U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  -----------

                                   FORM 10-KSB

           [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

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                         Commission File Number 0-21427

                       INTEGRATED MEDICAL RESOURCES, INC.
                 (Name of Small Business Issuer in its Charter)

Kansas                                                      48-1096410
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)

11320 West 79th Street, Lenexa, Kansas                         66214
(Address of principal executive offices)                     (Zip Code)

                  Issuer's telephone number: (913) 962-7201

     Securities registered pursuant to Section 12(b) of the Exchange Act:
                                      None

     Securities registered pursuant to Section 12(g) of the Exchange Act:
                                 Common stock
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter  period that the  registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will 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-KSB or any  amendment to
this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year.   $21,004,554

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days.  $13,447,940 on March 20, 1998 based on the average bid and asked price on
such date.

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:  As of March 20, 1998,  there were
6,731,058 outstanding shares of common stock, par value $.001 per share.

                      DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the  registrant's  definitive  Proxy Statement  relating to its 1998
Annual Meeting of  Stockholders  which will be filed with the Commission  within
120 days after the end of the registrant's 1997 fiscal year, are incorporated by
reference into Part III hereof.

Transitional Small Business Disclosure Format (Check one):  Yes         No
  X




<PAGE>



                                     PART I

                         Item 1. Description of Business

Overview

Integrated Medical Resources, Inc. (the "Company") was incorporated in Kansas on
March 11, 1991, and its executive offices are located at 11320 West 79th Street,
Lenexa,  Kansas 66214,  telephone (913) 962-7201.  Unless the context  otherwise
requires,  the "Company" refers to Integrated Medical Resources,  Inc., a Kansas
Corporation, and its subsidiaries,  and "Center" refers to The Diagnostic Center
for  Men(SM).  The  Diagnostic  Center for Men is a service mark of the Company.
This  service  mark will  expire on  November  25,  2003  unless a Section  8/15
Declaration is filed by that date. All other trademarks and trade names referred
to in this Annual Report are the property of their respective owners.

Integrated  Medical  Resources,  Inc. (the "Company") is the leading provider of
management  services to physicians and medical  clinics caring for men suffering
from sexual  dysfunction,  focusing  primarily on the diagnosis and treatment of
erectile  dysfunction,   commonly  known  as  impotence.   The  Centers  provide
comprehensive diagnostic, educational and treatment services designed to address
the medical and emotional  needs of its patients and their partners  through the
largest  network  of  medical  clinics in the  United  States  dedicated  to the
diagnosis and treatment of impotence.  The Company  believes that this market is
largely  underserved due to  misconceptions  about the causes of impotence,  the
general lack of specialized knowledge by primary care physicians about treatment
alternatives  and the limited  focus on  impotence by medical  specialists.  The
Company utilizes a direct marketing  approach  designed to motivate impotent men
to seek treatment and educate them,  their partners and other  physicians  about
available and affordable treatment options.

Five Centers were opened in 1995,  growing to a total of 13 Centers managed in 8
states at December 31, 1995. In 1996, 17 Centers were opened,  for a total of 30
Centers  managed in 18 states at December  31,  1996.  In 1997,  4 Centers  were
opened in the first 2 quarters, one Center was closed in the second quarter, and
7 Centers were closed in the fourth  quarter.  At December 31, 1997, the Company
managed 26 Centers in 17 states.  The following table summarizes  operations for
the three year period ended December 31, 1997:

                                        Clinics Managed      New
                         Year           (end of period)    Patients
                         1995                 13             9,087
                         1996                 30            13,123
                         1997                 26            21,448


Historically,  the FDA approval and  introduction of new treatment  alternatives
for men with impotence has resulted in an increase in the number of men who seek
diagnosis and  treatment at the Centers.  This was true with the FDA approval of
Caverject(R)  (Pharmacia & Upjohn) in 1995 and MUSE(R)  (Vivus) in 1996,  and is
projected  by  analysts  to be the case  with  the  approval  in  March  1998 of
Viagra(R)  (Pfizer),  which is the first oral medication approved for use in the
treatment of impotence. At the time of new treatment introductions,  the Company
focuses its direct-to-consumer marketing efforts on promoting the new treatment.
This  promotion,   in  conjunction  with  the  increased   visibility  that  the
manufacturers'  substantial national advertising  campaigns create, has resulted
in increases in call volume to the Company's  centralized  appointment center as
well as increases in new patients seen. The Company also  participates  in joint
marketing  programs and  strategic  alliances  with certain  developers of these
impotence treatments,  including direct mailing to the existing patient database
which brings these patients back in to consider the new treatment option.

Industry Background

Impotence is the inability to  consistently  achieve or maintain  erections that
are  satisfactory  for sexual  intercourse.  The disease is often  confused with
problems of fertility,  sexual desire, premature ejaculation or the inability to
reach  orgasm,  none of which is  included  within the  clinical  definition  of
impotence.

Causes of Impotence.  In a substantial majority of cases, impotence is a symptom
of an underlying  physiological cause. The primary causes of impotence fall into
the following general categories: (I) Vascular Diseases such as atherosclerosis,
hypertension and other diseases; (ii) Diabetes; (iii) Psychological; (iv) Pelvic
and Abdominal  Surgeries such as radical  prostatectomies,  cystoprostatectomies
and colectomies;  (v) Traumatic  Injuries  involving the pelvis and spine;  (vi)
Hormonal Imbalance; and (vii) Other Causes such as


<PAGE>


neurological  diseases  (multiple  sclerosis,  Parkinson's  disease and others),
prescription  drugs  (antihypertensive,  cardiac and other  medications),  renal
failure and dialysis, and drug and substance abuse (particularly smoking).

Market Size. Based on industry  studies,  the Company estimates that over 30% of
males in the United States  between the ages of 40 and 70, or  approximately  14
million men, suffer from moderate to complete  impotence.  The rate of impotence
increases significantly with age. The impact of aging suggests that as the "Baby
Boom"  generation  approaches  retirement  age, the number of cases of impotence
will increase from its current level.

Therapies.  The causes and  effects of sexual  dysfunction  are  numerous  and
complex   and   involve   physical,   emotional,    relational,   social   and
psychological  issues.  A number of effective  treatments  for  impotence  are
available,  whether  the  cause  is  psychological  or  physiological.   These
treatments include:

      Injection  of  Vaso-Dilator  Medications - This form of treatment involves
        the  injection  of   pharmacologic   agents   directly  into  the  penis
        approximately five to 15 minutes prior to sexual relations. These agents
        are generally vasoactive compounds such as alprostadil, phentolamine and
        papaverine,  which  increase  blood  flow  to the  penis.  This  form of
        treatment  requires a prescription  and  instruction  from a health care
        professional on self-injection.  In July 1995,  Caverject(R)  became the
        first drug of this type to be approved by the FDA for widespread use.

      Transurethral  Delivery of  Vaso-Dilator  Medications - In November  1996,
        MUSE(R), a non-invasive transurethral system that delivers pharmacologic
        agents  topically to the urethral  lining,  received an approval  letter
        from the FDA.

      Vacuum Constriction Devices - This form of treatment involves the use of a
        simple mechanical system that creates a vacuum around the penis, causing
        the  erectile  bodies to fill with blood.  A  constriction  band is then
        placed  around  the  base of the  penis to  impede  blood  drainage  and
        maintain  the   erection.   Vacuum   constriction   devices   require  a
        prescription from a physician and are regulated by the FDA.

      Oral  Medications - There are several oral  medications on the market that
        are being  prescribed  by  physicians  in attempts  to treat  impotence.
        Through  the  end  of  1997,   the  most   common  has  been   yohimbine
        hydrochloride.  Currently  available oral medications are effective in a
        small  percentage  of impotent  men. A new  medication is expected to be
        approved by the FDA in early 1998. Viagra(R) (Pfizer) would be the first
        oral  medication  approved for use in the  treatment of impotence and is
        anticipated  to be  significantly  more effective than any existing oral
        impotence treatment. There a number of additional oral medications being
        developed  by  other  pharmaceutical  companies  for  use  in  men  with
        impotence.

      Psychological  Counseling -  Counseling  by a certified  sex  therapist is
        typically designed to increase educational  awareness of the psychogenic
        causes  of  impotence  and  improve  partner   communication.   Specific
        techniques  are taught to the patient and his partner,  which  alleviate
        anxiety and improve  sexual  performance.  Psychological  counseling may
        also be used to support  other  therapies  and to mitigate the damage to
        self esteem often attributed to impotence.

      Testosterone Replacement - Testosterone hormone replacement is the primary
        pharmacological   treatment  for  the  small  percentage  of  men  whose
        impotence  is the result of  hormone  deficiency.  Testosterone  is most
        often  replaced  by  long-acting  intramuscular  injections  or  patches
        available by prescription only.

      Penile  Implants - This therapy  involves the surgical  implantation  of a
        semi-rigid   or   inflatable   device  into  the  penile   structure  to
        mechanically  simulate an erection.  This is the most invasive treatment
        alternative and only appropriate in a small percentage of cases.

Treatment.  Traditionally,  psychological  factors  were  considered  to be  the
primary causes of impotence.  More recently,  however,  it has become  generally
accepted  that the  majority  of  impotence  cases  can be  attributed  to under
physiological  causes.  Since  impotence  is a  symptom  of any of a  number  of
possible  underlying  causes,  a thorough  diagnostic  evaluation by a qualified
medical specialist is essential to determine the most appropriate treatment. The
diagnosis and treatment of impotence has historically  been conducted  primarily
by urologists, as well as by general practitioners, internists and other primary
care physicians.  Since these providers have not typically treated a significant
volume  of  impotence  patients,  they  may lack the  experience  and  incentive
necessary to focus on this area. The Company  believes that those  providers who
can offer comprehensive and dedicated diagnostic and treatment services are best
positioned to care for these patients.


<PAGE>


The Company's Approach

The Company's  diagnostic  experience  indicates that  approximately  80% of all
impotence patients suffer from a diagnosable  physiological cause. The Company's
approach  provides for a comprehensive  diagnostic  evaluation and access to all
available and appropriate non-surgical treatment alternatives in a male-oriented
environment. In the relatively few cases when surgical treatment is indicated or
preferred by the patient, the patient is referred to a local urological surgeon.

The Company's  network of managed medical clinics operates under the name of The
Diagnostic Center for Men(SM). To promote patient confidentiality, these Centers
have discreet signage and interior design,  and directly supply all medications,
devices and supplies necessary for prescribed  treatments.  Most of the clinical
staff are men due to the  sensitivity  of dealing with the  embarrassment  often
associated with  impotence.  The full-time,  specialty  physician at each Center
follows  internally-developed  patient  protocols,  which include  comprehensive
physical  examinations  and diagnostic  tests designed to identify the causes of
the  patient's  impotence.  Education of the patient and his partner is provided
during each step of the diagnostic and treatment  process,  and all  appropriate
treatment options are presented to the patient for consideration.

Company Operations

Patient   inquiries  come  from  multiple   sources,   including   local  market
direct-to-consumer  advertising,  local public relations  efforts,  responses to
national market education  efforts  sponsored by the Company and  pharmaceutical
and device  companies,  and men who learn of the Centers from their  physicians.
All inquiries are directed to the Company's national call center where specially
trained agents provide  education,  discuss  causes and treatment  options,  and
offer support and information to the patient and his partner, but do not attempt
to diagnose a caller's  condition.  Approximately  ten percent of inquiries  are
received from partners of afflicted men. The  appointment  agent can schedule an
appointment on-line directly with the Center nearest the patient. Each scheduled
appointment is then followed by a written  confirmation,  educational  materials
describing the Center's services, a map to the Center and other information.

Centers  typically  operate with a staff of three or four  persons,  including a
salaried  full-time  physician  and two or  three  clinical  and  administrative
individuals who handle patient education,  insurance verification,  patient data
entry and assist the physician with certain routine clinical duties.

When a patient arrives at a Center,  he completes a detailed medical history and
responds to questions  specifically  designed to  ascertain  the severity of his
sexual dysfunction.  An extensive physical  examination is then performed by the
attending  physician.  Because of the lack of knowledge  about  impotence in the
general  patient  population,  a  significant  portion of the  initial  clinical
evaluation is designed to improve patient  knowledge of male sexual problems and
often includes the patient's partner.  This office visit typically lasts between
one and two hours.

The  Centers  use  diagnostic  protocols  that  include a number  of  procedures
intended  to  determine  the  underlying  cause  of  the  patient's   impotence.
Specialized  blood tests including the measurement of hormone levels are used in
a high percentage of cases. Several specialized  diagnostic instruments are used
to measure  physiological  functions in certain  patients when  indicated by the
diagnostic  protocol.  These include the Rigiscan,  an in-home monitoring device
worn during the night to measure naturally occurring erections during sleep, and
penile  ultrasound,  which is used in an  office  procedure  that  measures  the
velocity of blood flow in the penis.  Biothesiometry is used as a painless nerve
function test  measuring the ability of the sensory nerves to detect a vibration
sensation.  In many  cases,  a  Pharmacological  Response  Test (PRT) is used to
evaluate the response to injected medication.

Once  any  indicated  diagnostic  tests  have  been  reviewed  and the  clinical
evaluation has been completed, a detailed discussion is held with the patient to
discuss  the  cause or  causes  of the  dysfunction  and the  various  treatment
options.  All  medications,  devices and supplies used in the offered  treatment
programs are  available  at the Center to provide  maximum  patient  service and
confidentiality.  In many cases,  a complete  clinical  evaluation  of a patient
results in the discovery of previously undiagnosed  physiological problems, such
as diabetes, vascular disease or prostate cancer. In these cases, the patient is
referred  to  other  specialty   physicians  for  treatment  of  the  previously
undiagnosed  disease,  while Center  treatment  continues to focus solely on the
sexual dysfunction.

Within  30 days  of the  commencement  of  therapy,  the  Company  uses  patient
follow-up  procedures to determine patient  satisfaction.  Patients may schedule
additional office visits to consider other treatment options, whether or not the
initial therapy is achieving the desired results. Over time, Centers continue to
maintain  contact with their  patients to resupply  therapeutic  products and to
continue  to  educate  patients  about  developing  therapies  that  may  become
available.


<PAGE>


Facilities

The  following  chart  shows the  location  and  opening  date of each of the 28
Centers operating at March 15, 1998:


Location                 Date              Location               Date
                         Opened                                   Opened
Kansas City, MO          April 1990        Chicago, IL            April 1996
Dallas, TX               October 1992      Norfolk, VA            July 1996
Pittsburgh, PA           June 1993         Hartford, CT           July 1996
Philadelphia, PA         January 1994      Laguna Hills, CA       July 1996
Cleveland, OH            May 1994          Milwaukee, WI          July 1996
Boston, MA               June 1994         Tampa, FL              August 1996
Detroit, MI              September 1994    Walnut Creek, CA       August 1996
Cincinnati, OH           October 1994      Indianapolis, IN       September 1996
Westchester Co., NY      January 1995      Jacksonville, FL       September 1996
Long Island, NY          February 1995     Oklahoma City, OK      October 1996
Columbus, OH             August 1995       Campbell, CA           November 1996
Houston, TX              November 1995     Greensboro, NC         May 1997
New York, NY             January 1996      Greenville, SC         May 1997
Washington, D.C.         April 1996        St. Louis, MO          January 1998

The Company's  principal  executive offices and administrative  support facility
are located in a leased facility in Lenexa, Kansas, a suburb of Kansas City.


Sales and Marketing

The Company  markets the Centers'  services  through a marketing and advertising
department  which  supports the  advertising  efforts of Media Direct  Partners,
Inc.,  a large  direct  response  agency.  The  Company  maintains  a  toll-free
telephone  center staffed with trained agents during business hours six days per
week. Prior to entering a market,  the Company  initiates a direct mail campaign
to physicians  in the area and holds an open house to introduce  them to the new
Center.  At the same time, the Company places  advertising for the new Center in
local and regional  newspapers and on key television  stations.  Over 90% of new
patient visits result from the Company's direct-to-consumer  advertising,  which
is in addition to public  relations  efforts in the national  and local  markets
through the  placement of articles in magazines and  newspapers  and features on
local television  stations and talk radio programs relating to impotence and its
treatment.  All such  marketing  efforts are  designed  to motivate  men to seek
treatment at a Center.

The Company  seeks to establish a national  brand  identity  for The  Diagnostic
Center for Men(SM)  through  focused  marketing  efforts to  patients  and their
partners,  payors and  providers.  The Company's  centralized  public  relations
efforts, physician education emphasis and affiliate program combine to raise the
awareness of the general  public,  physicians and other health care providers as
to the  availability  of  effective  treatments  for  impotence  offered  by the
Centers.

Payment Sources

For the year ended December 31, 1997, approximately 75% of patient billings were
covered by medical  insurance  plans subject to applicable  deductible and other
co-pay  provisions paid by the patient.  Approximately  34% of patient  billings
were  covered by  Medicare  and 41% were  covered by numerous  other  commercial
insurance plans that offer coverage for impotence treatment services.

To date, the Company has not participated in any HMO-type managed care programs.
Managed care system members seeking impotence  treatment are typically  referred
to  urologists  within that  system.  The Company  believes  that its  extensive
patient database and focused treatment  programs allow it to offer a lower cost,
more specialized  treatment alternative to managed care plans with high enrollee
satisfaction.  The Company has developed a patient service and billing  approach
aimed at providing  significant  cost  advantages to managed care  providers for
impotence treatment.

Risk Factors

Ability to Manage  Growth.  In 1996, the Company  experienced  rapid growth that
resulted in new and  increased  responsibilities  for  management  personnel and
placed increased demands on the Company's management,  operational and financial
systems and resources. To accommodate this growth and to compete effectively and
manage future growth, the Company will be required to continue to


<PAGE>


implement  and improve its  operational,  financial and  management  information
systems, and to expand,  train, motivate and manage its work force. There can be
no assurance that the Company's personnel, systems, procedures and controls will
be adequate to support the  Company's  operations.  Any failure to implement and
improve  the  Company's  operational,  financial  and  management  systems or to
expand, train, motivate or manage employees could have a material adverse effect
on the Company's financial condition and results of operations.

The  Company  intends to  establish  Centers in new  markets  where it has never
before provided services. As part of its market selection analysis,  the Company
has invested and will continue to invest  substantial  funds in the  compilation
and  examination of market data.  There can be no assurance that the market data
will be accurate or complete or that the Company will select markets in which it
will achieve profitability.

In addition, the Company may pursue acquisitions of medical clinics or practices
providing male sexual health  services.  There are various risks associated with
the Company's acquisition strategy,  including the risk that the Company will be
unable to identify,  recruit or acquire  suitable  acquisition  candidates or to
integrate  and  manage  the  acquired  clinics  or  practices.  There  can be no
assurance  that clinics and practices  will be available for  acquisition by the
Company on acceptable  terms, or that any liabilities  assumed in an acquisition
will not have a material adverse effect on the Company's financial condition and
results of operations.

Liquidity and Cash Flow  Shortages.  Throughout  the fourth quarter of 1997, the
Company  experienced  significant cash flow shortages as expenses  exceeded cash
receipts  and  accounts  receivable  collections  were slowed or, due to certain
Medicare reimbursement issues,  suspended.  As a result of these shortages,  the
Company obtained the Line of Credit and the Stockholder  Loan, both described in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources",  and in December 1997 and January
1998 implemented the expense reduction program,  also described in "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources."

Cash flow  shortages  continued  during the first quarter of 1998,  and in March
1998 the Company  entered  into the KMI  Financing  described  in  "Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
Liquidity  and  Capital  Resources"  and in the  Report on Form 8-K filed by the
Company on March 20, 1998. The proceeds of the Stockholder  Loan and the initial
phase of the KMI Financing have been substantially exhausted, the Line of Credit
is  drawn  to  capacity  and the  Company  continues  to  experience  cash  flow
shortages.  As a result, without additional cash infusion in the near term, such
as further  funds  contemplated  by the KMI  Financing  and  additional  amounts
committed under the Stockholder Loan described in  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources", the Company may be unable to continue as a going concern.

Seasonality and  Fluctuations  in Quarterly  Results.  The Company's  historical
quarterly  revenues and financial  results prior to 1997 demonstrated a seasonal
pattern in which the first and fourth quarters were typically  stronger than the
second and third  quarters.  The summer months of May through August have showed
seasonal  decreases  in patient  volume and  billings.  In 1997,  this  seasonal
downturn was not indicated in patient  volumes.  The Company cannot predict that
this  seasonality  will not be  demonstrated  in the  future and there can be no
assurance that such seasonal  fluctuations will not produce  decreased  revenues
and poorer  financial  results.  The failure to open new Centers on  anticipated
schedules,  the opening of multiple Centers in the same quarter or the timing of
acquisitions  may also have the effect of increasing the volatility of quarterly
results.  Any of these  factors  could  have a  material  adverse  impact on the
Company's stock price.

Dependence on Reimbursement  by Third Party Payors.  For the year ended December
31,  1997,  approximately  75% of  patient  billings  were  covered  by  medical
insurance plans subject to applicable  deductibles  and other co-pay  provisions
paid by the  patient.  Approximately  34% of patient  billings  were  covered by
Medicare and 41% were covered by numerous other commercial  insurance plans that
offer  coverage for impotence  treatment  services.  The health care industry is
undergoing  cost  containment  pressures as both  government and  non-government
third party payors seek to impose lower  reimbursement and utilization rates and
to negotiate reduced payment schedules with providers.  This trend may result in
a reduction from historical  levels of per-patient  revenue for such health care
providers.  Further  reductions  in third party  payments to physicians or other
changes  in  reimbursement  for  health  care  services  could  have a direct or
indirect  material  adverse  effect on the  Company's  financial  condition  and
results of operations. In addition, as managed Medicare arrangements continue to
become more  prevalent,  there can be no assurance that the Centers will qualify
as  a  provider  for  relevant  arrangements,  or  that  participation  in  such
arrangements  would be  profitable.  Any loss of business  due to the  increased
penetration  of managed  Medicare  arrangements  could  have a material  adverse
effect on the Company's financial condition and results of operations.


<PAGE>


The  Company's  net income is  affected  by  changes in sources of the  Centers'
revenues.  Rates paid by  commercial  insurers,  including  those which  provide
Medicare  supplemental  insurance,  are generally based on established  provider
charges, and are generally higher than Medicare reimbursement rates. A change in
the payor mix of the  Company's  patients  resulting  in a decrease  in patients
covered by commercial  insurance could adversely affect the Company's  financial
condition and results of operations.

Health  Care  Industry  and  Regulation.  The  health  care  industry  is highly
regulated at both the state and federal levels.  The Company and the Centers are
subject to a number of laws governing issues as diverse as relationships between
health  care  providers  and  their  referral  sources,  prohibitions  against a
provider referring patients to an entity with which the provider has a financial
relationship, licensure and other regulatory approvals, professional advertising
restrictions,  corporate  practice of medicine,  Medicare  billing  regulations,
dispensing  of  pharmaceuticals  and  regulation  of  unprofessional  conduct of
providers, including fee-splitting arrangements.  Many facets of the contractual
and  operational  structure  of the  Company's  relationships  with  each of the
Centers have not been the subject of judicial or regulatory  interpretation.  An
adverse review or  determination by any one of such  authorities,  or changes in
the regulatory requirements,  or otherwise, could have a material adverse effect
on the operations, financial condition and results of operations of the Company.
In  addition,   expansion  of  the   operations  of  the  Company  into  certain
jurisdictions may require modifications to the Company's  relationships with the
Centers located there. These  modifications could include changes in such states
in the way in which the Company's services and lease fees are determined and the
way in which the  ownership  and  control  of the  Centers is  structured.  Such
modifications  may have a material  adverse  effect on the  Company's  financial
condition and results of operations.

In recent years, numerous legislative proposals have been introduced or proposed
in the United States Congress and in some state  legislatures  that would effect
major  changes in the United  States health care system at both the national and
state  level.  It is not clear at this time  which  proposals,  if any,  will be
adopted or, if adopted,  what effect such proposals  would have on the Company's
business.  There can be no assurance  that  currently  proposed or future health
care legislation or other changes in the  administration  or  interpretation  of
governmental health care programs will not have a material adverse effect on the
Company's financial condition and results of operations.

Furthermore,  there  can be no  assurance  that the  method of  payment  for the
products and services  furnished by the Centers will not be radically altered in
the  future by changes in the  health  care  industry.  Changes in the system of
reimbursement, including Medicare, for the products and services provided by the
Centers that increase the difficulty of obtaining  payment for medical  services
could have a material  adverse effect on the Company's  financial  condition and
results of operations,  as the Company's  income stream depends upon revenues of
the Centers. If revenues of the Centers are diminished, either in quantity or in
continuity, the Company will be adversely affected.

Medicare  Reimbursement.   Historically,  the  percent  of  patients  for  which
reimbursement   is  sought  from   Medicare  has  averaged   approximately   30%
system-wide,  although such average ranges from  approximately  23% to 56% among
individual  Centers.  Medicare  reimbursements  for  professional  services  are
processed by numerous  carriers  ("Service  Carriers")  and  reimbursements  for
durable  medical  equipment  are handled by four regional  carriers  ("DMERCs").
These Service  Carriers and DMERCs  routinely  review the billing  practices and
procedures of health care providers and during such reviews these Carriers often
temporarily  suspend all reimbursement  payments to the providers whether or not
related to the billing issue being reviewed.

As of December 31, 1997, there were two DMERCs and two Service Carriers that had
notified a Center that a review is being  conducted and that Medicare claims are
being held in suspense  pending such review.  In January  1998,  the Company was
notified  that the review by one  Service  Carrier  had been  completed  and the
suspension  lifted.  The Company also learned in 1997 that the Federal Bureau of
Investigation is reviewing  certain aspects of its Medicare  billing  practices.
System-wide,  the total  amount of billings  under  suspension  and  included in
accounts receivable as of December 31, 1997 was approximately $1.1 million.

<PAGE>


The Company is fully  cooperating in these reviews and believes that its billing
practices and  procedures  are proper.  One earlier  review by another DMERC has
been concluded and the amounts suspended  released to the Company.  However,  in
the event the other carriers were to disallow the  reimbursement  requests under
review,  some  or all of the  suspended  payments  would  not be  collected.  In
addition,  depending upon the particular facts and circumstances involved in the
review,  the  carriers  could seek  repayment of prior  reimbursements  and deny
reimbursement for such claims in the future.  Under certain  circumstances,  the
submission  of improper  Medicare  reimbursement  claims can result in civil and
criminal  penalties and  disqualification  from seeking any  reimbursement  from
Medicare in the future.

The Company conducted an internal review of the matters that have been raised by
the carriers and  believes  that these  pending  reviews and  inquiries  will be
concluded without any material adverse effect on the Company.

Corporate  Practice of  Medicine.  Most states limit the practice of medicine to
licensed  individuals  or  professional   organizations  comprised  of  licensed
individuals.  Many states also limit the scope of business relationships between
business   entities  such  as  the  Company  and  licensed   professionals   and
professional corporations,  particularly with respect to fee-splitting between a
physician and another  person or entity and  non-physicians  exercising  control
over  physicians  engaged in the practice of  medicine.  Most of the Centers are
organized   as   professional   corporations--entities   authorized   to  employ
physicians--so as to comply with state statutes and state common law prohibiting
the  corporate  practice of medicine.  Because the laws  governing the corporate
practice of medicine vary from state to state and the  application of those laws
is often  ambiguous,  any expansion of the  operations of the Company to a state
with strict  corporate  practice of medicine  laws, or the  application of these
laws in states  with  existing  Centers,  may  require the Company to modify its
operations with respect to one or more Centers,  which could result in increased
financial  risk to the  Company.  Further,  there can be no  assurance  that the
Company's  arrangements will not be successfully  challenged as constituting the
unauthorized  practice of medicine or that  certain  provisions  of its services
agreements  with the Centers (the "Services  Agreements"),  options to designate
ownership  of  the  professional   corporations,   employment   agreements  with
physicians or covenants not to compete will be enforceable.  Alleged  violations
of the corporate  practice of medicine doctrine have also been used successfully
by physicians to declare a contract to be void as against public  policy.  There
can be no assurance  that a state or  professional  regulatory  agency would not
attempt to revoke or suspend a physician's  license or the corporate  charter or
license of a professional  corporation  owning a Center or the corporate charter
of the Company or one of its subsidiaries.

In October 1997, the Company was notified that the  California  Board of Medical
Examiners was  investigating  several  physicians  and Centers in California for
which the Company provides management services related to alleged infractions of
the state  corporate   practice of medicine rules. The California State Board of
Medical  Examiners has  referred the  investigation  to the California  Attorney
General's office. No  determinations  have been made by the California  Attorney
General's  office and no assessments  have been  proposed.  The Company is fully
cooperating  in this  review  and  believes  that  the  pending  review  will be
concluded without material adverse effect on the Company.

Dependence on  Rigiscans;  Potential  Impact of  Innovations.  Rigiscan  patient
monitoring  devices accounted for approximately 26% of the Centers' revenues for
the year ended  December  31,  1997.  As a  consequence,  any  material  adverse
development with respect to the Rigiscan devices, limitation in the availability
of such devices or material  increase in the costs of such devices  could have a
material adverse effect on the financial  condition and results of operations of
the Company. In addition, innovations in diagnostic tools and therapies for male
sexual  dysfunction or changes in reimbursement  practices by third party payors
for such diagnostic  tools and therapies could have a material adverse effect on
the financial condition and results of operations of the Company.

Competition.  Competition in the diagnosis and treatment of impotence stems from
a wide variety of sources. The Centers face competition from urologists, general
practitioners,  internists and other primary care  physicians who treat impotent
patients,  as  well  as  hospitals,   physician  practice  management  companies
("PPMs"),  HMOs and  non-physician  providers  of  services  related  to  sexual
dysfunction.  If federal or state  governments  enact  laws that  attract  other
health care  providers to the male sexual  dysfunction  market,  the Company may
encounter increased  competition from other parties which seek to increase their
presence  in the  managed  care  market  and which  have  substantially  greater
resources  than the  Company.  Any of these  providers,  many of which  have far
greater  resources  than the  Company,  could  adversely  affect the  Centers or
preclude the Company from  entering  those markets that can sustain only limited
competition.  There can be no assurance that the Centers will be able to compete
effectively  with their  competitors,  or that additional  competitors  will not
enter the market.

<PAGE>


There are also many  companies  that  provide  management  services  to  medical
practices,  and the  management  industry  continues  to evolve in  response  to
pressures to find the most  cost-effective  method of providing  quality  health
care.  There  can be no  assurance  that  the  Company  will be able to  compete
effectively with its competitors, that additional competitors will not enter the
market,  or that such competition will not make it more difficult to acquire the
assets of, and provide  management  services  for,  medical  practices  on terms
beneficial to the Company.

Developing Market;  Uncertain Acceptance of the Company's Services.  Over 90% of
new patient visits result from the Company's direct-to-consumer advertising. The
market for the Company's services has only recently begun to develop,  and there
can be no  assurance  that the public  will accept the  Company's  services on a
widespread  basis. The Company's  future operating  results are highly dependent
upon its ability to continually attract new patients.  There can be no assurance
that demand for the Company's  services will  continue in existing  markets,  or
that it will develop in new markets. The Company makes significant  expenditures
for  advertising,  and there can be no assurance that such  advertising  will be
effective in increasing  market  acceptance  of, or  generating  demand for, the
Company's  services.  Failure to achieve  widespread  market  acceptance  of the
Company's services or to continually  attract new patients could have a material
adverse effect on the Company's financial condition and results of operations.

Competition

The  Company  is not  aware  of any  company  providing  similar  services  on a
nationwide  basis at this time.  Competition  in the  diagnosis and treatment of
male sexual impotence varies from market to market. The Centers face competition
from general practitioners, urologists, internists and other physicians, as well
as hospitals,  PPMs,  HMOs and  non-physician  providers of services  related to
sexual  dysfunction.  Any of these  providers,  including those with far greater
capital than the Company, could preclude the Company from entering markets which
can only sustain limited competition. The Company believes that the programs and
quality of care provided by the Centers, the reputation of Centers and the level
of their charges for services are significant  competitive factors in its favor.
The Centers seek to meet local  competition  through their focus on the needs of
each patient and the low cost for services.

Furthermore,  there are many  companies  that  provide  management  services  to
medical  practices like the Centers,  and the management  industry  continues to
evolve  in  response  to  pressures  to find the most  cost-effective  method of
providing  quality  health  care.  Although  the  Company  focuses on  providing
services to  physician  practices  that treat male  impotence,  it competes  for
management   contracts  with  national  and  regional   providers  of  physician
management  services,  as well as hospitals  and  hospital-sponsored  management
services organizations.

Corporate Organization and Center Management Services

The Company's  organizational  structure is designed to maximize  managerial and
administrative  efficiency and standardize  clinic  operations while maintaining
physician control of patient  diagnosis and treatment.  Each Center is organized
as a separate corporation and, where required, it is organized as a professional
corporation  licensed to practice  medicine.  In accordance with state laws, the
Centers are operated by  corporations  qualified  to practice  medicine and as a
result,  most Centers are owned by  corporations  controlled by Dr.  Burns.  Dr.
Burns receives no financial benefit from his ownership of the Centers. In states
in which Dr. Burns is not a licensed  physician and an existing Center cannot be
used, a physician  licensed and  practicing  in such states acts as the owner of
the Center.  The Company has a  noncancelable  option to designate the holder of
the common stock of each Center  through the right to force each current  holder
to sell, at any time, the outstanding  shares of the  professional  corporations
operating  the Centers to the  Company's  designee  for a nominal  amount  which
management believes is deeply discounted from the fair value of the stock of the
corporations.  The amount to be paid represents the  reimbursement of the direct
expenses of the stockholder in forming the corporation operating the Center, and
normally ranges from $100 to $500. In general, the Company is legally prohibited
from owning the common stock of the Centers.

<PAGE>

The Company,  directly or indirectly  provides all management services necessary
to operate the Centers under several long-term  agreements  including a Services
Agreement and an Equipment Lease. The revenues  generated at the Centers,  after
payment of physician  salaries,  other operating expenses  including  laboratory
costs,  prescription  drugs,  treatment supplies and devices,  have historically
approximated the fees owed to the Company. In 1997, the Company received fees of
approximately $13.1 million under its agreements with the Centers.

Services  Agreement.  Under the  Services  Agreement,  each Center  appoints the
Company  as its sole  and  exclusive  manager  and  administrator  of all of the
Center's  day-to-day  non-medical  operations.  The  physicians  employed at the
Centers  perform all medical  functions and are responsible for the provision of
medical services provided at the Centers.

The management and administrative  services provided by the Company include: (i)
operation of a national call center for appointment scheduling; (ii) staffing of
all  non-medical  personnel  required to operate the Center;  (iii)  billing and
collection  of all patient  invoices;  (iv)  bookkeeping  and related  financial
services of the Center;  (v) telephone  support  services;  (vi) advertising and
promotional activities;  and (vii) other administrative and management services.
In exchange for these management  services,  the Center pays the Company monthly
fees.  Personnel staffing fees are charged on a fully-burdened  cost-plus basis,
the billing and  collection  services fee is a minimum amount plus a per patient
charge, bookkeeping,  financial and appointment scheduling services are provided
at fixed amounts,  and  advertising  and  promotional  services are charged on a
percentage  of  the  Company's  advertising  purchases.   The  Company  has  the
unilateral  right to increase its fees each year to account for any factors that
may increase the value, the extent or the cost of the services provided.

The initial term of the Services  Agreement is 40 years with  automatic  renewal
for successive 40-year terms. A Center may terminate its Services Agreement only
if the  Center is in  compliance  with the  Agreement's  terms  and the  Company
breaches a material obligation which the Company fails to cure within 60 days of
being  notified of such breach.  The Company may  terminate the Agreement at any
time with or without  cause.  Upon  termination of the Services  Agreement,  the
Center  must,  among  other  things,  cease  using  the  Company's  methods  and
procedures  and must comply with a covenant not to compete.  The covenant not to
compete prohibits Center officers, directors, stockholders, and/or partners from
providing  any of the types of  services  offered by the  Company  for two years
after  termination of the Services  Agreement within any metropolitan area where
the Company operates or manages a medical practice.

The  Services  Agreement  prohibits  the Center from taking  actions  that could
adversely  affect the  Company,  such as  liquidating,  selling  assets,  paying
dividends,  adding new  shareholders,  incurring  indebtedness,  and  increasing
physician  salaries.  The Services  Agreement does not restrict the Company from
developing multiple Diagnostic Centers for Men in the same metropolitan area.

<PAGE>

Equipment  Lease.  Each  Center  enters into an  Equipment  Lease  covering  all
equipment and other personal  property required for the operation of the Center,
including  Rigiscans.  Although the terms can vary, the typical  Equipment Lease
has a 5-year term. The Center assumes all costs and expenses for repairs, taxes,
and loss or damage of the equipment and is also required to acquire and maintain
personal injury property damage insurance on the equipment. The Equipment Lease,
the equipment, and any interest therein may not be assigned or transferred.  All
equipment remains the sole and exclusive  property of the Company throughout the
term of the lease and thereafter. The fees for the equipment are determined on a
per  Center  basis,  with the  exception  of the fees for the  Rigiscan  medical
diagnostic equipment.  The rental fees for Rigiscans are determined by a monthly
fee that increases based upon monthly usage.

Other Agreements. In addition to the Services Agreement and Equipment Lease, the
Company's   relationship   with  a  Center  typically   involves  several  other
agreements, including physician employment agreements.

The  physician at each Center is not the owner of the  professional  corporation
operating that Center and enters into two  employment  agreements - one with the
Company  for  non-medical  services  and one with the Center.  Generally,  these
employment  agreements  are for  initial two year  terms.  Under the  employment
agreement with the Center, the physician receives a salary. Under the employment
agreement with the Company,  the physician provides certain non-medical advisory
and consulting  services in exchange for a minimal salary and the opportunity to
receive Company stock options.

Employees

As of March 20, 1998, the Company operated  Centers and its headquarters  with a
combined staff of 161 full-time  equivalent  employees,  8 Center physicians who
were part-time, and 20 certified sex therapists who contracted their services as
independent contractors to the Centers on a part-time basis.

Government Regulation

Various state and federal laws regulate the  relationship  between  providers of
health  care  services  and  physicians,  and as a business  in the health  care
industry, the Company and the Centers are subject to these laws and regulations.
The  Company  is also  subject  to laws and  regulations  relating  to  business
corporations  in  general.  Although  many  aspects  of the  Company's  business
operations   have  not  been  the   subject  of  state  or  federal   regulatory
interpretation,  the  Company  believes  its  operations  will not result in any
material liability under these laws. There can be no assurance,  however, that a
review of the  Company's  or the  Centers'  businesses  by courts or  regulatory
authorities  will not result in a determination  that could adversely affect the
operations  of the  Company or the  Centers or that the health  care  regulatory
environment  will not change so as to  restrict or affect the  Company's  or the
Centers' existing operations or their expansion.
See "Risk Factors-Health Care Industry."

Licensure.  Every state imposes licensing  requirements on individual physicians
and on certain  types of health  care  providers  and  facilities.  Many  states
require   regulatory   approval,   including  licenses  to  render  care  before
establishing  certain  types of health  care  facilities.  The Centers and their
physicians are subject to licensing  requirements,  including continuing medical
education  and license fees.  While the  performance  of management  services on
behalf of a medical practice does not currently require any regulatory  approval
on the part of the Company,  there can be no assurance that such activities will
not be subject to licensure in the future.

Corporate  Practice of  Medicine.  Most states limit the practice of medicine to
licensed  individuals  or  professional   organizations  comprised  of  licensed
individuals.  Many states also limit the scope of business relationships between
business   entities  such  as  the  Company  and  licensed   professionals   and
professional corporations,  particularly with respect to fee-splitting between a
physician and another  person or entity and  non-physicians  exercising  control
over  physicians  engaged in the practice of  medicine.  Most of the Centers are
organized   as   professional   corporations-entities   authorized   to   employ
physicians-so  as to comply with state statutes and state common law prohibiting
the  corporate  practice  of  medicine.  Accordingly,  the  Company  attempts to
structure  all of its  operations  so that they comply with the  relevant  state
statutes  and state  common law and  believes  that its  operations  and planned
activities  do not and will not result in any  material  liability  under  these
laws.  However,  because the laws  governing the corporate  practice of medicine

<PAGE>

vary from state to state and the  application of those laws is often  ambiguous,
any expansion of the operations of the Company to a state with strict  corporate
practice  of  medicine  laws,  or the  application  of these laws in states with
existing Centers,  may require the Company to modify its operations with respect
to one or more Centers,  which could result in increased  financial  risk to the
Company. Further, there can be no assurance that the Company's arrangements will
not be successfully  challenged as  constituting  the  unauthorized  practice of
medicine or that  certain  provisions  of the  Services  Agreements,  employment
agreements with physicians,  options to designate  ownership of the professional
corporations,  or  covenants  not  to  compete  will  be  enforceable.   Alleged
violations  of the corporate  practice of medicine  doctrine have also been used
successfully  by physicians  to declare a contract to be void as against  public
policy. There can be no assurance that a state or professional regulatory agency
would not attempt to revoke or suspend a  physician's  license or the  corporate
charter  or  license  of a  professional  corporation  owning  a  Center  or the
corporate charter of the Company or one of its subsidiaries.

Fee-Splitting  Prohibitions.  The laws of some states  prohibit  physicians from
splitting  professional  fees. These statutes are sometimes quite broad and as a
result  prohibit  otherwise  legitimate  business  arrangements.  New York,  for
example,  prohibits compensation arrangements under which the amount received in
payment for furnishing space,  facilities,  equipment or personnel services used
by a licensed  physician  constitutes a percentage of or is otherwise  dependent
upon,  the income or  receipts of the  licensed  physician  from such  physician
practice.   Other  states,   such  as  Florida,   only  prohibit   fee-splitting
arrangements  that  are  based  on  referrals.  Penalties  for  violating  these
fee-splitting  statutes or regulations may include  revocation,  suspension,  or
probation of the physician's  license, or other disciplinary  action, as well as
monetary penalties.

Pursuant to the terms of the Services  Agreements with the Centers,  the Company
will receive a monthly management fee from the Centers for most services.  While
the  Company  believes  that its  compensation  arrangements  comply  with state
fee-splitting laws, there can be no assurance that these compensation structures
will not be  construed  by state or  judicial  authorities  as being  proscribed
fee-splitting laws.

<PAGE>


State Anti-Kickback and Self-Referral Laws. A number of states have enacted laws
that   prohibit  the  payment  for   referrals   and  other  types  of  kickback
arrangements.  Such state laws  typically  apply to all patients  regardless  of
their  insurance  coverage.  In  addition,  a number of states have enacted laws
which, to varying degrees,  prohibit  physician  self-referrals.  Illinois,  for
example,  has a broad  self-referral law which regulates all health care workers
(including physicians),  regardless of the patient's source of payment.  Subject
to certain limited  exceptions,  the Illinois law prohibits referrals for health
services  provided  by or  through  licensed  health  care  workers to an entity
outside the health care  worker's  office or group  practice in which the health
care worker is an  investor,  unless the health care  worker  directly  provides
health  services  within  the entity and will be  personally  involved  with the
provision of care to the referred  patient.  In April 1992, the State of Florida
enacted a Patient  Self-Referral  Act that severely  restricts patient referrals
for certain  services,  prohibits  mark-ups of certain  procedures  and requires
health care providers to disclose  ownership in businesses to which patients are
referred.  It is possible that more states will adopt similar  legislation.  The
Company believes that its operations comply with current  statutory  provisions,
although there can be no assurance that state  anti-kickback  and  self-referral
laws will not be  interpreted  more  broadly or amended in the future to be more
expansive.  In addition,  expansion of the  operations of the Company to certain
jurisdictions  may  require it to comply  with such  jurisdictions'  regulations
which could lead to structural and organizational modifications of the Company's
form or relationships  with Centers.  Governmental  interpretation of these laws
could limit reimbursements to the Centers, which could have an adverse effect on
the Company.

Federal  Medicare  Related  Regulation.  There  are a  number  of  federal  laws
prohibiting  certain  activities and arrangements  relating to services or items
which are  reimbursable by Medicare.  Certain  provisions of the Social Security
Act, commonly referred to as the "Anti-Kickback Amendments," prohibit the offer,
payment,  solicitation or receipt of any form of  remuneration  either in return
for the  referral of Medicare or state health  program  patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or  services  that are  covered by  Medicare  or state  health
programs. The Anti-Kickback  Amendments are broad in scope and have been broadly
interpreted by courts in many jurisdictions.  Read literally, the statute places
at risk many otherwise legitimate business arrangements,  potentially subjecting
such  arrangements  to  lengthy,   expensive   investigations  and  prosecutions
initiated by federal and state governmental officials. In particular, the Office
of the Inspector General of the U.S. Department of Health and Human Services has
expressed  concern that the acquisition of physician  practices by entities in a
position to receive  referrals of business  reimbursable  by Medicare  from such
practices could violate the Anti-Kickback Amendments.

In  July  1991,  in  part  to  address  concerns   regarding  the  Anti-Kickback
Amendments,   the  federal   government   published   regulations  that  provide
exceptions,  or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-Kickback Amendments.  Among the safe harbors included in the
regulations  were  provisions  relating  to the  sale  of  physician  practices,
management  and  personal  Services   Agreements  and  employee   relationships.
Additional  safe harbors were published in September  1993 offering  protections
under the Anti-Kickback Amendments to eight new activities,  including referrals
within group practices  consisting of active investors.  Proposed  amendments to
clarify these safe harbors were published in July 1994 which, if adopted,  would
cause substantive retroactive changes to the 1991 regulations.  Violation of the
Anti-Kickback  Amendments  is a felony,  punishable  by fines up to $25,000  per
violation and imprisonment for up to five years. In addition,  the Department of
Health and Human Services may impose civil  penalties  excluding  violators from
participation  in  Medicare  or state  health  programs.  Although  the  Company
believes that its current  operations are not in violation of the  Anti-Kickback
Amendments,  there can be no  assurance  that  regulatory  authorities  will not
determine that the Company's  operations  are in violation of the  Anti-Kickback
Amendments.

<PAGE>

Significant  prohibitions against physician  self-referrals for services covered
by Medicare and Medicaid programs were enacted,  subject to certain  exceptions,
by  Congress  in  the  Omnibus  Budget   Reconciliation   Act  of  1993.   These
prohibitions,   commonly   known  as  "Stark  II,"   amended   prior   physician
self-referral  legislation  known as "Stark I" (which  applied  only to clinical
laboratory  referrals)  by  dramatically  enlarging  the  list of  services  and
investment interests to which the referral prohibitions apply. Effective January
1, 1995 and subject to certain  exceptions,  Stark II prohibits a physician from
billing  Medicare or Medicaid with respect to any Medicare or Medicaid  patients
who are referred to any entity providing  "designated  health services" in which
the physician or a member of his immediate family has an ownership or investment
interest,   or  with  which  the  physician  has  entered  into  a  compensation
arrangement,  including the  physician's own group practice unless such practice
satisfies the "group practice" exception. The designated health services include
the provision of clinical laboratory  services,  radiology  services,  including
magnetic resonance  imaging,  computerized axial tomography scans and ultrasound
services,  radiation  therapy  services and supplies,  physical and occupational
therapy services, durable medical equipment and supplies, parenteral and enteral
nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices
and supplies,  outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. The penalties for violating Stark II include a
prohibition  on Medicaid and Medicare  reimbursement  and civil  penalties of as
much as $15,000 for each violative  referral and $100,000 for participation in a
"circumvention   scheme."  The  Company  believes  that  its  and  the  Centers'
operations  currently are not in violation of Stark I or II; however,  the Stark
legislation is broad and ambiguous.  Interpretative  regulations  clarifying the
provisions of Stark I were issued on August 14, 1995.  Stark II regulations were
proposed  in January  1998,  but have not yet been  adopted.  While the  Company
believes  it  is  in  compliance  with  the  Stark   legislation,   governmental
interpretations  or future  regulations  could require the Company to modify the
nature of its  relationships  with the Centers.  Private  parties may  institute
legal action against healthcare  providers alleging violations of Stark II or of
the Anti-Kickback Amendments. Moreover, the violation of Stark I or II or of the
Anti-Kickback  Amendments  by the  Company  or by the  Centers  could  result in
significant  fines and loss of  reimbursement  which would adversely  affect the
Company.  There can be no  assurance  that claims or  litigation  alleging  such
violations will not be brought against the Company or the Centers.

                         Item 2. Description of Property

All Centers operate in leased facilities of approximately 2000 square feet. (See
"Facilities" for a list of Center locations.) Rents are payable in equal monthly
installments which average $3,500 per Center.  Length of the leases range from 5
to 10 years, with termination  options at 5 years. Center leases provide options
to renew for periods averaging 5 years.

The  Company's  headquarters  consists of  approximately  15,400  square feet of
leased office space in Lenexa,  Kansas.  The headquarters lease has a term of 10
years at a base rental rate of $13,255 per month  through  August 31, 2001,  and
$14,581 per month  thereafter  through  August 31, 2006. In addition,  the lease
provides  for monthly  payment of estimated  real estate  taxes,  insurance  and
common area  maintenance  in the amount of $3,863,  said estimate to be adjusted
annually.  Upon  expiration of the initial 10 year lease term,  the Company will
have the option to extend the term of the lease for an additional 5 years at the
annual base rental increased by a percentage factor equal to the increase in the
Consumer Price Index for Kansas City, Missouri  established by the United States
of America for the date of February 28, 2006 over February 28, 1996.

The  Company  believes  that the  leased  facilities  of each  Center and of the
Company's  headquarters are in good condition,  adequately  covered by insurance
and  sufficient to meet the needs at that location for the  foreseeable  future.
The Company owns substantially all equipment used in its facilities.

                           Item 3. Legal Proceedings.

Not applicable.

         Item 4. Submission of Matters to a Vote of Security Holders.

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter ended December 31, 1997.

                                     PART II

    Item 5. Market for Registrant's Common Equity and Related Stockholder
                                    Matters.

The common stock of the Company began trading in November  1996  (subsequent  to
the public offering) on the Nasdaq National Market under the symbol "IMRI".  The
following  table  sets  forth  the high  and low  quotations  from the  National
Association of Securities Dealers Automated Quotation System "NASDAQ".  Prior to
the offering in November 1996, no established public
trading market existed.


<PAGE>


                                  Common Stock Price

                                    HIGH         LOW

      Fourth Quarter - 1996         6 1/8         3
      First Quarter - 1997          7 7/8       2 1/4
      Second Quarter - 1997         2 7/8       1 1/2
      Third Quarter - 1997          2 11/16     1 5/8
      Fourth Quarter - 1997         5 3/8       1 1/4

The number of record holders of the Company's common stock as of March 20, 1998,
was 154,  including  brokers  holding  shares as nominees or in street name, but
excluding those for which they hold such shares.

The Company has not paid a dividend  with  respect to its common  stock nor does
the Company anticipate paying dividends in the foreseeable future. The Company's
line of credit with a finance company prohibits the payment of dividends without
the finance company's prior written approval.

On December 11, 1997, the Company issued a stock purchase warrant to each of the
following:  Institutional  Venture Partners VI Limited Partnership  ("IVP"), IVP
Founders Fund I ("Founders Fund"),  Institutional  Venture Management VI ("IVM")
and Frazier  Healthcare II, L.P.  ("Frazier").  The stock purchase warrants were
issued  in  connection  with  a loan  to the  Company  by IVP in the  amount  of
$752,000,  by Founders  Fund in the amount of  $32,000,  by IVM in the amount of
$16,000 and by Frazier in the amount of $600,000. The number of shares of Common
Stock issuable upon exercise of each stock purchase  warrant is, with respect to
each investor,  generally  equal to forty percent (40%) of such  investor's loan
commitment  to the  Company  divided  by the  lesser  of 3.125 or the per  share
purchase  price  of one  share of  Common  Stock in the  Company's  next  equity
financing  resulting  in gross  proceeds to the Company of at least  $2,600,000,
excluding  securities  issued upon conversion of the notes  corresponding to the
above-mentioned loans (the "Next Financing").

In addition,  on December 11, 1997, the Company issued convertible  subordinated
promissory  notes in favor of IVP,  Founders  Fund, IVM and Frazier equal to the
loan  amounts  of the  above-mentioned  loans.  Upon  the  closing  of the  Next
Financing, the outstanding principal balance of the notes shall be automatically
converted into the  securities  issued in the Next Financing at the lower of (i)
$2.15 per share; (ii) the average market price per share of the Company's Common
Stock for the 15 days preceding the closing of the Next Financing;  or (iii) the
price  per  share at which  such  securities  are  actually  issued  in the Next
Financing.


     Item 6. Management's Discussion and Analysis of Financial Condition
                           and Results of Operations.


The Company is the leading  provider of management  services to  physicians  and
medical  clinics  caring for men  suffering  from sexual  dysfunction,  focusing
primarily on the diagnosis and treatment of erectile dysfunction, commonly known
as impotence.  The Centers  provide  comprehensive  diagnostic,  educational and
treatment  services  designed to address the medical and emotional  needs of its
patients and their partners  through the largest  network of medical  clinics in
the United States  dedicated to the  diagnosis  and treatment of impotence.  The
Company currently manages 28 Centers in 18 states.

The cost of opening a new Center includes  capital  expenditures  for diagnostic
and office  equipment,  furniture  and  fixtures  in the  approximate  amount of
$140,000 and pre-opening costs for physician  recruitment,  organizational costs
and advertising  expenses.  Pre-opening costs average  approximately $35,000 per
Center and are  amortized  over a one year  period.  The  Company  finances  new
Centers during the initial months of operations  until patient volume  generates
cash flow sufficient to cover the Center's operating expenses. Total pre-opening
costs,  including capital expenditures,  were approximately  $700,000 in 1997 in
connection with the opening of 4 new Centers.

For new Centers,  substantially  all patient volume can be  attributable  to the
Company's advertising and public relations efforts. As Centers mature,  patients
from other sources such as other  physicians  and broader  educational  programs
provide additional patient volume, although advertising remains the major source
of new patients.  As a result,  advertising  and  promotional  expenses remain a
large  cost to the  Company.  The  Company  has in the  past  received,  and may
continue in the future to receive,  funds for market development and patient and
physician  education  from  pharmaceutical   companies  that  develop  impotence
treatments.

<PAGE>


Centers  typically  operate with a staff of three or four  persons,
including a full-time  physician.  One full-time physician can see approximately
120 new patients per month, if at capacity.  The Centers  recognize  revenues at
the time services are rendered.  These services include  physician  professional
fees,   diagnostic   tests  conducted  at  the  Centers  and  laboratory   tests
subcontracted to a national reference laboratory,  use of specialized diagnostic
equipment,  including  the  Rigiscan  patient  monitor,  and the  dispensing  of
treatment  devices,  medications  and  supplies.  Approximately  86%  of  Center
billings are related to diagnostic services,  of which approximately  one-fourth
are  physician  professional  fees,  and 14% of average  billings are related to
treatments dispensed by the Center. Historically,  average patient billings have
remained relatively constant at approximately $800, although the average patient
billings for the year ended December 31, 1997 were approximately $820.

For the year ended December 31, 1997, approximately 75% of patient billings were
covered by medical  insurance  plans subject to applicable  deductible and other
co-pay  provisions paid by the patient.  Approximately  34% of patient  billings
were  covered by  Medicare  and 41% were  covered by numerous  other  commercial
insurance plans that offer coverage for impotence  treatment  services.  Patient
billings  average less for Medicare  patients due to  restrictions on laboratory
test reimbursement and standard professional fee discounts.

Results of Operations

      The following table sets forth, for the periods  indicated,  certain items
from the statement of operations of the Company as a percentage of net revenue:

                                               Year Ended December 31,
                                             1997               1996
     Net revenue                            100.0%             100.0%
     Center operating expenses:
       Physician salaries                    17.4               21.7
       Cost of services                      30.1               28.5
       Center staff salaries                 11.0               14.4
       Center facilities rent                 6.5                7.2
                                             ----               ----
         Total Center operating              65.0               71.8
                                             ----               ----
     expenses
     Center contribution                     35.0               28.2
     Corporate expenses:
       Advertising                           26.9               39.2
       Selling, general and                  30.9               33.7
     administrative
       Depreciation and amortization         11.1               12.0
       Restructuring charge                   4.4                0.0
                                             ----               ----
         Total corporate expenses            73.3               84.9
                                             ----               ----
     Operating loss                         (38.3)             (56.7)
     Interest expense, net                  ( 1.6)             ( 2.5)
     Other expense, net                     ( 0.3)               0.0
                                            ------              ----
     Loss before income tax benefit         (40.2)            ( 59.2)
     Income tax benefit                     ( 0.0)               0.0
                                            ------              ----
     Net loss                               (40.2)            ( 59.2)

Years Ended December 31, 1997 and 1996

Net  Revenue.  Net  revenue  increased  91% from $11.0  million in 1996 to $21.0
million in 1997.  This  growth was  attributable  primarily  to the full year of
revenues in 1997 from Centers open for a partial year in 1996. In addition,  the
Company  opened 4 new Centers in the first two  quarters of 1997.  The  weighted
average  number of clinics  increased  57%, from 21 in 1996 to 33 in 1997.  Fees
related to the use of Rigiscans  accounted for  approximately 26% of revenues in
each period.

Physician  Salaries.  Physician salaries increased 52% from $2.4 million in 1996
to $3.6  million in 1997.  This  increase was  attributable  to the full year of
operations for the 17 Centers opened in 1996 and the opening of 4 new Centers in
1997,  evidenced in the 57% increase in the weighted  average number of clinics.
As a  percentage  of net revenue,  physician  salaries  decreased  from 21.7% to
17.4%.


<PAGE>


Cost of Services.  Cost of services  represent direct operating  expenses of the
Centers, including costs for laboratory and outsourced services,  diagnostic and
treatment supplies,  and treatment devices and medications dispensed through the
Centers.  Cost of  services  increased  102% from $3.1  million  in 1996 to $6.3
million in 1997 due to the full year of operations  for the 17 Centers opened in
1996 and the opening of 4 new Centers in the 1997  period,  evidenced in the 57%
increase in the  weighted  average  number of clinics.  As a  percentage  of net
revenues cost of services increased slightly, from 28.5% to 30.1%.

Center Staff Salaries.  Center staff salaries increased 46% from $1.6 million in
1996 to $2.3  million  in 1997 due to the  full  year of  operations  for the 17
Centers  opened  in 1996  and the  opening  of 4  additional  Centers  in  1997,
evidenced in the 57% increase in the weighted  average  number of clinics.  As a
percentage of net revenue, Center staff salaries decreased from 14.4% in 1996 to
11% in 1997.

Center  Facilities Rent.  Center  facilities rent increased 72% from $797,000 in
1996 to $1.4  million  in 1997 due to the  full  year of  operations  for the 17
Centers  opened in 1996 and the opening of 4  additional  Centers  during  1997,
evidenced  in the 57%  increase in the weighted  average  number of clinics.  In
addition, average monthly Center rent increased 12.9%, from $3,100 to $3,500 per
Center,  due to  increased  space  leased to expand  capacity  to meet demand in
certain  mature  Centers,  as well as higher  lease  rates in several  high cost
markets entered in late 1996. As a percentage of net revenue,  Center facilities
rent decreased from 7.2% to 6.5%.

Clinic  Contribution.  Clinic  contribution  increased 137% from $3.1 million in
1996  to  $7.3  million  in  1997.  As  a  percentage  of  net  revenue,  clinic
contribution  increased from 28.2% to 35%, due to the increase in net revenue at
a greater rate than the increase in expenses.

Advertising. Advertising expense increased 31% from $4.3 million in 1996 to $5.7
million in 1997 due primarily to the 57% increase in the weighted average number
of clinics.  As a  percentage  of net  revenue,  advertising  expense  decreased
significantly from 39.2% to 26.9%, which was primarily  attributable to a change
in media used to  direct-response  television  from more costly  radio,  and the
engagement of an outside advertising agency in November 1996.

Selling, General and Administrative. Selling, general and administrative expense
increased 75% from $3.7 million in 1996 to $6.5 million in 1997, due principally
to a full year's expense for the addition of an experienced  management team and
staff  at the  Company's  corporate  headquarters,  expansion  of the  telephone
appointment center staff to support additional Centers and increased staffing in
billing to increase reimbursement and improve collection of accounts receivable.
As a percentage  of net revenue,  selling,  general and  administrative  expense
decreased from 33.7% to 30.9%, due primarily to increased revenue.

Depreciation and Amortization.  Depreciation and amortization increased 76% from
$1.3 million in 1996 to $2.3  million in 1997 due to a full year's  depreciation
charges  for  clinical  and office  equipment  purchased  in 1996 to support new
Centers and increased staffing at the Company's headquarters and amortization of
pre-opening costs incurred with respect to the significant growth in new Centers
in 1996. As a percentage of net revenue, depreciation and amortization decreased
slightly from 12.0% to 11.1%.

Restructuring Charge. The Company incurred a restructuring charge of $919,243 in
1997,  primarily  representing  lease  termination  payments  and other costs of
closing 7 Centers and canceling the planned opening of a new Center.

Interest  Expense,  Net. Net interest expense increased from $275,000 in 1996 to
$337,000 in 1997, resulting from increased borrowings under the Company's credit
facilities to support equipment  purchases and working capital at Centers opened
in late 1996 and in 1997.

Income Taxes. No income tax provision or benefit was recorded in 1996 or 1997 as
the deferred tax benefit otherwise  provided was offset by valuation reserves on
deferred tax assets.

Seasonality

The Company's  historical quarterly revenues and financial results prior to 1997
demonstrated  a seasonal  pattern in which the first and  fourth  quarters  were
typically stronger than the second and third quarters.  The summer months of May
through  August,  spanning  the  second  and  third  quarters,  showed  seasonal
decreases  in patient  volume and  billings.  Because  impotence is not an acute
condition,  has typically persisted for some time in most patients,  and usually
does not present immediate health risks, the Company believes that some patients
postpone  scheduling  visits with the Centers during the summer months. In 1997,
this seasonal downturn was not indicated in patient volumes.  The Company cannot
predict that this  seasonality  will not be demonstrated in the future and there
can be


<PAGE>


no assurance that such seasonal fluctuations will not produce decreased revenues
and poorer financial results.  In addition,  the Company's quarterly results are
affected by the timing of the opening of new Centers.

Liquidity and Capital Resources

Throughout the fourth quarter of 1997, the Company experienced  significant cash
flow  shortages as expenses  exceeded  cash  receipts  and  accounts  receivable
collections  were  slowed  or,  due to certain  Medicare  reimbursement  issues,
suspended.  As a result of these  shortages,  the Company  obtained  the Line of
Credit and the Stockholder  Loan, both described below, and in December 1997 and
January 1998 implemented the expense reduction program described below.

Cash flow  shortages  continued  during the first quarter of 1998,  and in March
1998 the  Company  entered  into the KMI  Financing  described  below and in the
Report on Form 8-K filed by the Company on March 20,  1998.  The proceeds of the
Stockholder  Loan  and  the  initial  phase  of  the  KMI  Financing  have  been
substantially exhausted, the Line of Credit is drawn to capacity and the Company
continues to experience cash flow  shortages.  As a result,  without  additional
cash infusion in the near term,  such as further funds  contemplated  by the KMI
Financing and  additional  amounts  committed  under the  Stockholder  Loan, the
Company may be unable to continue as a going concern.

Due to the  growth  in the  number  of new  Center  openings,  the  Company  has
experienced  increased and varied operating cash flow deficits from 1994 through
1997.  This  resulted  primarily  from  differences  in working  capital  levels
(particularly   accounts  receivable)  required  to  accommodate  the  increased
services to Centers and  variances  in operating  results.  The  variances  were
principally attributable to the fact that revenues at new Centers have generally
increased  with patient  volumes over the first six months of  operations  while
operating  expenses  have  remained  relatively  fixed  from the first  month of
operation.  In addition, the Company had increased corporate staff, expanded the
national  call  center and  increased  advertising  costs to support  new Center
openings, thereby significantly increasing administrative expenses in advance of
expected revenues.

The Company has financed its  operations and met its capital  requirements  with
cash flows from  services  provided to existing  Centers,  proceeds from private
placements  of  equity   securities,   an  initial  public  offering  of  equity
securities,  the  utilization  of bank lines of credit,  bank loans and  capital
lease  obligations.  The Company has a working capital line of credit (the "Line
of Credit") with a finance  company under which it may borrow up to $5.0 million
through October 24, 1999,  based on specified  percentages of eligible  accounts
receivable.  At December 31, 1997, the Company had $3,085,954  outstanding under
this Line of Credit, the maximum available based on eligible accounts receivable
balances.  The interest rate  applicable to the Line of Credit is 2.5% above the
Bank of  America  prime  lending  rate  (which  prime  lending  rate was 8.5% at
December 31, 1997).  In October 1997,  the Company  entered into a $500,000 term
loan  agreement  with the finance  company  which  provides  the Line of Credit,
secured by  property  and  equipment,  payable in monthly  installments  through
October 2000, bearing interest at 12.74%.

In December 1997,  the Company  issued $1.4 million in convertible  subordinated
promissory  notes to two  major  institutional  shareholders  (the  "Stockholder
Loan"). Three of the Company's directors are affiliated with these institutional
shareholders.  The  notes  are  convertible  into the  securities  issued in the
Company's next equity financing  involving the receipt by the Company of, in the
aggregate,  more than $3 million, at the purchase price paid by the investors in
that  financing.  Subsequent  to December 31,  1997,  the note  agreements  were
amended to provide  for  extension  of the  maturity  date from May 31,  1998 to
November 30, 1998, in the event the notes are not converted on or before May 31,
1998.  In addition,  the  amendment  reduced the amount of the  required  equity
financing to $2.6 million,  and provided an additional  loan commitment of up to
$600,000,  based on the Company meeting certain cash flow projections.  Attached
to these notes are warrants to purchase the Company's  common stock based upon a
stated formula.  The fair value of the warrants of $209,664 has been recorded as
an offset to the related debt.

As of December 31, 1997,  the Company had, for tax purposes,  net operating loss
carry forwards of  approximately  $16.8  million,  which are available to offset
future taxable income and expire in varying amounts through 2012, if unused.

At December 31,  1997,  the Company had cash and cash  equivalents  of $765,000.
Accounts receivable, net of allowance, increased $6.0 million, from $2.4 million
at December  31, 1996 to $8.4  million at December  31,  1997.  The  increase in
accounts  receivable  is  primarily  due  to  increases  in net  revenue  and in
receivables  attributable to services to Medicare patients, which increased from
$499,000 at December 31, 1996 to $4.3 million at December 31, 1997. The December
31, 1997 accounts  receivable  balance  includes $2.1 million pending payment or
submission  for  Medicare   reimbursement  awaiting  completion  of  appropriate
provider  registration  requirements,  which  the  Company  anticipates  will be
completed  by the third  quarter  1998.  In  addition,  $1.1 million in Medicare
billings   were  under  payment   suspension,   see  "Risk  Factors  -  Medicare
Reimbursement." At December 31, 1997, total accounts


<PAGE>


receivable reflected an average balance of 111 days of net revenue, and accounts
receivable greater than 180 days totaled approximately $3.3 million.

The Company has taken measures to reduce  operating losses and improve cash flow
through the  closing of 7 Centers,  cancellation  of the  planned  opening of an
additional Center and reductions in corporate staffing in January 1998. In March
1998, the Company  entered into a financing  arrangement  (the "KMI  Financing")
with  Kardatzke  Management  Inc.,  ("KMI"),  as  evidenced  by a Note  Purchase
Agreement  and  Convertible  Note.  Pursuant  to the terms of the Note  Purchase
Agreement,  KMI has loaned the Company $1.6 million at an interest rate of 8.5%.
All  payments  of  principal  and  interest  under the Note are  deferred  until
September  1, 1998.  The Note may be  converted at the option of KMI into common
stock of the Company at the lower of $2.15 per share or the average market price
for the 15 days  prior to  conversion,  at any time  prior to  maturity.  If not
converted  or  extended  prior to  September  1, 1998,  the Note shifts to an 18
month, fully amortizing term loan and is no longer convertible. In addition, KMI
has agreed to provide management  consulting services to the Company,  which end
at the Company's  option if the Note is converted or shifts to a term loan.  KMI
will receive an option to purchase 300,000 shares of common stock exercisable at
$2.70 per share if certain performance criteria are met prior to April 15, 1999.

As part of the  financing  transaction,  KMI also has four  options to  purchase
shares of common stock at increasing  share prices and with  staggered  exercise
dates,  which,  when  combined with the  conversion  of the Note,  aggregate 2.3
million shares.  The exercise of each option is dependent on the exercise of the
earlier  options  and the  exercise  of the  first  option is  dependent  on the
conversion of the Note.

Also,  upon the conversion of the Note and the investment of an additional  $1.0
million  through the exercise of the initial option to purchase  common stock, a
principal  of KMI will  join the  Company  in the  capacity  of Chief  Executive
Officer and Chairman of the Board of Directors. In the event that this principal
assumes these positions,  he will have a three year employment contract with the
Company and receive options to purchase an aggregate of 600,000 shares of common
stock at a purchase price of $2.15 per share, vesting over four years.

The Company  believes that funds  available  under the Company's Line of Credit,
operating cash flows generated, especially if collections of accounts receivable
improve,  proceeds of additional  borrowings  under the Stockholder Loan and the
proceeds of  additional  investments  by KMI, if any, will be sufficient to fund
its operations and satisfy its working capital  requirements for the next twelve
months.


Year 2000 Compliance

Many computer  software and hardware  systems  currently are not, or will or may
not be, able to read,  calculate or output correctly using dates after 1999, and
such systems will require  significant  modifications  in order to be "year 2000
compliant".  This  issue may  adversely  affect  the  operations  and  financial
performance of the Company because its computer  systems are an integral part of
the Company's  health care delivery  activities  as well as its  accounting  and
other information  systems and because the Company will have to divert financial
resources and personnel to address this issue.

The Company has begun to review its computer hardware and software systems.  The
existing systems will be upgraded either through  modification,  or replacement.
The Company  currently  anticipates  this  upgrading  to be completed by July 1,
1999.

Although  the  Company  is not  aware of any  material  operational  impediments
associated with upgrading its computer  hardware and software systems to be year
2000  compliant,  the Company cannot make any assurances that the upgrade of the
Company's  computer  systems  will be completed on schedule or that the upgraded
systems  will be free of  defects.  If any such risks  materialize,  the Company
could experience material adverse consequences, material costs or both.

Year 2000  compliance  may also  adversely  affect the  operations and financial
performance of the Company indirectly by causing  complications of, or otherwise
affecting,  the  operations  of any one or more of the  Company's  vendors.  The
Company intends to contact its significant  vendors in the last half of calendar
year 1998 in an attempt to identify any potential  year 2000  compliance  issues
with them.  The Company is currently  unable to anticipate  the magnitude of the
operational or financial  impact on the Company of year 2000  compliance  issues
with its vendors.


<PAGE>


The  Company  expects to incur  approximately  $100,000  in each  fiscal  period
beginning  with the second quarter of 1998 through the second quarter of 1999 to
resolve the Company's  year 2000  compliance  issues.  All expenses  incurred in
connection with year 2000  compliance  will be expensed as incurred,  other than
acquisitions of new software or hardware, which will be capitalized.

Recently Issued Accounting Standards

Recent  pronouncements of the Financial  Accounting Standards Board, which are
not  required to be adopted  until  1998,  include  SFAS No.  130,  "Reporting
Comprehensive  Income" and SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise and Related Information."

SFAS No. 130  establishes  standards for reporting and display of  comprehensive
income and its components in a full set of general purpose financial statements.
The statement  requires that all items that are required to be recognized  under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial  statements.  The Company has not yet determined the effects,  if any,
the adoption will have on the Company's financial  statements.  Applicability of
FAS No. 130 will not impact amounts previously reported for net income.

SFAS No. 131 supersedes  SFAS No. 14 and  establishes  new standards for the way
that public companies report selected  information  about operating  segments in
annual  financial  reports and requires  that those  companies  report  selected
information  about segments in interim financial reports issued to shareholders.
It also  establishes  standards  for  related  disclosures  about  products  and
services,  geographic  areas  and  major  customers.  The  Company  has  not yet
determined  the  effects,  if any,  the  adoption  will  have  on the  Company's
financial statements.


                          Item 7. Financial Statements.


For a list of financial  statements  filed as part of this report,  see index to
financial statements at F-1 of this report.


            Item 8. Changes in and Disagreements with Accountants
                   on Accounting and Financial Disclosure.


Not applicable.

                                    PART III



    Item 9. Directors, Executive Officers, Promoters and Control Persons;
              Compliance With Section 16(a) of the Exchange Act.


Incorporated  by reference to the Company's  Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.


                        Item 10. Executive Compensation.


Incorporated  by reference to the Company's  Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.




<PAGE>


   Item 11. Security Ownership of Certain Beneficial Owners and Management.

Incorporated  by reference to the Company's  Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.


           Item 12. Certain Relationships and Related Transactions.


Incorporated  by reference to the Company's  Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.


Item 13.  Exhibits

(a)   The following exhibits are filed herewith:

  Exhibit     Description
   Number

             Amended and Restated Articles of Incorporation
 3(a)(ii)(1)
 3(b)(ii)(4) Restated Bylaws
     4(a)(1) Specimen of Common Stock Certificate
  4(b)(i)(1) Loan  Agreement  dated  December 29, 1995 by and among the Company,
             certain  Centers and Citizens  National Bank of Fort Scott,  Kansas
             (the "Loan Agreement")
 4(b)(ii)(1) First  Amendment to the Loan  Agreement  dated June 18, 1996 by and
             among the Company,  certain  Centers and Citizens  National Bank of
             Fort Scott
  4(c)(i)(4) Security  Agreement  dated  September  30, 1997, by and between the
             Company and P&C Investments
 4(c)(ii)(4) Promissory Note dated September 30, 1997, in favor of P&C
             Investments
     4(d)(4) Revolving Loan and Security Agreement dated October 23, 1997 by and
             between the Company and DVI Business Credit Corporation
     4(e)(4) Loan and Security  Agreement  dated October 23, 1997 by and between
             the Company and DVI Financial Services, Inc.
     4(f)(5) Note Purchase  Agreement by and between KMI and the Company,  dated
             March 5, 1998
     4(g)(5) Convertible  Note by the  Company in favor of KMI,  dated  March 5,
             1998
     4(h)(i) Note and Warrant  Agreement  dated  December  11, 1997 by and among
             Institutional Venture Partners VI Limited Partnership, IVP Founders
             Fund I, Institutional  Venture Management VI, Frazier Healthcare II
             L.P. and the Company
    4(h)(ii) Amendment to the Note and Warrant  Agreement dated March 5, 1998 by
             and among  Institutional  Venture Partners VI Limited  Partnership,
             IVP Founders Fund I,  Institutional  Venture Management VI, Frazier
             Healthcare II L.P. and the Company
   4(h)(iii) Form of Convertible  Subordinated  Promissory Note in favor of each
             of  Institutional  Venture  Partners  VI Limited  Partnership,  IVP
             Founders Fund I,  Institutional  Venture  Management VI and Frazier
             Healthcare II L.P.
    4(h)(iv) Form of Stock  Purchase  Warrant in favor of each of  Institutional
             Venture  Partners  VI Limited  Partnership,  IVP  Founders  Fund I,
             Institutional Venture Management VI and Frazier Healthcare II L.P.
    10(a)(6) Amended and Restated 1995 Stock Option Plan
    10(d)(1) Amended and Restated Investors Rights Agreement dated March 29,
             1996 by and among the Company, Institutional Venture Management VI,
             Institutional  Venture  Partners VI, IVP Founders  Fund I, L.P. and
             Frazier Healthcare II, L.P.
 10(e)(i)(1) Form of Services Agreement by and between a Subsidiary of the
             Company and a Center (Revised)
10(e)(ii)(1) Form of Promissory Note by a Center in favor of a Subsidiary of
             the Company
10(e)(iii)(1)Form of Security Agreement by a Center in favor of a Subsidiary
             of the Company
10(e)(iv)(1) Form of Equipment Lease by and between the Centers and a
             Subsidiary of the Company
 10(e)(v)(1) Form of Sublease by and between the Centers and a Subsidiary of
             the Company
    10(f)(1) Rigiscan Purchase Agreement dated December 1, 1995 by and
             between UROHEALTH Systems, Inc. and the Company

<PAGE>

 10(f)(i)(2) Amendment to the Rigiscan Purchase Agreement dated September 6,
             1996 by and between UROHEALTH Systems, Inc. and the Company
10(f)(ii)(2) Amendment to the Rigiscan Purchase Agreement dated December 19,
             1996 by and between UROHEALTH Systems, Inc. and the Company
10(f)(iii)(4)Amendment to the Rigiscan Purchase Agreement dated October 15,
             1997 by and between Imagyn Medical Technologies, Inc. (formerly
             known as UROHEALTH Systems, Inc.) and the Company
    10(g)(1) VCD Purchase Agreement dated December 1, 1995 by and between
             UROHEALTH Systems, Inc. and the Company
    10(i)(1) Service Mark Assignment Agreement dated August 1, 1996 by and
             between Troy A. Burns and the Company
    10(j)(1) Office Building Lease dated December 20, 1993 by and between
             Troy A. Burns and the Company
    10(k)(7) Non-Employee Director Stock Option Plan
    10(l)(1) Form of Non-Competition and Non-Solicitation Agreement by and
             between each of Troy A. Burns, M. D. and T. Scott Jenkins and
             the Company
    10(m)(1)  Employment  Agreement by and between  William Raup and the Company
    10(n)(1) Option Agreement dated September 26, 1996 by and between Troy A.
             Burns, M.D. and the Company
    10(o)(1) Employment Agreement dated September 30, 1996 by and between
             Troy A. Burns, M.D. and the Company
  Exhibit     Description
   Number

    10(p)(1) Employment  Agreement  dated  September  30, 1996 by and between T.
             Scott Jenkins and the Company
    10(q)(1) Agreement dated September 30, 1996 by and among the Company,
             Institutional Venture Management VI, Institutional Venture
             Partners VI, IVP Founders Fund I, L.P., Stanford University,
             Virgil A. Place, Leland Wilson, S.F. Growth Fund, Frazier
             Healthcare II, L.P., Troy A. Burns, M.D., Troy A. Burns
             Revocable Trust, Catherine P. Burns Revocable Trust, James
             Marvine and T. Scott Jenkins
    10(r)(2) Advertising Agency Agreement dated December 4, 1996 by and
             between DraftDirect Worldwide, Inc. and the Company
    10(s)(3) Agreement dated March 1, 1997 by and between TheraCom, Inc. and
             the Company
    10(t)(3) Services Agreement dated January 6, 1997 by and between and
             Strategem, Inc. and the Company
 10(t)(i)(4) Amendment to Services Agreement dated July 1, 1997 by and
             between Strategem, Inc. and the Company
10(t)(ii)(4) Termination of Services Agreement dated September 30, 1997 by
             and between Strategem, Inc. and the Company
    10(u)(3) Registration Rights Agreement dated January 6, 1997 by and
             between Strategem, Inc. and the Company
       10(v) Advertising Agency Agreement dated September 19, 1997 by and
             between Media Direct Partners, Inc. and the Company
          21 List of Subsidiaries of the Company
       23(b) Consent of Ernst & Young LLP
          27 Financial Data Schedule

-----------

   (1)  Incorporated by reference to the corresponding  exhibit filed as part of
Registration  Statement No. 333-5414-D,  as amended,  originally filed on August
12, 1996.

   (2) Incorporated by reference to the corresponding exhibit filed on March 31,
1997 as part of Form 10-KSB for the year ended December 31, 1996.

   (3) Incorporated  by reference to the corresponding  exhibit filed on May 15,
1997 as part of Form 10-QSB for the quarter ended March 31, 1997.

   (4) Incorporated by reference to the corresponding  exhibit filed on November
14, 1997 as part of Form 10-QSB for the quarter ended September 30, 1997.

   (5) Incorporated by reference to the  corresponding  exhibit  filed as part
of Form 8-K on March 20, 1998.

   (6)Incorporated by reference to Appendix A to the Company's  Definitive Proxy
Statement for the annual meeting held on May 30, 1997, File No.  0-21427,  filed
with the Securities and Exchange Commission on April 28, 1997.

<PAGE>

   (7)Incorporated by reference to Appendix B to the Company's  Definitive Proxy
Statement for the annual meeting held on May 30, 1997, File No.  0-21427,  filed
with the Securities and Exchange Commission on April 28, 1997.


(b)  Reports on Form 8-K

     The Company filed no reports on Form 8-K for the fiscal year ended December
31, 1997.


<PAGE>



                                   SIGNATURES

      In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of
1934,  the  registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                               INTEGRATED MEDICAL RESOURCES, INC.

                               By: /s/ TROY A. BURNS, M.D.

                               -----------------------------------
                              Troy A. Burns, M.D.,
                               Chief Executive Officer

      In accordance  with the Securities  Exchange Act of 1934,  this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.

  Signature               Title

 /s/ TROY A. BURNS, M.D.  Chief Executive Officer, Chief Medical
                          Officer, Chairman of the Board and
                          Director                                March 30, 1998
  Troy A. Burns, M.D.    (Principal Executive Officer)           

  /s/ BEVERLY O. ELVING   Chief Financial Officer and Vice
                          President, Finance and Administration
                          (Principal Financial and Accounting     March 30, 1998
    Beverly O. Elving     Officer)                                

  /s/ T. SCOTT JENKINS    Director

                                                                  March 30, 1998
    T. Scott Jenkins                                              

  /s/ SAMUEL D. COLELLA   Director

                                                                  March 30, 1998
    Samuel D. Colella                                             

 /s/ JOHN K. TILLOTSON,   Director
          M.D.
                                                                  March 30, 1998
                                                                  
    John K. Tillotson

   /s/ ALAN D. FRAZIER    Director

                                                                  March 30, 1998
     Alan D. Frazier                                                

   /s/ BRUCE A. HAZUKA    Director

                                                                  March 30, 1998
     Bruce A. Hazuka                                              

<PAGE>
  /s/ DWAYNE R. SIGLER    Director

                                                                  March 30, 1998
    Dwayne R. Sigler                                              

    /s/ JAMES R. KAHL     Director

                                                                  March 30, 1998
      James R. Kahl                                               



<PAGE>



                                  EXHIBIT INDEX

                                                                    Sequential
  Exhibit     Description                                            Page
   Number                                                            Number

  3(a)(ii)(1) Amended and Restated Articles of Incorporation
  3(b)(ii)(4) Restated Bylaws
      4(a)(1) Specimen  of Common Stock  Certificate  4(b)(i)(1)  Loan Agreement
              dated December 29, 1995 by and among the Company, certain  Centers
              and Citizens National Bank of  Fort  Scott,  Kansas   (the   "Loan
              Agreement")
  4(b)(ii)(1) First  Amendment to the Loan Agreement  dated June 18, 1996 by and
              among the Company,  certain Centers and Citizens  National Bank of
              Fort Scott
   4(c)(i)(4) Security  Agreement  dated  September 30, 1997, by and between the
              Company and P&C Investments
  4(c)(ii)(4) Promissory Note dated September 30, 1997, in favor of
              P&C Investments
      4(d)(4) Revolving  Loan and Security  Agreement  dated October 23, 1997 by
              and between the Company and DVI Business Credit Corporation
      4(e)(4) Loan and Security  Agreement dated October 23, 1997 by and between
              the Company and DVI Financial Services, Inc.
      4(f)(5) Note Purchase Agreement by and between KMI and the Company,  dated
              March 5, 1998
      4(g)(5) Convertible  Note by the  Company in favor of KMI,  dated March 5,
              1998
      4(h)(i) Note and Warrant  Agreement  dated  December 11, 1997 by and among
              Institutional   Venture  Partners  VI  Limited  Partnership,   IVP
              Founders Fund I,  Institutional  Venture  Management  VI,  Frazier
              Healthcare II L.P. and the Company
     4(h)(ii) Amendment to the Note and Warrant Agreement dated March 5, 1998 by
              and among Institutional  Venture Partners VI Limited  Partnership,
              IVP Founders Fund I, Institutional  Venture Management VI, Frazier
              Healthcare II L.P. and the Company
    4(h)(iii) Form of Convertible  Subordinated Promissory Note in favor of each
              of  Institutional  Venture  Partners VI Limited  Partnership,  IVP
              Founders Fund I,  Institutional  Venture Management VI and Frazier
              Healthcare II L.P.
     4(h)(iv) Form of Stock Purchase  Warrant in favor of each of  Institutional
              Venture  Partners VI Limited  Partnership,  IVP  Founders  Fund I,
              Institutional Venture Management VI and Frazier Healthcare II L.P.
     10(a)(6) Amended and Restated 1995 Stock Option Plan
     10(d)(1) Amended and Restated Investors Rights Agreement dated
              March 29, 1996 by and among the Company,
              Institutional Venture Management VI, Institutional
              Venture Partners VI, IVP Founders Fund I, L.P. and
              Frazier Healthcare II, L.P.
  10(e)(i)(1) Form of Services Agreement by and between a
              Subsidiary of the Company and a Center (Revised)
 10(e)(ii)(1) Form of Promissory Note by a Center in favor of a
              Subsidiary of the Company
10(e)(iii)(1) Form of Security Agreement by a Center in favor of a
              Subsidiary of the Company
 10(e)(iv)(1) Form of Equipment Lease by and between the Centers
              and a Subsidiary of the Company
  10(e)(v)(1) Form of Sublease by and between the Centers and a
              Subsidiary of the Company
     10(f)(1) Rigiscan Purchase Agreement dated December 1, 1995 by
              and between UROHEALTH Systems, Inc. and the Company
  10(f)(i)(2) Amendment to the Rigiscan Purchase Agreement dated
              September 6, 1996 by and between UROHEALTH Systems,
              Inc. and the Company
 10(f)(ii)(2) Amendment to the Rigiscan Purchase Agreement dated
              December 19, 1996 by and between UROHEALTH Systems,
              Inc. and the Company
10(f)(iii)(4) Amendment to the Rigiscan Purchase Agreement dated
              October 15, 1997 by and between Imagyn Medical
              Technologies, Inc. (formerly known as UROHEALTH
              Systems, Inc.) and the Company
     10(g)(1) VCD Purchase Agreement dated December 1, 1995 by and
              between UROHEALTH Systems, Inc. and the Company
<PAGE>

                                                                    Sequential
  Exhibit     Description                                            Page
   Number                                                            Number

     10(i)(1) Service Mark Assignment Agreement dated August 1,
              1996 by and between Troy A. Burns and the Company
     10(j)(1) Office Building Lease dated December 20, 1993 by and
              between Troy A. Burns and the Company
     10(k)(7) Non-Employee Director Stock Option Plan
     10(l)(1) Form of Non-Competition and Non-Solicitation
              Agreement by and between each of Troy A. Burns, M. D.
              and T. Scott Jenkins and the Company
     10(m)(1) Employment Agreement by and between William Raup and
              the Company
     10(n)(1) Option Agreement dated September 26, 1996 by and
              between Troy A. Burns, M.D. and the Company
     10(o)(1) Employment Agreement dated September 30, 1996 by and
              between Troy A. Burns, M.D. and the Company
     10(p)(1) Employment Agreement dated September 30, 1996 by and
              between T. Scott Jenkins and the Company
     10(q)(1) Agreement dated September 30, 1996 by and among the
              Company, Institutional Venture Management VI,
              Institutional Venture Partners VI, IVP Founders
              Fund I, L.P., Stanford University, Virgil A. Place,
              Leland Wilson, S.F. Growth Fund, Frazier
              Healthcare II, L.P., Troy A. Burns, M.D., Troy A.
              Burns Revocable Trust, Catherine P. Burns Revocable
              Trust, James Marvine and T. Scott Jenkins
     10(r)(2) Advertising Agency Agreement dated December 4, 1996
              by and between DraftDirect Worldwide, Inc. and the
              Company
     10(s)(3) Agreement dated March 1, 1997 by and between
              TheraCom, Inc. and the Company
     10(t)(3) Services Agreement dated January 6, 1997 by and
              between and Strategem, Inc. and the Company
  10(t)(i)(4) Amendment to Services Agreement dated July 1, 1997 by
              and between Strategem, Inc. and the Company
 10(t)(ii)(4) Termination of Services Agreement dated September 30,
              1997 by and between Strategem, Inc. and the Company
     10(u)(3) Registration Rights Agreement dated January 6, 1997
              by and between Strategem, Inc. and the Company
        10(v) Advertising Agency Agreement dated September 19, 1997
              by and between Media Direct Partners, Inc. and the
              Company
           21 List of Subsidiaries of the Company
        23(b) Consent of Ernst & Young LLP
           27 Financial Data Schedule

-----------

(1)Incorporated  by reference to the  corresponding  exhibit  filed as part of
Registration  Statement  No.  333-5414-D,  as  amended,  originally  filed  on
August 12, 1996.

   (2)Incorporated by reference to the corresponding  exhibit filed on March 31,
1997 as part of Form 10-KSB for the year ended December 31, 1996.

   (3)Incorporated  by reference to the  corresponding  exhibit filed on May 15,
1997 as part of Form 10-QSB for the quarter ended March 31, 1997.

   (4)Incorporated  by reference to the corresponding  exhibit filed on November
14, 1997 as part of Form 10-QSB for the quarter ended September 30, 1997.

   (5)Incorporated  by reference to the  corresponding  exhibit  filed as part
of Form 8-K on
March 20, 1998.

<PAGE>

   (6)Incorporated by reference to Appendix A to the Company's  Definitive Proxy
Statement for the annual meeting held on May 30, 1997, File No.  0-21427,  filed
with the Securities and Exchange Commission on April 28, 1997.

   (7)Incorporated by reference to Appendix B to the Company's  Definitive Proxy
Statement for the annual meeting held on May 30, 1997, File No.  0-21427,  filed
with the Securities and Exchange Commission on April 28, 1997.



<PAGE>



              Integrated Medical Resources, Inc. and Subsidiaries
                  Index To Consolidated Financial Statements


Report of Independent Auditors                                             F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1997                         F-2
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996                                           F-4
Consolidated Statements of Stockholders' Equity for the 
years ended December 31, 1997 and 1996                                     F-5
Consolidated Statements of Cash Flows for the years ended 
December 31, 1997 and 1996                                                 F-6
Notes to Consolidated Financial Statements                                 F-8




<PAGE>
















                      (THIS PAGE LEFT BLANK INTENTIONALLY)



















<PAGE>



                         Report of Independent Auditors

The Board of Directors and Stockholders
Integrated Medical Resources, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheet of  Integrated
Medical Resources,  Inc. and subsidiaries (the Company) as of December 31, 1997,
and the related consolidated statements of operations,  stockholders' equity and
cash  flows for each of the two years in the period  ended  December  31,  1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements 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 financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Integrated Medical
Resources,  Inc. and  subsidiaries  at December 31, 1997,  and the  consolidated
results  of their  operations  and their cash flows for each of the two years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.

As discussed in Note 11 to the consolidated financial statements,  the Company's
recurring  losses from  operations  and net  working  capital  deficiency  raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these  matters  are also  described  in Note 11. The 1997  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                        /s/ Ernst & Young LLP

Kansas City, Missouri
March 4, 1998



                                      F-1
<PAGE>



                       Integrated Medical Resources, Inc.
                                and Subsidiaries

                           Consolidated Balance Sheet

                                December 31, 1997


Assets (Notes 3 and 4)
Current assets:
  Cash and cash equivalents                         $
                                                       765,204
  Accounts receivable, less allowance of             8,411,413
   $2,074,660
  Supplies                                             407,071
  Prepaid expenses                                     101,640
                                                    -----------
Total current assets                                 9,685,328



Property and equipment (Note 2):
  Office equipment and software                      1,920,454
  Furniture, fixtures and equipment                  6,431,249
  Leasehold improvements                               151,836
                                                    -----------
                                                     8,503,539
  Accumulated depreciation                           2,801,377
                                                    -----------
                                                    -----------
                                                     5,702,162




Intangible assets                                      182,843
Other assets                                           239,439
                                                    ===========
Total assets                                        $15,809,772
                                                    ===========

                                      F-2
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries

                     Consolidated Balance Sheet (continued)

                                December 31, 1997



Liabilities and stockholders' equity Current liabilities:
  Accounts payable                                  $
                                                     3,793,008
  Accrued payroll                                      647,582
  Accrued advertising                                  773,468
  Other accrued expenses                               188,980
  Accrued restructuring charge (Note 10)               628,120
  Working capital line of credit (Note 3)            3,085,954
  Current portion of long-term debt (Note 4)         2,685,491
  Current portion of capital lease obligations         245,684
  (Note 2)
                                                    -----------
Total current liabilities                           12,188,480

Deferred rent                                          195,748
Long-term debt, less current portion (Note 4)        1,325,282
Capital lease obligations, less current portion        139,898
(Note 2)

Stockholders' equity (Notes 4, 6 and 8): 
  Preferred stock, $.001 par value:
   Authorized shares - 1,696,698
   Issued and outstanding shares - none 
  Common stock, $.001 par value:
   Authorized shares - 10,000,000
   Issued and outstanding shares - 6,731,058             6,731
  Treasury stock, at cost                              (11,347)
  Additional paid-in capital                        18,219,781
  Accumulated deficit                              (16,114,608)
                                                   -----------
Total stockholders' equity                           2,100,557
                                                   ===========
Total liabilities and stockholders' equity         $15,809,772
                                                   ===========

See accompanying notes.

                                      F-3
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries

                      Consolidated Statements of Operations

                                       Year ended December 31
                                           1997       1996
                                       ------------------------

Net revenue                            $21,004,554  $11,006,774
Center operating expenses:
  Physician salaries                     3,646,894    2,393,556
  Cost of services                       6,332,429    3,131,855
  Center staff salaries                  2,310,516    1,582,380
  Center facilities rent                 1,368,459      796,658
                                       ------------------------
Total Center operating expenses         13,658,298    7,904,449
                                       ------------------------
Center contribution                      7,346,256    3,102,325

Corporate expenses:
  Advertising                            5,654,802    4,309,419
   Selling, general and administrative   6,498,720    3,714,119
   Depreciation and amortization         2,328,676    1,322,353
  Restructuring charge                     919,243            -
                                       ------------------------
Total corporate expenses                15,401,441    9,345,891
                                       ------------------------
Operating loss                          (8,055,185)  (6,243,566)

Other income (expense):
  Interest income                          118,787       81,730
  Interest expense                        (455,572)    (356,710)
  Other                                    (55,267)           -
                                       ------------------------
                                          (392,052)    (274,980)
                                       ------------------------

Loss before income tax benefit          (8,447,237)  (6,518,546)
Income tax benefit (Note 5)                      -           -
                                       ========================
Net loss                               $(8,447,237) $(6,518,546)
                                       ========================

Net loss per common share -- basic     
  and diluted                          $     (1.26) $     (1.82)
                                       ========================
Basic and diluted weighted
  average common shares                  6,719,706    3,573,910
  outstanding                          ========================

See accompanying notes.

                                      F-4
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries

                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>

                                          Preferred Stock                            Additional
                                  --------------------------
                                    Series A     Series B     Common    Treasury    Paid-In   Accumulated
                                   Convertible  Convertible   Stock      Stock      Capital     Deficit        Total
                                  ---------------------------------------------------------------------------------------
<S>                                    <C>         <C>          <C>    <C>        <C>         <C>            <C> 

Balance at December 31, 1995           $  1,081    $     --     $2,907 $          $ 4,367,235                $ 3,222,398
                                                                               --             $(1,148,852)
  Issuance of 222,222 shares of              --         222         --                924,549           --       924,771
  Series B
    Convertible preferred stock,
    net of issuance costs of $75,228
  Issuance of 5,500 shares of                --          --          5                 30,244           --        30,249
  common stock to employee
  Issuance of 2,500,000 shares               --          --      2,500             12,638,001           --    12,640,501
  of common stock in initial public
  offering, net of issuance 
  costs of $2,359,499
  Conversion of preferred stock         (1,081)       (222)      1,303                     --           --            --
  to common stock
  Net loss                                   --          --         --                     --  (6,518,546)   (6,518,546)
                                  ---------------------------------------------------------------------------------------
Balance at December 31, 1996                 --          --      6,715             17,960,029  (7,667,371)    10,299,373

Issuance of 16,041 shares of                 --          --         16                 50,088           --        50,104
common stock
Repurchase of 5,500 shares of                --          --         --   (11,347)          --                   (11,347)
common stock
Fair value of warrants issued in             --          --                           209,664                    209,664
November 1997
Net loss                                     --          --                                --  (8,447,237)   (8,447,237)
                                  ---------------------------------------------------------------------------------------
Balance at December 31, 1997         $       --    $     --     $6,731  $(11,347) $18,219,781 $(16,114,608)   $2,100,557
                                  =======================================================================================
</TABLE>


See accompanying notes.

                                      F-5
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries

                      Consolidated Statements of Cash Flows


                                       Year ended December 31
                                           1997       1996
                                       ------------------------

Operating activities
Net loss                               $(8,447,237)  $(6,518,546)
Adjustments to reconcile net
  loss to net cash used in
  operating activities:
   Depreciation                         1,423,540       779,176
   Amortization                           905,136       543,177
   Provision for bad debts              1,687,847       250,761
   Deferred rent                           19,816        96,687
   Pre-opening costs incurred            (138,399)     (782,108)
   Restructuring charge                   919,243            --
   Changes in operating assets and
    liabilities:
    Accounts receivable                (7,731,881)   (1,251,910)
    Supplies                              (94,343)     (178,313)
    Prepaid expenses                      166,439      (111,200)
    Accounts payable                    1,905,305       705,731
    Accrued payroll                        79,532       381,819
    Accrued advertising                   422,743       266,985
    Other accrued expenses               (143,229)      (48,991)
                                       ----------    ----------
Net cash used in operating activities  (9,025,488)   (5,866,732)

Investing activities
Purchases of property and equipment      (458,397)   (1,682,641)
Proceeds from the sale of property and     23,551            --
  equipment
Other                                    (186,274)     (276,000)
                                       ----------    ----------
Net cash used in investing activities    (621,120)   (1,958,641)

                                      F-6
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries

              Consolidated Statements of Cash Flows (continued)


                                       Year ended December 31
                                           1997       1996
                                       ------------------------

Financing activities
Borrowings on line of credit         $  5,069,258    $ 1,100,000
Principal payments on line of credit   (1,983,304)    (1,100,000)
Proceeds from issuance of               1,400,000             --
  convertible debt
Proceeds from issuance of
  notes payable and long-term             990,000        303,400
  debt
Principal payments on long-term debt   (1,277,444)    (1,143,585)
Debt issuance costs incurred             (115,375)       (15,000)
Principal payments on capital lease      (449,777)      (298,060)
  obligations
Purchase of treasury stock                (11,347)            --
Proceeds from issuance of preferred            --        924,771
  stock
Proceeds from issuance of common stock     50,104     12,670,750
                                        ------------------------
Net cash provided by financing          3,672,115     12,442,276
  activities
                                        ------------------------

Net increase (decrease) in cash
  and cash equivalents                 (5,974,493)     4,616,903
Cash and cash equivalents at            6,739,697      2,122,794
  beginning of year
                                        ------------------------
                                        ========================
Cash and cash equivalents at end       $  765,204    $ 6,739,697
  of year                               ========================

Supplemental disclosures of cash
flow information
Cash paid for interest                 $  385,725   $   356,710
                                       ========================

Supplemental schedule of noncash
investing and financing activities
Additions to equipment through
  issuance of capital lease            $2,042,734    $2,509,216
  obligations or long-term debt        ========================

See accompanying notes.





                                      F-7
<PAGE>


                       Integrated Medical Resources, Inc.
                                and Subsidiaries
                  Notes to Consolidated Financial Statements


1.  Summary of Significant Accounting Policies

Nature of Business

Integrated Medical Resources,  Inc. and subsidiaries (the Company) is a provider
of management  services to clinics providing disease management services for men
suffering from sexual dysfunction. At December 31, 1997, the Company operated 26
diagnostic  clinics  under the name The  Diagnostic  Center for Men in 17 states
(collectively  the  Centers).  Each of those 26  clinics  is owned  directly  or
beneficially  by an officer and  stockholder of the Company and has entered into
long-term management  contracts and lease agreements with the Company.  Pursuant
to these contracts and agreements, the Company provides a wide array of business
services to the  Centers in  exchange  for  management  fees.  The Company has a
noncancelable  option to designate the holder of the common stock of each Center
through  the  right to force  each  current  holder to sell,  at any  time,  the
outstanding shares of the professional corporations operating the Centers to the
Company's  designee  for a nominal  amount which  management  believes is deeply
discounted from the fair value of the stock of the  corporations.  The amount to
be paid represents the  reimbursement  of the direct expenses of the stockholder
in forming the corporation  operating the Center,  and normally ranges from $100
to $500. In general,  the Company is legally  prohibited  from owning the common
stock of the Centers.

Basis of Presentation

In November  1997, the Emerging  Issues Task Force (EITF)  reached  consensus on
issue No. 97-2,  "Application of APB Opinion No. 16 and FASB Statement No. 94 to
Medical  Entities." This EITF requires the  consolidation of physician  practice
management  entities (PPM) and physician  practices when a PPM has a controlling
financial  interest in a physician  practice  without directly owning any of its
equity instruments. The Company has elected to early adopt the provisions of the
EITF.  Accordingly,  the 1996 financial  statements  have been  reclassified  to
conform with the new presentation.

The consolidated financial statements include the accounts of Integrated Medical
Resources,  Inc., its wholly-owned subsidiaries and the Centers. All significant
intercompany accounts and transactions have been eliminated in consolidation.


                                      F-8
<PAGE>



1.  Summary of Significant Accounting Policies (continued)

Use of Estimates

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts  reported in the consolidated  financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

Cash and Cash Equivalents

Cash and cash  equivalents  consist of cash,  money market funds and  short-term
invest-ments with an original maturity of three months or less.

Property and Equipment

Property  and  equipment  are  recorded  at  cost  and  depreciated   using  the
straight-line method over the following estimated useful lives:

                                     Years

Office equipment and software         3-5
Furniture, fixtures and equipment     5-7

Leasehold improvements are depreciated over the shorter of the lease term or the
estimated useful life of the asset.

Intangible Assets

Intangible assets consist of the following:

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

        Debt issuance costs           $   189,895
        Pre-opening costs               1,005,523
        Other                              22,914
                                     -------------
                                        1,218,332
        Less accumulated                1,035,489
        amortization
                                     -------------
                                      $   182,843
                                     =============

                                      F-9
<PAGE>


1.  Summary of Significant Accounting Policies (continued)

Debt  issuance  costs  represent  cost  incurred in obtaining the line of credit
facility (see Note 3) and term loan (see Note 4). Debt issuance  costs are being
amortized  over the two-year term of the line of credit using the  straight-line
method.

Pre-opening  costs represent  certain  start-up costs  capitalized  prior to the
opening of each  Center.  Pre-opening  costs are being  amortized  over one year
using the straight-line method.

Financial Instruments

The carrying value of the Company's  financial  instruments,  including cash and
cash equivalents,  accounts receivable, accounts payable, and long-term debt, as
reported in the accompanying balance sheet, approximates fair value.

Income Taxes

The Company  accounts for income taxes using the liability  method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income  Taxes." The  liability  method  provides  that  deferred  tax assets and
liabilities are determined based on differences  between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.

Revenue Recognition

Revenues are recorded at estimated net amounts to be received  from  third-party
payors and individual patients at the time services are rendered.

Advertising Costs

Advertising costs are charged to expense as incurred, except for direct-response
advertising  which is  capitalized  and  amortized  over its expected  period of
future benefits.  Direct-response  advertising costs capitalized at December 31,
1997 and 1996 were not  material.  The Company has an  arrangement  with a major
supplier  who has agreed to  underwrite  a portion of costs  incurred to educate
physicians and patients regarding impotence.


                                      F-10
<PAGE>



1.  Summary of Significant Accounting Policies (continued)

Stock Compensation

The Company has elected to follow  Accounting  Principles  Board  Opinion No. 25
(APB  No.  25),   "Accounting  for  Stock  Issued  to  Employees,"  and  related
Interpretations in accounting for its stock options. The Company has established
the exercise prices of options granted at fair value on the date of grant. Prior
to  completion of its initial  public  offering in 1996 (see Note 6), fair value
was  determined  by  sales  of  common  stock  to  unrelated  third  parties  in
arms-length  transactions  at or about the date of grant. In accordance with APB
No. 25, no  compensation  is  recognized  in such  circumstances.  The effect of
applying  the fair  value  method  required  by SFAS No.  123,  "Accounting  for
Stock-Based  Compensation,"  to the Company's  stock options results in net loss
and net loss per share that are not materially  different from amounts  reported
in the consolidated statements of operations.

Net Income (Loss) Per Share

In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share."  SFAS 128  replaced  the  calculation  of primary and fully  diluted
earnings  per share with basic and diluted  earnings per share.  Unlike  primary
earnings per share,  basic earnings per share  excludes any dilutive  effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the  previously  reported  fully  diluted  earnings  per  share.  All
earnings  per share  amounts  for all  periods  have been  presented,  and where
appropriate, restated to conform to the SFAS 128 requirements.

Concentration of Credit Risk

The  Company  grants  credit  to  individual  patients  and  third-party  payors
(including insurers and Medicare) who meet preestablished  credit  requirements.
At December 31, 1997,  approximately 38% of patient accounts receivable were due
from individual  patients and 62% were due from third-party  payors.  Generally,
the Company does not require  collateral  from patients or  third-party  payors.
Reserves for credit  losses are provided for as Center  operating  expenses.  In
1997, the Company increased the reserve for credit losses by approximately  $1.7
million. Accounts receivable write-offs amounted to $197,491 and $263,578 during
the years ended December 31, 1997 and 1996, respectively.

Major Payors

The Company had revenues from Medicare  amounting to 34% and 27% of net revenues
during the years ended December 31, 1997 and 1996, respectively.

                                      F-11
<PAGE>



1.  Summary of Significant Accounting Policies (continued)

Reclassifications

Certain  amounts  within the 1996  financial  statements  have been reclassed to
conform with the 1997 presentation.

2.  Leases

The Company leases certain office  equipment under  agreements  accounted for as
capital leases. Obligations under these capital leases are collateralized by the
leased  equipment,  and certain of the leases are  guaranteed  by an officer and
stockholder.   Amortization  of  assets  under  capital  lease  is  included  in
depreciation  expense.  Assets under capital leases at December 31, 1997 were as
follows:

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

        Office equipment                   $1,450,140
        Less accumulated amortization         940,646
                                        -------------
                                           $  509,494
                                        =============

The  Company  leases  its  office  and  clinic   facilities   under   long-term,
noncancelable  operating leases.  In addition,  the Company rents certain office
equipment  under  operating  leases.  Rent  expense  for  operating  leases with
scheduled  rent increases is accounted for on the  straight-line  basis over the
respective lease terms. Rent expense for all operating leases totaled $1,631,006
and $935,554 for the years ended December 31, 1997 and 1996, respectively.

                                      F-12
<PAGE>



2.  Leases (continued)

Future minimum lease payments under capital leases and  noncancelable  operating
leases consisted of the following at December 31, 1997:

                      Year ending           Capital         Operating
                      December 31           Leases            Leases
          -----------------------------------------------------------------
          1998                             $295,319         $1,403,594
          1999                              136,269          1,268,366
          2000                               23,599          1,084,830
          2001                                   --          1,069,006
          2002                                   --          1,069,006
          Thereafter                             --          3,346,228
                                       ------------------------------------

          Total minimum lease payments      445,187         $9,241,030
                                                            ==========
          Less amounts representing interest 69,605
                                            -------
          Present value of minimum lease
               payments                     385,582

          Less current portion              245,684
                                            -------
                                            $139,898

          
3.  Line of Credit

In October  1997,  the Company  entered into a line of credit  agreement  with a
finance  company  providing for  borrowings up to $5,000,000  based on specified
percentages  of eligible  accounts  receivable,  with interest at 2.5% above the
Bank of America prime rate (8.5% at December 31, 1997).  Borrowings  outstanding
under this line of credit  agreement at December 31, 1997 were  $3,085,954.  The
line of credit,  which expires in October 1999,  is  collateralized  by accounts
receivable  and the property and equipment  securing the $500,000 term loan with
the same finance  company entered into in October 1997 (see Note 4). The line of
credit  agreement  requires  the Company to  maintain  compliance  with  certain
covenants  including  limitations  on the payment of dividends and collection of
certain levels of accounts receivable.

During 1997,  the Company had a separate  line of credit  agreement  with a bank
providing  for  borrowings up to $2,000,000  based on specified  percentages  of
eligible accounts  receivable,  with interest at 1% above the bank's prime rate.
This line of credit was paid in full and retired in October 1997.

The weighted average interest rate on all line of credit  borrowings in 1997 and
1996 was 9.69% and 9.25%, respectively.

                                      F-13
<PAGE>

4.   Notes Payable and Long-Term Debt

The Company's notes payable and long-term debt are as follows:

                                                        December 31, 1997
                                                    ---------------------------
           Equipment note payable, interest at
             5.75%, due in monthly installments
             through August 1999                                    $  846,296
           Equipment note payable, interest at
             5.22%, due in monthly installments
             through November 1999                                     216,341
           Equipment note payable, interest at
             5.75%, due in monthly installments
             through September 2000                                  1,297,483
           Term loan, interest at 12.74%, payable
             in monthly installments through
             October 2000                                              460,317
           Convertible subordinated promissory
             notes, interest 8.5%, lump sum
             payment due November 1998                               1,190,336
                                                    ---------------------------
                                                                     4,010,773
           Less current maturities                                   2,685,491
                                                    ---------------------------
           Long-term debt                                           $1,325,282
                                                    ===========================

The equipment  notes payable  listed above were incurred to finance the purchase
of  equipment  to be  used in  providing  clinic  services.  An  officer  of the
equipment vendor serves as a director of the Company.

At December  31,  1997,  the Company is  contractually  obligated  to acquire an
additional $1,476,000 of equipment with the same vendor.

In October 1997,  the Company  entered into a $500,000 term loan  agreement with
the finance  company which provides the $5,000,000  line of credit (see Note 3),
secured by property and equipment.

In December 1997,  the Company  issued $1.4 million in convertible  subordinated
promissory notes to two major institutional shareholders. Three of the Company's
directors are affiliated with these  institutional  shareholders.  The notes are
convertible  into the securities  issued in the Company's next equity  financing
involving the receipt by the Company of, in the aggregate, more than $3 million,
at the purchase price paid by the investors in that financing.  The notes, which
are secured by a pledge of 400,000 shares of common stock of the Company held by
an officer,  mature May 31, 1998.  Subsequent  to December  31,  1997,  the note
agreements were amended to provide for extension of the

                                      F-14
<PAGE>



4.   Notes Payable and Long-Term Debt (continued)

maturity  date to November 30, 1998, in the event the notes are not converted on
or before May 31, 1998.  In addition,  the  amendment  reduced the amount of the
required equity financing to $2.6 million.  Attached to these notes are warrants
to purchase the Company's  common stock (see Note 6), valued at $209,664,  which
have been recorded as an offset to the related debt. As a result,  the effective
interest rate on the debt is approximately 30%.

Principal  maturities  under the  $4,010,773 of notes payable and long-term debt
outstanding  as of December  31,  1997 for each of the next three  years  ending
December 31 are as follows:

                      1998                  $2,685,491
                      1999                       887,771
                      2000                       437,511

 

                                     F-15
<PAGE>



5.  Income Taxes

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

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

           Deferred tax assets:
             Net operating loss carryforwards                  $  6,725,978
             Accounts payable                                       278,869
             Accrued expenses                                       237,345
             Accrued restructuring costs                            241,460
             Other                                                   52,780
                                                    ------------------------
                                                                  7,536,432

           Deferred tax liabilities:
             Accounts receivable                                   (564,615)
             Prepaid expenses                                       (78,186)
             Other assets                                          (187,766)
             Other                                                 (358,706)
                                                    ------------------------
                                                                 (1,189,273)
                                                    ------------------------

           Valuation reserves                                    (6,347,159)
                                                    ------------------------
           Net deferred taxes                           $                --
                                                    ========================

During 1997,  the Company  elected to file its income tax returns on the accrual
basis versus cash-basis. The deferred tax assets and liabilities at December 31,
1996 related to the previous cash-basis tax balance sheet will be amortized over
four years.  However, due to the uncertainty of the Company's ability to utilize
the net deferred tax assets, the amount has been fully reserved.








                                      F-16
<PAGE>



5.  Income Taxes (continued)

A  reconciliation  of the income  tax  benefit to the  amounts  computed  at the
federal statutory rate is as follows:

<TABLE>
<CAPTION>
                                                            Year ended December 31
                                                          1997                  1996
                                                     --------------------------------------
           <S>                                          <C>                   <C>

           Federal income tax benefit at
             statutory rate                             $(2,872,061)          $(2,216,306)
           State income taxes, net of federal tax
             benefit                                       (506,834)             (391,113)
           Change in valuation reserve                    3,370,999             2,554,831
           Other                                              7,896                52,588
                                                     --------------------------------------
                                                        $        --           $        --
                                                     ======================================
</TABLE>

At December  31,  1997,  the Company had net  operating  loss  carryforwards  of
approximately  $16,815,000  which are available to offset future  taxable income
and expire in varying amounts through 2012, if unused. Additionally, utilization
of a portion of the net operating  loss may be limited  under certain  ownership
change provisions of the Internal Revenue Code.

6.  Stockholders' Equity

In March 1996,  the  stockholders  of the  Company  approved  an  Amendment  and
Restatement  of the Company's  Articles of  Incorporation  which  authorized the
Company to issue  10,000,000  shares of $.001 par value common stock,  1,081,080
shares of $.001 par value Series A Convertible  preferred stock,  222,222 shares
of $.001 par value Series B Convertible  preferred stock and 1,696,698 shares of
$.001 par value undesignated preferred stock.

In March  1996,  the Company  sold  222,222  shares of the Series B  Convertible
preferred stock to investors at $4.50 per share.  Proceeds of the offering,  net
of  offering  costs of  $75,228,  amounted to  $924,771.  Simultaneous  with the
closing, certain common stock-holders sold 651,621 shares of common stock to the
same investor for $2,410,998.

                                      F-17
<PAGE>



6.  Stockholders' Equity (continued)


In November  1996,  the  Company  sold  2,500,000  shares of its $.001 par value
common stock at $6.00 per share in its initial  public  offering.  Proceeds from
the offering,  net of offering  costs of  $2,359,499,  amounted to  $12,640,501.
Simultaneous  with the initial public  offering,  the Series A and B Convertible
preferred  stock was  automatically  converted into  1,303,302  shares of common
stock. The authorized shares of Series A and B Convertible  preferred stock were
then retired,  leaving only 1,696,698  shares of  undesignated  preferred  stock
authorized.

In  conjunction  with the $1.4 million in  convertible  notes issued in December
1997 (see Note 4), the Company  issued  warrants to purchase a certain number of
shares  of common  stock  based  upon a stated  formula.  The fair  value of the
warrants of $209,664 was determined using the Black Scholes method based upon an
assumed stock price of $3.13 and an estimated  life of five years.  The warrants
expire in December 2002.

7.  Employee Benefits and Compensation

Effective January 1, 1996, the Company implemented a 401(k) retirement plan. All
employees of the Company over 21 years of age who have  completed  six months of
service are eligible for participation in the plan.  Employees may contribute up
to 15% of their  annual  compensation  subject to annual  Internal  Revenue Code
maximum limitations.  The Company will match 50% of each employee's contribution
up to a  maximum  of 4% of the  employee's  salary.  The  Company  may also make
discretionary  contributions under this plan. Company  contributions to the plan
amounted to $63,551 and $26,542 for the years ended  December 31, 1997 and 1996,
respectively.

8.  Stock Option Plans

During  1994,  the Company  approved a stock  incentive  plan (the 1994 Plan) to
provide certain  employees with restricted shares of common stock. In June 1996,
shares  awarded  under the 1994 Plan were  converted  to options to  purchase an
equivalent number of shares of common stock with an estimated fair market option
price of $3.70 per share. Such options become exercisable in March 1998.

In December 1995,  the Company  approved an employee stock option plan (the 1995
Plan) and reserved  303,550 shares of $.001 par value common stock,  in addition
to the nonvoting  common shares  originally  reserved  under the 1994 Plan,  for
issuance to employees and consultants.

                                      F-18
<PAGE>


8.  Stock Option Plans (continued)


In March 1996, the Company  amended and restated the 1995 Plan.  Options granted
under the restated 1995 Plan are either incentive stock options  qualified under
the Internal Revenue Code or nonqualified,  nonstatutory stock options. Terms of
exercise are determined by the Compensation  Committee of the Board of Directors
(the Compensation Committee).

Options granted under the restated 1995 Plan expire up to 10 years after date of
grant,  except for those granted to stockholders who own greater than 10% of the
voting stock of the Company,  which expire up to five years after date of grant.
The number of options  granted to individual  employees  cannot  exceed  100,000
shares in any fiscal year,  with the  exception of options  granted upon initial
employment.  The option price for an incentive stock option may not be less than
the fair market  value of the shares on the date of grant.  The option price for
nonqualified  stock options is determined by the  Compensation  Committee at the
date of grant.  The exercise  schedule of these options provides that 25% of the
options  become  exercisable  one year  after  the date of grant and 1/48 of the
total options granted become exercisable each month thereafter.

In August  1996,  the Company  amended  and  restated  the 1995 Plan,  including
increasing  the number of shares of common stock reserved for issuance under the
restated 1995 Plan to 700,000 shares.

In December  1996,  the Board of Directors  authorized  the repricing of certain
$5.50 and $7.00 per share options  previously  issued to the company officers to
$3.88 per  share,  fair  value on the date of  repricing.  The  total  amount of
options repriced was 160,000  options.  In December 1996, the Board of Directors
also  approved the 1997  Executive  Bonus Plan, an unfunded  bonus  compensation
agreement in which certain members of management are awarded  bonuses  comprised
of both cash and stock  options  based on the  ability of the  employee  and the
Company to achieve certain 1997 goals. Any stock options awarded pursuant to the
1997 Executive  Bonus Plan are granted under the restated 1995 Plan.  Options to
purchase  70,064 shares of common stock were issued in 1996,  but did not become
exercisable and were subsequently canceled in December 1997.


                                      F-19
<PAGE>



8.  Stock Option Plans (continued)

In May 1997, the Company  amended the restated 1995 Plan,  increasing the number
of shares reserved for issuance to 1,160,000 shares.

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                   Average
                                   Number of   Option Price per   Exercise
                                     Shares          Share          Price      Exercisable
                                  ------------------------------------------------------------
<S>                                   <C>         <C>                <C>                <C>

Outstanding at December 31, 1995        19,450       $3.70           $3.70               7,540
Exercised                                --           --              --                    --
Granted                                686,014    $3.70 - $7.00      $4.81              81,973
Canceled/Expired                      (177,300)   $3.70 - $7.00      $5.27                  --
                                  ------------------------------------------------------------
Outstanding at December 31, 1996       528,164    $3.70 - $7.00      $4.54              89,513
Exercised                              (13,451)       $3.70          $3.70             (13,451)
Granted                                317,214    $1.88 - $4.81      $2.66              83,197
Canceled/Expired                      (337,828)   $2.06 - $7.00      $4.34                  --
                                  ------------------------------------------------------------
Outstanding at December 31, 1997       494,099   $1.88 - $7.00      $3.60             159,259
                                  ============================================================

</TABLE>

<TABLE>
<CAPTION>

                                       Options Outstanding           Options Exercisable
                                       -------------------           -------------------
                                                                                 Weighted
                                     Number    Weighted Average    Number    Average Exercise
         Exercise Price           Outstanding   Exercise Price   Exercisable      Price
----------------------------------------------------------------------------------------------
         <S>                           <C>                 <C>        <C>               <C> 

              $1.88                     11,700             $1.88         --               --
          $2.00 - $2.06                150,900             $2.04      75,000            $2.00
          $2.25 - $2.50                 17,895             $4.21         --                --
          $3.70 - $3.88                216,039             $3.76      64,395            $3.76
          $4.50 - $4.81                 32,265             $4.79       8,197            $4.81
              $7.00                     65,300             $7.00      11,667            $7.00
</TABLE>



                                      F-20
<PAGE>



8.  Stock Option Plans (continued)

In August 1996, the Company  adopted a  Non-Employee  Director Stock Option Plan
(the Director Plan) and reserved  100,000 shares of common stock for issuance of
options to non-employee directors. In May 1997, the Company amended the Director
Plan, increasing the number of shares reserved for issuance to 140,000 shares.

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                   Average
                                   Number of   Option Price per   Exercise
                                     Shares          Share          Price       Exercisable
                                  -------------------------------------------------------------
<S>                                    <C>       <C>                <C>           <C>

Outstanding at December 31, 1995           --         --             --             --
Granted                                 40,000       $7.00          $7.00         13,332
Canceled/Expired                           --         --             --             --
                                  -------------------------------------------------------------
Outstanding at December 31, 1996        40,000       $7.00          $7.00         13,332
Exercised                                  --         --             --             --
Granted                                 72,500       $2.25          $2.25           --
Canceled/Expired                           --         --             --             --
                                  -------------------------------------------------------------
Outstanding at December 31, 1997       112,500   $2.25 - $7.00      $3.94         13,332
                                  =============================================================
</TABLE>

<TABLE>
<CAPTION>

                                           Options Outstanding            Options Exercisable
                                           -------------------            -------------------
                                                                                    Weighted
                                     Number    Weighted Average    Number       Average Exercise
         Exercise Price           Outstanding   Exercise Price   Exercisable          Price
------------------------------------------------------------------------------------------------
              <S>                       <C>                <C>        <C>                <C>

              $2.25                     72,500             $2.25          --                --
              $7.00                     40,000             $7.00      13,332             $7.00
</TABLE>

9.  Related-Party Transactions

The Company leases clinic space from an officer and  stockholder.  Rent payments
to this stockholder totaled $27,300 in each of the years ended December 31, 1997
and 1996.

10.  Restructuring Charge

During 1997,  the Company  incurred a  restructuring  charge of  $919,243.  This
charge  primarily  represents  lease  termination  payments  and other  costs of
closing 7 clinics and canceling the planned opening of a new clinic.

                                      F-21
<PAGE>



11.     Going Concern Matters

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of  liabilities in the normal course of business.  As shown in the  consolidated
financial  statements,  during the years  ended  December  31, 1997 and 1996 the
Company incurred losses of $8,447,237 and $6,518,546, respectively, and has used
net cash in operating  activities of $9,025,488  and  $5,866,732,  respectively.
These  factors  among  others may  indicate  that the Company  will be unable to
continue as a going concern for a reasonable period of time.

The consolidated financial statements do not include any adjustments relating to
the  recoverability  and  classification  of liabilities that might be necessary
should the  Company be unable to  continue  as a going  concern.  The  Company's
continuation  as a going  concern is  dependent  upon its  ability  to  generate
sufficient  cash  flow to meet its  obligations  on a timely  basis,  to  obtain
additional financing or refinancing as may be required, and ultimately to attain
profitability.

The Company has taken measures to reduce  operating losses and improve cash flow
by closing certain clinics (see Note 10), and has located  additional sources of
debt and potential equity  financing in order to achieve  positive  earnings and
cash flow (see Note 13).

12.  Contingencies

The Company is subject to extensive federal and state laws and regulations, many
of which have not been the  subject of judicial  or  regulatory  interpretation.
Management believes the Company's operations are in substantial  compliance with
laws and  regulations.  Although an adverse review or  determination by any such
authority could be significant to the Company,  management  believes the effects
of any such  review or  determination  would not be  material  to the  Company's
financial condition.


                                      F-22
<PAGE>


13.  Subsequent Events

In March 1998, the Company entered into a financing  arrangement  with Kardatzke
Management,  Inc.  ("KMI"),  as evidenced in part by a Note  Purchase  Agreement
("Note Purchase Agreement") and Convertible Note ("Note"). Pursuant to the terms
of the Note  Purchase  Agreement,  KMI has loaned the Company  $1,600,000  at an
interest rate of 8.5%. All payments of principal and interest under the Note are
deferred until September 1, 1998. The Note may be converted at the option of KMI
into common  stock of the Company at the lower of $2.15 per share or the average
market price for the 15 days prior to conversion, at any time prior to maturity.
If not converted or extended  prior to September 1, 1998,  the Note shifts to an
18 month, fully amortizing term loan and is no longer convertible.

In addition,  KMI has agreed to provide  management  consulting  services to the
Company, which end at the Company's option if the Note is converted or shifts to
a term loan.  KMI will  receive an option to purchase  300,000  shares of common
stock  exercisable  at $2.70 per share if certain  performance  criteria are met
prior to April 15, 1999.

As a part of the  financing  transaction,  KMI also has four options to purchase
shares of common stock at increasing  share prices and with  staggered  exercise
dates, which, when combined with the conversion of the Note, aggregate 2,300,000
shares.  The exercise of each option is dependent on the exercise of the earlier
options and the exercise of the first option is dependent on the  conversion  of
the Note.

Also,  upon  the  conversion  of the Note and the  investment  of an  additional
$1,000,000  through the exercise of the initial option to purchase common stock,
a  principal  of KMI will join the Company in the  capacity  of Chief  Executive
Officer and Chairman of the Board of Directors. In the event that this principal
assumes these positions,  he will have a three year employment contract with the
Company and will receive  options to purchase an aggregate of 600,000  shares of
common stock at a purchase price of $2.15 per share, vesting over four years.

The  Company  has  $1,400,000  in  convertible   subordinated  promissory  notes
outstanding from two major institutional investors that are due May 1, 1998 (see
Note 4).  These  investors  have  agreed to convert  these notes at the same per
share price as the conversion of the KMI loan in the event that KMI converts its
loan and exercises its first option to invest an additional $1,000,000 in shares
of common stock.









                                      F-23
<PAGE>
                                                                      EX-4(h)(i)
                              Note and Warrant Agt


                       INTEGRATED MEDICAL RESOURCES, INC.
                           NOTE AND WARRANT AGREEMENT

      This Agreement is made effective as of December 11, 1997, among Integrated
Medical  Resources,  Inc.,  a  Kansas  corporation  (the  "Company"),  with  its
principal  office  at 11320  West  79th  Street,  Lenexa,  Kansas  66214 and the
Investors  set  forth  on  the  signature   pages  hereto   (collectively,   the
"Investors").

      1.   Sale and Issuance of the Notes and the Warrants.

         1.1 The Investors  severally  agree, on the terms of and subject to the
conditions specified in this Agreement, to lend to the Company the sum set forth
on the signature page of this Agreement. Each Investor's loan shall be evidenced
by a  convertible  subordinated  promissory  note (the  "Note")  dated as of the
Closing Date in the form  attached  hereto as Exhibit A. These  Notes,  together
with the  other  notes  issued  pursuant  to this  Agreement,  are  collectively
referred to as the "Notes." The securities  into which the Notes are convertible
are referred to as the "Conversion Stock."

         1.2 At the Closing,  the Company  shall issue to each  Investor a Stock
Purchase  Warrant  (the  "Warrant")  dated  as of the  Closing  Date in the form
attached  hereto as Exhibit B to purchase a number of the class and/or series of
shares of the Company's  capital stock issued in the Next  Financing (as defined
in the Note).  The capital stock  expected to be issued in the Next Financing is
Common  Stock of the  Company.  These  Warrants,  together  with the other stock
purchase warrants issued pursuant to this Agreement,  are collectively  referred
to as the  "Warrants." The securities for which the Warrants are exercisable are
referred to as the "Exercise Stock." The Notes and the Conversion Stock, and the
Warrants  and  the  Exercise  Stock,  are   collectively   referred  to  as  the
"Securities."

         1.3 The  above-referenced  loans will be secured by a pledge of 400,000
shares of Common Stock of the Company held by Troy Burns  pursuant to a Security
Agreement, in the form attached hereto as Exhibit C (the "Security Agreement").

         1.4 The closing of these  transactions  (the "Closing") will be held at
the  offices of Wilson,  Sonsini,  Goodrich & Rosati,  650 Page Mill Road,  Palo
Alto,  California  at 10:00 a.m. on the date  hereof,  or at such other time and
place as the parties shall mutually agree (the "Closing Date").

         1.5  Delivery.    At the  Closing,  the Company  shall  deliver to each
Investor a Note in the principal  amount set forth on the signature  page hereof
and a Warrant to purchase shares of the Company's capital stock. At the Closing,
each Investor shall deliver the amount of such  Investor's  loan as set forth on
the signature  page hereof.  At the Closing,  the Company and the Investors will
deliver executed copies of the Securit Agreement.


                                       1
<PAGE>


         1.6 Subsequent Loans.   At any time prior to the completion of the Next
Financing  (as defined in the Note),  the Company may request that each Investor
loan to the Company  additional funds equal to up to the difference between each
Investor's  loan  commitment  set forth on the  signature  pages hereto less the
amount of each  Investor's  initial  loan.  Each such  request  shall be made in
writing and shall  request that the  Investors  loan the Company an amount of at
least $400,000.00. Any such additional loans shall be made by each Investor on a
pro rata basis based on the amount of each Investor's initial loan.

     2.   The Company's Representations and Warranties

          The  Company  hereby  represents  and  warrants  to the  Investors  as
follows, except as set forth on the Disclosure Schedule attached hereto:

          2.1  Organization  and  Standing.  The Company is a  corporation  duly
organized and validly  existing under,  and by virtue of, the laws of Kansas and
is in good standing  under such laws.  The Company has the  requisite  corporate
power to own and operate its properties and assets, and to carry on its business
as  presently  conducted.  The Company is  qualified to do business as a foreign
corporation in each  jurisdiction  in which the failure to be so qualified would
have a materially  adverse impact on the business or financial  condition of the
Company taken as a whole.

          2.2  Corporate  Power.  The Company  will have at the Closing Date all
requisite legal and corporate  power to execute and deliver this  Agreement,  to
sell and issue the Notes and the Warrants hereunder, to issue the Warrant Shares
upon  exercise of the  Warrants,  to issue the  Conversion  Stock  issuable upon
conversion of the Notes and the Warrant  Shares and to carry out and perform its
obligations under the terms of this Agreement.

          2.3  Subsidiaries.  The Company  has no  subsidiaries  or   affiliated
companies  and does not otherwise own or control,  directly or  indirectly,  any
other corporation, association or business entity.

          2.4  Authorization.  All corporate  action on the part of the Company,
its directors and shareholders  necessary for the sale and issuance of the Notes
and  Warrants  and the  performance  of the  Company's  obligations  under  this
Agreement,  the Notes and the Warrants will be taken prior to the Closing.  This
Agreement,  each Investor's Note and each Investor's Warrant are valid,  binding
and enforceable  obligations of the Company,  subject to applicable  bankruptcy,
insolvency,  reorganization  or  similar  laws  relating  to  or  affecting  the
enforcement  of  creditor's  rights  and to the  availability  of the  remedy of
specific  performance.  The execution and delivery of the Agreements,  the Notes
and the Warrants and the performance by the Company of their respective terms do
not violate,  conflict with or result in a material  breach of (i) the Company's
Articles  of  Incorporation,  as amended  through  the  Closing  Date;  (ii) the
Company's Bylaws; (iii) any judgment, order or decree of any court or arbitrator
to which the Company is a party; or (iv) any contract, undertaking, indenture or
other  agreement or  instrument by which the 

                                       2

<PAGE>

Company is now bound or to which it is now a party.  The  Company is not a party
or subject to the provisions of any order, writ, injunction,  judgment or decree
of any court or arbitrator or government agency or  instrumentality.  Except for
notices  required  or  permitted  to be filed  with  certain  state and  federal
securities  commissions,  which  notices the Company  agrees to file on a timely
basis, the execution, delivery and performance by the Company of this Agreement,
the Notes and the Warrants in compliance with their respective provisions do not
require any governmental consent or approval.

          2.5   Governmental   Consents.   No   consent,   approval,   order  or
authorization of, or registration,  qualification,  designation,  declaration or
filing with, any federal,  state, local or provincial  governmental authority on
the part of the Company is required in connection  with the  consummation of the
transactions  contemplated by this Agreement,  except for the filing pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968, as amended,
and the rules  thereunder,  which filing will be effected  within 15 days of the
sale of the Notes and Warrants hereunder.

          2.6 Litigation.  There is no action, suit, proceeding or investigation
pending or currently threatened against the Company which questions the validity
of this Agreement or the right of the Company to enter into it, or to consummate
the transactions contemplated hereby, or which might result, either individually
or in the aggregate,  in any material adverse changes in the assets,  condition,
affairs or prospects of the Company,  financially or otherwise, or any change in
the current equity ownership of the Company, nor is the Company aware that there
is any basis for the  foregoing.  The  Company  is not a party or subject to the
provisions of any order,  writ,  injunction,  judgment or decree of any court or
arbitrator or government agency or  instrumentality.  There is no action,  suit,
proceeding  or  investigation  by the  Company  currently  pending  or which the
Company intends to initiate.

     3. Representations,  Warranties of the Investors.   Each Investor, for that
Investor  alone,  represents and warrants to the Company upon the acquisition of
the Note and the Warrant and upon  conversion  of the Note and upon  exercise of
the Warrant as follows:

          3.1  Binding  Obligation.  Each of this  Agreement,  the  Note and the
Warrant issued to the Investor is a valid, binding and enforceable obligation of
the Investor,  subject to applicable bankruptcy,  insolvency,  reorganization or
similar laws relating to or affecting the  enforcement of creditor's  rights and
to the availability of the remedy of specific performance.

          3.2  Investment  Experience.  The  Investor  is either  an  accredited
investor  within the meaning of  Regulation D prescribed by the  Securities  and
Exchange  Commission  pursuant to the  Securities  Act of 1933,  as amended (the
"Act"),  or (by virtue of the Investor's  experience in evaluating and investing
in private  placement  transactions  of securities  in companies  similar to the
Company)  the  Investor  is  capable of  evaluating  the merits and risks of the
Investor's  investment  in the  Company  and has the  capacity  to  protect  the
Investor's own interests.

                                       3
<PAGE>


          3.3 Investment Interest.  The Investor is acquiring the Securities for
investment  for the Investor's own account and not with a view to, or for resale
in connection with, any distribution  thereof. The Investor understands that the
Securities  have not been  registered  under  the Act by  reason  of a  specific
exemption from the  registration  provisions of the Act that depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.

          3.4 Rule 144. The Investor  acknowledges  that the Securities  must be
held  indefinitely  unless  subsequently  registered under the Act, or unless an
exemption  from such  registration  is  available.  The Investor is aware of the
provisions of Rules 144 and 144A  promulgated  under the Act that permit limited
resale  of  securities   purchased  in  a  private   placement  subject  to  the
satisfaction of certain conditions.

          3.5 Discussions with  Management.  The Investor has had an opportunity
to discuss the Company's  business,  management,  and financial affairs with the
Company's management and to review the Company's facilities.

           3.6  Transfer  Among  Affiliates.  Without  in any way  limiting  the
representations set forth in this Section 3, an Investor may transfer all or any
portion of the Securities to its partners or affiliated funds if the Company and
its  counsel are  satisfied  that the  transfer is exempt from the  registration
requirements of federal and applicable state securities laws.

     4. Conditions to Closing

          4.1  Conditions  to  Obligations  of the  Investors.  Each  Investor's
obligations  at the Closing are subject to the  fulfillment,  on or prior to the
Closing Date, of all of the following conditions,  any of which may be waived in
whole or in part by the Investor:

                (a) The  representations  and warranties  made by the Company in
Section 2 shall be true and correct when made,  and shall be true and correct on
the Closing  Date with the same force and effect as if they had been made on and
as of the same date.

                (b) Except for the  notices  required or  permitted  to be filed
after the Closing Date with certain  federal and state  securities  commissions,
the  Company  shall  have  obtained  all  governmental   approvals  required  in
connection with the lawful sale and issuance of the Securities.

                (c) At the Closing,  the sale and  issuance by the Company,  and
the purchase by the Investor,  of the Securities  shall be legally  permitted by
all laws and regulations to which the Investor or the Company is subject.



<PAGE>

 
                (d) The  Security  Agreement  in the  form  attached  hereto  as
Exhibit C shall have been executed by the parties thereto.

                (e) All corporate and other  proceedings in connection  with the
transactions  contemplated  at the Closing  and all  documents  and  instruments
incident to such transaction  shall be reasonably  satisfactory in substance and
form to the Investor.

          4.2 Conditions to Obligations of the Company. The Company's obligation
to issue and sell the  Securities at the Closing is subject to the  fulfillment,
to the Company's  satisfaction on or prior to the Closing Date, of the following
conditions, any of which may be waived in whole or in part by the Company:

                (a) Except for the  notices  required or  permitted  to be filed
after the Closing Date with certain  federal and state  securities  commissions,
the  Company  shall  have  obtained  all  governmental   approvals  required  in
connection with the lawful sale and issuance of the Securities.

                (b) At the Closing,  the sale and  issuance by the Company,  and
the purchase by the Investor,  of the Securities  shall be legally  permitted by
all laws and regulations to which the Investor or the Company is subject.

     5. Registration Rights

          5.1 Grant of Rights.  The Company hereby grants to the Investor,  with
respect to the  "Registrable  Securities"  (as defined  below) the  Registration
Rights set forth in the Company's  Investors  Rights  Agreement  entered into in
connection  with the Company's  December 1995 financing (as the same may be have
been amended to date). Each Investor hereby agrees to be bound by and subject to
the Investors  Rights  Agreement.  For purposes hereof,  Registrable  Securities
shall mean the Common Stock issued or issuable upon (i)  conversion of the Notes
and (ii) exercise of the Warrants.

          5.2  Acceptance  by  Investors.  Each  Investor  accepts  the grant of
registration rights in the Restated Investors Rights Agreement and hereby agrees
to be  bound by and  subject  to the  aforementioned  sections  of the  Restated
Investors Rights Agreement.

     6. Miscellaneous

          6.1 Waivers  and  Amendments.  With the written  consent of the record
holders of more than 50% of the principal amount of Notes then outstanding,  the
obligations of the Company and the rights of the holders of the Securities under
this  Agreement  may be waived  (either  generally or in a particular  instance,
either  retroactively or prospectively and either for a specified period of time
or  indefinitely),  and with the same consent the Company,  when  authorized  by
resolution of its Board of Directors,  may enter into a supplementary  agreement
for the  purpose  of adding  any  provisions  to or  changing  in any  manner or
eliminating any of the provisions of this

                                       5
<PAGE>


Agreement;  provided,  however,  that no such waiver or  supplemental  agreement
shall  reduce the  aforesaid  percentage  of the  principal  amount of Notes the
holders  of  which  are  required  to  consent  to any  waiver  or  supplemental
agreement.  Upon the  effectuation  of each  such  waiver,  consent,  agreement,
amendment or modification the Company shall promptly give written notice thereof
to the  record  holders  of the  Securities  who have not  previously  consented
thereto in writing.  Neither this  Agreement  nor any  provisions  hereof may be
changed, waived, discharged or terminated orally, but only by a signed statement
in writing.

          6.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of  California  as such  laws are  applied  to  agreements
between  California  residents entered into and to be performed  entirely within
California.

          6.3  Survival.   The   representations,   warranties,   covenants  and
agreements made herein shall survive any investigation  made by any Investor and
the  Closing of the  transactions  contemplated  hereby.  All  statements  as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company  pursuant hereto or in connection with the transactions
contemplated  hereby shall be deemed to be representations and warranties by the
Company hereunder as of the date of such certificate or instrument.

          6.4 Successors  and Assigns.  Except as otherwise  expressly  provided
herein,  the  provisions  hereof  shall  inure to the benefit of, and be binding
upon,  the  successors,  assigns,  heirs,  executors and  administrators  of the
parties hereto.

          6.5 Entire Agreement.  This Agreement (including the exhibits attached
hereto) and the other documents  delivered  pursuant hereto  constitute the full
and entire  understanding  and agreement  between the parties with regard to the
subjects hereof and thereof.

          6.6  Notices,  etc. All notices and other  communications  required or
permitted  hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person,  by telecopy,  electronic mail,  overnight  delivery
service or U.S. mail, in which event it may be mailed by first-class,  certified
or  registered,  postage  prepaid,  addressed  (a) if to an  Investor,  at  such
Investor's address set forth on the signature page of this Agreement, or at such
other address as such Investor shall have furnished the Company in writing,  or,
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Securities who has so furnished an address to
the Company, or (b) if to the Company, at its address set forth at the beginning
of this Agreement,  or at such other address as the Company shall have furnished
to the Investor and each such other holder in writing.

          6.7  Separability of Agreements;  Severability of this Agreement . The
Company's  agreement with each Investor is a separate  agreement and the sale of
the  Securities  to each  Investor is a separate  sale. If any provision of this
Agreement   shall  be   judicially   determined   to  be  invalid,   illegal  or
unenforceable,  the  validity,  legality  and  

                                       6

<PAGE>

enforceability  of the remaining  provisions shall not in any way be affected or
impaired  thereby.

          6.8 Payment of Fees and Expenses.  The Company and the Investor  shall
each  bear  their  own  expenses  incurred  with  respect  to this  transaction;
provided,  however,  that the Company  will pay the fees and  expenses of Wilson
Sonsini  Goodrich & Rosati,  Professional  Corporation,  special  counsel to the
Investors, in an amount not to exceed $7,500.

          6.9  Counterparts.  This  Agreement  may be  executed in any number of
counterparts,  each of which  shall be an  original,  but all of which  together
shall be deemed to constitute one instrument.


                                       7
<PAGE>



      IN  WITNESS  WHEREOF,  the  parties  have  caused  this  Note and  Warrant
Agreement to be duly executed and delivered as of the day and year first written
above.


THE COMPANY:                        INTEGRATED MEDICAL RESOURCES, INC.


                                    By:   /s/ Troy A. Burns, M.D.
                                          ---------------------------------

                                    Title:   Chief Executive Officer




                                       8
<PAGE>



THE INVESTORS:


INSTITUTIONAL VENTURE PARTNERS VI LIMITED PARTNERSHIP

      By Institutional Venture Management VI, its
      General Partner

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner

      Amount of Initial Loan:      $537,142.00
      Amount of Loan Commitment:   $752,000.00


IVP FOUNDERS FUND I

      By Institutional Venture Management VI, its
      General Partner

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner

      Amount of Initial Loan:      $  22,857.00
      Amount of Loan Commitment:   $  32,000.00


INSTITUTIONAL VENTURE MANAGEMENT VI

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner

      Amount of Initial Loan:      $  11,429.00
      Amount of Loan Commitment:   $  16,000.00

3000 Sand Hill Road, Bldg. 2, Suite 290
Menlo Park, California 94025

                                       9
<PAGE>


FRAZIER HEALTHCARE II L.P.

      By FHM II LLC, its
      General Partner

      By Frazier Management LLC,
      its Managing Member

By: /s/ Alan D. Frazier
    -------------------
      Alan D. Frazier, Member


      Amount of Initial Loan:      $428,572.00
      Amount of Loan Commitment:   $600,000.00

Two Union Square, Suite 2110
Seattle, WA 98101









                                       10

<PAGE>

                                                                Exhibit 4(h)(ii)

                          Amendment to Note Agreement

  
                       INTEGRATED MEDICAL RESOURCES, INC.
                            NOTE AMENDMENT AGREEMENT

      This  Agreement is made  effective as of March 5, 1998,  among  Integrated
Medical  Resources,  Inc.,  a  Kansas  corporation  (the  "Company"),  with  its
principal office at 11320 West 79th Street,  Lenexa, Kansas 66214, the Investors
(the "Investors") in the Note and Warrant Agreement dated December 11, 1997 (the
"Note Agreement") and Kardatzke Management, Inc. (the "New Investor").

      WHEREAS,  the New  Investor  will be making  certain  loans to the Company
pursuant to a Note Purchase  Agreement  (the "KMI Loan  Agreement")  and related
Promissory Note (the "KMI Note") of even date herewith and, in  consideration of
the New  Investor's  provision of such loans,  the Investors have agreed to make
certain modifications to the terms of their existing loans.

      1.   Amendments and Modifications to Terms of Existing Notes.

          1.1  Modification  of Note Terms.  Each Investor  severally  agrees to
modify its note  (individually  a "Note" and  collectively  the "Notes")  issued
pursuant to the Note Agreement as follows:

                (a) In the event that the KMI Note has not been  converted  into
Common Stock on or prior to May 31, 1998,  each  Investor will  severally  enter
into a new loan  transaction  with the  Company  which  will have the  effect of
replacing such Investor's  existing loan with such new loan. Such new loan shall
be on such terms as are mutually  acceptable to the  Investors,  the Company and
KMI.  Such new loan shall have a maturity  date that is on or prior to  November
30, 1998.

                (b) The term "Next  Financing"  as used in the  Notes,  the Note
Agreement and the warrants  issued pursuant to the Note Agreement shall mean the
Company's first equity financing after the date of the Note Agreement  resulting
in gross  proceeds to the Company of at least  $2,000,000  excluding  securities
issued upon conversion of the Notes issued pursuant to the Note Agreement).  The
conversion  price for  conversion  of the Notes upon the  completion of the Next
Financing  shall be the lower of (i) $2.15 per share,  (ii) the market price per
share of the Company's  Common Stock as of the closing of the Next  Financing or
(iii) the price per share at which  securities  are actually  issued in the Next
Financing.  In no  event  shall  the  Investors  be  required  to  purchase  any
securities,  either  by  conversion  of the  Notes  or  otherwise,  in the  Next
Financing or in any other approximately contemporaneous financing of the Company
on terms less favorable than those  extended to other  participants  in any such
financing.

          1.2  Conditions  to   Modification   of  Note  Terms.   The  foregoing
modifications  to the terms of the Notes shall become effective upon the closing
of the  transactions  contemplated  by the KMI  Loan  Agreement,  including  the
receipt by the Company of the proceeds of the loan evidenced by the KMI Note.



                                       1
<PAGE>


      2. Additional Loan Commitment

           2.1  Subsequent  Loans.  Each  Investor  severally  agrees  that,  if
requested by the Company and KMI, such Investor will loan the Company the amount
set forth  opposite  such  Investor's  name on the  signature  pages hereto (the
"Additional Loan Amount") on the following terms and conditions: (i) One-half of
each  Investor's  Additional Loan Amount may be called by the Company and KMI if
the  Company's  cash  flow for the month of March  1998 is below the March  1998
worst case cash flow  projection set forth on Exhibit B hereto and (ii) one-half
of each  Investor's  Additional Loan Amount may be called by the Company and KMI
if the  Company's  cash flow for the month of April 1998 is below the April 1998
worst case cash flow projection set forth on Exhibit B hereto. In the event that
any such additional loans are made by the Investors,  such loans shall be on the
same terms and  conditions,  including  security and  collateralization,  as the
loans made by KMI pursuant to the KMI Loan Agreement.  In addition, in the event
that the Company obtains debt financing from any person or entity other than its
existing  senior  secured  financial  institution  lenders  at any time that any
Additional Loans are outstanding, the Additional Loans shall be on terms no less
favorable to the Investors  than the terms provided to the lenders in such other
debt financing transactions.

     3. Relative Priorities of Loans.

          3.1 KMI Loans  and  Existing  Investor  Loans.  KMI and the  Investors
hereby agree that,  as between them as creditors of the Company,  any  unsecured
portion of the loans made by KMI  pursuant  to the KMI Loan  Agreement  shall be
pari passu with the loans made by the Investors  pursuant to the Note Agreement.
For purposes hereof,  unsecured  amounts shall consist of any portion of the KMI
Loan remaining  unsatisfied after KMI has exhausted its remedies with respect to
the collateral securing the KMI loans. KMI and the Investors further agree that,
in the event the Investors  make any Additional  Loans,  as set forth in Section
2.1,  such  Additional  Loans  shall be pari  passu  with  the KMI  Loans in all
respects.

     4. Miscellaneous.

          4.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of  California  as such  laws are  applied  to  agreements
between  California  residents entered into and to be performed  entirely within
California.

          4.2  Amendment.  This  Agreement  may be amended  only  pursuant  to a
written instrument executed by all parties hereto.

          4.3 Successors  and Assigns.  Except as otherwise  expressly  provided
herein,  the  provisions  hereof  shall  inure to the benefit of, and be binding
upon,  the  successors,  assigns,  heirs,  executors and  administrators  of the
parties hereto.

          4.4 Entire Agreement. This Agreement and the other documents

                                       2

<PAGE>

delivered  pursuant  hereto  constitute  the full and entire  understanding  and
agreement between the parties with regard to the subjects hereof and thereof.

          4.5  Notices,  etc. All notices and other  communications  required or
permitted  hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person,  by telecopy,  electronic mail,  overnight  delivery
service or U.S. mail, in which event it may be mailed by first-class,  certified
or  registered,  postage  prepaid,  addressed  (a) if to an  Investor,  at  such
Investor's address set forth on the signature page of this Agreement, or at such
other address as such Investor shall have furnished the Company in writing,  or,
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Securities who has so furnished an address to
the Company, (b) if to the Company, at its address set forth at the beginning of
this Agreement,  or at such other address as the Company shall have furnished to
the  Investor  and each such other  holder in writing or (c) if to KMI,  at such
address as KMI shall have furnished the Investors and the Company in writing.

          4.6  Separability of Agreements;  Severability of this Agreement . The
Company's agreement with each Investor is a separate agreement. If any provision
of this  Agreement  shall be  judicially  determined  to be invalid,  illegal or
unenforceable,  the  validity,  legality  and  enforceability  of the  remaining
provisions shall not in any way be affected or impaired thereby.

          4.7 Payment of Fees and Expenses.  The Company and the Investors shall
each  bear  their  own  expenses  incurred  with  respect  to this  transaction;
provided,  however,  that the Company  will pay the fees and  expenses of Wilson
Sonsini  Goodrich & Rosati,  Professional  Corporation,  special  counsel to the
Investors, in an amount not to exceed $5,000.

          4.8  Counterparts.  This  Agreement  may be  executed in any number of
counterparts,  each of which  shall be an  original,  but all of which  together
shall be deemed to constitute one instrument.


                                       3
<PAGE>



      IN WITNESS WHEREOF,  the parties have caused this Note Amendment Agreement
to be duly executed and delivered as of the day and year first written above.


THE COMPANY:                        INTEGRATED MEDICAL RESOURCES, INC.


                                    By:   /s/ Troy A. Burns, M.D.
                                          ---------------------------------

                                    Title:  Chief Executive Officer



                                       4
<PAGE>


THE INVESTORS:


INSTITUTIONAL VENTURE PARTNERS VI LIMITED PARTNERSHIP

      By Institutional Venture Management VI, its
      General Partner

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner

      Amount of  Additional Loan Commitment:  $322,286.00


IVP FOUNDERS FUND I

      By Institutional Venture Management VI, its
      General Partner

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner

      Amount of Additional Loan Commitment:   $  13,714.00

INSTITUTIONAL VENTURE MANAGEMENT VI

By: /s/ Samuel D. Colella
    ---------------------
      Samuel D. Colella,
      General Partner


      Amount of Loan Commitment:              $   6,857.00

3000 Sand Hill Road, Bldg. 2, Suite 290
Menlo Park, California 94025


                                       5
<PAGE>


FRAZIER HEALTHCARE II L.P.

      By FHM II LLC, its
      General Partner

      By Frazier Management LLC,
      its Managing Member

By: /s/ Alan D. Frazier
    -------------------
      Alan D. Frazier, Member


      Amount of Additional Loan Commitment:  $257,143.00

Two Union Square, Suite 2110
Seattle, WA 98101


KARDATZKE MANAGEMENT, INC.

By: /s/ Stanley Kardatzke, M.D.
    ---------------------------

Title: Chairman and Chief Executive Officer


                                       6
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT A

IMR Cash Flow/Cash Needs Forecast
2-12-98

000's omitted       Dec-actual     Jan-actual       Feb       Mar       April       May       June      Steady State
<S>                      <C>           <C>        <C>       <C>         <C>       <C>        <C>              <C>

Net Revenue              $1,777        $1,839     $1,749    $1,982      $2,042    $1,981     $2,190           $2,200

Receipts:
     worst case                                   $1,450    $1,550      $1,850    $2,100     $2,000           $1,900
           high          $1,604        $1,441     $1,700    $2,100      $2,600    $2,900     $2,600           $2,200
  Cash Infusion          $1,400                   $1,000    

Disbursements            $1,920        $1,686     $1,850    $1,800      $1,850    $1,900     $1,900           $1,900

Payables Clean Up          $670                     $600      $150        $313      $500       $100

Cash Flow:
     worst case                                       $0     -$400       -$313     -$300         $0               $0
           high            $414          $245       $250      $150        $437      $500       $600             $300

Cash Balance:
     worst case                                     $413       $13       -$300     -$600      -$600            -$600
           high            $658          $413       $663      $813      $1,250    $1,750     $2,350           $2,650
</TABLE>
   

<PAGE>
                                                               Exhibit 4(h)(iii)


                           Form of Subordinated Note


THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  QUALIFIED  UNDER  APPLICABLE  STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT  PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION  THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT,  EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES,  AN
OPINION OF COUNSEL FOR THE HOLDER,  CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.


                       INTEGRATED MEDICAL RESOURCES, INC.

           CONVERTIBLE SUBORDINATED PROMISSORY NOTE

                                               Lenexa, Kansas
$____________                               December 11, 1997


      1.   Principal and Interest.

           INTEGRATED  MEDICAL  RESOURCES,   INC.  (the  "Company"),   a  Kansas
corporation,  for  value  received,  hereby  promises  to pay to  the  order  of
____________________ or holder ("Payee") in lawful money of the United States at
the address of Payee set forth below, the principal  amount of  ________________
Dollars  ($__________),  or if less,  the amount  actually  lent by Payee to the
Company  pursuant  to that  certain  Note and  Warrant  Agreement  of even  date
herewith (the "Agreement"), together with simple interest at a rate equal to the
sum of the prime rate as quoted by the Bank of America NT & SA, calculated as of
the date hereof, plus one percent (1.0%), per annum.

           The loans made by the Payee to the Company  shall be as  specified on
the schedule of advances following the signature page hereto. Upon the making of
a loan by the Payee, such loan shall be reflected on such schedule.

           The principal of and accrued interest on this Note is due and payable
on May 31, 1998. This Note may be prepaid without penalty,  in whole or in part,
at any time.

           Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Company for cancellation.

<PAGE>


      2.   Subordination.

           (a) "Senior Indebtedness" means the principal of and premium, if any,
and interest on  indebtedness  of the Company for money borrowed from commercial
banks,  equipment  lessors or other  financial  institutions  under a secured or
unsecured line of credit, term loan or equipment lease.

           (b) The  Company  agrees and the holder of each Note,  by  acceptance
thereof,  agrees, expressly for the benefit of the present and future holders of
Senior  Indebtedness,  that,  except as otherwise  provided herein,  upon (i) an
event of default under any Senior Indebtedness, or (ii) any dissolution, winding
up, or liquidation of the Company,  whether or not in bankruptcy,  insolvency or
receivership proceedings, the Company shall not pay, and the holder of such Note
shall not be  entitled to receive,  any amount in respect of the  principal  and
interest of such Note unless and until the Senior  Indebtedness  shall have been
paid or  otherwise  discharged.  Upon (1) an event of  default  under any Senior
Indebtedness, or (2) any dissolution,  winding up or liquidation of the Company,
any payment or distribution  of assets of the Company,  which the holder of this
Note would be entitled to receive but for the provisions  hereof,  shall be paid
by the  liquidating  trustee or agent or other  person  making  such  payment or
distribution directly to the holders of Senior Indebtedness ratably according to
the  aggregate  amounts  remaining  unpaid on Senior  Indebtedness  after giving
effect to any  concurrent  payment  or  distribution  to the  holders  of Senior
Indebtedness.  Subject to the  payment in full of the  Senior  Indebtedness  and
until this Note is paid in full,  the holder of this Note shall be subrogated to
the rights of the holders of the Senior  Indebtedness (to the extent of payments
or distributions  previously made to the holders of Senior Indebtedness pursuant
to this paragraph 2(b)) to receive  payments or  distributions  of assets of the
Company applicable to the Senior Indebtedness.

           (c) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of Senior  Indebtedness) and the holder of
this Note, the unconditional  and absolute  obligation of the Company to pay the
principal  of and  interest  on the Note or affect  the  relative  rights of the
holder of this Note and the  other  creditors  of the  Company,  other  than the
holders of Senior Indebtedness. Nothing in this Note shall prevent the holder of
this Note from  exercising  all remedies  otherwise  permitted by applicable law
upon default  under the Note,  subject to the rights,  if any, of the holders of
Senior  Indebtedness  in respect to cash,  property or securities of the Company
received upon the exercise of any such remedy.

      3.   Conversion.

           (a)  The  outstanding   principal  balance  of  this  Note  shall  be
automatically  converted upon the closing of the Company's next equity financing
(the  "Next  Financing")  involving  the  receipt  by  the  Company  of,  in the
aggregate, more than $3,000,000 (excluding amounts received on conversion of the
Notes),   into  the  securities   issued  in  the  next  equity  financing  (the
"Securities")  at the purchase price paid for the 

<PAGE>

Securities by the investors in the Next Financing.

           (b) Upon automatic conversion of this Note, the outstanding principal
shall be converted  automatically  without any further  action by the holder and
whether or not the Note is surrendered to the Company or its transfer agent. The
Company shall not be obligated to issue  certificates  evidencing  the shares of
the  securities  issuable upon such automatic  conversion  unless such Notes are
either  delivered to the Company or its transfer  agent,  or the holder notifies
the  Company  or its  transfer  agent  that such Note has been  lost,  stolen or
destroyed and executes an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection  with such Note.  The Company
shall,  as soon as  practicable  after  such  delivery,  or such  agreement  and
indemnification, issue and deliver at such office to such holder of such Note, a
certificate  or  certificates  for the  securities  to which the holder shall be
entitled  and a check  payable to the holder in the  amount of any  accrued  and
unpaid  interest  on such Note and any cash  amounts  payable as the result of a
conversion into fractional  shares of the Securities.  Such conversion  shall be
deemed to have been made immediately  prior to the close of business on the date
of  closing  of the  transaction  causing  automatic  conversion.  The person or
persons  entitled to receive  securities  issuable upon such conversion shall be
treated for all purposes as the record  holder or holders of such  securities on
such date.

      4.  Security.  This Note is secured by a pledge by Troy Burns of shares of
the  Company's  Common  Stock  pursuant  to a  Security  Agreement  of even date
herewith.  Upon the failure of the Company to pay this Note when due,  the Payee
may,  in its sole  discretion,  proceed  against  the  Company or  against  such
collateral, or against both the Company and such collateral.

      5. Attorneys'  Fees. If the  indebtedness  represented by this Note or any
part  thereof  is  collected  in  bankruptcy,  receivership  or  other  judicial
proceedings  or if this Note is placed in the hands of attorneys for  collection
after  default,  the Company  agrees to pay, in  addition to the  principal  and
interest  payable  hereunder,  reasonable  attorneys' fees and costs incurred by
Payee.

      6.  Notices.  Any  notice,  other  communication  or payment  required  or
permitted  hereunder  shall be in writing and shall be deemed to have been given
upon delivery if personally delivered or upon deposit if deposited in the United
States mail for mailing by certified  mail,  postage  prepaid,  and addressed as
follows:

      If to Payee:            At the address set forth on the signature page  of
                          the Agreement

      If to Company:           At   the  address  of  the  Company's   principal
                          executive office set forth on page 1 of the Agreement.

Each of the above  addressees  may  change  its  address  for  purposes  of this
paragraph  by giving  to the  other  addressee  notice  of such new  address  in
conformance with this paragraph.

      7. Acceleration. This Note shall become immediately due and payable if (i)
the  Company   commences  any  proceeding  in  bankruptcy  or  for  dissolution,
liquidation,  winding-up,

<PAGE>


composition or other relief under state or federal bankruptcy laws; or (ii) such
proceedings  are  commenced  against  the  Company,  or a receiver or trustee is
appointed  for the  Company  or a  substantial  part of its  property,  and such
proceeding or  appointment  is not dismissed or discharged  within 60 days after
its commencement.

      8. Waivers.  Company hereby waives  presentment,  demand for  performance,
notice of non-performance, protest, notice of protest and notice of dishonor. No
delay on the part of Payee in exercising any right  hereunder shall operate as a
waiver of such right or any other  right.  This Note is being  delivered  in and
shall be  construed  in  accordance  with the laws of the  State of  California,
without regard to the conflicts of laws provisions thereof.

                                    INTEGRATED MEDICAL RESOURCES, INC.


                                    By: ____________________________________

                                    Title:   _______________________________



Schedule of Advances:

December 11, 1997 (initial advance)               $_____________________


____________, 199_                                $_____________________


____________, 199_                                $_____________________







<PAGE>

                                                                Exhibit 4(h)(iv)
                             Form of Stock Purchase


THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  QUALIFIED  UNDER  APPLICABLE  STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT  PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION  THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT,  EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES,  AN
OPINION OF COUNSEL FOR THE HOLDER,  CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.

                             STOCK PURCHASE WARRANT
                      To Purchase Shares of Common Stock of
                       INTEGRATED MEDICAL RESOURCES, INC.

      THIS CERTIFIES  that, for value  received,  ________________________  (the
"Investor"),  is  entitled,  upon  the  terms  and  subject  to  the  conditions
hereinafter  set forth,  at any time on or prior to the close of business on the
date five (5) years after the date hereof, but not thereafter,  to subscribe for
and purchase, from INTEGRATED MEDICAL RESOURCES, INC., a Kansas corporation (the
"Company"),  a number of shares of Common Stock  determined  as set forth below.
The number of shares of Common  Stock  issuable  upon  exercise of this  Warrant
shall equal:

      [(A* .20)/B] +[(C *.20)/B], where

      A equals the amount of the Investor's  loan  commitment to the Company set
forth on the  signature  pages of that certain Note and Warrant  Agreement  (the
"Agreement") of even date herewith;

      B equals  the lesser of (i) the per share  purchase  price of one share of
Common Stock in the Next Financing (as defined below) and (ii) the last reported
sale price per share of the  Company's  Common  Stock (as reported by Nasdaq) on
the trading day immediately preceding the date of this Warrant; and

      C equals the amount actually lent by the Investor to the Company  pursuant
to the Agreement.

      For purposes  hereof,  (i) the "Next  Financing"  shall mean the Company's
first equity  financing after the date hereof resulting in gross proceeds to the
Company of at least $____________ excluding securities issued upon conversion of
the Notes  issued  pursuant to the  Agreement)  and (ii)  Common  Stock shall be
deemed to refer to the class and/or  series of equity  securities of the Company
issued in the Next Financing.

<PAGE>

      The  purchase  price for one share of  Company  Common  Stock  under  this
Warrant shall equal the lesser of lesser of (i) the per share  purchase price of
one share of Common Stock in the Next  Financing and (ii) the last reported sale
price per share of the  Company's  Common  Stock (as  reported by Nasdaq) on the
trading day immediately preceding the date of this Warrant.

      The  purchase  price and the  number of shares  for which the  Warrant  is
exercisable  shall be subject to  adjustment as provided  herein.  The class and
series of shares of capital stock of the Company  issuable upon exercise of this
Warrant is also subject to adjustment pursuant to Section 9 hereof.

      1.  Title of  Warrant.  Prior to the  expiration  hereof  and  subject  to
compliance  with  applicable  laws,  this Warrant and all rights  hereunder  are
transferable,  in whole or in part,  at the  office or  agency  of the  Company,
referred  to in  Section 2  hereof,  by the  holder  hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed.

      2.   Exercise of Warrant.

           (a) The purchase  rights  represented by this Warrant are exercisable
by the  registered  holder  hereof,  in whole or in part, at any time before the
close of  business  on the date five (5) years  after  the date  hereof,  by the
surrender of this Warrant and the Subscription Form annexed hereto duly executed
at the office of the Company, in Lenexa,  Kansas (or such other office or agency
of the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company), and
upon payment of the purchase price of the shares  thereby  purchased (by cash or
by check or bank draft payable to the order of the Company or by cancellation of
indebtedness  of the  Company  to the  holder  hereof,  if any,  at the  time of
exercise  in an  amount  equal  to the  purchase  price  of the  shares  thereby
purchased);  whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Preferred Stock so purchased. The
Company agrees that if at the time of the surrender of this Warrant and purchase
the holder  hereof  shall be entitled to exercise  this  Warrant,  the shares so
purchased shall be and be deemed to be issued to such holder as the record owner
of such  shares as of the close of  business  on the date on which this  Warrant
shall have been exercised as aforesaid.

           (b) In lieu of the cash  payment set forth in  paragraph  2(a) above,
the Holder shall have the right ("Conversion  Right") to convert this Warrant in
its entirety  (without payment of any kind) into that number of shares of Common
Stock  equal to the  quotient  obtained  by  dividing  the Net Value (as defined
below) of the shares  issuable  upon exercise of this Warrant by the Fair Market
Value (as defined below) of one share of Common Stock.  As used herein,  (A) the
Net Value of the Shares means the  aggregate  Fair Market Value of the shares of
Common Stock subject to this Warrant minus the aggregate purchase price; and (B)
the Fair Market Value of one share of Common Stock means:


                                       2
<PAGE>

                (i) if the exercise  occurs at a time during which the Company's
Common  Stock is traded  on a  national  securities  exchange  or on the  Nasdaq
National  Market,  the Fair Market  Value of one share of Common Stock means the
average last  reported or closing sale price for the  Company's  Common Stock on
such  exchange  or market for the three  trading  days ending one  business  day
before the exercise of this Warrant;

                (ii) if the  exercise is in  connection  with a merger,  sale of
assets or other  reorganization  transaction as described in Section 9(a) below,
the Fair Market Value of one share of Common  Stock means the value  received by
the holders of the Company's  Common Stock pursuant to such Merger  Transaction;
and

                (iv) in all other  cases,  the Fair Market Value of one share of
Common  Stock  shall  be  determined  in good  faith by the  Company's  Board of
Directors.

           (c) Certificates for shares purchased hereunder shall be delivered to
the holder hereof within a reasonable  time after the date on which this Warrant
shall have been exercised as aforesaid. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant,  be fully
paid and nonassessable and free from all taxes,  liens and charges in respect of
the issue  thereof  (other  than  taxes in  respect  of any  transfer  occurring
contemporaneously with such issue).

      3.  No  Fractional   Shares  or  Scrip.  No  fractional  shares  or  scrip
representing  fractional  shares  shall  be  issued  upon the  exercise  of this
Warrant. With respect to any fraction of a share called for upon the exercise of
this Warrant,  an amount equal to such  fraction  multiplied by the then current
price at which each share may be  purchased  hereunder  shall be paid in cash to
the holder of this Warrant.

      4. Charges,  Taxes and Expenses.  Issuance of  certificates  for shares of
Common Stock upon the exercise of this Warrant  shall be made without  charge to
the holder hereof for any issue or transfer tax or other  incidental  expense in
respect of the  issuance of such  certificate,  all of which taxes and  expenses
shall be paid by the Company,  and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant;  provided,  however,  that in the event certificates for
shares of Common  Stock  are to be issued in a name  other  than the name of the
holder of this  Warrant,  this Warrant when  surrendered  for exercise  shall be
accompanied by the Assignment  Form attached  hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery  of any  certificates  for  shares of Common  Stock,  the  Company  may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.

      5. No Rights as  Shareholders.  This  Warrant  does not entitle the holder
hereof to any voting  rights or other  rights as a  shareholder  of the  Company
prior to the exercise thereof.

                                       3
<PAGE>

      6. Exchange and Registry of Warrant.  This Warrant is  exchangeable,  upon
the surrender hereof by the registered holder at the  above-mentioned  office or
agency of the  Company,  for a new  Warrant  of like  tenor and dated as of such
exchange.

           The Company shall maintain at the above-mentioned  office or agency a
registry showing the name and address of the registered  holder of this Warrant.
This  Warrant  may  be  surrendered  for  exchange,  transfer  or  exercise,  in
accordance  with its terms,  at such  office or agency of the  Company,  and the
Company  shall be entitled to rely in all respects,  prior to written  notice to
the contrary, upon such registry.

      7. Loss, Theft,  Destruction or Mutilation of Warrant. Upon receipt by the
Company  of  evidence  reasonably   satisfactory  to  it  of  the  loss,  theft,
destruction  or  mutilation  of this  Warrant,  and in case of  loss,  theft  or
destruction,  of indemnity or security  reasonably  satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto,  and
upon surrender and cancellation of this Warrant, if mutilated,  the Company will
make and deliver a new Warrant of like tenor and dated as of such  cancellation,
in lieu of this Warrant.


      8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the  expiration of any right  required or granted herein
shall be a Saturday  or a Sunday or shall be a legal  holiday,  then such action
may be taken or such right may be  exercised  on the next  succeeding  day not a
legal holiday.

      9.   Merger, Reclassification, etc.

           (a) Merger,  Sale of Assets, etc. If at any time the Company proposes
to merge with or into any other corporation, effect a reorganization, or sell or
convey  all or  substantially  all of its assets to any other  entity,  then the
surviving  entity shall be obligated to assume the  obligations  of this Warrant
and it  shall  be  exercisable  for the  number  of  shares  of  stock  or other
securities  or property  which the holder of this Warrant would have received in
the   transaction  if  the  holder  had  exercised  the  Warrant  prior  to  the
consummation  of the  transaction.  The exercise price shall,  in such event, be
proportionately adjusted based on the exchange ratio for shares of the Company's
Common Stock in such transaction.

           (b)  Reclassification,  etc.  If the  Company at any time  shall,  by
subdivision,  combination or reclassification of securities or otherwise, change
any of the securities to which purchase rights under this Warrant exist into the
same or a different  number of securities of any class or classes,  this Warrant
shall  thereafter be to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities  which
were subject to the purchase rights under this Warrant immediately prior to such
subdivision,  combination,  reclassification  or other change.  If shares of the
Company's  Common  Stock are  subdivided  or combined  into a greater or smaller
number of shares of Common Stock, the purchase price under this 

                                       4
<PAGE>

Warrant shall be  proportionately  reduced in case of  subdivision  of shares or
proportionately increased in the case of combination of shares, in both cases by
the ratio  which the total  number of shares of Common  Stock to be  outstanding
immediately after such event bears to the total number of shares of Common Stock
outstanding immediately prior to such event.

           (c) Cash Distributions. No adjustment on account of cash dividends or
interest on the Company's Common Stock or other securities purchasable hereunder
will be made to the purchase price under this Warrant.

           (d) Authorized Shares. The Company covenants that, from and after the
completion  of the  Next  Financing  and  through  the  period  the  Warrant  is
outstanding,  it will reserve from its  authorized  and unissued  Common Stock a
sufficient number of shares to provide for the issuance of Common Stock upon the
exercise  of any  purchase  rights  under  this  Warrant.  The  Company  further
covenants that its issuance of this Warrant shall  constitute  full authority to
its officers who are charged with the duty of executing  stock  certificates  to
execute and issue the necessary  certificates for shares of the Company's Common
Stock upon the exercise of the purchase rights under this Warrant.

      10.  Miscellaneous.

           (a) Issue Date. The provisions of this Warrant shall be construed and
shall be given  effect in all respect as if it had been issued and  delivered by
the  Company  on the  date  hereof.  This  Warrant  shall  be  binding  upon any
successors or assigns of the Company.  This Warrant shall  constitute a contract
under  the  laws of the  State  of  California  and for all  purposes  shall  be
construed in accordance with and governed by the laws of said state.

           (b)  Restrictions.  The holder  hereof  acknowledges  that the Common
Stock acquired upon the exercise of this Warrant may have  restrictions upon its
resale imposed by state and federal securities laws.

           (c)  Waivers  and  Amendments.  With the  consent of the  Holders (as
defined  below)  holding rights to purchase more than fifty percent (50%) of the
shares  issuable  upon  exercise of the then  outstanding  Warrants  (as defined
below),  the  obligations  of the  Company  and the right of the  Holders may be
waived (either generally or in a particular  instance,  either  retroactively or
prospectively  and either for a specified period of time or  indefinitely),  and
with the same consent the Company may enter into a  supplementary  agreement for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Warrants; provided, however, that no such waiver or
supplemental  agreement shall reduce the aforesaid  percentage which is required
for consent to any waiver or supplemental agreement,  without the consent of all
of the  Holders  of the then  outstanding  Warrants.  As used in this  paragraph
10(c), (i) the "Warrants" shall be the warrants issued pursuant to the Agreement
of even date herewith, and (ii) the "Holders" shall be the record holders of the
Warrants.

                                       5
<PAGE>


      IN WITNESS WHEREOF, INTEGRATED MEDICAL RESOURCES, INC. has
caused this Warrant to be executed by its officers thereunto duly
authorized.

Dated:     ________, 1997

                                    INTEGRATED MEDICAL RESOURCES,
INC.


                                    By:   /s/ Troy A. Burns, M.D.

                                    Title:     Chief Executive Officer



                                       6
<PAGE>


                               NOTICE OF EXERCISE


To:  INTEGRATED MEDICAL RESOURCES, INC.

      (1) The  undersigned  hereby  elects to  purchase  ____________  shares of
Common Stock of INTEGRATED MEDICAL RESOURCES,  INC. pursuant to the terms of the
attached  Warrant,  and tenders  herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.

      (2) Please issue a certificate of certificates representing said shares of
Common  Stock  in the  name  of the  undersigned  or in  such  other  name as is
specified below:


            -----------------------------------------------
                                     (Name)


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

            -----------------------------------------------
                                    (Address)


      (3) The undersigned  represents that the aforesaid  shares of Common Stock
are being  acquired for the account of the  undersigned  for  investment and not
with a view to, or for resale in connection with, the  distribution  thereof and
that the undersigned has no present  intention of distributing or reselling such
shares.


--------------------------
------------------------------------------
(Date)                              (Signature)


                                       7
<PAGE>


                                 ASSIGNMENT FORM

               (To assign the  foregoing  warrant,  execute this form and supply
              required information.
               Do not use this form to purchase shares.)

      FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to

------------------------------------------------------------------------
                                 (Please Print)

whose address is
----------------------------------------------------------------
                                 (Please Print)

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



                                     Dated:
                         _____________________, 19____.



                               Holder's Signature: --------------------------

                                Holder's Address: ---------------------------


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







Signature Guaranteed: -----------------------------------------------------

NOTE: The signature to this  Assignment Form must correspond with the name as it
appears on the face of the Warrant,  without  alteration or  enlargement  or any
change whatever, and must be guaranteed by a bank or trust company.  Officers of
corporations  and those acting in a fiduciary or other  representative  capacity
should file proper evidence of authority to assign the foregoing Warrant.

                                       8
<PAGE>
                                                                   Exhibit 10(v)
                                Advertising Agt

September 19, 1997

Ms. Desiree DuMont
Managing Director
Media Direct Partners, Inc.
650 Fifth Avenue, 32nd Floor
New York, NY 10019


      1. Integrated Medical  Resources,  Inc. (referred to as IMRI) on behalf of
The Diagnostic  Center For Men hereby  appoint the  undersigned as our exclusive
agent and broker for the buying,  scheduling and placement for all of our print,
broadcast and cable media  advertising  ("Media  Placement")  during the term of
this Agreement,  and agree that we will neither accept Media Placement  services
from any third party nor engage in Media  Placement  for our own account  during
such term. The initial term of this Agreement  shall be for a period of one year
commencing on the date hereof (the "Initial Term").  Thereafter,  this Agreement
shall be  automatically  renewed for  consecutive  periods of one year (each,  a
"Renewal Term" and collectively with the Initial Term, the "Term") unless either
of us gives notice to the other of its intention not to renew this Agreement not
less than 60 days prior to the  expiration  of the  Initial  Term or any Renewal
Term. We may also terminate this Agreement at any time and without notice if you
fail or refuse to perform any of your  obligations  (monetary  or  non-monetary)
under this  Agreement.  We may terminate at any time upon 60 days notice for any
reason.

      2. We agree to furnish  advertising to you  sufficiently in advance of its
scheduled  use to permit us to place such  advertising  (as you shall  direct or
approve) in the ordinary course of business.  Such  advertising  shall (i) be in
form ready for  delivery to media,  (ii) comply  with the  Creative  Code of the
American  Association of Advertising Agencies and all other applicable rules and
codes and (iii) to our knowledge be free from  infringement  of the  copyrights,
trademarks  and rights of privacy  and  publicity  of others and from  libelous,
slanderous and defamatory material,  it being understood that we will not review
advertising for any such matters.  By delivering  advertising to you, we will be
representing to you that such  advertisement  to our knowledge does not infringe
upon  any  rights  of  third  parties,  that we have  obtained  fully  effective
permission to place such  advertisement,  and that such advertisement is free of
libelous, slanderous and defamatory material.



  3.   We shall pay a usage fee determined by the following schedule:
      Fee                           Annual Purchase of Media
      15%                           0-$1,000,000
      12%                           $1,000,001-$4,000,000
      10%                           $4,000,001-$10,000,000
      8%                            Over $10,000,000

<PAGE>

The calendar year for determining annual purchases shall commence on the date of
this contract. The usage fee shall be payable on all Media Placement effected by
you for us or effected by you or by any third party for you during the Term. The
usage  fee  shall  be  earned  and  payable  when  we  direct  placement  of the
advertisement  (even if the "run" date shall fall after the end of the Term). We
shall  reimburse  you  for  all  of  your  out-of-pocket   expenses,   including
pre-approved  travel  expenses,  incurred  in  connection  with Media  Placement
effected for us.  Purchase  price shall mean the gross amount less discounts and
rebates charged by the media. MDP will disclose to us any rebates and discounts.

      4. We agree to pay for Media Placement (i) not later than thirty (30) days
prior to first "run" date if our credit has not been  accepted by the media,  or
(ii) not later than thirty days after invoice from the media,  if our credit has
been  accepted by the media.  We shall be  directly  liable to the media for the
cost of all  media  purchased,  and you in our  discretion  may  bill us for the
purchase price of media plus our fees and disbursements, or may pass media bills
directly on to us and bill separately for our fees and  disbursements.  We agree
to promptly deliver any financial information respecting you which is reasonably
requested by media. If any Media Placement is canceled after being ordered,  our
usage fee with respect to the canceled media  placement  shall be reduced to 5%.
For late payment of fees and/or  media  costs,  we shall pay a late fee equal to
the lesser of 1.5% per month or the maximum legal rate, together with all of our
costs of collection, including fees and expenses of counsel.

      5. It is  expressly  agreed  that you are  acting  solely  as an agent and
broker and shall have no liability to third  parties as a result of our services
to be performed  hereunder  including,  without  limitation,  liability  for the
matters  referred to in the second  paragraph of this letter or for the costs of
purchased media.

      6. We agree to indemnify  the  undersigned  and its  employees,  officers,
directors,  shareholders,  licensees  and  agents  against  all  losses,  costs,
liabilities  and expenses  (including  reasonable  attorneys'  fees) you or such
other  party may incur as the result of any claim,  suit or  proceeding  made or
brought  against the  undersigned  (i) in  connection  with  rendering  services
pursuant to this Agreement or (ii) based upon any advertising or publicity which
we delivered to you for  placement  (including,  without  limitation,  any claim
pertaining to libel,  slander,  defamation,  copyright  infringement,  trademark
infringement or diminishment, invasion of privacy, piracy, and/or plagiarism and
any personal  injury claims arising from use of our  products).  If either we or
the  undersigned  shall  default  in its  obligations  hereunder  and it becomes
necessary for the other party to employ the services of any attorney to enforce,
terminate or advise with respect to this  Agreement  (whether or not  litigation
ensues),  then the prevailing party shall be entitled to  reimbursement  for its
attorneys' fees and disbursements incurred in connection therewith.

<PAGE>

  7. This Agreement shall be binding upon and inure to the benefit of us and the
undersigned and our respective successors and assigns;  provided,  however, that
we may not assign this Agreement without your prior written consent.

      8. This Agreement  shall be governed by and  interpreted  and construed in
accordance  with the laws of the State of New York without regard to conflict of
laws principles.

      9. All of the terms and provisions  hereof (except your appointment as our
agent for Media Placement) shall survive the termination of this Agreement.

If the foregoing is in accordance with your understanding,  please sign the copy
of this letter






MEDIA DIRECT PARTNERS, INC.               Accepted and Agreed To:

                                          IMR, Inc.


BY:  /s/ Desiree DuMont                   BY: /s/ T. Scott Jenkins

TITLE:  Managing Director                 TITLE: President


<PAGE>

                                   EXHIBIT 21


                 INTEGRATED MEDICAL RESOURCES, INC. SUBSIDIARIES
                                (AS OF 12/31/97)



                                                         STATE OF
NAME*                                                  INCORPORATION

IMR Integrated Diagnostics, Inc.                       Texas
IMR Integrated Diagnostics of Florida, Inc.            Florida
IMR Integrated Diagnostics of Oklahoma, Inc.           Oklahoma
IMR of Arizona, Inc.                                   Arizona
IMR of Connecticut, Inc.                               Connecticut
IMR of Illinois, Inc.                                  Illinois
IMR of Indiana, Inc.                                   Indiana
IMR of Michigan, Inc.                                  Michigan
IMR of Missouri, Inc.                                  Missouri
IMR of Nevada, Inc.                                    Nevada
IMR of North Carolina, Inc.                            North Carolina
IMR of Ohio, Inc.                                      Ohio
IMR of South Carolina, Inc.                            South Carolina
IMR of Virginia, Inc.                                  Virginia
IMR of Wisconsin, Inc.                                 Wisconsin
Integrated Diagnostics, Inc.                           New York
Integrated Medical Resources, Inc.                     Kansas
Integrated Medical Resources of California, Inc.       California
Integrated Medical Resources of Colorado, Inc.         Colorado
Integrated Medical Resources of Massachusetts, Inc.    Massachusetts
Integrated Medical Resources of Pennsylvania, Inc.     Pennsylvania


*     None of the subsidiaries are operating or doing business
under a fictitious name




<PAGE>


                                                              Exhibit 23(b)


                         Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30529) pertaining to the Amended and Restated 1995 Stock Option Plan
of Integrated Medical Resources,  Inc. and the Registration  Statement (Form S-8
No.  333-24485)  pertaining to the  Non-Employee  Director  Stock Option Plan of
Integrated  Medical  Resources,  Inc. of our report  dated  March 4, 1998,  with
respect  to  the  consolidated   financial   statements  of  Integrated  Medical
Resources,  Inc.  included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1997.





                                        /s/ Ernst & Young LLP


Kansas City, Missouri
March 30, 1998