is
subject to volume restrictions which prohibit the sale of more than 25% of the
daily or weekly trading volume in any such period, unless certain circumstances
exist.  The liquidation preference of each Convertible Preferred Share 

                                      F-21
<PAGE>
 
is $1,000 plus 3% per annum. The holder of the Convertible Preferred Shares is
entitled to limited voting rights.

     As of December 31, 1997, based upon the current market price of the
Company's Common Stock, the Convertible Preferred Shares would be convertible
into 1,944,000 shares of Company Common Stock, representing 8% of the
outstanding shares of Common Stock as of such date after giving effect to the
conversion of the Convertible Preferred Shares.  Under the terms of the
Convertible Preferred Shares, RGC is not permitted to convert Shares of the
Convertible Preferred Shares which would result in RGC owning in excess
of 5% of the outstanding shares of Common Stock.  As discussed above, the
Company can limit the conversion of the Preferred Stock for up to thirty (30)
days and has the option to repurchase the shares at 110% of stated value plus 3%
per annum.

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

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

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


                                      F-22
<PAGE>
 
Stock Options and Employee Stock Grants

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

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

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

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

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

 
                                          1997            1996           1995
                                          ----            ----           ----

Net income (loss) applicable to
 common stockholders:
   As reported                          $(33,177)         $7,254         $1,690
   Pro forma                             (34,049)          6,732          1,652
Basic income (loss) per share:        
   As reported                             (1.62)           0.64           0.22
   Pro forma                               (1.66)           0.59           0.21
Diluted income (loss) per share:       

   As reported                             (1.62)           0.59           0.22
   Pro forma                               (1.66)           0.55           0.21

                                      F-23
<PAGE>
 
 
The fair value of each option granted under all plans is estimated on the date
of grant using the Black-Scholes option-pricing model based on the following
assumptions:
 
                                            1997           1996           1995
                                            ----           ----           ----

All Plans:
 
   Dividend yield                             0%              0%             0%
   Expected volatility                       70%             52%            52%
   Expected life (years)                      2               2              2
 
The risk-free interest rates for 1997, 1996 and 1995 were based upon  rates with
maturities equal to the expected term of the option.  The weighted average
interest rate in 1997, 1996 and 1995 amounted to 5.52%, 5.93% and 6.41%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1997, 1996 and 1995 amounted to $4.20, $2.34 and $1.15,
respectively.


Stock option share activity and weighted average exercise price under these
plans and grants for the years ended December 31, 1997, 1996 and 1995, were as
follows:
 
                                           NUMBER OF   WEIGHTED AVERAGE
                                             SHARES     EXERCISE PRICE
                                           ----------  ----------------
 
   Outstanding, January 1, 1995..........    393,675       $4.92
     Granted.............................    472,500        5.32
     Exercised...........................    (12,916)       4.00
     Forfeited...........................    (63,584)       4.50
                                           ---------       
                                                           
   Outstanding, December 31, 1995........    789,675        5.21
     Granted.............................  1,073,140        7.94
     Granted as transfer of NMR Options..    132,687        5.05
     Exercised...........................   (243,197)       5.42
     Forfeited...........................   (120,587)       6.58
                                           ---------       
                                                           
   Outstanding, December 31, 1996........  1,631,718        6.76
     Granted.............................    399,000        8.46
     Exercised...........................   (234,855)       5.17
     Forfeited...........................   (315,500)       7.33
                                           ---------       
                                                           
   Outstanding, December 31, 1997........  1,480,363        7.51
                                           =========
   Exercisable at:                                         
     December 31, 1995...................    301,209        5.31
     December 31, 1996...................    909,710        6.40
     December 31, 1997...................  1,129,641        6.98

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


                                      F-24
<PAGE>
<TABLE> 
<CAPTION> 
                                                      Outstanding                         Exercisable
                                                      -----------                          -----------
                           Number of         Average Life        Average Price      Number of            Average Price   
 Exercise Price Range       Shares                                                   Shares                          
----------------------     ---------            ---                   ---            ------                  ---         
<S>                     <C>               <C>                   <C>              <C>                    <C> 
$4.00 to 5.00                203,978           6 years              $ 4.64             196,144             $ 4.70
$5.50                        305,000           5 years              $ 5.50             305,000             $ 5.50
$6.50 to 6.55                215,272           6 years              $ 6.50             131,268             $ 6.51
$7.51 to 8.50                413,213           9 years              $ 8.42             361,666             $ 8.50
$9.00 to 10.00                91,900           8 years              $ 9.46              58,566             $ 9.15
$10.38 to 11.13              176,000           4 years              $10.44              68,664             $10.54
$11.63 to 12.00               75,000           4 years              $11.88               8,333             $12.00
                           ---------                                                 ---------
$4.00 to 12.00             1,480,363                                                 1,129,641
                           =========                                                 =========
</TABLE>

Stock Purchase Warrants

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

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

<TABLE>
<CAPTION>
   Warrants
   --------
 Expiring In                            Number of Shares                      Range of Exercise Price
------------                            ----------------                      -----------------------
                                 
<S>                                     <C>                                    <C>
    1998                                               -                                          -
    1999                                          93,188                           $ 4.50 to $25.00
    2000                                               -
    2001                                         651,374                             3.36 to  12.00
    2002                                       1,660,000                             9.50 to  12.59
    2003                                          51,563                                       4.63
    2004                                          73,959                              5.70 to  9.54
                                               ---------
                                               2,530,084
                                               =========
</TABLE>

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

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

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

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

                                      F-25
<PAGE>
 
     Warrants issued in connection with the acquisition of ATI Centers, Inc. to
     purchase 168,000 shares of the Company's Common Stock at an exercise price
     of $11.06 per share. The warrants have a term of three years, are
     exercisable from the date of grant and have an estimated fair value (for
     accounting purposes only) of $847,000.

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

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

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

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


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

     In March 1996 a financial consulting firm doing business with the Company
was granted warrants to purchase 75,000 shares of the Company's Common Stock
consisting of 37,500 warrants with an exercise price of $8.00 per share and
37,500 warrants with an exercise price of $12.00 per share. These warrants have
a term of five years and are exercisable from date of grant. The number of such
warrants was subsequently increased by 4,687 with an exercise price of $8.00 per
share and 4,687 warrants with an exercise price of $12.00 per share. As of
December 31, 1997, warrants to purchase 42,187 shares of the Company's Common
Stock at $8.00 a share and 42,187 at $12.00 per share were outstanding. The
warrants had an estimated fair value of $60,000. The fair value of each warrant
was estimated using the Black-Scholes option pricing model using the following
assumptions: Dividend yield 0%, Expected volatility 52%, Expected life 5 years
and a risk free interest rate of 5.93% based upon the expected term of the
warrants.

     Under the terms of the merger agreement with NMR, all outstanding NMR
warrants were deemed to be exercisable for that number of shares of the
Company's Common Stock the warrant holder would 

                                      F-26
<PAGE>
 
have received in the NMR Acquisition, had the holder exercised the NMR warrant
prior to the NMR Acquisition. As such, in connection with the NMR Acquisition
the Company assumed the following warrants:

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

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

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


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

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

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

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

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

     As required by the merger agreement with NMR, the President of NMR was
granted (i) five year warrants to purchase 40,000 shares of the Company's Common
Stock at an exercise price of $8.00 per share (the "$8.00 Warrants") and (ii)
six year warrants to purchase 200,000 shares of the Company's Common 

                                      F-27
<PAGE>
 
Stock at an exercise price of $9.50 per share (the "$9.50 Warrants), and (iii)
in exchange for his NMR employee stock options, three separate five year
warrants to purchase (A) 34,375 shares at $9.27, (B) 68,750 shares at $4.18 and
(C) 34,375 shares of the Company's Common Stock at $4.73. As of December 31,
1997, 40,000 of the $8.00 Warrants, 168,000 of the $9.50 Warrants, warrants to
purchase 68,750 shares at $4.18 and 34,375 shares of the Company's Common Stock
at $4.73 remain outstanding.

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

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

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


10. INCOME TAXES

     The total income tax provisions (benefits) for the years ended December 31,
1997, 1996 and 1995 are allocated as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      1997                   1996                  1995
                                                                      ----                   ----                  ----
<S>                                                            <C>                      <C>                   <C>

Tax provision (benefit) from continuing operations before          ($ 8,400)               $  4,162             $ 3,167
  valuation allowances
Income tax valuation allowance related to
  continuing operations                                              10,700                     -0-              (1,508)
                                                                  ---------                --------             -------
 
    Income tax provision  continuing operations                   $   2,300                $  4,162             $ 1,659
                                                                  =========                ========             =======
 
Tax (benefit) from discontinued
operations                                                        $     -0-                $    -0-               ($312)
                                                                  =========                ========             =======
 
Tax (benefit) related to sale of
discontinued business                                             $     -0-                $    -0-               ($656)
                                                                  =========                ========             =======
 
Tax benefit associated with the exercise of employee
 stock options which has been credited to stockholders'
 equity                                                             ($1,000)                  ($368)            $   -0-
                                                                  =========                ========             =======
 
 
     The components of the Company's income tax provision (benefit) from continuing operations are as follows (in
      thousands):
</TABLE> 

                                      F-28
<PAGE>
 
<TABLE> 
<CAPTION> 
 
                                                                              December 31,  1997
                                                                              -------------------
                                                               FEDERAL               STATE                 TOTAL
                                                          -----------------   -------------------   -------------------
<S>                                                     <C>                     <C>                     <C>  
Current provision                                                 $   1,968                $1,168               $ 3,136
Deferred benefit                                                       (932)                   96                  (836)
                                                                  ---------                ------               -------
 
Income tax provision                                              $   1,036                $1,264               $ 2,300
                                                                  =========                ======               =======
 
 
                                                                                DECEMBER 31, 1996
                                                                                -----------------
                                                               FEDERAL               STATE                 TOTAL
                                                          -----------------   -------------------   -------------------
 
Current provision                                                 $   3,764                $1,239               $ 5,003
Deferred benefit                                                       (704)                 (137)                 (841)
                                                                  ---------                ------               -------
Income tax provision                                              $   3,060                $1,102               $ 4,162
                                                                  =========                ======               =======
 
 
                                                                                DECEMBER 31, 1995
                                                                                -----------------
                                                               FEDERAL               STATE                 TOTAL
                                                          -----------------   -------------------   -------------------
 
Current provision                                                 $   3,051                $  769               $ 3,820
Deferred benefit                                                     (1,789)                 (372)               (2,161)
                                                                  ---------                ------               -------
Income tax provision                                              $   1,262                $  397               $ 1,659
                                                                  =========                ======               =======
</TABLE>
                                                                                
A reconciliation of the enacted federal statutory income tax to the Company's
recorded effective income tax rate is as follows:

<TABLE> 
<CAPTION> 
                                                                                    DECEMBER 31
                                                                 1997                 1996                   1995
                                                          ------------------  ---------------------  ---------------------
 
<S>                                                       <C>                 <C>                    <C>
Statutory federal income tax at 34%                                  (34.0%)                 34.0%                  34.0%
 
Effect of partnership status and amounts taxed to                                                                         
 parties other than the company                                         --                   (1.1%)                  2.0% 
State income tax expense (benefit) net of federal                                                                         
 benefit                                                              (3.8%)                  6.1%                   4.5% 
Meals and entertainment                                                1.3%                   1.9%                   3.6%
Change in valuation allowance                                         37.0%                   ---                  (26.2%)
Goodwill amortization                                                  3.4%                   2.3%                   ---
Other                                                                  4.0%                  (6.6%)                 10.7%
                                                                  --------                -------                  -----
 
Effective tax rate                                                     7.9%                  36.6%                  28.6%
                                                                  ========                =======                  =====
v</TABLE> 
 
 


                                      F-29
<PAGE>
<TABLE> 
<CAPTION>  
The significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):

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

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

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

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

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


11. COMMITMENTS AND CONTINGENCIES

Leases

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

                                      F-30
<PAGE>
 
      The following is a summary of assets under capital leases which amounts
are included in Property and Equipment (in thousands):
<TABLE>
<CAPTION>
 
                                                     December 31,
                                                  -------------------
                                                    1997      1996
                                                  --------  ---------
<S>                                               <C>       <C>
 
Diagnostic equipment and associated leaseholds    $31,211   $ 23,036
 
Less: Accumulated amortization                     (5,221)   (12,096)
                                                  -------   --------
                                                  $25,990    $10,940
                                                  =======   ========
</TABLE>

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

     The following analysis schedules the minimum future lease payments under
capital leases as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
 
Year ending December 31,
<S>                                                                                <C>
1998.............................................................................  $ 13,044
1999.............................................................................    11,263
2000.............................................................................     9,876
2001.............................................................................     5,611
2002.............................................................................     2,063
Thereafter.......................................................................       571
                                                                                   --------
Total minimum lease payments.....................................................    42,428
Less: amount representing interest (imputed at an average rate of 7 %)...........    (6,201)
                                                                                   --------
Present value of minimum lease payments..........................................    36,227
Less current installments........................................................   (10,311)
Less debt shown as current due to financial covenant default installments........    (9,555)
                                                                                   --------
 
Obligations under capital leases, shown as long-term.............................  $ 16,361
                                                                                   ========
</TABLE>

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

     The Company leases its corporate offices and certain centers for periods
generally ranging from three to ten years. These leases include rent escalation
clauses generally tied to the consumer price index and contain provisions for
additional terms at the option of the tenant. The leases generally require the
Company to pay utilities, taxes, insurance and other costs. Rental expense under
such leases was approximately $6,585,000,  $2,597,000 and $2,238,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Ten of the offices
are subleased to affiliated Physicians. By reason of the sublease arrangements,
if the respective Physicians should be unable to pay the rental on the site, the
Company would be contingently liable. As of December 31, 1997, the Company has
subleased the operating sites to the Physicians for the base rental as
stipulated in the original lease. The related sublease income has been offset by
the lease rent expense. The Company also has operating leases for diagnostic
imaging equipment installed in certain of its imaging centers. In addition,
StarMed leases temporary housing for its per diem employees under operating
leases with terms of one to six months. Total rent expense for temporary housing
amounted to approximately $2,083,000, $1,744,000 and $1,757,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

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

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
                            Leases                Original               Net
                          -----------             Subleases              ---
                                                  ---------
<S>                       <C>          <C>                         <C>
1998                          $11,900              $  707            $11,193
1999                           10,106                 626              9,480
2000                            9,069                 643              8,426
2001                            8,280                 267              8,013
2002                            5,874                  96              5,778
thereafter                      6,538                 228              6,310
                              -------              ------            -------
                              $51,767              $2,567            $49,200
                              =======              ======            =======
</TABLE>

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

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

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

          On November 8, 1997, the Company removed John P. O'Malley III, the
Company's Chief Financial Officer, for failure to fulfill certain of his
functions as Chief Financial Officer.  Mr. O'Malley has filed a complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and members of the Board of Directors, as defendants, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and
defamation.  Mr. O'Malley alleges that the Company terminated his employment in
retaliation for voicing the concerns of shareholders and senior management

                                      F-32
<PAGE>
 
regarding related-party transactions and because the Company did not want to
make full and adequate disclosure of the facts and circumstances surrounding
such transactions.  In addition, Mr. O'Malley alleges that the Company published
false and defamatory statements about him.  Mr. O'Malley seeks unspecified 
compensatory and punitive damages, interest and costs of bringing the action. On
April 8, 1998, the Company filed its Answer to the Complaint, and asserted a 
counterclaim against Mr. O'Malley for breach of fiduciary duties. The Company
intends to defend vigorously against the allegations.

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

          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 such
other litigation will not have an material adverse effect on the Company's
financial position, cash flows or results of operations.


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

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

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

                                      F-33
<PAGE>
 
consideration may be paid in cash or shares of Common Stock, or a combination of
both.


12. RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

                                      F-34
<PAGE>
 
          The Committee issued the results of its investigation and certain
recommendations in a report to the Company's Board of Directors and on April 6,
1998, the Company's Board of Directors voted to adopt the recommendations
contained in the report. Accordingly, the Committee recommended and the
Affiliate agreed to reimburse the Company approximately $1,424,000 in fees for
transactions completed after June 1, 1997, to reimburse $112,500 of the retainer
paid to the Affiliate for 1997, to waive payment of an additional $112,500 of
fees accrued by the Company for the third and fourth quarters of 1997, and to
pay a substantial amount of the expenses associated with the Committee's
investigations. In addition, the committee recommended and the Affiliate agreed
to allow the Company to terminate its relationship with the Affiliate.

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


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

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

13. SEGMENT INFORMATION

          The Company operates in two industry segments--diagnostic imaging
services and temporary staffing services. The operations of the diagnostic
imaging segment involves operating and managing diagnostic imaging centers. The
Company's diagnostic imaging segment also develops and sells radiology industry
information systems through its subsidiary, Dalcon Technologies, Inc. The
operations of the temporary staffing segment involves providing temporary
staffing of registered nurses, technicians and other medical industry personnel
to acute and sub acute care facilities.

          The following table shows net revenues, operating income (loss) and
other financial information by industry segment for the years ended December 31
(in thousands):
<TABLE>
<CAPTION>
 
                                        1997       1996      1995
                                     ----------  --------  --------
<S>                                  <C>         <C>       <C>
Net revenues:
     Diagnostic imaging centers....  $ 144,412   $ 64,762   $35,860
     Temporary staffing services...     57,974     29,023    16,133
                                     ---------   --------   -------
 
       Total.......................  $ 202,386   $ 93,785   $51,993
                                     =========   ========   =======
 
   Operating income (loss):
     Diagnostic imaging centers....   ($21,297)  $ 13,700   $ 7,194
     Temporary staffing services...      2,161        993       313
                                     ---------   --------   -------
 
       Total.......................   ($19,136)  $ 14,693   $ 7,507
                                     =========   ========   =======
 
   Identifiable assets:
     Diagnostic imaging centers....  $ 314,477   $154,415   $36,550
     Temporary staffing services...     24,479     10,099     7,586
                                     ---------   --------   -------
 
       Total.......................  $ 338,956   $164,514   $44,136
                                     =========   ========   =======
 
</TABLE> 

                                      F-35

<PAGE>
 
<TABLE> 
<S>                                 <C>         <C>       <C> 
   Depreciation and amortization:
     Diagnostic imaging centers....  $  18,733   $  6,964   $ 4,274
     Temporary staffing services...        601        502       293
                                     ---------   --------   -------
       Total.......................  $  19,334   $  7,466   $ 4,567
                                     =========   ========   =======
 
   Capital expenditures:
     Diagnostic imaging centers....  $   5,245   $    910   $   771
     Temporary staffing services...        184        160       106
                                     ---------   --------   -------
 
       Total.......................  $   5,429   $  1,070   $   877
                                     =========   ========   =======
 
</TABLE>



14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

<TABLE>
<CAPTION>
                                                                                 December 31, 1997
                                                                        -----------------------------------
(in thousands)                                                            Carrying Amount      Fair Value
                                                                        --------------------  -------------
 
Assets:
<S>                                                                     <C>                   <C>
   Cash and cash equivalents                                                     $ 23,198         $ 23,198
   Restricted cash                                                                  1,073            1,073
   Patient receivables and due from physician associations, net                    65,887           65,887
Liabilities:                                                                                  
   Notes payable, line of credit and mortgages                                    119,802          111,085
   Capital lease obligations                                                       36,227           35,281
   Convertible debentures                                                               -                -
</TABLE>

<TABLE>
<CAPTION>
                                                                                 December 31, 1996
                                                                        -----------------------------------
                                                                          Carrying Amount      Fair Value
                                                                        --------------------  -------------
<S>                                                                     <C>                   <C>
Assets:
   Cash and cash equivalents                                                      $15,346          $15,346
   Short-term investments                                                           6,163            6,163
   Restricted cash                                                                  1,045            1,045
   Patient receivables and due from physician associations, net                    39,878           39,878
Liabilities:                                                                                  
   Notes Payable, line of credit and mortgages                                     19,367           19,093
   Capital lease obligations                                                       14,365           14,681
   Convertible debentures                                                           6,988            6,972
</TABLE>



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


                                      F-36
<PAGE>
15. ACQUISITIONS

1997 Acquisitions
-----------------

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

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

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

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

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

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

                                      F-37
<PAGE>
 
     On March 14, 1997, the Company acquired a diagnostic imaging center in
Rancho Cucamonga, California (the "Rancho Cucamonga" center) for approximately
$3,948,000 in cash and 44,016 shares of the Company's Common Stock valued at
$500,000.  The shares of the Company's Common Stock are subject to registration
rights. The excess of the purchase price and direct acquisition costs, including
55,000 warrants with an exercise price of $11.25 valued (for accounting purposes
only) at $282,000 issued to the Affiliate for financial advisory services, over
the fair value of net assets acquired amounted to approximately $4,073,000 and
is being amortized on a straight-line basis over 20 years.

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

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

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

     On June 24, 1997, the Company, acquired the assets of Wesley Medical
Resources, Inc. ("Wesley") a medical staffing company in San Francisco,
California for 137,222 shares of the Company's Common Stock valued at $2,000,000
and contingent consideration based on the company achieving certain financial
objectives during the three year period subsequent to the transaction.  In the
event that substantially all of the capital stock or assets of Wesley are sold
by the Company prior to the completion of 

                                      F-38
<PAGE>
 
the measurement period, the measurement period shall be deemed to be completed
as of the date of such sale. The shares issued in connection with the
acquisition are subject to registration rights. Contingent consideration based
upon future cash flow is payable within 90 days of the end of the measurement
period. The excess of the purchase price and direct acquisition costs over the
fair value of net assets acquired amounted to approximately $2,448,000 and is
being amortized on a straight-line basis over 20 years.

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

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

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

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

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

                                      F-39
<PAGE>
 
the fair value of net assets acquired amounted to approximately $1,541,000 and
is being amortized on a straight-line basis over 20 years.

     On August 21, 1997, the Company acquired four diagnostic imaging centers
(the "Presgar" centers) on the west coast of Florida for approximately
$5,575,000 in cash and up to $3,700,000 in promissory notes, due August 21, 1998
and convertible into the Company's Common Stock, of which $1,200,000 in
principal amount is contingent upon the occurrence of certain events, plus the
assumption of indebtedness. The excess of the purchase price and direct
acquisition costs over the fair value of net liabilities assumed amounted to
approximately $8,514,000 and is being amortized on a straight-line basis over 20
years.

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

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

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

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

                                      F-40
<PAGE>
 
     On September 24, 1997, the Company  acquired Dalcon Technologies, Inc.
("Dalcon") located in Nashville, Tennessee  a software developer and provider of
radiology information systems for $645,000 in cash and 107,166 shares of the
Company's stock valued at $1,934,000.  The shares of the Company's Common Stock
issued at the closing are subject to registration rights. The excess of the
purchase price and direct acquisition costs over the fair value of net
liabilities assumed amounted to approximately $2,615,000 and is being amortized
on a straight-line basis over 5 years.
 
     On October 4, 1997, the Company acquired six diagnostic imaging centers
located in Ohio (the "Ohio" centers) for approximately $8,018,000 in cash and a
$1,750,000 promissory note, due October 3, 1998 and convertible at the Company's
option into shares of Common Stock.  The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
$7,791,000 and is being amortized on a straight-line basis over 20 years.

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

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

1996 Acquisitions
-----------------

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

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

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

                                      F-41
<PAGE>
 


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

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

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

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

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

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

     Each of the above acquisitions consummated in 1996 (the "1996
Acquisitions") were accounted for under the purchase method of accounting. The
operations of these acquisitions are included in the Consolidated
                                      F-42
<PAGE>
 
Financial Statements from the date of purchase. Contingent consideration
associated with acquisitions is recorded as additional purchase price.

                                      F-43
<PAGE>
 
1995 Acquisitions
-----------------

     On February 24, 1995, the Company consummated a merger (the "Merger") with
Maternity Resources, Inc. ("Maternity Resources"), a Delaware corporation
engaged in the wholesale, manufacture and retail sale of maternity apparel. The
merger was consummated pursuant to a Stock Purchase Agreement (the "Agreement")
dated as of February 24, 1995 by and among the Company, Maternity Resources and
the other parties named therein (the "Sellers"). Maternity Resources was formed
on December 27, 1994 for the sole purpose of acquiring Maternity Retail
Partners, L.P. and Kik Kin, L.P. Pursuant to the Agreement, the Company acquired
(i) 100% of the issued and outstanding common stock of Maternity Resources from
the Sellers in exchange for an aggregate of 480,000 shares of the Company's
Common Stock, par value $0.01 and (ii) 100% of the issued and outstanding shares
of Series B and Series C Preferred Stock of Maternity Resources from the holders
thereof in exchange for shares of the Company's Series A Preferred Stock and
Series B Preferred Stock. At the time of the Merger, the Company and Maternity
Resources were under common control through stock ownership and, as a result,
the Merger was accounted for as a transfer between entities under common
control. Under this method of accounting, when entities are under common
control, the assets, liabilities and operations are combined at  historical cost
in a manner similar to that in pooling of interests accounting.   In November
1995, the Company sold its Maternity Resources subsidiaries and consequently
transferred all of Maternity Resources liabilities to unaffiliated third
parties. The Company has no material contingent liabilities remaining with
respect to Maternity Resources. Since the Maternity operations have been sold,
Maternity Resources has been reported as a discontinued operation.

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

     On May 26, 1995, the Company consummated the acquisition of the business
operations of New England MRI, Inc. ("New England MRI"), a Florida corporation
based in Fort Myers, Florida, which owned and managed two diagnostic imaging
centers (the "Centers"). The acquisition was consummated pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of May 17, 1995 by and among two
of the Company's wholly owned subsidiaries--Fort Myers Resources, Inc. ("FMR")
and Central Fort Myers Resources, Inc. ("CFMR"), and "New England MRI".
Pursuant to the Agreement, FMR acquired substantially all of the assets of one
of the centers and CFMR acquired all of the assets of the other center through
the issuance of 1,200,000 shares of the Company's Common Stock valued at
$3,449,000. Of the 1,200,000 shares, 600,000 shares were issued at closing with
the remaining 600,000 shares to be issued within two years of closing (600,000
of such shares were issued in 1997). The centers achieved certain earnings
objectives and as a result, an additional 200,000 shares were issued in
September 1997, to New England MRI, in accordance with the additional
consideration provisions in the purchase agreement. The 

                                      F-44
<PAGE>
 
market value of the shares upon issuance was recorded as additional goodwill
subject to amortization over the stated period. The excess of the purchase price
over the fair value of net assets acquired amounted to approximately $5,746,000
and is being amortized on a straight line basis over 20 years. The accompanying
Consolidated Financial Statements include the operations of FMR and CFMR from
the above date of acquisition. The shares issued to New England MRI as
consideration for the purchased assets are subject to certain registration
rights.

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

     The following table summarizes the unaudited pro forma results of
operations for the years ended December 31, 1997 and 1996, assuming all of the
foregoing 1997 acquisitions had occurred on January 1, 1997 and 1996 and the
foregoing 1996 acquisitions had occurred on January 1, 1996 (in thousands,
except per share data):
<TABLE>
<CAPTION>
 
                                                            1997          1996
                                                         (unaudited)   (unaudited)
                                                        -------------  -----------
<S>                                                     <C>            <C>
 
Revenue, net..........................................      $243,359     $225,135
Operating income (loss)...............................       (15,162)(a)   27,201
Income (loss) before income taxes.....................       (28,326)      11,169
Net income (loss).....................................       (30,626)       6,651
Basic net income (loss) per share.....................        ($1.51)    $   0.33
</TABLE>

     (a) 1997 pro forma results include a $12,962,000 loss on the impairment of
     goodwill and other long-lived assets and other unusual charges of
     $9,723,000. See Note 3 of the Notes to the Consolidated Financial
     Statements for further details.


16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

     The following is a summary of unaudited quarterly consolidated financial
results for the years ended December 31, 1997 and 1996 (in thousands except per
share amounts):
<TABLE>
<CAPTION>
 
                                         First   Second    Third    Fourth
                                        Quarter  Quarter  Quarter   Quarter
                                        -------  -------  -------  ---------
<S>                                     <C>      <C>      <C>      <C>
1997
   Revenue, net.......................  $39,987  $50,678  $57,559  $ 54,162
   Operating income (loss)............    7,322    6,335   10,154   (42,947)
   Net income (loss)..................    3,602    2,783    4,287   (41,911)
   Basic earnings (loss) per share....     0.19     0.14     0.20     (2.02)
   Diluted earnings (loss) per share       0.18     0.13     0.19     (2.02)
</TABLE>

                                      F-45
<PAGE>
 
<TABLE>
<CAPTION>
                                  First   Second    Third   Fourth
                                 Quarter  Quarter  Quarter  Quarter
                                 -------  -------  -------  -------
<S>                              <C>      <C>      <C>      <C>
   1996
   Revenue, net................  $18,098  $18,678  $24,774  $32,235
   Operating income............    2,328    3,027    3,927    5,411
   Net income..................    1,298    1,606    1,845    2,505
   Basic earnings per share....     0.16     0.18     0.17     0.15
   Diluted earnings per share       0.15     0.16     0.16     0.14
 
</TABLE>

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

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

     Quarterly results are generally affected by the timing of acquisitions.

                                      F-46
<PAGE>
 
                            Medical Resources, Inc.

                Schedule II - Valuation and Qualifying Accounts
                                (In Thousands)

<TABLE> 
<CAPTION> 
                                   Balance at      Additions                         Balance
                                  Beginning of    Charged to                          at End
        Description                  Period         Expense       Deductions (1)    of Period
-----------------------------     ------------    ----------      --------------    ---------
<S>                               <C>             <C>             <C>               <C> 
Year ended December 31, 1995
 Total Allowances for Doubtful
 Accounts                          $ 2,881         $ 3,378           $   427        $ 5,832

Year ended December 31, 1996
 Total Allowances for Doubtful
 Accounts                            5,832           4,783               247         10,368

Year ended December 31, 1997
 Total Allowances for Doubtful
 Accounts                           10,368          20,656            12,102         18,922  
</TABLE> 

(1) Uncollectible accounts written off, net of recoveries.