THIS FORM 10-K REFLECTS CHANGES INCLUDED IN AMENDMENTS FILED WITH SECURITIES
            AND EXCHANGE COMMISSION ON APRIL 8, 1997 AND JUNE 27, 1997
                                ON FORM 10-K/A     
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                         FORM 10-K/A Amendment No. 2        
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                          COMMISSION FILE NO. 0-20440
 
                            MEDICAL RESOURCES, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                      13-3584552
      (STATE OF INCORPORATION)                             (IRS EMPLOYER
                                                        IDENTIFICATION NO.)
 
  155 STATE STREET, HACKENSACK, NJ                             07601
   (ADDRESS OF PRINCIPAL EXECUTIVE                          (ZIP CODE)
               OFFICE)
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 488-6230
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
 
                              TITLE OF EACH CLASS
 
                    COMMON STOCK (PAR VALUE $.01 PER SHARE)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 
                           Yes  [X]          No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  At March 26, 1997 19,331,236 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the NASDAQ closing price of these shares on that
date) held by non-affiliates was $185,960,045.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  The information required by Part III of this Form 10-K is incorporated by
reference from the registrant's definitive Proxy Statement to be filed not
later than 120 days after December 31, 1996.
 
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                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Medical Resources, Inc. ("Medical Resources" and collectively, with its
subsidiaries, affiliated partnerships and joint ventures, the "Company")
specializes in the operation, management and acquisition of diagnostic imaging
centers. The Company currently operates 53 diagnostic imaging centers located
in the Northeast (29), Florida (15), California (3) and the Chicago area (6)
and provides network management services to managed care organizations. The
Company is rapidly growing and has increased the number of diagnostic imaging
centers it operates from 11 at December 31, 1995 to 53 at March 26, 1997. In
addition, through the Per Diem and Travel Nursing divisions of its wholly
owned subsidiary, StarMed Staffing, Inc. ("StarMed"), the Company provides
temporary healthcare staffing to acute and sub-acute care facilities
nationwide.
 
  The Company's diagnostic imaging centers provide diagnostic imaging services
to patients referred by physicians in a comfortable, service-oriented
outpatient environment. At each of its centers, the Company provides
management, administrative, marketing and technical services, as well as
equipment and facilities, to physicians who interpret scans performed on
patients. Medical services are provided by board certified interpreting
physicians, generally radiologists, with whom the Company enters into
contracts. Fifty-two of the Company's 53 centers provide magnetic resonance
imaging ("MR"), which accounts for a majority of the Company's imaging
revenues. Many of the Company's centers also provide some or all of the
following services: computerized tomography ("CT"), ultrasound, nuclear
medicine, general radiology, fluoroscopy and mammography.
 
  The number of outpatient diagnostic imaging centers in the United States has
grown from approximately 700 in 1984 to an estimated 2,200 in 1996. Ownership
of outpatient diagnostic imaging centers is highly fragmented, with no
dominant national provider. The Company believes that the environment faced by
diagnostic imaging center operators is characterized by rising business
complexity, growing control over patient flows by payors and reimbursement
pressures that require center owners to seek operational efficiencies. In
addition, the Company believes that public and private reforms in the
healthcare industry emphasizing cost containment and accountability will
continue to shift the delivery of imaging services from highly fragmented,
individual or small center operators to companies operating larger multi-
modality networks of centers.
 
  The Company's goal is to become the leading operator of diagnostic imaging
centers in the country. The Company now has implemented a strategy for growth
which includes acquisitions as well as internal development of its existing
operations. The Company intends to capitalize on the fragmented nature of the
diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy is to expand the scope and efficiency of its
operations at its existing and acquired facilities by: (i) leveraging the
geographic concentration of its centers; (ii) expanding the imaging services
offered by its centers by upgrading existing technology and adding new
modalities; (iii) applying sophisticated operating, financial and information
systems and procedures; (iv) utilizing targeted local marketing programs; and
(v) developing its network management services to address more fully the needs
of managed care providers.
 
  The Company has a successful record of acquiring imaging centers and
integrating and improving their operations. Since the beginning of 1996, the
Company has acquired 45 imaging centers through 13 acquisitions, including 18
imaging centers resulting from the Company's acquisition (the "NMR
Acquisition") on August 30, 1996 of NMR of America, Inc. ("NMR"). The Company
has also entered into definition documentation to acquire a company owning
interests in and managing 11 centers in the Northeast and has an option to
acquire an additional center in the Northeast. The Company believes that it
will be able to continue to be a leader in the consolidation of the diagnostic
imaging services industry because of its: (i) experience in identifying,
structuring and completing acquisitions; (ii) ability to integrate effectively
these acquisitions; (iii) size and financial resources; and (iv) existing
presence in key geographic areas.
 
 
                                       1

 
  The Company's temporary staffing business, StarMed, was founded in 1978 and
acquired by the Company in August 1994. StarMed's Per Diem staffing division
provides registered nurses, licensed practical nurses, nursing assistants,
therapists and medical transcriptionists on a daily basis to healthcare
facilities through 21 offices located in 10 states at March 26, 1997.
StarMed's Travel Nursing division is operated from a central office in
Clearwater, Florida and provides registered nurses and operating room
technicians for periods usually ranging from 8 to 26 weeks. StarMed commenced
its per diem operations in March 1995 and, since such time, it has opened 18
offices, acquired three staffing companies operating five additional offices
and consolidated the operations of two other offices in 10 states. In January
1996, StarMed acquired a per diem healthcare staffing business in California;
in June 1996, StarMed acquired a per diem healthcare staffing business in
Florida and in January 1997 StarMed acquired a per diem healthcare staffing
business in Michigan. The Company's growth strategy for its temporary staffing
business includes offering new services to clients, expanding the number of
markets served by StarMed's Per Diem division and acquiring other companies in
the temporary healthcare staffing industry in selected markets.
 
  Medical Resources was incorporated in Delaware in August 1990 and has its
principal executive office at 155 State Street, Hackensack, New Jersey 07601,
telephone number (201) 488-6230. Prior to the Company's incorporation, the
Company's operations, which commenced in 1979, were conducted by corporations
which are now among its subsidiaries.
 
DIAGNOSTIC IMAGING SERVICES INDUSTRY
 
 Overview
 
  Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as MR, CT, ultrasound, nuclear medicine,
mammography and x-ray in an outpatient setting. Diagnostic imaging procedures
are used to diagnose diseases and physical injuries through the use of various
imaging modalities. The use of non-invasive diagnostic imaging has grown
rapidly in recent years because it allows physicians to diagnose quickly and
accurately a wide variety of diseases and injuries without exploratory surgery
or other invasive procedures, which are usually more expensive, risky and
potentially debilitating for patients. In addition, diagnostic imaging is
increasingly used as a screening tool for preventive care. While conventional
x-ray continues to be the primary imaging modality based on the number of
procedures performed, the use of MR and CT procedures has increased due to
their more sophisticated diagnostic capabilities. The Company believes that
utilization will continue to increase because of the growth in demand for
diagnostic imaging services as well as the introduction of new diagnostic
imaging procedures using new or existing modalities.
 
 Equipment and Modalities
 
  Diagnostic imaging systems are based on the ability of energy waves to
penetrate human tissue and generate images of the body which can be displayed
either on film or on a video monitor. Imaging systems have evolved from
conventional x-rays to the advanced technologies of MR, CT, ultrasound,
nuclear medicine and mammography. The principal diagnostic imaging modalities
used by the Company include the following:
 
  Magnetic Resonance Imaging. MR is a sophisticated diagnostic imaging system
that utilizes a strong magnetic field in conjunction with low energy
electromagnetic waves which are processed by a computer to produce high
resolution images of body tissue. A principal element of MR imaging is that
the atoms in various kinds of body tissue behave differently in response to a
magnetic field, enabling the differentiation of internal organs and normal and
diseased tissue. Unlike CT and x-rays, MR does not utilize ionizing radiation
which can cause tissue damage in high doses. As with other diagnostic imaging
technologies, MR is generally non-invasive.
 
  Computerized Tomography. CT is used to detect tumors and other conditions
affecting bones and internal organs. CT provides higher resolution images than
conventional x-rays, but generally not as well defined as those produced by
MR. In a CT, a computer directs the movement of an x-ray tube to produce
multi-cross sectional images of a particular organ or area of the body.
 
                                       2

 
  Ultrasound. Ultrasound has widespread application, particularly for
procedures in obstetrics, gynocology and cardiology. Ultrasound imaging relies
on the computer-assisted processing of sound waves to develop images of
internal organs and the vascular system. A computer processes sound waves as
they are reflected by body tissue, providing an image that may be viewed
immediately on a computer screen or recorded continuously or in single images
for further interpretation.
 
  Nuclear Medicine. Nuclear medicine is used primarily to study anatomic and
metabolic functions. During a nuclear medicine procedure, short lived
radioactive isotopes are administered to the patient by ingestion or
injection. The isotopes release small amounts of radioactivity that can be
recorded by a gamma camera and processed by a computer to produce an image of
various anatomical structures.
 
  General Radiology and Fluoroscopy (X-ray). The most frequently used type of
imaging equipment, radiology uses "x-rays" or ionizing radiation to penetrate
the body and record images on film. Fluoroscopy uses a video viewing system
for real time monitoring of the organs being visualized.
 
  Mammography. Mammography is a specialized form of radiology equipment using
low dosage x-rays to visualize breast tissue. It is the primary screening tool
for breast cancer.
 
 Growth Strategy
 
  The Company's goal is to become the leading operator of diagnostic imaging
centers in the country. The Company has implemented a strategy for growth
which includes acquisitions as well as internal development of its existing
operations. The Company intends to capitalize on the fragmented nature of the
diagnostic imaging center industry through the acquisition of additional
centers. The Company's strategy is to expand the scope and efficiency of its
operations at its existing and acquired facilities by: (i) leveraging the
geographic concentration of its centers; (ii) expanding the imaging services
offered by its centers by upgrading existing technology and adding new
modalities; (iii) applying sophisticated operating, financial and information
systems and procedures; (iv) utilizing targeted local marketing programs; and
(v) developing its network management services to address more fully the needs
of managed care providers. The Company's growth strategy for its temporary
staffing business includes offering new services to clients, expanding the
number of markets serviced by its Per Diem division and acquiring other
companies in the temporary healthcare staffing industry in selected markets.
 
 Acquisition Strategy
 
  The Company has a successful record of acquiring imaging centers and
integrating and improving their operations. Since the beginning of 1996, the
Company has acquired 45 imaging centers through 13 acquisitions. The Company
believes that it will be able to continue to be a leader in the consolidation
of the diagnostic imaging services industry because of its: (i) experience in
identifying, structuring and completing acquisitions; (ii) ability to
integrate effectively these acquisitions: (iii) size and financial resources;
and (iv) existing presence in key geographic areas.
 
  Through the Company's full time acquisition staff, the Company identifies
suitable acquisition candidates based on various factors, including market
demographics; physician referral patterns; reimbursement profiles; local
competition; location in relation to other Company centers and urban areas;
quality and reputation of interpreting physicians; imaging equipment present;
and ability to improve the center's operations and profitability.
 
  The Company's acquisitions have included individual centers, multi-center
groups and two imaging management companies. The Company views each of these
types of acquisitions as attractive due to the operational improvements, cost
savings and strategic synergies which may benefit the Company. After the
acquisition of a center, the Company applies its operating and financial
expertise and procedures and utilizes its sales and marketing programs to
manage the center effectively and to improve the center's utilization. In
addition, the Company seeks to reduce the operating expenses of its acquired
centers through various means,
 
                                       3

 
including capitalizing upon the Company's established relationships with
vendors and its ability to take advantage of group purchasing discounts. In
certain instances where the Company has acquired multiple centers from a
single seller, it has closed a limited number of centers upon determining that
such acquired centers would not likely meet its operating and financial
objectives. Of the 45 centers acquired since the beginning of 1996, the
Company has closed three centers through March 31, 1997.
 
GROWTH STRATEGY AT EXISTING AND ACQUIRED CENTERS
 
 Leveraging Geographic Concentration
 
  The Company has developed clusters of imaging centers in certain geographic
areas which enable it to improve the utilization of its centers by attracting
business from larger referral sources, such as managed care providers due to
the Company's ability to meet the quality, volume and geographical coverage
requirements of these payers. The Company intends to increase its center
concentration in existing markets to attract additional referrals of this type
and to expand into new geographic areas, through acquisitions, in order to
attract additional managed care contracts.
 
 Expanding Imaging Services Offered
 
  The Company expands the imaging services it offers by upgrading existing
technology and adding new modalities at selected centers. The Company's
imaging centers utilize state of the art imaging equipment for which new
applications are continually being developed. New developments and system
upgrades frequently have the ancilliary benefit of reducing imaging time and
thus increasing capacity of the centers' imaging equipment.
 
 Apply Sophisticated Operating, Financial and Information Systems and
Procedures
 
  The Company provides management expertise, financial and operating controls,
and capital resources to its centers in order to optimize their performance.
Generally, each of the centers or groups of centers acquired have had
different operating and financial systems and operating procedures. The
Company evaluates the effectiveness of each and develops a transition plan to
integrate each center, over time, to the Company's targeted operating and
financial systems environment. In addition, the Company is able to achieve
economies of scale and provide cost savings in developing managed care
contracts and negotiating group purchasing of goods and services.
 
 Utilize Targeted Localized Marketing
 
  The Company develops and coordinates marketing programs which center
managers, sales representatives, and affiliated interpreting physicians
utilize to establish referral relationships and to maximize facility usage and
reimbursement yield. The Company's marketing programs emphasize the
capabilities of its imaging equipment, the quality and timeliness of the
imaging results and reports, and the high level of patient and referring
physician service.
 
 Develop Network Management Services
 
  The Company plans to develop and expand further its network management
services business. As a network manager, the Company enters into contracts
with managed care organizations to coordinate the demand for imaging services
and to provide certain administrative functions related to the delivery of
such services. The Company includes certain of its centers in these networks
and believes that the inclusion of these centers in the networks will increase
their utilization. In addition, the Company believes that its network
management services enhance its relationships with managed care organizations
and its ability to enter into additional contracts with such entities.
 
TEMPORARY HEALTHCARE STAFFING INDUSTRY
 
  The demand for supplemental per diem staffing services in the healthcare
market is being driven by a variety of factors in the acute and sub-acute care
segments. The increasing presence of managed care and the rapid
 
                                       4

 
evolution of technology has dramatically reduced the average length of stay in
acute care hospitals. The dynamics of this reduction in length of stay has
made the task of staffing a facility difficult. Many hospitals are reducing
the number of full time staff and and managing the peak periods by utilizing
per diem nursing services. The attractiveness of utilizing per diem services
is the ability to monitor and regulate expenses more closely. When a hospital
adds full time staff, it makes a committment in salary and benefits which it
can avoid with per diem services. With the emphasis on outpatient care, the
needs of the hospital's admitted patients have increased which subsequently
requires a high level of critical care nursing skills. Due to the intense
environment of critical care units, turnover is a significant challenge for a
hospital. The ability to utilize per diem services to address the needs of
these units is becoming increasingly advantageous to hospitals. In addition,
the number of nursing home beds continues to increase each year in an attempt
to meet the needs of the country's aging population. The ability of nursing
services to recruit and place qualified nursing assistants and licensed
practical nurses in these facilities who are available on a day by day or part
time basis is a great benefit to this client base. Nursing homes, like
hospitals, are regulated on a state by state basis and are required to
maintain a specific patient to caregiver ratio. Per diem servies provide
experienced employees who are productive on their first assignment, compared
to new graduates who may require extensive orientation.
 
  The demand for travel nursing is being driven by dynamics similar to that of
the per diem market. In most cases, the client utilizes travel nurses when
they require additional personnel for an extended period of time. Examples of
this would be the opening of a new satellite facility, an information system
conversion that might divert existing hospital employees from other duties
and, in many cases, a severe local market shortage for a specific nursing
speciality. Additionally, in areas of the country that have significant
population changes tied to seasonality, such as Florida during the winter
months, the utilization of travel nurses is an economic alternative.
 
                                       5

 
DIAGNOSTIC IMAGING BUSINESS
 
  The following table sets forth certain information concerning the imaging
centers operated by the Company. Imaging centers that are not 100% owned by
the Company, through a wholly owned subsidiary, are typically owned by limited
partnership or other business entities in which a subsidiary of the Company is
the sole general partner or manager. The equity ownership interest shown
includes general and limited partnership interests or other equity interests
owned by the Company. For the centers not wholly owned by the Company, the
Company is generally paid a management fee based on patient cash collections
and/or patient volume under management agreements with certain of the
partnerships.
 
  

                                                                 OPERATED
        LOCATION                         NAME                    SINCE(1)    OWNERSHIP(2)   MODALITIES(3)
        --------         ------------------------------------ -------------- ------------ -----------------
                                                                              
Northeast Region
 Englewood, NJ.......... Englewood Imaging Center             December 1979       100%    MR,CT,US,R,F,M
 Marlton, NJ(5)......... MRImaging of South Jersey            July 1984          91.0%    MR
 Union, NJ(5)........... OPEN MRI of Union                    August 1984        79.7%    MR
 Morristown, NJ(5)...... MRImaging of Morristown              December 1984      94.2%    MR
 Philadelphia, PA(5).... Academy Imaging Center               January 1986       97.7%    MR,CT,US,NM,R,F,M
 Allentown, PA(5)....... MRImaging of Lehigh Valley           May 1986           95.9%    MR
 Clifton, NJ............ Clifton Medical Imaging Center       June 1987           100%    MR,CT,US,NM,R,F,M
 Yonkers, NY............ Inter-County Imaging                 September 1987     65.0%    MR,CT,US,NM,R,F,M
 West Orange, NJ(4)..... Northfield Imaging                   January 1991        100%    MR,CT,US,NM,R,F,M
 Bel Air, MD(5)......... Colonnade Imaging Center             November 1991      62.9%    MR,CT,US,NM,R,F,M
 Jersey City, NJ........ The MR Institute at Midtown          July 1992           100%    MR
 Brooklyn, NY........... Advanced MRA Imaging Associates      January 1993        100%    MR,CT,US,NM,R,F,M
 Seabrook, MD(5)........ Seabrook Radiological Center         April 1995         87.1%    MR,CT
 Hackensack, NJ......... Hackensack Diagnostic Imaging        June 1995           100%    MR,CT,US,R,F,M
 Bronx, NY.............. Westchester Square Imaging           January 1996        100%    MR,CT
 New York, NY........... MRI-CT Scanning of Manhattan         January 1996        100%    MR,CT,US,R,M
 Centereach, NY......... Open MRI of Centerreach              July 1996           100%    MR
 Garden City, NY........ Open MRI at Garden City              November 1996       100%    MR
 East Setauket, NY...... Open MRI at Smith Haven              November 1996       100%    MR
 Newark, NJ............. Imaging Center of the Ironbound      December 1996       100%    MR
 North Bergen, NJ....... Advanced Magnetic Imaging            March 1997          9.0%    MR
 Kearny, NJ............. West Hudson MRI Associates           March 1997         25.0%    MR
 Cranford, NJ........... Cranford Diagnostic Imaging          March 1997         75.0%    MR,CT,US,M
 Montvale, NJ........... Montvale Medical Imaging             March 1997         13.8%    MR,CT,US,M,R,F
 Randolph, NJ........... Morris-Sussex MRI                    March 1997         20.0%    MR
 Totowa, NJ............. Advantage Imaging                    March 1997         15.0%    MR
 Dedham, MA............. MRI of Dedham                        March 1997         35.0%    MR
 Seekonk, MA............ Rhode Island-Massachusetts MRI       March 1997          5.0%    MR
 Chelmsford, MA......... MRI of Chelmsford                    March 1997         65.0%    MR
Florida
 St. Petersburg, FL..... Magnetic Resonance Associates        July 1984          80.2%    MR
 Naples, FL............. Gulf Coast MRI                       June 1993           100%    MR
 Ft. Myers, FL.......... Ft. Myers MRI-Central                May 1995            100%    MR,CT

 Ft. Myers, FL.......... Ft. Myers MRI-South                  May 1995            100%    MR
 Cape Coral, FL(5)...... Cape Coral MRI                       September 1995      100%    MR
 Naples, FL(5).......... Naples MRI                           September 1995      100%    MR
 Titusville, FL(5)...... MRI of North Brevard                 September 1995      100%    MR
 Sarasota, FL(5)........ Sarasota Outpatient MRI & Diag. Ctr. September 1995      100%    MR, CT
 Tampa, FL.............. Americare MRI                        May 1996            100%    MR
 Tampa, FL.............. Americare Imaging                    May 1996            100%    CT,US,NM,R,M
 Tarpon Springs, FL..... Tarpon Springs MRI                   May 1996            100%    MR
 Clearwater, FL......... Access Imaging                       May 1996            100%    MR
 Melbourne, FL.......... South Brevard MRI                    January 1997        100%    MR
 Jacksonville, FL....... MRI Center of Jacksonville           February 1997       100%    MR
 West Palm, FL.......... The Magnet of Palm Beach March       March 1997          100%    MR,CT,US,R,M
Chicago Area
 Chicago, IL(5)......... MRImaging of Chicago                 April 1987         87.2%    MR
 Chicago, IL(5)......... OPEN MRI of Chicago                  June 1992          79.6%    MR
 Oak Lawn, IL(5)........ Oak Lawn Imaging Center              January 1994        100%    MR,CT,US,R,F,M
 Des Plaines, IL(5)..... Golf MRI & Diagnostic Imaging Ctr.   January 1995       75.0%    MR,CT,US,NM,R,F,M
 Libertyville, IL(5).... Libertyville Imaging Center          January 1995        100%    MR,R,F
 Chicago, IL(5)......... Central Diversey, IL                 January 1996        100%    MR
California
 Long Beach, CA......... Long Beach Radiology                 January 1997        100%    MR
 San Clemente, CA....... Oceanview Diagnostic Imaging         January 1997        100%    MR,CT,US,R,F,M
 Rancho Cucamonga, CA... Grove Diagnostic Imaging             March 1997          100%    MR,CT,NM,US,R,F,M
  
 
 
                                       6


 
(1) Operated by the Company or NMR since such date.
(2) Represents the Company's interest in, losses and distributions of the
    respective centers.
(3) Modalities are magnetic resonance imaging (MR), computerized tomography
    (CT), ultrasound (US), nuclear medicine (NM), radiology (R), fluoroscopy
    (F) and mammography (M).
(4) Includes the operation of the Livingston Breast Care mammography unit
    which is located at the Northfield Imaging Center.
(5) Acquired from NMR.
 
  The Company may further increase its ownership of its non-wholly owned
centers. There can be no assurance that the Company will be successful in
completing such acquisitions. The Company has also increased its revenues and
by adding new imaging equipment modalities to certain centers and plans to
continue this strategy in those situations where the Company believes that
such additions are economically justified.
 
  Each center consists of a waiting/reception area and one room per modality,
dressing rooms, billing/administration rooms and radiologist interpreting
rooms. The size of the Company's centers generally range from 1,500 to 11,400
square feet.
 
OPERATIONS OF CENTER AND SERVICES PROVIDED BY THE COMPANY
 
  General. The Company's centers provide diagnostic imaging services to
patients referred by physicians who are either in private practice or
affiliated with managed care providers or other payer groups. The Company's
centers are operated in a manner which eliminates the admission and other
administrative inconvienence of in-hospital diagnostic imaging services. The
Company's imaging services are performed in an outpatient setting by trained
medical technologists under the direction of interpreting physicians.
Following the diagnostic procedures, the images are reviewed by the
interpreting physicians who prepare a report of these tests and their
findings. These reports are transcribed by Company personnel and then
delivered to the referring physician. The interpreting physicians are board
certified specialists in radiology, nuclear medicine, nuclear cardiology or
neuroradiology, as appropriate. Such interpreting physicians are independent
contractors, located at the center on a full time basis, and are not employees
of the Company. All medical aspects of each center are under the direct
control and are the sole responsibility of the interpreting physician. The
Company is not engaged in the practice of medicine.
 
  Financial and Operational Programs. Each center implements a total quality
management program which emphasizes fully upgradable imaging equipment, on
site board certified radiologists, the participation of technical employees in
rigorous ongoing quality assurance programs and patient and physician
satisfaction surveys. The Company also utilizes group purchasing of certain
goods and services to reduce the operating expenses of its centers. The
compensation of the centers' managers and certain other personnel is tied
directly to the centers' profitability.
 
  Management Information Systems. The Company has developed sophisticated
management information systems designed to, among other objectives, enhance
the efficiency and productivity of its centers, lower operating costs,
facilitate financial controls, increase reimbursement and assist in the
analysis of sales, marketing and referral data. The management information
systems provide information and assistance to managers with respect to, among
other matters, billing, patient scheduling, marketing, sales, accounts
receivable, referrals and collections. These systems, which provide highly
detailed or customized management reports, enable management to coordinate and
enhance many aspects of the centers' operations and allow for the development
of working plans for improving profit margins by reviewing results and trends
in center operations. Generally each of the centers or groups of centers
acquired have had different operating and financial systems and operating
procedures. The Company evaluates the effectiveness of each and develops a
transition plan to integrate each center, over time, to the Company's targeted
operating and financial systems environment.
 
SALES AND MARKETING
 
  The Company develops and coordinates marketing programs which center
managers, sales representatives, affiliated interpreting physicians and
corporate managers utilize in an effort to establish and maintain profitable
 
                                       7

 
referring physician relationships and to maximize reimbursement yields. These
marketing programs identify and target selected market segments consisting of
area physicians with certain desirable medical specialities and reimbursement
yields. Corporate and center managers determine these market segments based
upon an analysis of competition, imaging demand, medical specialty and or
payer mix of each referral from the local market. The Company also directs
marketing efforts at managed care providers.
 
  Managed care providers are becoming an increasingly important factor in the
diagnostic imaging industry, and, consequently, the Company places major
emphasis on cultivating and developing relationships with such organizations.
The Company employs industry professionals who have significant experience in
dealing with managed care and other providers. The Company believes that the
geographic concentration of its centers, the presence of multi-modality
centers in all of its regions, its ability to offer cost effective services
and its experience in developing relationships with various managed care
organizations will constitute a competitive advantage with managed care
providers.
 
REIMBURSEMENT, BILLING AND COLLECTION
 
  Each center charges patients a fee per imaging study performed, which is
generally billed on behalf of and in the name of an independent physician
group. The Company's centers maintain a competitive billing strategy based
upon evaluation of available pricing data with respect to each location.
 
  Third party payers, including Medicare, Medicaid, managed care/HMO providers
and certain commercial payers have taken extensive steps to contain or reduce
the costs of healthcare services. In certain areas, such payers are subject to
regulations as to payments. Current discussions within the Federal government
regarding national healthcare reform are emphasizing the containment of
healthcare costs as well as the expansion of the number of eligible parties.
Although such actions have resulted in the general decline in reimbursement
rates for the types of services provided at the Company's centers, the Company
has sought to offset the decline in reimbursement rates by establishing
contractual relationships with managed care organizations and other commercial
payers in order to increase the utilization of its centers
 
  In addition, during 1996 and 1995 approximately 19.5% and 21.8%,
respectively, of the Company's net service revenues from imaging centers were
derived through physicians providing imaging services to patients involved in
personal injury claims. The Company believes that such services are an
attractive revenue source and will continue to seek such business because the
reimbursement rates for services provided to patients involved in personal
injury claims are typically significantly greater than the reimbursement rates
of Medicare, Medicaid and managed care providers. Nevertheless, personal
injury claims require more extensive documentation than other procedures, in
addition, patients with personal injury claims who do not have insurance
coverage tend to delay payment until legal matters are resolved, which may
result in significant collection delays.
  
  Approximately 2% of the Company's revenues in 1996 were derived from
capitation contracts with some third party payors which typically provide for
the payment of a fixed fee per month on a per member basis, without regard to
the amount or scope of services rendered. Because the obligations to perform
service are not related to the payments, it is possible that either the cost or
the value of the services performed may significantly exceed the fees received,
and there may be a significant period between the time the services are rendered
and payment is received. While the Company carefully analyzes the potential
risks of capitation arrangements, there can be no assurances that any capitation
contracts which the Company is a party to or which it may enter into in the
future will not generate significant losses to the Company. 

  
  In addition, certain types of capitation agreements, may be deemed a form of
risk contracting. Many states limit the extent to which any person can engage in
risk contracting, which involves the assumption of a financial risk with respect
to providing services to a patient. If the fees received by the Company are less
than the cost of providing the services, the Company may be deemed to be acting
as a de facto insurer. In some states, only certain entities, such as insurance
companies, HMOs and independent practice associations, are permitted to contract
for the financial risk of patient care. In such states, risk contracting in
certain cases has been deemed to be engaging in the business of insurance. The
Company believes that it is not in violation of any restrictions on risk bearing
or engaging in the business of insurance. If the Company is held to be
unlawfully engaged in the business of insurance, such finding could result in
civil or criminal penalties or require the restructuring of some or all of the
Company's operations, which could have a material adverse effect upon the
Company's business. 
 
INTERPRETING PHYSICIANS AGREEMENTS
    
  At each of the Company's centers, all medical services are performed
exclusively by physician groups (the "Physician Group" or the "Interpreting
Physician"), generally consisting of radiologists, with whom the Company enters
into independent contractor agreements. Pursuant to these agreements, the
Company, among other duties, provides to the Physician Group the diagnostic
imaging facility and equipment, performs all marketing and administrative
functions at the centers and is responsible for the maintenance and servicing of
the equipment and leasehold improvements. The Physician Group is solely
responsible for, and has complete and exclusive control over, all medical and
professional services performed at the centers, including, most importantly, the
interpretation of diagnostic images, as well as the supervision of technicians,
and medical related quality assurance and communications with referring
physicians. Insofar as the Physician Group has complete and exclusive control
over the medical services performed at the centers, including the manner in
which medical services are performed, the assignment of individual physicians to
center duties and the hours that physicians are to be present at the center, the
Company believes that the Interpreting Physicians who perform medical services
at the centers are independent contractors. In addition, Interpreting Physician
Groups which furnish professional services at the centers generally have their
own medical practices and, in most instances, perform medical services at non-
Company related facilities. The Company's employees do not perform professional
medical services at the centers. Consequently, the Company does not believe that
it engages in the practice of medicine in jurisdictions which prohibit or permit
the corporate practice of medicine. The Company performs only administrative and
technical services and does not exercise any control over the practice of
medicine by physicians at the centers or employ physicians to provide medical
services. The Company is aware of three Interpreting Physicians who own a
nominal percentage of three limited partnerships that are managed and partially
owned by the Company.    
    
  As part of its administrative responsibilities under the terms of the
Interpreting Physician agreements, the Company is responsible for the
administrative aspects of billing and collection functions at the centers.
Certain third-party payor sources of the Company, such as Medicare, insurance
companies and managed care providers, require that they receive a single or
"global" billing statement for the imaging services provided at the Company's
centers. Consequently, billing is done in the name of the Physician Group
because such billings include a medical component. The Physician Group grants a
power of attorney to the Company authorizing the Company to establish bank
accounts using the Physician Group's name related to that center's collection
activities and to access such accounts. In states where permitted by law, such
as Florida, the Company generally renders bills in the center's name. In such
circumstances, the Physician Group has no access to associated collections.    
    
  The Company recognizes revenue under its agreements with Interpreting
Physicians, notwithstanding the Company's ownership interest in the center in
one of three ways: (1) the Company receives a technical fee for each diagnostic
imaging procedure interpreted at the center by the Physician Group, the amount
of which is fixed upon the type of the procedure performed; (2) the Company pays
the Interpreting Physician Group a fixed percentage of fees collected at the
center, based upon the specific diagnostic imaging procedures performed; or, (3)
the Company receives from an affiliated physician association a fee for the use
of the premises, a fee per procedure for acting as billing and collection agent
for the affiliated physician association and for administrative and technical
services performed at the centers and affiliated physician association pays the
interpreting physician group based upon a percentage of the cash collected at
the center. All of such amounts and the basis for payments are negotiated
between the Physician Group and the Company. The agreements generally have terms
ranging from one to ten years.     
    
   For additional information pertaining to the Company's arrangements with
interpreting physicians see Note 1 to the Company's Consolidated Financial
Statements--"Revenue Recognition".      


                                       8



 
THE COMPANY'S TEMPORARY STAFFING BUSINESS
 
 Services Provided by StarMed
 
  Through its Per Diem and Travel Nursing divisions, StarMed provides
temporary staffing to acute and sub-acute care facilities nationwide.
StarMed's Per Diem staffing division provides registered nurses, licensed
practical nurses, nursing assistants, therapists and medical transcriptionists
on a daily basis to healthcare facilities currently through 21 offices located
in 10 states. StarMed's Travel Nursing division operates from a central office
in Clearwater, Florida and provides registered nurses and operating room
technicians nationwide for periods ranging from eight to twenty six weeks.
StarMed's travel nursing personnel are relocated from their place of residence
to the hospital location for the period of an assignment. StarMed employs the
travel nursing staff under short-term employment agreements, provides
accommodations, travel reimbursements and other benefits central to employees
and bills the client on an hourly basis.
 
  In fiscal 1995, the Company expanded its temporary healthcare staffing
segment by opening six per diem staffing offices; four in Florida and one each
in Missouri and Ohio. During 1996 and 1997, StarMed opened twelve per diem
offices in seven states. In addition, StarMed completed the acquisitions of
three per diem healthcare staffing companies operating an aggregate of five
offices in southern California during January 1996, in Florida during June
1996 and in Michigan during January 1997.
 
CLIENTS AND MARKETING
 
  StarMed has entered into agreements with client hospitals nationwide to
provide temporary staffing of healthcare personnel. These hospitals, which are
both for-profit and not-for-profit, range from small rural hospitals to major
teaching and trauma centers.
 
  StarMed's Per Diem division markets its services primarily through its own
direct sales force. StarMed's marketing approach targets hospitals in major
metropolitan areas or other areas which are attractive from a patient census
perspective as well as to nurses and other professional medical personnel.
Marketing for the Travel Nursing division is conducted primarily by
telemarketing and also by attendance at national and regional conventions,
seminars and direct solicitations. In certain geographic markets, the Company
has contracted with a health services marketing and per diem placement firm to
market its services.
 
  Upon receiving an order from a client for a travel nursing position, StarMed
utilizes a sophisticated software application program to match available
candidates to the client's order. The application program considers a services
number of unique hiring criteria established by the client and also certain
general criteria established by StarMed. Suitable candidates are then
presented to the client for temporary staffing assignments.
 
RECRUITMENT
 
  Temporary staff are recruited through advertising in industry publications,
job fairs, referrals and other methods. All applicants for employment are
screened to ensure they have the required practical current experience and
skills, valid license and positive references. StarMed believes that temporary
assignments are attractive for nurses and other medical personnel because they
provide competitive compensation, the ability to work in various clinical
environments during the course of the year and flexible work schedules.
 
 
                                       9

 
COMPETITION
 
  The outpatient diagnostic imaging industry is highly competitive.
Competition focuses primarily on attracting physician referrals at the local
market level and, increasingly, referrals through relationships with managed
care organizations. The Company believes that principal competitors in each of
the Company's markets are hospitals, independent or management company-owned
imaging centers, some of which are owned with physician investors and mobile
MR units. Some of these competitors have greater financial and other resources
than the Company. Principal competitive factors include quality and timeliness
of test results, ability to develop and maintain relationships with managed
care organizations and referring physicians, type and quality of equipment,
facility location, convenience of scheduling and availability of patient
appointment times. Competition for referrals can also be affected by the
ownership or affiliation of competing centers or hospitals. Certain of the
Company's competitors have historically derived a significant portion of their
revenues from referrals by physicians who are also investors and have a
financial interest in, or are otherwise affiliated with, the competing center
or hospital. The Company may benefit to the extent current or future
regulations will reduce self-referrals from physician investors and make their
referrals part of the market for which other centers may more effectively
compete.
 
  The temporary healthcare staffing industy is also highly competitive.
StarMed competes for client's business with other providers of temporary
staffing. StarMed also competes for the limited number of available qualified
staff. Within the temporary staffing industry, StarMed competes with several
companies which are larger and may possess greater financial resources than
StarMed. Competition for hospital clients is generally based upon the ability
to provide qualified nurses and medical personnel on a timely basis at
competitive prices. Location of assignment, nature of clinical
responsibilities, compensation and beneits are generally the principal factors
considered by nurses and medical personnel in deciding whether to accept a
temporary assignment.
 
GOVERNMENT REGULATION
 
  The healthcare industry is highly regulated at the Federal, state and local
levels. The following factors affect the Company's operation and development
activities:
 
CERTIFICATES OF NEED, LICENSING AND CERTIFICATION
 
  All states in which the Company currently operates or may operate have laws
that may require a certificate of need ("CON") in certain circumstances to
establish, construct, acquire or expand healthcare facilities and services or
for the purchase, expansion or replacement of major moveable equipment,
including outpatient diagnostic imaging centers utilizing MR or other major
medical equipment. At the present time, the CON laws of New Jersey, New York,
Illinois, Florida, Maryland, California and Pennsylvania pertain to the
Company's activities. In states with CON programs, regulatory approvals are
frequently required for capital expenditures exceeding certain amounts, if
such expenditures relate to certain types of medical services or equipment.
 
  State CON statutes generally provide that prior to construction of new
facilities or the introduction of new services, a state health planning agency
(a "Planning Agency") must determine that a need exists for those facilities
or services. The CON process is intended to promote comprehensive healthcare
planning, assist in providing high quality health care at the lowest possible
cost and avoid unneccessary duplication by ensuring that only those healthcare
facilities that are needed will be built.
 
  Typically, the provider submits an application to the appropriate Planning
Agency with information concerning the geographic area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan, if applicable, and the cost per patient for the type of care
contemplated. Whether the CON is granted is based upon a finding of need by
the Planning Agency in accordance with criteria set forth in CON statutes,
applicable regulations and applicable state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be an appropriate
 
                                      10

 
provider, the Planning Agency will issue a CON containing a maximum amount of
expenditure and a specific time period for the holder of the CON to implement
the approved project.
 
  The necessity for these CON approvals serves as a barrier to entry in
certain markets which the Company wishes to service and has the potential to
increase the costs and delay the Company's acquisition or addition of centers.
A CON program or similar requirement has the potential to curtail the
Company's expansion which could have a material adverse effect on the
Company's future growth.
 
  The Company may also have to comply with Federal certification requirements.
For example, the Company's centers which provide mammography examinations must
be certified by the Federal government. Further, additional certification
requirements may affect the Company's centers, but such certification
generally will follow specific standards and requirements that are set forth
in readily available public documents. Compliance with the requirements often
is monitored by annual on site inspections by representatives of various
government agencies. The Company believes that it currently has obtained all
necessary certifications, but the failure to obtain a necessary certification
could have a material adverse effect on the Company's imaging business.
 
  In addition to the CON programs and Federal certification described above,
the operations of outpatient imaging centers are subject to Federal and state
regulations relating to licensure, standards of testing, accredation of
certain personnel and compliance with government reimbursement programs. The
operation of these centers requires a number of Federal and state licenses,
including licenses for personnel and certain equipment. Although the Company
believes that currently it has obtained or is in the process of obtaining all
such necessary CON approvals and licenses, the failure to obtain a required
approval could have a material adverse effect on the Company's diagnostic
imaging business. The Company believes that diagnostic testing will continue
to be subject to intense regulation at the Federal and state levels and cannot
predict the scope and effect of such regulation nor the cost to the Company of
such compliance.
 
MEDICARE ANTI-KICKBACK PROVISIONS
 
  The Anti-Kickback Act prohibits the offering, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare or
Medicaid patients or patient care opportunities, or in return for the
purchase, lease or order or provision of any item or service that is covered
by Medicare or Medicaid. Violation of the Anti-Kickback Act is punishable by
substantial fines, imprisonment for up to five years, or both. In addition,
the Medicare and Medicaid Patient and Program Protection Act of 1987 (the
"Protection Act") provides that persons guilty of violating the Anti-Kickback
Act may be excluded from the Medicare or Medicaid programs. Investigations
leading to prosecutions and/or program exclusion may be conducted by the
Office of Inspector General ("OIG") of the Department of Health and Human
Services ("HHS").
 
  Under the Anti-Kickback Act law enforcement authorities, HHS and the Federal
courts are increasingly scrutinizing arrangements between health care
providers and referrals sources (such as physicians) in order to ensure that
the arrangements are not designed as a mechanism to exchange remuneration for
patient referrals. This scrutiny is not limited to financial arrangements that
involve a direct payment for patient referrals, but extends to indirect
payment mechanisms that carry the potential for inducing Medicare and Medicaid
referrals, including situations where physicians hold investment interests in
a healthcare entity to which such physicians refer patients. The Anti-Kickback
Act would cover, for example, situations in which physicians hold investment
interests in a billing company which profits from Medicare referrals. The
Company does not believe that it is operating in violation of the Anti-
Kickback Act.
   
CORPORATE PRACTICE OF MEDICINE AND FEE SPLITTING   
  
  The laws of many states prohibit unlicensed, non-physician-owned entities or 
corporations (such as the Company) from performing medical services or 
physicians from splitting fees with non-physicians. The Company does not believe
that it engages in the unlawful practice of medicine or the delivery of medical 
services in any state where it is prohibited, and is not licensed to practice 
medicine in states which permit such licensure. Professional medical services, 
such as the interpretation of MRI scans, are separately provided by independent 
contractor interpreting physicians pursuant to agreements with the Company. The 
Company performs only administrative and technical services and does not 
exercise control over the practice of medicine by physicians or employ 
physicians to provide medical services. However, in many jurisdictions, the laws
restricting the corporate practice of medicine and fee-splitting have been 
subject to limited judicial and regulatory interpretation and, therefore, there 
is no assurance that, upon review, some of the Company's activities would not be
found to be in violation of such laws. If such a claim were successfully 
asserted against it, the Company could be subject to civil and criminal 
penalties and could be required to restructure its contractual relationships. 
In addition, certain provisions of its contracts with interpreting physicians, 
including the payment of management fees and restrictive covenants could be held
to be unenforceable. Such results or the inability of the Company to restructure
its contractual relationships could have a material adverse effect upon the 
Company.   

SAFE HARBOR REGULATIONS
 
  On July 29, 1991, the OIG published safe harbor regulations that specify the
conditions under which certain kinds of financial arrangements, including (i)
investment interests in public companies, (ii) investment interests in small
entities, (iii) management and personal services contracts, and (iv) leases of
space and equipment, will
 
                                      11

 
be protected from criminal prosecution or civil sanctions under the Anti-
Kickback Act if the standards set forth in the regulation are strictly
followed. Additional regulations were proposed on July 21, 1994 to amend
portions of the original Safe Harbor Regulations and to reaffirm and clarify
the OIG's original intent under the Safe Harbor Regulations. However, these
regulations are not yet in effect. Although the Company believes its
operations generally qualify for protection under the applicable safe harbor
regulations, these regulations have thus far been relatively untested in
practice, and there can be no assurance that the Company would prevail in its
position. The OIG has stated that failure to satisfy the conditions of an
applicable "safe harbor" does not necessarily indicate that the arrangement in
question violates the Anti-Kickback Act, but means that the arrangements are
not among those that the "safe harbor" regulations protect from criminal or
civil sanctions under that law.
 
  While the Company believes that it is in compliance with the current
requirements of the Anti-Kickback Act under the applicable safe harbor
regulations, these regulations have so far been relatively untested in
practice. Furthermore, no assurances can be given that a Federal or state
agency charged with enforcement of the Anti-Kickback Act and similar laws
might not assert a contrary position or that new Federal or state laws or new
interpretations of existing laws might not adversely affect relationships
established by the Company with healthcare providers, including physicians, or
result in the imposition of penalties on the Company or certain of its
centers. The assertion of a violation, even if successfully defended by the
Company, could have a material adverse effect upon the Company.
 
STARK LAW PROHIBITION ON PHYSICIAN REFERRALS
 
  The Federal "Stark Law" as amended in 1993 provides that where a physician
has a "financial relationship" with a provider of "designated health services"
(including, among other activities, the provision of MR and other radiology
services which are services provided by the Company), the physician will be
prohibited from making a referral of Medicaid or Medicare patients to the
healthcare provider, and the provider will be prohibited from billing Medicare
or Medicaid, for the designated health service. In August 1995, regulations
were issued pursuant to the Stark Law as it existed prior to its amendment in
1993. The preamble to these regulations indicates that the Health Care
Financing Administration ("HCFA") intends to rely on the language and
interpretations in the regulations when reviewing compliance under the Stark
Law, as amended. Submission of a claim that a provider knows, or should know,
is for services for which payment is prohibited under the amended Stark Law,
could result in refunds of any amounts billed, civil money penalties of not
more than $15,000 for each service billed, and possible exclusion from the
Medicare and Medicaid programs.
 
  The Stark Law provides exceptions from its prohibition for referrals which
include certain types of employment, personal services arrangements and
contractual relationships. The Company continues to review all aspects of its
operations and believes that it complies in all material respects with
applicable provisions of the Stark Law, although because of the broad and
sometimes vague nature of this law and the related regulations, there can be
no assurance that an enforcement action will not be brought against the
Company or that the Company will not be found to be in violation of the Stark
Law.
 
FALSE CLAIMS ACT
 
  A number of Federal laws impose civil and criminal liability for knowingly
presenting or causing to be presented a false or fraudulent claim, or
knowingly makes a false statement to get a false claim paid or approved by the
government. Under one such law, the False Claims Act, civil damages may
include an amount that is three times the government's loss plus $5,000 to
$10,000 per claim. Actions to enforce the False Claims Act may be commenced by
a private citizen on behalf of the Federal government, and such private
citizens receive between 15 and 30 percent of the recovery. Efforts have been
made to assert that any claim resulting from a relationship in violation of
the Anti-Kickback Act or the Stark Law is false and fraudulent under the False
Claims Act. The Company carefully monitors its submissions to HCFA and all
other claims for reimbursement to assure that they are not false or
fraudulent, and as noted above, believes that it is not in violation of the
Anti-Kickback Act or the Stark Law.
 
                                      12

 
STATE LAWS
 
  Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals
and other types of financial arrangements with healthcare providers, which,
while similar in certain respects to the Federal legislation, vary from state
to state. Some states expressly prohibit referrals by physicians to facilities
in which such physicians have a financial interest. Sanctions for violating
these state restrictions may include loss of licensure and civil and criminal
penalties assessed against either the referral source or the recipient
provider. Certain states also have begun requiring healthcare practitioners to
disclose to patients any financial relationship with other providers,
including advising patients of the availability of alternative providers.
 
  The Company continues to review all aspects of its operations and believes
that it complies in all material respects with applicable provisions of the
Anti-Kickback Act, the Stark Law and applicable state laws governing fraud and
abuse as well as licensing and certification, although because of the broad
and sometimes vague nature of these laws and requirements, there can be no
assurance that an enforceable action will not be brought against the Company
or that the Company will not be found to be in violation of one or more of
these regulatory provisions. Further, there can be no assurance that new laws
or regulations will not be enacted, or existing laws or regulations
interpreted or applied in the future in such a way as to have a material
adverse impact on the Company, or that Federal or state governments will not
impose additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.
 
REGULATIONS AFFECTING STARMED
 
  StarMed has obtained all necessary licenses to conduct business in the
states where required. Temporary staff are also subject to various
occupational and professional licensing laws that apply to medical
professionals. Many states have temporary staff laws requiring training,
monitoring and regulating of medical professionals.
 
  Because the services of StarMed's temporary staff are paid for directly by
the client hospitals, StarMed is not subject to the reimbursement, billing and
collection procedures required by the existence of government and private
third party payers as is the case with respect to the Company's diagnostic
imaging centers.
 
INSURANCE COVERAGE
 
  The nature of the services provided by StarMed potentially exposes StarMed
to greater risks of liability than are posed by other non-medical personnel
staffing businesses. The Company maintains public and professional liability
insurance in amounts which it deems adequate to cover all potential risk.
There can be no assurance that the amount of such insurance will be adequate
to cover all potential liabilities.
 
EMPLOYEES
 
  As of December 31, 1996, the Company had approximately 460 full time and 163
part time employees, including two executive officers, 356 administrative
personnel, 54 sales and marketing personnel and 211 technical personnel. These
numbers do not include the healthcare personnel contracted by StarMed for its
Per Diem and Travel Nursing divisions. The Company is not a party to any
collective bargaining agreements and considers its relationship with its
employees to be good.
 
INSURANCE
 
  The Company carries workmen's compensation insurance, comprehensive and
general liability coverage, fire, allied perils coverage and professional
liability insurance in amounts deemed adequate by management. There is no
assurance that potential claims will not exceed the coverage amounts, that the
cost of coverage will not substantially increase or require the Company to
insure itself or that certain coverage will not be reduced or become
unavailable.
 
 
                                      13

 
ITEM 2. PROPERTIES
 
  The Company leases its principal and executive office pursuant to an eight
and a half year lease with a term commencing January 1995 and expiring August
2003, subject to one five year renewal term. The building also houses the
Company's Hackensack imaging center. The Company also leases a 14,000 square
foot storage facility located in Passaic, New Jersey with a lease term of two
years. The Company's imaging centers range in size from approximately 1,500 to
11,400 square feet. Each center consists of a waiting/reception area and one
room per modality, dressing rooms, billing/administration rooms and
radiologist interpreting rooms. Center leases expire between December 1996 and
October 2002 and, in certain instances, contain options to renew. StarMed's 21
per diem staffing offices lease approximately 14,000 square feet of office
space in the aggregate under various lease terms expiring through December
1999.
 
ITEM 3. LITIGATION
 
  From time to time, the Company encounters litigation in the ordinary course
of its business (see Note 10 to the Consolidated Financial Statements). In
1996, an individual and his spouse brought an action in the Supreme Court of
the State of New York, King's County against Advanced MRA Imaging Associates
in Brooklyn, New York, a wholly owned subsidiary of the Company ("MRA
Imaging"), for damages aggregating $12.5 million. The plaintiff alleges
negligent operations, improper supervision and hiring practices and the
failure to operate the premises in a safe manner, as a result of which the
individual suffered physical injury. The Company's general liability and
professional negligence insurance carriers have been notified, and it has been
agreed that the general liability insurance will pursue the defense of this
matter, however, such insurers have reserved the right to claim that the scope
of the matter falls outside the Company's coverage. The parties to this matter
are engaged in discovery. The Company's legal counsel believes that it is more
probable than not that the plaintiffs will not recover the damages sought. The
Company has made no provision in its financial statements for this matter. In
the event the plaintiffs prevail, this matter may have a material adverse
effect on the Company's financial condition, results of operations and cash
flow.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  There were no matters submitted to a vote of security holders during the
last quarter for the year ended December 31, 1996.
 
 
                                      14

 
                                    PART II
 
ITEM 5. FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
 Market Information and Stock Price
 
  The Company's common stock had been traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market, under
the symbol MRII, since November 3, 1995, and on the NASDAQ SmallCap Market
prior thereto. The following table sets forth for the periods indicated below
the high and low bid prices per share of the Common Stock as reported by
NASDAQ:
 


                                                                   HIGH    LOW
                                                                  ------- ------
                                                                    
      1995
        First Quarter............................................ $    4  $2 7/8
        Second Quarter........................................... $ 3 3/4 $3 1/8
        Third Quarter............................................ $ 6 1/2 $3 1/2
        Fourth Quarter........................................... $    8  $4 1/2
      1996
        First Quarter............................................ $ 6 3/8 $4 5/8
        Second Quarter........................................... $10 1/4 $   6
        Third Quarter............................................ $ 9 1/4 $6 1/4
        Fourth Quarter........................................... $11 3/4 $   7

 
  As of the close of business on March 24, 1997, the last reported sales price
per share of the Company's Common Stock was $11 1/8.
 
  There were 469 holders of record of the Company's Common Stock at the close
of business on March 24, 1996. Such number does not include persons, who's
shares are held by a bank, brokerage house or clearing company, but does
include such banks, brokerage houses and clearing companies.
 
  No cash dividends have been paid on the Company's common stock since the
organization of the Company and the Company does not anticipate paying
dividends in the foreseeable future. The payment by the Company of cash
dividends is limited by the terms of the agreement related to its Senior
Notes. The Company currently intends to retain earnings for future growth and
expansion opportunities.
 
  The following is a list of securities sold by the Company during the period
covered by this Report on Form 10-K which, pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), were not registered under the Securities Act:
 
  On January 9, 1996, the Company issued to MRI-CT, Inc. 194,113 shares of the
Company's Common Stock as partial consideration for the acquisition of four
diagnostic imaging centers.
 
  On April 30, 1996, the Company issued to Access Imaging Centers, Inc.
192,063 shares of the Company's Common Stock as partial consideration for the
acquisition of a diagnostic imaging center located in Florida.
 
  On May 1, 1996, the Company issued to Americare Imaging Centers, Inc. and
MRI Associates of Tarpon Springs, Inc. 228,571 shares of the Company's Common
Stock as partial consideration for the acquisition of four diagnostic imaging
centers located in Florida.
 
  On November 25, 1996, the Company issued to Belle Meade MRI Imaging Corp.
and related entities 573,175 shares of the Company's Common Stock as partial
consideration for the acquisition of two diagnostic imaging centers located in
New York.
 
  On December 16, 1996, the Company issued to TME, Inc. 18,868 shares of the
Company's Common Stock as partial consideration for the acquisition of a
diagnostic imaging center located in New Jersey.
 
 
                                      15

 
  
  In addition, on March 1, 1996, the Company issued to a financial advisory
and brokerage firm, five-year warrants to purchase 75,000 shares of the
Company's Common Stock consisting of 37,500 warrants with an exercise price of
$8.00 per share and 37,500 warrants with an exercise price of $12.00 per
share, for financial advisory services rendered to the Company; on May 20,
1996, the Company issued to 712 Advisory Services, Inc., a financial advisory
firm and affiliate of the Company's Chairman of the Board (the "Affiliate"),
five year warrants to purchase 120,000 shares of the Company's Common Stock at
an exercise price of $9.00 per share, for financial advisory services rendered
to the Company in connection with the NMR Acquisition; and on November 1, 1996,
the Company issued to a financial consultant, five year warrants to purchase
5,000 shares of the Company's Common Stock at an exercise price of $9.00 per
share, for financial advisory services rendered to the Company. In all cases,
the exercise prices of the warrants referred to above were no less than, and in
some cases exceeded, the fair market value of the Company's Common Stock on the
date of grant.   
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected consolidated historical financial data of the Company
is derived from the Company's consolidated financial statements for the
periods indicated and, as such, reflects the impact of acquired entities from
the effective dates of such transactions. The information in the table and the
notes thereto should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto.
 


                                    1996     1995     1994      1993      1992
                                  -------- -------- --------  --------  --------
                                                         
STATEMENT OF OPERATIONS DATA:
Net service revenues............  $ 93,785 $ 51,994 $ 45,178  $ 45,242  $ 41,143
Operating income................    14,693    7,507    1,036       287     3,288
Income (loss) from continuing
 operations before extraordinary
 item...........................     7,254    4,143   (1,093)   (2,055)      610
  Income (loss) per share from
   continuing operations before
   extraordinary items:
    Primary.....................  $   0.62 $   0.53   ($0.15)   ($0.32) $   0.11
    Fully diluted...............  $   0.59 $   0.53   ($0.15)   ($0.32) $   0.11
SUPPLEMENTAL DATA:
Number of consolidating imaging
 centers at end of period.......        39       11        8         8         7
Total procedures at consolidated
 imaging centers................   209,970  124,302  101,460    86,686    63,246
Total Assets....................  $164,514 $ 44,136 $ 40,372  $ 40,881  $ 33,993
Long term debt and capital lease
 obligations (excluding current
 portion).......................  $ 21,012 $ 11,157 $ 13,415  $ 19,034  $ 12,765
Convertible Debentures..........  $  6,988 $  4,350

 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
 
 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
    
  Reference is made to Note 1 of the Company's consolidated financial statements
for a definition of net service revenues.
  
  For the year ended December 31, 1996, net service revenues amounted to
$93,785,000 versus $51,994,000 for the year ended December 31, 1995, an increase
of $41,791,000 or 80.4%. Management fee and use revenues for diagnostic imaging
services increased $8,270,000 from $31,174,000 for the year ended December 31,
1995 to $39,445,000 for the year ended December 31, 1996. This increase is
primarily attributable to an increase of $1,326,000 (4.5%) at centers which were
included in revenue for all of 1996 and 1995; $2,752,000 (169%) in revenue at a
center acquired during 1995 and $4,192,000 of revenue contributed by imaging
centers acquired during 1996. Diagnostic imaging patient service revenues
increased $20,631,000 for the year ended December 31, 1996 to $25,317,000 from
$4,686,000 for the year ended December 31, 1995. This increase is attributable
to an increase of $615,000 (19%) at centers which were included in revenue for
all of 1995 and 1996; $2,670,000 (183%) at centers acquired during 1995 and;
$22,032,000 of revenue was contributed by centers acquired during 1996. Staffing
segment revenues increased $12,890,000 (80.3%) primarily due to internal growth
and acquisitions. Internal growth in the staffing segment consisting of the
opening of new per diem offices accounted for approximately $3,200,000 of the
increase in staffing revenue. Increased revenues at per diem offices opened
during 1995, related primarily to improved volume as these offices matured from
their start up phase, accounted for approximately $3,400,000 of the increase in
staffing revenues. Per diem staffing businesses acquired during 1996 contributed
approximately $6,300,000 in revenues during the year.    
    
  Technical services payroll and related costs for the year ended December 31,
1996 amounted to $35,073,000 compared to $19,526,000 for the year ended December
31, 1995, an increase of $15,547,000 or 80%. Of this increase $6,356,000 or 41%
is attributable to costs incurred at imaging centers acquired during 1995 and
1996. $6,569,000 or 42% is attributable to the opening of new per diem offices
and the staffing acquisitions. The remaining $2,622,000 increase is due to the 
maturation of per diem offices opened in 1995.     
               
  Medical supplies amounted to $4,223,000 for the year ended December 31, 1996 
as compared to $2,440,000 for the year ended December 31, 1995, and increase of 
$1,783,000 or 73%. Of this increase $1,725,000 or 97% is attributable to centers
acquired during 1995 and 1996.

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

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

  Administrative costs which include facilities rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers increased approximately $5,853,000 or 96% from $6,084,000 for
the year ended December 31, 1995 to $11,937,000. This increase is primarily due
to costs incurred at imaging centers acquired during 1995 and 1996.  
      
  Other costs increased by $1,924,000 or 134% for the year ended December 31,
1996 to $3,354,000 as compared to $1,430,000 in the prior year primarily due to
an increase in accounting, legal and professional fees for the centers.     

                                      16

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

  Corporate general and administrative expense increased by $2,801,000 or
56.3% from $4,978,000 for the year ended December 31, 1995 to $7,779,000 for
the current year. This increase is primarily due to the expanded business
development activities and the resulting growth experienced during the year in
the imaging and staffing segments, particularly following the NMR Acquisition.
 
  Depreciation and amortization expense was $7,465,000 for the year ended
December 31, 1996 compared to $4,567,000 for the year ended December 31, 1995
or an increase of $2,898,000 (63.5%). The imaging segment accounted for
$2,690,000 or 92.8% of this increase in aggregate depreciation and
amortization expense due primarily to depreciation expense relating to
acquired assets and increased goodwill amortization incurred in connection
with such acquisitions. Equipment depreciation and amortization expense
increased from $3,844,000 in 1995 to $5,463,000 in 1996 while goodwill and
other amortization increased from $1,134,000 to $2,002,000 primarily due to
the NMR Acquisition.
 
  Interest expense for the year ended December 31, 1996 was $2,968,000 as
compared to $1,829,000 for the prior year, an increase of $1,139,000 or 62.3%.
This increase is primarily attributable to an increase in interest on
convertible debentures and lines of credit outstanding during 1996 of $646,000
and increases in interest on debt assumed in acquisitions during 1996 totaling
$764,000 offset by decreases in interest expense relating to scheduled
reductions in outstanding principal balances.
 
  Minority interest amounted to $308,000 for the year ended December 31, 1996
as compared to ($124,000) for the year ended December 31, 1995. The increase
of $432,000 or 348.4% is attributable to increased profitability at the
Company's St. Petersburg, Florida and Yonkers, New York facilities ($383,000)
and the acquisition of the NMR facilities ($49,000).
 
  The provisions for income taxes increased $2,503,000 or 150.9% for the year
ended December 31, 1996 from $1,659,000 to $4,162,000. This increase is
attributable to the increased profitability of the Company's existing and
acquired businesses during 1996 and an increase in the Company's effective
income tax rate. The Company's provision for income taxes resulted in
effective tax rates of 36.6% in 1996 and 28.6% in 1995, respectively. The 1996
provision was higher than the statutory rate due primarily due to state and
local income taxes, net of the Federal tax effect (6.1%), the impact on non-
deductible goodwill (2.3%) and meals and entertainment, offset by other items
amounting to (6.6%). In 1995, the effective tax rate was lower than the
statutory rate primarily to a reduction in the deferred tax asset valuation
allowance (26.2%) offset by other items amounting to 10.7%.
 
  For the reasons described above, the Company's net income for the year ended
December 31, 1996 increased $ 5,564,000 or 329.2% from $1,690,000 for the
period ended December 31, 1995 to $7,254,000. The year ended December 31, 1995
net income includes two non-recurring items relating to losses incurred upon
the sale of the Company's maternity apparel subsidiary.

   Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 
      
  The Company's net service revenues in 1995 and 1994 were $51,994,000 and
$45,179,000, respectively, representing an increase of $6,815,000, or 15%, in
1995. Management fee and use revenues increased $3,257,000 from $27,917,000 for 
the year ended December 31, 1994 to $31,174,000 for the year ended December 31, 
1995.  This increase is attributable to a center acquired during 1995 
($1,627,000) and an increase in existing centers of $1,630,000 resulting from 
higher procedure volume.  Diagnostic imaging patient revenue increased 
$1,995,000 to $4,686,000 for the year ended December 31, 1995 from $2,691,000 
for the prior year.  Of this increase $1,463,000 is attributable to centers 
acquired during 1995 and $532,000 is attributable to increased volume at the 
existing center.      
 
                                      17

 
      
   In addition, revenues from the Company's staffing business increased in 1995
by $1,562,000 due to (i) the opening of 8 per diem staffing offices which
generated approximately $1,263,000 in revenues during 1995 and (ii) a $299,000
increase in travel nursing revenues ($14,870,000 in 1995 versus $14,571,000 in
1994).     
      
  Technical services payroll and related costs in 1995 and 1994 were $19,526,000
and $17,484,000, respectively, representing an increase of $2,042,000 or 12% in
1995. This increase is primarily due to the acquisition of 3 additional centers
in 1995. 
            
  Medical supplies amounted to $2,440,000 for the year ended December 31,1995 as
compared to $2,687,000 for the year ended December 31, 1994. The decrease of
$247,000 or 9% is attributable to an implementation of an operating cost
reduction program by the Company.

  Diagnostic equipment maintenance increased $304,000 or 23% from $1,344,000 for
the year ended December 31, 1994 to $1,648,000 for the year ended December 31,
1995. This increase is primarily due to centers acquired during 1995.

  Independent contractor fees increased $47,000 from $390,000 for the year ended
December 31, 1994 to $437,000 for the year ended December 31, 1995. This 
increase is due to the acquisition of two additional centers in Florida.     

  Administrative costs which include facilities rent, marketing costs and
personnel costs of employees whose activities relate to the operations of
multiple centers in 1995 and 1994 were $6,084,000 and $5,770,000, respectively,
representing an increase of $314,000 or 5%. This increase is primarily due to
the acquisition of 3 additional centers in 1995. 
      
  Other costs in 1995 and 1994 were $1,430,000 and $1,632,000, respectively
representing a decrease of $202,000 or 12% due to the implementation of an
operating cost reduction program by the Company.    

  Provision for uncollectible accounts receivable in 1995 and 1994 was
$3,378,000 and $2,495,000, respectively, representing an increase of $883,000,
or 35%, in 1995. As a percentage of total revenues, provision for
uncollectible accounts receivable increased to 6.5% in 1995, compared to 5.5%
in 1994. The increase is primarily attributable to a change in estimate for
receivables derived from revenues with a higher risk of bad debts.
 
  Corporate general and administrative expenses in 1995 and 1994 were
$4,978,000 and $4,438,000, representing an increase of $540,000, or 12%, in
1995. This increase is attributable to an increase in corporate staff
associated with the Company's increased business and acquisitions and new
business development activity during 1995.
 
  Depreciation and amortization, including the amortization of value of
venture contracts, in 1995 and 1994 was $4,567,000 and $4,844,000,
respectively, representing a decrease of $277,000, or 6%, in 1995. The
decrease in depreciation and amortization was primarily due to the write down
of intangible assets in 1994 of $2,176,000 relating to the value of venture
contracts recognized in connection with the acquisition of the Company in
September, 1990 and goodwill associated with the Company's purchase of the
Livingston Breast Care Center in July, 1992. The decrease in depreciation and
amortization expense was partially offset by the depreciation and amortization
expense related to the three centers acquired by the Company during fiscal
1995.
 
  The provision for minority interest in losses of joint venture of $532,000
in 1994 relates to the Company's Brooklyn facility. Executive severance of
$328,000 in 1994 is reflective of the separation agreements entered into with
two former senior executives of the Company during that year. write-down of
medical diagnostic equipment of $40,000 arose from an adjustment to the
Clifton center's ultrasound unit to its fair market value in February, 1994.
The gain on the disposal of $17,500 resulted from the sale of a MR unit at the
Company's Naples facility in February, 1994 for $100,000. There were no such
charges or gains in 1995.
 
  As a result of the foregoing, operating income in 1995 and 1994 was
$7,507,000 and $1,036,000, respectively, representing an increase of
$6,471,000 in 1995.
 
  Interest expense in 1995 and 1994 was $1,829,000 and $1,693,000,
respectively, representing an increase of $136,000, or 8%, in 1995. The
increase in interest expense is primarily due to the interest on the
convertible debentures which accounted for $279,000 of interest partially
offset by a reduction of notes payable and renegotiation of some capital
leases in the fourth quarter of 1994.
 
  Minority interest in losses of joint ventures and limited partnerships in
1995 and 1994 was $124,000 and $46,000, respectively, an increase of $78,000.
This increase was due primarily to the Company's Brooklyn and St. Petersburg
facilities operating at a combined loss in 1994 of $543,000 compared with net
operating income of $268,000 in 1995 before adjustment for minority partner
capital contributions. The minority interest in losses of joint ventures and
limited partnerships in 1994 was reduced as a result of the Company taking a
charge for the majority of operating losses at the Brooklyn facility in the
amount of $532,000.
 
  The provision for income taxes in 1995 and 1994 was $1,659,000 and $481,000,
respectively, representing an increase of $1,178,000 in 1995. The 1995
provision for income taxes represents federal and state income taxes resulting
from separate company state tax filing requirements is net of reductions in
the deferred tax asset
 
                                      18

 
valuation allowance of $1,508,000, in recognition of profitable operations.
The increase is attributable to the increase in current taxable income during
1995. StarMed operated as a partnership prior to the combination with the
Company in August, 1994; therefore, StarMed had not recorded any income tax
expense or benefits. The pro forma income tax expense (benefit), assuming
StarMed was taxed as a C Corporation, was $660,000 for 1994, excluding the
$297,000 income tax effect for the extraordinary item in 1994.
 
  The extraordinary item, gain on debt restructuring of $762,000 relates to
the restructuring of a note payable in January 1994.
 
  Loss from discontinued operations of $2,453,000 in 1995 was $790,000 higher
than losses of $1,663,000 in 1994. The increase is due primarily to
approximately $1,376,000 of losses incurred upon the sale of Maternity
partially offset by reduced operating losses in 1995.
 
  As a result of the foregoing, net income/(loss) in 1995 and 1994 was
$1,690,000 and ($1,994,000), respectively, representing an increase of
$3,684,000 in net income in 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's cash balances at December 31, 1996 and 1995 were $15,346,000
and $3,935,000, respectively, representing an increase of $11,411,000 or 290%,
in 1996. The Company's working capital position at December 31, 1996 was
$42,776,000 compared to a December 31, 1995 balance of $10,738,000, an
increase of $32,038,000 or 298% during 1996. The increase in working capital
resulted primarily from (i) the net proceeds of $25,164,000 from the Company's
common stock offering, (ii) the net proceeds of $6,533,000 from the issuance
of convertible subordinated debentures and (iii) the merger with NMR offset by
cash paid as consideration for 1996 acquisitions and the assumption of certain
liabilities of acquired companies. Delays in reimbursement of claims from
third party payers, including Medicare, Medicaid, Managed Care/HMO providers
and certain commercial payers, negatively affect the Company's liquidity.
   
  Net cash provided by operating activities for the years ended 1996 and 1995
was $1,450,000 and $2,335,000, respectively, representing a decrease of $885,000
in 1996. The decrease was primarily due to a large increase in accounts
receivable and certain other assets which relate primarily to the Company's
expansion activities offset by increases in net income, non-cash charges and
other liabilities. The Company's average days sales outstanding (on an
annualized basis) in accounts receivable increased from 3.1 months as of
December 31, 1995 to 4.0 months as of December 31, 1996 primarily because of the
significant increase in imaging revenues during 1996. Revenues derived from the
imaging services business generally have a longer payment cycle than staffing
receivables. 
 
  In 1996, net cash used in investing activities totaled $16,703,000 which
includes (i) $8,569,000 expended for the purchase of diagnostic imaging
centers, offset by $2,157,000 of cash acquired in the NMR Acquisition, (ii)
$2,314,000 for the purchase of per diem staffing businesses and (iii) $184,000
for the purchase of limited partnership interests. During 1996, the Company
purchased $6,137,000 of investments, $4,500,000 of these investments were
subsequently set aside (restricted) pursuant to the terms of a letter of
credit issued in connection with an acquisition. An additional $600,000 in
cash was set aside (restricted) pursuant to a letter of credit issued in
conjunction with a consulting agreement to which the Company is a party. The
Company expended $1,070,000 in 1996 for medical diagnostic and office
equipment.
 
  Financing activities provided $27,110,000 in cash during the year ended
December 31, 1996, which consisted of net proceeds of $25,164,000 received
through a public offering of the Company's Common Stock, $6,533,000, net
proceeds from the issuance of subordinated debentures in May 1996, $1,229,000
proceeds from borrrowings during the year (used to purchase equipment for the
imaging centers), $2,022,000 realized from the exercise of stock options and
warrants, offset by $7,773,000 utilized for the repayment of debt and capital
lease obligations and $64,000 used to purchase shares of the Company's Common
Stock.
 
  The Company currently has a capital lease equipment line of credit of
$7,000,000 which was used at December 31, 1996. Medical equipment purchases,
capital improvements, acquisitions and new center development have been funded
primarily through third party capital lease and debt obligations and
internally generated cash flow. The debt is generally collaterized by the
equipment, and usually other assets, of the center. In addition, the Company
has $12,000,000 in working capital lines of credit none of which were used at
December 31, 1996. The Company has agreed that in order to draw on such lines
it must pledge adequate collateral.
 
                                      19

 
  As of December 31, 1996, $6,988,000 aggregate principal amount of
convertible subordinated debentures were outstanding. Of such amount,
$1,370,000 aggregate principal amount of such convertible subordinated
debentures bear interest at 11%, are due 2000 and are convertible into common
stock at anytime by the debenture holder at $4.00 per share. The debentures
automatically convert into common stock at $4.00 per share when, after June 1,
1997, the market price of the stock exceeds $6.00 per share for any 15 day
period. Additionally, $4,800,000 aggregate principal amount of the outstanding
convertible debentures bear interest at 10.5%. Subsequent to year end, the
Company called for a redemption of such debentures at the conversion price of
$6.00 per share on or before March 27, 1997. Also, $818,000 aggregate
principal amount of the outstanding convertible debentures bear interest at
8.0%. Subsequent to year end, the Company called for a redemption of such
debentures at the conversion price of $6.54 per share on or before March 27,
1997.
 
  Subsequent to year end, in February 1997, the Company raised $52,000,000
through the private placement of senior uncollateralized notes which bear
interest at 7.77% and require sinking fund payments commencing in February
2001 with a final maturity in 2005. The proceeds of the senior notes were used
to retire approximately $14,230,000 of existing debt. The Company expects to
utilize the balance of the proceeds to fund future acquisitions.
  
  The Company believes that funds available from these capital raising
activities together with the existing cash and cash equivalents, short-term
investments and cash generated from operating activities will be sufficient to
meet the needs of its current operations, any acquisitions of additional
limited partnership interests in the Company's centers, anticipated capital
expenditures and scheduled debt repayments for the next twelve months and
on a long term basis.   
  
  In addition, management believes and continues to believe that there are and
will continue to be opportunities to acquire additional diagnostic imaging
centers, as well as companies which own multiple centers. Management reviews
proposals to acquire additional centers and evaluates these opportunities on the
basis of the price at which it believes the centers can be acquired, relevant
demographic characteristics, competitive centers, physician referral patterns,
location and other factors. The Company is committed to a substantial
acquisition strategy based upon its assessment of strategic markets and
opportunities resulting in the acquisition of fifteen imaging centers, in six
separate transactions subsequent to December 31, 1996. Management intends to
pursue the acquisition of additional centers if its analysis of these factors
indicate the Company would receive a favorable rate of return from investing in
these centers. Any centers that are acquired can be expected to involve the
payment of the purchase price in either cash, notes or shares of common stock or
a combination thereof. No assurances can be given that additional centers will
be acquired or as to the terms thereof. In the event that the Company engages in
the acquisition of additional centers, it may be required to raise additional
long-term capital through the issuance of debt or equity securities. No
assurance can be given that such capital will be available on terms acceptable
to the Company. The unavailability of capital for this purpose would adversely
affect the Company's ability to acquire additional centers.   
 
OTHER
  
  The Company believes that its imaging business is generally unaffected by
seasonality. The Company's staffing business usually experiences lower revenues
during the third quarter due to reduced activity during the summer months.   
 
  The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Management is aware
of inflationary expectations and growing health care costs, and believes that
the Company may not be able to raise the prices for its diagnostic imaging
procedures by an amount sufficient to offset cost inflation. The Company has
responded to these concerns in the past by increasing the volume of its
business. In addition, current discussions within the Federal government
regarding national health care reform are emphasizing containment of health
care costs as well as expansion of the number of eligible parties. The
implementation of this reform could have a material effect on the financial
results of the Company.
 
  In the first quarter of 1996, the Company adopted Financial Accounting
Standards 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("Statement No. 121"), which
 
                                      20

 
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. No adjustments were required
pursuant to adoption of Statement No. 121 by the Company.
 
  In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"), was issued which established standards
for computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company is currently evaluating the effect of
this standard on earnings per share.
 
  In October 1995 Statement of Financial Accounting Standards No. 123,
"Accounting and Disclosure of Stock-Based Compensation" ("Statement No. 123")
was issued. It encourages but does not require companies to recognize stock
awards based on their fair value at the date of grant. The Company currently
follows, and expects to continue to follow, the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
"APB 25", and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of the company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Although the Company is
permitted to continue to follow the provisions of APB 25 under Statement No.
123, certain pro forma disclosure has been made in the notes as if the Company
had accounted for its stock options under the Statement No. 123 fair value
method.
 
  Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. In addition, the Company,
from time to time, makes forward-looking public statements concerning its
expected future operations and performance and other developments. Such
forward-looking statements are necessarily estimates reflecting the Company's
best judgement based upon current information and involve a number of risks
and uncertainties, and there can be no assurance that other factors will not
affect the accuracy of such forward-looking statements. While it is impossible
to identify all such factors, factors which could cause actual results to
differ materially from those estimated by the Company include, but are not
limited to, risks associated with the acquisition of existing imaging centers,
management of growth, government regulation, limitations and delays in
reimbursement, the Company's ability to obtain and retain favorable
arrangements with third party payers, as well as operating risks, general
conditions in the economy and capital markets, and other factors which may be
identified from time to time in the Company's Securities and Exchange
Commission filings and other public announcements.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  Registrant's response to this item is incorporated herein by reference to
the consolidated financial statements and consolidated financial statement
schedules and the report thereon of independent accountants, listed in Item
14(a)1 and (2) and appearing after the signature page to this Annual Report on
Form 10-K.
 
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
  On February 5, 1997, the Company dismissed Ernst & Young LLP and engaged
Coopers & Lybrand L.L.P. as its independent accountant to audit the Company's
consolidated financial statements. The decision to change the Company's
independent accountant was approved by the Board of Directors of the Company
at the recommendation of the Company's audit committee.
 
  In neither of the past two fiscal years of the Company have the reports of
Ernst & Young LLP on the consolidated financial statements of the Company
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting principles. In neither
of the past two fiscal years of the Company nor in the subsequent interim
period preceding the dismissal of Ernst & Young LLP were there any
disagreements with Ernst & Young, LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to the satisfaction of Ernst & Young LLP, would have
caused Ernst & Young LLP to make a reference thereto in their report.
 
                                      21

 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
 
  The directors, executive officers and certain key employees of the Company
are as follows:
 


NAME                     AGE POSITION
- ----                     --- --------
                       
Gary N. Siegler......... 35  Chairman of the Board
William D. Farrell...... 34  President, Chief Operating Officer and Director
John P. O'Malley III.... 35  Senior Vice-President--Finance and Chief Financial Officer
Gregory Mikkelsen....... 50  President and Chief Operating Officer of StarMed
Gerald H. Allen......... 50  Senior Vice-President--New York and Chicago Operations
Carl Larson............. 43  Senior Vice-President--New Jersey Operations
Daniel F. Bafia......... 38  Senior Vice-President--Southeast Operations
Robert L. Farrell....... 32  Vice-President--Business Development
Michael J. Drumgoole.... 50  Vice-President--Sales and Marketing
Stephen M. Davis........ 42  Director and Secretary
Gary L. Furhman......... 35  Director
John H. Josephson....... 35  Director
Neil H. Koffler......... 30  Director

 
  Gary N. Siegler has served as Chairman of the Board of Directors of the
Company since 1990. Mr. Siegler is a co-founder and, since January 1989, has
been President of Siegler, Collery & Co. , a New York-based investment firm
("Siegler Collery"). Mr. Siegler is an executive officer of the general
partner of The SC Fundamental Value Fund, L.P. ("Fundamental Value Fund"), a
fund investing in marketable securities, and an executive officer of SC
Fundamental Value BVI, Inc. ("Fundamental Value BVI"), the investment advisor
to an off- shore fund investing in marketable securities. Mr. Siegler serves
as the Chairman of the Board of Directors of National R.V. Holdings, Inc., a
manufacturer of motorhomes and other recreational vehicles.
 
  William D. Farrell has been a director of the Company since November 1995
and has been the Company's President since September 1996 and served as Co-
President since August 1994 and Chief Operating Officer from April 1994. From
May 1986 to April 1994, Mr. Farrell served in various executive capacities
with the Company. Mr. Farrell is a Certified Public Accountant.
 
  John P. O'Malley III was appointed Senior Vice President-Finance and Chief
Financial Officer in September 1996. Prior thereto, Mr. O'Malley was Executive
Vice President-Finance and Chief Financial Officer of NMR since December 1992
and was initially employed by NMR in May 1992. From August 1984 to May 1992,
Mr. O'Malley was employed by Ernst & Young, LLP, a public accounting firm, and
its predecessors. Mr. O'Malley is a Certified Public Accountant.
 
  Gregory Mikkelsen joined StarMed as President and Chief Operating Officer in
August 1996. Prior thereto, Mr. Mikkelsen was President and Chief Executive
Officer of Medical Recruiters of America, Inc. Mr. Mikkelsen has held senior
executive positions with Baxter Health Care and the Norrell Corporation.
 
  Gerald H. Allen is Senior Vice President-New York and Chicago Area
Operations of the Company and since April 1995 has also held the positions of
Executive Vice President-Regional Operations and Senior Vice President-
Development. Mr. Allen was also employed by the Company in several executive
capacities from 1984 to 1993. From 1993 through 1995, Mr. Allen was the
Executive Vice President and Chief Financial Officer of Prime Capital
Corporation, a merchant banking company.
 
                                      22

 
  Carl Larson is Senior Vice President--New Jersey Operations of the Company.
Prior to Mr. Larson's employment by the Company, Mr. Larson managed a 13 site
privately operated radiology practice in New York. Mr. Larson is a licensed
radiological technologist and, in prior positions, spent eight years in
hospital-based radiological administration and five years as a staff member at
the American College of Radiology.
 
  Daniel F. Bafia is Senior Vice President--Southeast Operations of the
Company. Mr. Bafia joined the Company in 1992 and prior thereto had over 10
years experience developing and managing radiation therapy and diagnostic
imaging centers for public and private companies and hospitals.
 
  Robert L. Farrell is Vice President--Business Development of the Company and
over the past decade has held a number of executive positions with the
Company, including Manager of Corporate Accounting, Controller and Director of
National Operations. Mr. Farrell is the brother of William Farrell.
 
  Michael J. Drumgoole is Vice President--Sales and Marketing of the Company
and has held such position since 1993. Mr. Drumgoole has over 20 years in
medical sales and has held various sales, sales training and sales management
positions within the healthcare industry.
 
  Stephen M. Davis has been a director and Secretary of the Company since 1992
and is a member of the Company's Audit Committee. For more than the past five
years, Mr. Davis has been a partner of the law firm Werbel & Carnelutti, A
Professional Corporation. Mr. Davis is a director of National R.V. Holdings,
Inc.
 
  Gary L. Fuhrman has been a director of the Company since 1992 and is a
member of the Company's Audit Committee. Mr. Fuhrman has been a director and
Senior Vice President of Arnhold and S. Bleichroeder, Inc., an investment
banking firm, since March 1995 and January 1993, respectively, and a vice
president of such firm for more than five years prior therto. Mr. Fuhrman is a
director of National R.V. Holdings, Inc.
 
  John H. Josephson has been a director of the Company since July 1995. Mr.
Josephson is a Vice President and Director of Allen & Company Incorporated, an
investment banking firm, and has been with such firm since 1987. Mr. Josephson
is also a director of Norwood Promotional Products, Inc.
 
  Neil H. Koffler has been a director of the Company since November 1995 and
is a member of the Company's Audit Committee. Mr. Koffler has been employed by
Siegler Collery since 1989. Mr. Koffler is an executive officer of Fundamental
Value Fund and Fundamental Value BVI. Mr. Koffler is a director of National
R.V. Holdings, Inc.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required for this Item will be set forth in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1996, and which information is incorporated herein by
reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required for this Item will be set forth in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1996, and which information is incorporated herein by
reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
  Financial advisory services are provided annually to the Company by the
Affiliate and the fees for such services amounted to $102,084 for fiscal 1996.
The Company also paid transaction related advisory fees and expenses to the
Affiliate of $362,500 and issued to the Affiliate warrants to purchase 120,000
shares of the Company's Common Stock exercisable at $9.00 per share for services
rendered to the Company, including services in connection with the NMR
Acquisition, the public offering of the Company's Common Stock in October 1996
and other transactions. 
  
  Werbel & Carnelutti, a law firm in which Mr. Stephen M. Davis, a Director, is 
a partner, provided legal services to the Company during fiscal 1996.  
 

                                      23

 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) Exhibits and Financial Statements:
 
  1. Financial Statements:
 
    The following consolidated financial statements and consolidated
  financial statement schedule of Medical Resources, Inc. and the report
  thereon of independent certified public accountants are filed as part of
  this Annual Report on Form 10-K and are incorporated by reference in Item
  8:
 
    (i) Reports of Independent Accountants.
 
    (ii) Consolidated Balance Sheets as of December 31, 1996 and 1995.
 
    (iii) Consolidated Statements of Operations for the years ended
          December 31, 1996, 1995 and 1994.
 
    (iv) Consolidated Statements of Cash Flows for the years ended December
         31, 1996, 1995 and 1994.
 
    (v) Consolidated Statements of Changes in Stockholder's Equity for the
        years ended December 31, 1996, 1995 and 1994.
 
    (vi) Notes to Consolidated Financial Statements
 
  2. Financial Statement Schedule
 
    The following consolidated financial statement schedule of Medical
  Resources, Inc. and subsidiaries is submitted herewith in response to Item
  14(d)2:
 
                Schedule II--Valuation and Qualifying Accounts
 
    All other schedules for which provision is made in the applicable
  accounting regulation of the Securities and Exchange Commission are not
  required under the related instructions or are inapplicable and, therefore,
  have been omitted
 
  3. Exhibits
 
    See the accompanying Exhibit Index which precedes the Exhibits filed with
  this Annual Report on Form 10-K.
 
(b) Reports on Form 8-K
 
  On December 6, 1996, the Company filed a current Report on Form 8-K
reporting, under Item 5 hereof, that the Company, through an indirect wholly
owned subsidiary, consummated the acquisition of the business assets of two
entities, consisting primarily of two diagnostic imaging centers located in
Long Island, New York.
 
                                      24

 
                                 EXHIBIT INDEX
 
  
  2.1 Agreement and Plan of Merger dated May 20, 1996, by and among NMR of
      America, Inc., MRI Sub, Inc. and the Company.*
  3.1 Company's Certificate of Incorporation, as amended to date.**
  3.2 Company's By-Laws, as amended.**
  4.1 Common Stock Specimen Certificate.**
  4.2 Shareholder Rights Plan of the Company, dated September 15, 1996.*
 10.1 Note Purchase Agreement ($52,000,000 7.77% Senior Notes) between the
      Company and the Purchasers listed therein, dated as of February 20,
      1997.***
 10.2 Form of 1992 Stock Option Plan.**
 10.3 1995 Stock Option Plan of the Company.****
 10.4 1996 Stock Option Plan of the Company.#
 10.5 1996 Stock Option Plan B of the Company.#
 10.6 Employment Agreement, dated September 30, 1994 between Medical Resources,
      Inc. and
      William D. Farrell.****
 10.7 Amendment, dated August 1, 1995, to Employment Agreement between Medical
      Resources, Inc.
      and William D. Farrell.****
 10.8 Amended and restated Employment Agreement, dated January 1, 1997 between
      the Company and William D. Farrell.#
 10.9 Non-Competition and Consulting Agreement, dated May 20, 1996, between the
      Company and
      John P. O'Malley III.*****
 11   Computation of Earnings per Share.#
 16   Letter re: Change in Certifying Accountants.******
 21.1 List of Subsidiaries.#
 27.1 Financial Data Schedule.#
 99.1 Important Factors Regarding Forward-Looking Statements.#
     
       
- --------
     * Incorporated herein by reference from the Company's Current Report on
       Form 8-K dated, September 13, 1996
    ** Incorporated herein by reference from the Company's Registration
       Statement on Form S-1 (Registration No. 33-48848).
   *** Incorporated herein by reference from the Company's Current Report on
       Form 8-K dated, March 4, 1997.
  **** Incorporated herein by reference from the Company's Annual Report on
       Form 10-K for the year ended December 31, 1995.
 ***** Incorporated herein by reference from the Company's Registration
       Statement on Form S-4 (Registration No. 333-09155).
****** Incorporated herein by reference from the Company's Current Report on
       Form 8-K dated, February 5, 1997.
       # Previously filed       
 
                                      25

 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          Medical Resources Inc.
 
                                                  /s/ William D. Farrell
                                          By: _________________________________
                                               PRESIDENT AND CHIEF OPERATING
                                               OFFICER (PRINCIPAL EXECUTIVE
                                                   OFFICER) AND DIRECTOR
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES AND ON MARCH 31, 1997.
 
              SIGNATURE                     CAPACITY IN WHICH
                                                 SIGNED
 
         /s/ Gary N. Siegler           Chairman of the
- -------------------------------------   Board of
           GARY N. SIEGLER              Directors
 
       /s/ William D. Farrell          President and
- -------------------------------------   Chief Operating
         WILLIAM D. FARRELL             Officer
                                        (Principal
                                        Executive
                                        Officer) and
                                        Director
 
      /s/ John P. O'Malley, III        Senior Vice-
- -------------------------------------   President-
        JOHN P. O'MALLEY, III           Finance and
                                        Chief Financial
                                        Officer
                                        (Principal
                                        Accounting
                                        Officer)
 
        /s/ Stephen M. Davis           Director
- -------------------------------------
          STEPHEN M. DAVIS
 
         /s/ Gary L. Fuhrman           Director
- -------------------------------------
           GARY L. FUHRMAN
 
        /s/ John H. Josephson          Director
- -------------------------------------
          JOHN H. JOSEPHSON
 
         /s/ Neil H. Koffler           Director
- -------------------------------------
           NEIL H. KOFFLER
 
 
                                      26

 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of Medical Resources, Inc.
 
  We have audited the accompanying consolidated balance sheet of Medical
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
the related consolidated statement of operations, stockholders' equity, and
cash flows and the financial statement schedule listed in the index at Item
14(a) for the year ended December 31, 1996. These financial statements and the
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Medical Resources, Inc. and Subsidiaries at December 31, 1996 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
 
                                          Coopers & Lybrand L.L.P.
 
Parsippany, New Jersey
March 28, 1997
 
                                      27

 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Board of Directors
and Stockholders of Medical Resources, Inc.
     
  We have audited the acompanying consolidated balance sheet of Medical
Resources, Inc. (the "Company") as of December 31, 1995 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for the two years then ended. Our audits also included the
financial statement schedule for 1995 listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of two predecessor partnerships of Maternity Resources,
Inc., a wholly-owned subsidiary, which statements reflect a loss from operations
of discontinued business of $1,633,000 in 1994. Those statements were audited by
other auditors whose reports have been furnished to us, and in our opinion,
insofar as it relates to the data included for the two predecessor partnerships
of Maternity Resources, Inc., is based solely on the reports of the other
auditors.      

  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 consolidated financial
statements. An audit also includes assessing the accounting principles used
and signifcant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits and
the reports of the other auditors provide a reasonable basis for our opinion.
 
  In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medical Resources,
Inc., at December 31, 1995, and the consolidated results of its operations and
its cash flows for the two years then ended in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
                                          /s/ Ernst & Young LLP
 
Tampa, Florida
February 29, 1996
 
                                      28

 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Partners of Maternity
 Retail Partners, L.P.:
 
  We have audited the accompanying consolidated balance sheet of Maternity
Retail Partners, L.P. as of January 29, 1995 and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash
flows for the two years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
 
  As discussed in Note 1, on February 24, 1995, the partners of the
Partnership sold their partnership interests to an affiliate of the
Partnership. On November 14, 1995 the affiliate sold the Partnership to an
unaffiliated third party. On November 22, 1995 the Partnership filed a
Voluntary Chapter 11 Bankruptcy Petition in Federal Court and is currently in
liquidation.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maternity
Retail Partners, L.P. as of January 29, 1995 and the results of its operations
and its cash flows for the two years then ended in conformity with generally
accepted accounting principles.
 
  The accompanying financial statements for January 29, 1995 have been
prepared assuming that the Partnership would continue as a going concern. The
financial statements do not include any adjustments that might result from the
liquidation of the Partnership.
 
  As discussed in Note 2, effective January 31, 1994, the Partnership changed
its method of accounting for lease acquisition costs.
 
                                          /s/ Kempisty & Company
                                          Certified Public Accountants, P.C.
 
New York, New York
February 9, 1996
 
                                      29

 
                         INDEPENDENT AUDITORS' REPORT
 
To the Partners
Kik Kin, L.P.
New York, New York
 
  We have audited the accompanying consolidated balance sheets of Kik Kin L.P.
as of December 31, and January 1, 1994 and the related statements of
operations, changes in partners' capital and cash flows for the years then
ended. 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 provides 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 Kik Kin, L.P.
as of December 31 and January 1, 1994 and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
 
                                          /s/ Dixon, Odom & Co., LLP
 
February 21, 1995
    
Greensboro, NC      
 
                                      30

 
                            MEDICAL RESOURCES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 


                                                     DECEMBER 31,  DECEMBER 31,
                                                         1996          1995
                                                     ------------  ------------
                                                             
                       ASSETS
Current assets:
  Cash and cash equivalents......................... $ 15,346,254  $ 3,934,677
  Short-term investments............................    1,662,600
  Restricted short-term investments.................    4,500,000
  Accounts receivable, net..........................   39,878,380   13,837,637
  Other receivables.................................    2,290,825      477,062
  Prepaid expenses..................................    3,715,092    1,074,459
  Deferred tax assets, net..........................    3,354,000    1,871,397
                                                     ------------  -----------
    Total current assets............................   70,747,151   21,195,232
Medical diagnostic and office equipment, net........   24,397,077   11,530,159
Goodwill, net.......................................   62,638,656    9,122,663
Other assets........................................    3,170,684    1,497,207
Deferred tax assets, net............................    2,351,089      533,301
Restricted cash.....................................    1,045,000
Value of venture contracts..........................      164,155      257,261
                                                     ------------  -----------
    Total assets.................................... $164,513,812  $44,135,823
                                                     ============  ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of notes and mortgage payable..... $  6,728,668  $   957,884
  Current portion of obligations under capital
   leases...........................................    5,991,626    3,244,652
  Accounts payable and accrued expenses.............   13,070,370    4,602,926
  Other current liabilities.........................      116,847    1,405,875
  Income taxes payable..............................    2,063,860      245,899
                                                     ------------  -----------
    Total current liabilities.......................   27,971,371   10,457,236
Notes and mortgage payable..........................   12,637,926    4,448,974
Obligations under capital leases....................    8,373,681    6,707,650
Convertible debentures..............................    6,988,089    4,350,000
Other long-term liabilities.........................    2,158,771    1,205,627
                                                     ------------  -----------
    Total liabilities...............................   58,129,838   27,169,487
                                                     ------------  -----------
Stockholders' equity:
  Common stock, $.01 par value, 50,000,000 shares
   authorized, 18,593,900 issued and 18,326,400
   outstanding at December 31, 1996 and 7,697,500
   issued and 7,442,500 outstanding at December 31,
   1995.............................................      185,939       76,975
  Common stock to be issued; 600,000 shares of
   common stock.....................................    1,721,250    1,721,250
  Additional paid-in capital........................  102,927,874   20,834,922
  Unrealized appreciation of investments............       25,889
  Retained earnings/(deficit).......................    2,955,530   (4,298,678)
  Less 267,500 and 255,000 common shares in
   treasury, at cost, at December 31, 1996 and 1995.   (1,432,508)  (1,368,133)
                                                     ------------  -----------
    Total stockholders' equity......................  106,383,974   16,966,336
                                                     ------------  -----------
    Total liabilities and stockholders' equity...... $164,513,812  $44,135,823
                                                     ============  ===========

 
          See accompanying notes to consolidated financial statements.
 
                                      F-1

 
                            MEDICAL RESOURCES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                        FOR THE YEAR ENDED DECEMBER 31,
 
    
   
                                              1996        1995         1994
                                           ----------- -----------  -----------
                                                           
Net service revenues.....................  $93,785,117 $51,993,758  $45,178,945
                                           ----------- -----------  -----------
Imaging center and staffing operating 
  costs:
 Technical services payroll and related 
  expenses                                  35,073,444  19,525,611   17,483,695
 Medical supplies                            4,223,171   2,439,837    2,687,319
 Diagnostic equipment maintenance            3,274,403   1,647,976    1,344,422
 Independent contractor fees                 1,201,590     437,131      389,985
 Administrative expenses                    11,937,222   6,083,630    5,769,982
 Other costs                                 3,354,326   1,429,611    1,632,047
Provision for uncollectible accounts
 receivable..............................    4,783,306   3,377,862    2,495,413
Corporate general and administrative.....    7,779,385   4,978,045    4,438,348
Depreciation and amortization............    7,465,475   4,567,144    4,844,265
Write-down of value contracts and
 intangible assets.......................                             2,176,118
Provision for minority interest in losses
 of joint venture........................                               531,543
Executive severance......................                               327,679
Write-down of medical diagnostic
 equipment...............................                                40,000
Gain on disposal of medical diagnostic
 equipment...............................                               (17,500)
                                           ----------- -----------  -----------
   Operating income......................   14,692,795   7,506,911    1,035,629
Interest expense.........................    2,968,206   1,829,017    1,692,931
                                           ----------- -----------  -----------
Income (loss) from continuing operations
 before minority interest, income taxes
 and extraordinary item..................   11,724,589   5,677,894     (657,302)
Minority interest........................      308,381    (124,085)     (46,134)
                                           ----------- -----------  -----------
Income (loss) from continuing operations
 before income taxes and extraordinary
 item....................................   11,416,208   5,801,979     (611,168)
Income taxes.............................    4,162,000   1,659,111      481,436
                                           ----------- -----------  -----------
Income (loss) from continuing operations
 before extraordinary item...............    7,254,208   4,142,868   (1,092,604)
                                           ----------- -----------  -----------
Discontinued operations, net of tax:
 Loss from operations of discontinued
  operations.............................               (1,076,644)  (1,663,426)
 Loss on sale of discontinued business...               (1,376,000)
                                           ----------- -----------  -----------
 Loss from discontinued operations.......               (2,452,644)  (1,663,426)
Income (loss) before extraordinary item..    7,254,208   1,690,224   (2,756,030)
Extraordinary item:
 Debt extinguishment.....................                               761,683
                                           ----------- -----------  -----------
Net income (loss)........................  $ 7,254,208 $ 1,690,224  $(1,994,347)
                                           =========== ===========  ===========
Income (loss) per common share:
 Primary income (loss) per share:
 Income (loss) from continuing
  operations before extraordinary item...  $      0.62 $      0.53  $     (0.15)
 Discontinued operations.................                    (0.31)       (0.23)
 Extraordinary item......................                                  0.10
                                           ----------- -----------  -----------
 Net income (loss) per share.............  $      0.62 $      0.22  $     (0.28)
                                           =========== ===========  ===========
Weighted average number of shares........   11,670,000   7,785,000    7,097,500
                                           =========== ===========  ===========
 Fully diluted income (loss) per share:
 Income (loss) from continuing
  operations before extraordinary item...  $      0.59 $      0.53  $     (0.15)
 Discontinued operations.................                    (0.31)       (0.23)
 Extraordinary item......................                                  0.10
                                           ----------- -----------  -----------
Net income (loss) per share..............  $      0.59 $      0.22  $     (0.28)
                                           =========== ===========  ===========
Weighted average number of shares........   12,903,000   7,785,000    7,097,500
                                           =========== ===========  ===========
Unaudited pro forma data:
Loss from continuing operations before
 income taxes and extraordinary item.....                           $  (611,168)
Income taxes.............................                               660,061
                                                                    -----------
Loss from continuing operations before
 extraordinary item......................                            (1,271,229)
Discontinued operations, net of taxes....                            (1,014,690)
                                                                    -----------
Loss before extraordinary item...........                            (2,285,919)
Extraordinary items, net of taxes........                               464,627
                                                                    -----------
Net loss.................................                           $(1,821,292)
                                                                    ===========
Pro forma loss per common share:
Loss from continuing operations before
 extraordinary items.....................                           $     (0.18)
Discontinued operations..................                                 (0.14)
Extraordinary item.......................                                  0.07
                                                                    -----------
 Net loss................................                           $     (0.25)
                                                                    ===========
     
 
          See accompanying notes to consolidated financial statements.
 
                                      F-2

 
                            MEDICAL RESOURCES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                        FOR THE YEAR ENDED DECEMBER 31,
 


                                            1996         1995         1994
                                        ------------  -----------  -----------
                                                          
Cash flows from operating activities:
Net income (loss)...................... $  7,254,208  $ 1,690,224  $(1,994,347)
                                        ------------  -----------  -----------
Adjustments to reconcile net income
 (loss) to net cash provided by
 operating activities:
  Loss on sale of discontinued
   business............................                 1,376,000
  Deferred income tax provision........     (841,000)  (2,160,698)    (244,000)
  Extraordinary gain on debt
   extinguishment......................                               (761,683)
    Depreciation and amortization......    7,465,475    4,567,144    4,844,265
    Provision for uncollectible
     accounts receivable...............    4,783,306    3,377,862    2,495,413
  Write-down of medical diagnostic
   equipment...........................                                 40,000
  Write-down of value of venture
   contracts and intangible assets.....                              2,176,118
  Gain on disposal of medical
   equipment...........................       (3,933)                  (17,500)
  Equity in earnings of joint venture..                                  5,120
    Minority interest in (losses) of
     joint venture and limited
     partnerships, net of
     distributions.....................       98,475      122,114      (46,134)
  Provision for minority interest in
   losses of joint venture.............                                531,543
Changes in operating assets and
 liabilities:
    Accounts receivable................  (14,386,434)  (6,308,829)  (2,607,927)
    Due from joint ventures and limited
     partnerships......................                    27,426       18,113
    Other receivables..................   (1,813,763)    (170,755)    (698,991)
    Prepaid expenses...................   (1,501,981)    (613,913)     (20,445)
    Other assets.......................   (1,494,826)     (27,117)     376,317
    Accounts payable and accrued
     expenses..........................    2,081,400        3,818     (115,512)
    Other current liabilities..........   (1,509,758)     567,760      268,195
    Income taxes payable...............    2,185,961     (322,730)     568,629
    Other long-term liabilities........     (867,575)     206,342      (27,771)
                                        ------------  -----------  -----------
      Total adjustments................   (5,804,653)     644,424    6,783,750
                                        ------------  -----------  -----------
Net cash provided by operating
 activities............................    1,449,555    2,334,648    4,789,403
                                        ------------  -----------  -----------
Cash flows from investing activities:
    (Purchase) sale of short-term
     investments.......................   (1,636,711)     599,736     (599,736)
    Proceeds from sale of equipment....       12,600
    Change in net assets of
     discontinued business.............                 1,396,250    1,663,426
    Purchase of PCC, Inc. .............                (1,763,832)
    Purchase of NurseCare Plus, Inc. ..   (1,263,991)
    Purchase of MRI-CT, Inc. ..........     (553,245)
    Purchase of Centereach Resources,
     Inc. .............................   (3,100,000)
    Purchase ofAmericare Imaging
     Centers, Inc. ....................   (1,500,000)
    Purchase of Access Imaging Center,
     Inc. .............................   (1,300,000)
    Purchase of WeCare--Allied Health
     Care, Inc. .......................   (1,049,618)
    Purchase of NMR of America, Inc.,
     net of cash acquired..............    2,157,379
    Purchase of Newark center..........     (215,675)
    Purchase of Long Island centers....   (1,900,000)
    Purchase of limited partnership
     interests.........................     (184,000)
    Purchase of restricted short-term
     investments.......................   (4,500,000)
    Restricted cash....................     (600,000)
    Proceeds from sale of medical
     equipment.........................                                100,000
    Purchase of medical diagnostic and
     office equipment..................   (1,069,870)    (877,018)    (563,074)
                                        ------------  -----------  -----------
      Net cash (used in) provided by
       investing activities............  (16,703,131)    (644,864)     600,616
                                        ------------  -----------  -----------

 
          See accompanying notes to consolidated financial statements.
 
                                      F-3

 
                            MEDICAL RESOURCES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                        FOR THE YEAR ENDED DECEMBER 31,
 


                                              1996         1995         1994
                                           -----------  -----------  -----------
                                                            
Cash flows from financing activities:
  Proceeds from issuance of Common Stock.   25,944,000
  Stock issuance cost....................     (779,800)
  Principal payments under capital lease
   obligations...........................   (4,805,393)  (3,043,061)  (3,466,647)
  Principal payments on notes payable....   (2,967,903)  (1,118,859)  (1,006,722)
  Capital distributions..................                                (41,886)
  Proceeds from borrowings...............    1,229,096
  Proceeds from convertible debentures...    6,532,965    4,102,500
  Purchase of treasury stock.............      (64,375)  (1,368,133)
  Purchase of Maternity preferred stock..                  (268,674)
  Proceeds from exercises of options.....    2,021,563
                                           -----------  -----------  -----------
    Net cash provided by (used in)
     financing activities................   27,110,153   (1,696,227)  (4,515,255)
                                           -----------  -----------  -----------
Net increase (decrease) in cash and cash
 equivalents.............................   11,856,577       (6,443)     874,764
Cash and cash equivalents at beginning of
 year....................................    3,934,677    3,941,120    3,066,356
Reclassification of prior year restricted
 cash....................................     (445,000)
                                           -----------  -----------  -----------
Cash and cash equivalents at end of year.  $15,346,254  $ 3,934,677  $ 3,941,120
                                           ===========  ===========  ===========
Cash paid during the year:
  Income taxes...........................  $ 3,440,299  $ 1,982,000  $   159,000
  Interest...............................  $ 2,638,545  $ 1,894,000  $ 1,695,000
Supplemental schedule of non-cash
 activities:
Capital lease obligation incurred for the
 use of equipment........................  $ 2,469,100  $ 1,159,000  $   892,000
Capital lease obligations assumed in
 connection with acquisitions............  $ 6,749,298
Notes payable obligations assumed in
 connection with acquisitions............  $13,850,341
Notes and mortgage payable issued in
 connection with acquisitions............  $ 1,848,202
Conversion of subordinated debentures to
 Common Stock............................  $ 5,735,000
Reclassification of debt to equity.......               $ 1,022,000  $   469,000
Refinancing of assets under capital
 lease...................................                            $ 1,079,000
Purchase of minority interest in limited
 partnership for Common Stock............               $    45,000
Issuances of Common Stock in connection
 with acquisitions.......................  $48,325,000  $ 3,443,000
Issuance of warrants in connection with
 acquisitions............................  $   974,879

 
          See accompanying notes to consolidated financial statements.
 
                                      F-4

 
                            MEDICAL RESOURCES, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  DECEMBER 31,
 


                                                 COMMON              ADDITIONAL    RETAINED     TREASURY      UNREALIZED
                                       COMMON   STOCK TO  PREFERRED   PAID-IN      EARNINGS      SHARES     APPRECIATION OF
                           TOTAL       STOCK   BE ISSUED    STOCK     CAPITAL      (DEFICIT)     AT COST      INVESTMENTS
                        ------------  -------- ---------- --------- ------------  -----------  -----------  ---------------
                                                                                    
Balance at December
 31, 1993.............  $ 12,939,234  $ 70,975              $ 25    $ 17,390,888  $(4,522,654)
Distributions.........       (41,886)                                                 (41,886)
Capital contributions
 including debt
 conversions of
 $469,249.............       969,249                                     969,249
Net loss..............    (1,994,347)                                              (1,994,347)
                        ------------  -------- ----------   ----    ------------  -----------  -----------      -------
Balance at December
 31, 1994.............    11,872,250    70,975                25      18,360,137   (6,558,887)
Maternity debt
 forgiveness treated
 as a capital
 contribution.........     1,022,184                                   1,022,184
Maternity short period
 (1/1/95-1/31/95).....       569,985                                                  569,985
Redemption by Mater-
 nity of its preferred
 stock................      (268,650)                                   (268,650)
Purchase of Ft. Myers
 centers for 1,200,000
 shares of Common
 Stock................     3,448,500     6,000 $1,721,250              1,721,250
Preferred stock pay-
 out..................           (24)                        (25)              1
Purchase of treasury
 shares...............    (1,368,133)                                                          $(1,368,133)
Net income............     1,690,224                                                1,690,224          --
                        ------------  -------- ----------   ----    ------------  -----------  -----------      -------
Balance at December
 31, 1995.............    16,966,336    76,975  1,721,250             20,834,922   (4,298,678)  (1,368,133)
Purchase of New York
 centers for 194,113
 shares of Common
 Stock................       913,750     1,941                           911,809
Purchase of Tampa
 centers for 228,571
 shares of Common
 Stock................     1,275,000     2,286                         1,272,714
Purchase of Clearwater
 center for 192,063
 shares of Common
 Stock................     1,445,000     1,921                         1,443,079
Purchase of NMR of
 America, Inc. centers
 for 4,456,500 shares
 of Common Stock......    39,604,820    44,565                        39,560,255
Warrants issued in
 connection with NMR
 Acquisition..........       974,879                                     974,879
Purchase of Long
 Island centers for
 533,175 shares of
 Common Stock.........     4,500,000     5,732                         4,494,268
Purchase of Newark
 center for 18,868
 shares of
 unregistered Common
 Stock................       200,000       189                           199,811
Net proceeds from
 public offering of
 3,680,000 shares of
 Common Stock.........    25,944,000    36,800                        25,907,200
Public offering
 issuance costs.......      (779,800)                                   (779,800)
Conversion of
 subordinated
 debentures into
 Common Stock.........     5,735,000    11,899                         5,723,101
Exercise of stock op-
 tions................     2,021,563     3,631                         2,017,932
Tax benefit from
 exercise of stock
 options..............       367,704                                     367,704
Unrealized
 appreciation on
 investment...........        25,889                                                                            $25,889
Purchase of treasury
 shares...............       (64,375)                                                              (64,375)
Net income............     7,254,208                                                7,254,208
                        ------------  -------- ----------   ----    ------------  -----------  -----------      -------
Balance at December
 31, 1996.............  $106,383,974  $185,939 $1,721,250   $--     $102,927,874  $ 2,955,530  $(1,432,508)     $25,889
                        ============  ======== ==========   ====    ============  ===========  ===========      =======

 
          See accompanying notes to consolidated financial statements.
 
                                      F-5

 
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
 
  The Company--Medical Resources, Inc., (herein referred to as "MRI" and
collectively with its subsidiaries, affiliated partnerships and joint
ventures, referred to herein as the "Company"), is engaged in two segments of
the healthcare industry. The Company operates and manages primarily free
standing, outpatient diagnostic imaging centers (herein referred to as
"centers"), and provides diagnostic imaging network management services to
managed care providers. The Company provides services in a second segment of
the healthcare industry through its wholly owned subsidiary, StarMed Staffing,
Inc. (herein referred to as "StarMed"). StarMed provides temporary staffing of
registered nurses and other professional medical personnel to acute and sub-
acute care facilities nationwide.
 
  Consolidation--The accompanying consolidated financial statements include
the accounts of MRI, its wholly-owned subsidiaries, majority-owned joint
ventures and limited partnerships in which the Company is a general partner.
All material intercompany balances and transactions have been eliminated. As
general partner, the Company is subject to all the liabilities of a general
partner and as of December 31, 1996, is entitled to share in partnership
profits, losses and distributable cash as follows:
 


                                                                COMPANY SHARE OF
                                                                PROFITS, LOSSES
                                                                      AND
                           PARTNERSHIP                           DISTRIBUTIONS
                           -----------                          ----------------
                                                             
   NMR Associates I (Union, New Jersey)........................        80%
   MR Associates I (Philadelphia, Pennsylvania)................        98%
   MR Associates of Allentown (Allentown, Pennsylvania)........        96%
   MR Associates of Morristown (Morristown, New Jersey)........        94%
   MR Partners of Greenbelt (Seabrook, Maryland)...............        87%
   MR Associates of Chicago (Chicago, Illinois)................        87%
   Garden State Imaging Partners (Marlton, New Jersey).........        91%
   Harford County Imaging Partners (Bel Air, Maryland).........        63%
   Accessible MRI (Chicago, Illinois)..........................        80%
   Golf MRI Center (Des Plaines, Illinois).....................        75%
   Diagnostic Imaging Center (Des Plaines, Illinois)...........        75%
   North Bronx Services Group (Yonkers, New York)..............        65%
   South Umberton Asset Mgmt Assoc (St. Petersburg, Florida)...        84%

 
  The Company owns a 100% interest in imaging centers located in Englewood,
Clifton, Newark, West Orange, Jersey City, and Hackensack, New Jersey;
Brooklyn (2), Bronx, Centereach, East Setauket, Garden City and New York, New
York; Chicago, Libertyville, and Oak Lawn, Illinois as well as Cape Coral,
Clearwater, Naples (2), Fort Myers (2), Sarasota, Tampa (2), Tarpon Springs
and Titusville, Florida. The Company is also paid a monthly management fee
based on patient cash collections and/or patient volume under management
agreements with certain of the partnerships.
 
  Accumulated losses, from inception, of the Company's Harford County,
Maryland limited partnership fully offset the capital contributed by its
limited partners. Accordingly, losses incurred in excess of such limited
partnership capital have been charged, in full, to the Company as general
partner. Future profits, if any, in the Harford County partnership will be
allocated, in full, to the Company as general partner until such profits equal
the Company's excess share of allocable losses. Thereafter, future profits and
losses will be allocated in accordance with the parties respective ownership
interests.
 
  Reclassification--Certain prior year items have been reclassified to conform
to the current year presentation.
 
  Use of Estimates--The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
in the consolidated financial
 
                                      F-6

 
   
statements and accompanying notes. The most significant estimates relate to
contractual allowances, the allowance for doubtful accounts, income taxes,
contingencies and the useful lives of equipment. In addition, healthcare
industry reforms and reimbursement practices will continue to impact the
Company's operations and the determination of contractual and other allowance
estimates. Actual results could differ from those estimates. 
 
  Cash and Cash Equivalents--For financial statement purposes cash equivalents
include short-term investments with an original maturity of ninety days or
less. Restricted cash consists of amounts held pursuant to the terms of
letters of credit and is classified based upon the expiration of the
restriction. The Company has committed $445,000 of cash as collateral for the
letters of credit which serve as collateral on certain of the Company's
leases, with terms consistent with the remaining terms of the leases. The
remaining $600,000 of restricted cash underlies a letter of credit held
pursuant to the terms of a consulting agreement to which the Company is a
party.
 
  Short-term Investments--The Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities". Debt securities for which the Company does not
have the intent or the ability to hold to maturity are classified as
available-for-sale. Securities available for sale are carried at fair value
with unrealized gains and losses, net of tax, reported as a separate component
of shareholders' equity. Any realized gains and losses are determined on the
specific identification method.
 
  At December 31, 1996 the Company's short-term investments, all of which are
classified as available-for-sale as defined by SFAS 115, consist of
certificates of deposits and treasury bills with maturities between three and
twelve months.
 
  Restricted short-term investments consist of $4,500,000 of United States
government obligations held pursuant to a letter of credit issued in
connection with one of the Company's acquisitions. The letter of credit served
to reserve consideration for the acquisition in the event that the shares of
the Company's Common Stock to be issued to the Seller were not registered
within 60 days of the closing of the sale. Subsequent to December 31, 1996,
the shares were registered within the specified timeframe of the agreement,
and as such, the restriction of the investment was removed.
 
  Investments in Joint Ventures and Limited Partnerships--The minority
interests in the equity of consolidated joint ventures and limited
partnerships, which are not material, are reflected in the accompanying
consolidated financial statements. Investments by the Company in joint
ventures and limited partnerships over which the Company can exercise
significant influence but does not control are accounted for using the equity
method.
 
  The Company suspends recognition of its share of joint ventures losses in
entities in which it holds a minority interest when its investment is reduced
to zero. The Company does not provide for additional losses unless, as a
partner or joint venturer, the Company has guaranteed obligations of the joint
venture or limited partnership.
 
  Property and Equipment--Property and equipment procured in the normal course
of business is stated at cost. Property and equipment purchased in connection
with an acquisition is stated at its estimated fair value, generally based on
an appraisal. Property and equipment is being depreciated for financial
accounting purposes using the straight-line method over the shorter of their
estimated useful lives, generally five to seven years, or the term of a
capital lease, if applicable. Leasehold improvements are being amortized over
the shorter of the useful life or the remaining lease term. Upon retirement or
other disposition of these assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or losses
are reflected in the results of operations. Expenditures for maintenance and
repairs are charged to operations. Renewals and betterments are capitalized.
 
  Organizational Costs and Capitalized Lease Costs--The Company recorded
organization costs and lease costs as part of a purchase price allocation. The
organization costs represent a portion of the costs associated
 
                                      F-7

 
with the original purchase of the acquired company in 1990. The lease costs
represent the estimated value of favorable leases in the acquisition of the
acquired company. The unamortized organization costs and capitalized lease
costs were approximately $101,000 and $82,000 at December 31, 1996,
respectively and approximately $128,000 and $104,000 as of December 31, 1995,
respectively. Such costs are amortized on a straight-line basis over a five to
ten year period. At December 31, 1996 accumulated amortization for
organization costs and capitalized lease costs amounted to approximately
$168,000 and $137,000, respectively.
 
  Value of Venture Contracts--Value of venture contracts, which represent the
value associated with management contracts with radiologist groups and the
Company's ownership interest in various joint ventures and limited
partnerships, which was recognized in connection with the acquisition of the
Company in September 1990, is being amortized on a straight line basis over
the shorter of the lives of the facilities or the terms of the management
contracts, as appropriate, generally from five to ten years. Accumulated
amortization as of December 31, 1996 and 1995 was approximately $328,000 and
$231,000 (after the write down discussed below), respectively. Amortization of
value of joint venture contracts was approximately $97,000, $122,000 and
$250,000 in 1996, 1995 and 1994, respectively.
 
  The implementation of the Stark II anti-referral legislation, effective
January 1, 1995, restricting physicians from making referrals for services to
be rendered to Medicare and Medicaid patients to facilities in which they have
an ownership interest and the lower than expected level of cash flows
generated from the venture contracts, materially impacted the fair value of
the value of venture contracts. Due to these changes in the regulatory and
economic environment, during the second quarter of 1994, the Company assessed
the recoverability of the value of venture contracts and determined that its
current estimate of the fair value of the assets was significantly less than
the current unamortized cost of the assets. As a result, during the second
quarter of 1994, the Company reduced the carrying amount of its value of
venture contracts by approximately $1,950,000. At December 31, 1996, the
remaining unamortized balance amounted to approximately $164,000 and
represents the estimated value associated with non-compete agreements with
certain radiologists and the Company believes is recoverable through
profitable operations of the related imaging centers.
 
  Goodwill--The excess of the purchase price over the fair market value of net
assets acquired is being amortized using the straight-line method over periods
ranging from 20 to 25 years. As of December 31, 1996 and 1995, accumulated
amortization amounted to approximately $3,027,000 and $1,530,000,
respectively. Amortization expense of goodwill was approximately $1,497,000,
$386,000 nd $413,000 in 1996, 1995 and 1994, respectively.

   
  The Company periodically reviews goodwill to assess recoverability based upon
expectations of undiscounted cash flows and operating income of each
consolidated entity having a material goodwill balance. An impairment would be
recognized in operating results, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the related costs in excess of net assets acquired.  

  401(k) Plan--The Company maintains a 401(k) plan under which the Company
matches one-half of employee contributions up to 4% of qualified earnings and
subject to Internal Revenue Service limitations.
 
  From August 31, 1996 to November 30, 1996, the Company elected to continue
the 401(k) plan of NMR of America ("NMR") for employees of this acquired
company. Under the NMR plan, the Company matched one-half of employee
contributions up to 6% of qualified earnings and subject to Internal Revenue
Service limitations. On November 30, 1996, the NMR 401(k) plan was merged into
the Company's 401(k) plan.
 
  Plan expense, including Company contributions to the NMR plan for 1996,
amounted to $90,000, $80,000 and $55,000 in 1996, 1995 and 1994, respectively.
 
  Earnings Per Share--Earnings per share is computed on the basis of the
weighted average number of common shares outstanding and dilutive common stock
equivalents. Common stock equivalents consist of stock options and warrants
and 600,000 shares to be issued over a period of 24 months in accordance with
Fort Myers
 
                                      F-8

 
     
center asset purchase agreement. In the first quarter of 1997, 525,000 of such
shares were issued and the remaining 75,000 shares were issued in April
1997. The shares issued by the Company in connection with the purchases of
various centers were considered outstanding from the date of acquisition.     
 
  The Company's convertible subordinated debentures are not considered common
stock equivalents until shares are issued and become outstanding upon
conversion and, as such, are not included in the calculation of primary
earnings per share. For purposes of fully diluted earnings per share, the
calculation assumes the conversion of the Company's convertible subordinated
debentures for the period they were outstanding.
 
  The number of common shares used to compute primary and fully diluted net
income per share are as follows:
 


                                                     1996      1995      1994
                                                  ---------- --------- ---------
                                                              
   Primary....................................... 11,670,000 7,785,000 7,097,500
   Fully Diluted................................. 12,903,000 7,785,000 7,097,500


Supplemental earnings per share data:
      
  As described in Note 6, the Company called for redemption of its outstanding
NMR's 8% Convertible Subordinated Debentures ($859,000 outstanding at December
31, 1996) and the Company's 10.5% Convertible Subordinated Debentures
($4,800,000 outstanding at December 31, 1996) on or before March 27, 1996. The
Company's primary earnings per share would have been $0.61 per share and fully
diluted earnings per share would have been $0.58 per share if the conversions
occurred on January 1, 1996.      

  New Accounting Standards--Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") requires impairment losses recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets to be disposed of. The Company adopted
SFAS No. 121 in the first quarter of 1996. No adjustments were required.
 
  In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128), was issued which establishes standards
for computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company is currently evaluating the impact of
implementing this standard on earnings per share.
      
  Revenue Recognition--The Company has entered into three forms of agreements
(defined as Type I, Type II and Type III as described below) to provide
equipment, comprehensive management, administration and technical imaging
services to independent contractor interpreting physicians for the provision of
medical services with respect to magnetic resonance scanning, computerized
tomography scanning, radiography and fluoroscopy, ultrasound, x-ray, mammography
and other radiological modalities mutually agreed upon. In accordance with the
agreements, as a part of the Company's administrative duties, the Company
provides billing and collection services on behalf of the interpreting
physicians for the diagnostic imaging services performed.     
    
  Type I
  ------    
  Under Type I agreements interpreting physicians are required to pay to the
Company a charge per procedure performed. These charges are specified in a
schedule included by attachment to the agreements and represent the Company's
net service revenue, net of contractually determined discounts. Under Type I
agreements, the Company bears the risk of amounts being uncollectible equivalent
to the proportionate relationship of its charge per procedure, including LOP
Type services (See Note 2) and the total charge to the referring physician's
patient. The Company has established and recognized reserves for potential
uncollectibles.    
    
  Type II
  -------
  For consolidated centers which the Company has acquired, other than NMR
developed centers, subsidiaries of the Company have entered into independent
contractor agreements with unaffiliated professional corporations to provide
radiological services. Fees paid to the radiologists based upon cash
collections, at these centers are reflected as a component of independent
contractor fees in the accompanying statements of operations. The Company has
entered directly into agreements, under its Type II structure, with third-party
payers that provides for payment to the Company at amounts which differ from its
established rates. Under Type II agreements, Medicare and Medicaid represented
approximately 11%, 10% and 11% of revenue, net during 1996, 1995 and 1994,
respectively. Services rendered to Medicare and Medicaid beneficiaries are
provided under a prospective payment system which establishes a reimbursement
rate by modality. These rates vary depending upon the type of image rendered.
The Company has also entered directly into payment agreements, under its Type II
structure, with certain commercial insurance carriers, health maintenance
organizations and preferred provider organizations. The basis for payment to the
Company under these agreements includes contractually determined discounts from
established rates. Accordingly, net service revenue for these acquired centers
consists of patient billings, adjusted for contractual allowances which have
been negotiated with various third party payers.

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

              

       
  Net service revenues are reported when earned at their estimated net
realizable amounts from patients, third-party payers and others for services
rendered including estimated prospectively determined adjustments relating to 
contractual adjustments, which pertain to prospectively determined (established)
rates. These adjustments are recognized at the time the services are rendered
and adjusted in future periods, if required, as final settlements are
determined. Revenues derived from medicare and medicaid are subject to audit.
The Company is aware of no pending audits.       

  The Company also recognizes revenue from temporary nurse staffing. Revenues
are recognized on an accrual basis when earned and realizable.  
 
                                      F-9

 
2. ACCOUNTS RECEIVABLE, NET
 
  Accounts receivable, net is comprised of the following:
 
    

                                                           DECEMBER 31,
                                                      ------------------------
                                                         1996         1995
                                                      -----------  -----------
                                                             
   Management and use receivables
     Due from unaffiliated physicians................ $23,569,802  $17,138,185
     Due from affiliated physicians...................  9,195,387           --
   Patient accounts receivable.......................  17,481,493  $ 2,530,969
   Less: Allowance for doubtful accounts.............  (9,598,740)  (5,061,955)
         Allowance for contractual allowances........    (769,562)    (769,562)
                                                      -----------  -----------
                                                      $39,878,380  $13,837,637
                                                      ===========  ===========
       

    
  Contractual adjustments, representing standard fee reductions negotiated with
the third party payers, amounted to approximately $25,270,000, $13,375,000 and
$9,690,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.     

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

    
 
                                                December 31
                                        ---------------------------
                                         1996                 1995
                                        ------               ------
                                                  
up to 1 year....................  $ 43,121,992         $ 13,847,031
up to 2 years...................     4,104,147            3,067,375
over 2 years....................     3,020,543            2,754,948
                                  ------------         ------------
                                    50,246,682           19,669,354


Less:  Allowance for
       doubtful accounts
       and contractual
       adjustments..............   (10,368,302)          (5,831,517)
                                  ------------         ------------
                                  $ 39,878,380         $ 13,837,837
                                  ============         ============
      
    
  A significant financial instrument is accounts receivable, which is
concentrated among third party medical reimbursement organizations, principally
insurance companies. Approximately 19.5% and 21.8% of the Company's 1996 and
1995 imaging revenue was derived from the delivery of services of which the
timing of payment is substantially contingent upon the timing of settlement of
pending litigation involving the recipient of services and third parties (Letter
of Protection or "LOP-type" accounts receivable). The Company undertakes certain
measures to identify and document the individual's obligation to pay for
services rendered regardless of the outcome of pending litigation. By its
nature, the realization of a substantial portion of these receivables is
expected to extend beyond one year from the date the service was rendered. The
Company anticipates that a material amount of its accounts receivable will be
outstanding for periods in excess of twelve months in the future. The Company
considers the aging of its accounts receivable in determining the amount of
allowance for doubtful accounts. Credit losses associated with the receivables
are provided for in the consolidated financial statements and have historically
been within management's expectations. For LOP-type receivables, the Company
provides for uncollectible accounts at substantially higher rates than any other
revenue source. During 1995, the Company changed its estimate of the level of
bad debts within the LOP-type balance to a higher overall factor, based upon
continuously updated levels of internal write off experience. The effect on the
consolidated financial statements of this change in estimate in 1995 was a
decrease in income from continuing operations before extraordinary items of
$595,000, net of income taxes of $239,000, and a decrease in net income per
common share of $0.08.     
   
  "LOP type" services are rendered at substantially all of the Company's imaging
centers, but only in the case of Type II agreements are such accounts
receivables reflected directly in the Company's financial records. This is as a
result of the structure in terms of the Company's Type I and Type III agreements
as described in Note 1 "Revenue Recognition."      

3. SHORT-TERM INVESTMENTS
 
  The following is a summary of the investments in debt securities classified
as current assets, and which are available for sale:
 


                                                            GROSS
                                                          UNREALIZED    FAIR
                                                 COST       GAINS      VALUE
                                              ----------  ---------- ----------
                                                            
   December 31, 1996
   Available-for-sale:
     US Government obligations............... $5,360,694   $25,889   $5,386,583
     Certificates of deposit.................    776,017       --       776,017
                                              ----------   -------   ----------
     Total...................................  6,136,711    25,889    6,162,600
     Less: Restricted Investments............ (4,500,000)      --    (4,500,000)
                                              ----------   -------   ----------
                                              $1,636,711   $25,889   $1,662,600
                                              ==========   =======   ==========

 
  As of December 31, 1995, there were no short-term investments available-for-
sale.
 
                                     F-10

 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment stated at cost are set forth below:
 


                                                             DECEMBER 31,
                                                        -----------------------
                                                           1996        1995
                                                        ----------- -----------
                                                              
   Diagnostic equipment................................ $33,938,043 $20,184,995
   Leasehold improvements..............................   9,351,983   6,449,980
   Furniture and fixtures..............................   2,996,673   2,421,621
   Land and buildings..................................     632,240         --
   Construction in progress............................     270,000         --
                                                        ----------- -----------
                                                         47,188,939  29,056,596
   Less, accumulated depreciation......................  22,791,862  17,526,437
                                                        ----------- -----------
                                                        $24,397,077 $11,530,159
                                                        =========== ===========
 
  Depreciation expense amounted to $5,463,078, $3,844,225 and $4,077,669 for
the years ended December 31, 1996, 1995 and 1994, respectively.
    
  The cost and accumulated depreciation for the diagnostic equipment subject to
usage arrangements under the Company's Type III agreements was $2,769,252 and
$434,514, respectively at December 31, 1996.     

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
  Accounts payable and accrued expenses are comprised of the following:
 

                                                             DECEMBER 31,
                                                        -----------------------
                                                           1996        1995
                                                        ----------- -----------
                                                              
   Trade accounts payable.............................. $10,902,789 $ 1,936,775
   Accrued professional fees...........................                 195,531
   Accrued payroll and bonuses.........................     792,038     975,643
   Accrued interest....................................     322,648
   Other accrued expenses..............................   1,052,895   1,494,977
                                                        ----------- -----------
                                                        $13,070,370 $ 4,602,926
                                                        =========== ===========

 
6. CONVERTIBLE SUBORDINATED DEBENTURES AND LINES OF CREDIT
 
  On May 30, 1995 the Company issued at par $4,350,000 aggregate principal
amount of 11% Convertible Subordinated Debentures due 2000 (the "1995
Debentures"). The 1995 Debentures are convertible into Common Stock of the
Company at any time by the holder at a conversion price of $4.00 per share.
The 1995 Debentures automatically convert to Common Stock when, after June 1,
1997 the market price of the Stock exceeds $6.00 per share for any 15
consecutive day period. Interest is payable on May 31 and November 30 in each
year. Related debt issuance costs of $248,000 are included as a component of
other assets in the accompanying consolidated balance sheet and are being
amortized on a straight line basis over five years. As of December 31, 1996
$2,980,000 aggregate principal amount of the 1995 Debentures were converted
into 745,000 shares of the Company's Common Stock. No conversions were made
prior to 1996.
 
  On February 7, 1996, the Company issued at par $6,533,000 aggregate
principal amount of 10.5% Convertible Subordinated Debentures due 2001 (the
"1996 Debentures"). The 1996 Debentures are convertible into Common Stock of
the Company at a conversion price of $6.00 per share. Related debt issuance
costs of $435,000 are included as a component of other assets in the
accompanying consolidated balance sheet and are being amortized on a straight
line basis over five years. Interest is payable on February 1 and August 1 in
each year. As of December 31, 1996, $1,733,000 aggregate principal amount of
the 1996 Debentures were converted into 288,831 shares of the Company's Common
Stock. Subsequent to year end, the Company called for redemption of the 1996
Debentures at the conversion price of $6.00 per share on or before March 27,
1997.
 
                                     F-11

 
       
  Under the terms of the merger agreement with NMR, the Company assumed the
obligations of NMR under NMR's 8% Convertible Subordinated Debentures due 2001
including payment of principal and interest (the "NMR Debentures"). At
December 31, 1996, $859,000 aggregate principal amount of NMR Debentures were
outstanding. Interest is payable on January 1 and July 1 in each year. The NMR
Debentures are redeemable at a declining premium after July 1988, contain a
mandatory sinking fund provision calculated to retire 90% of the NMR
Debentures before maturity at a rate of 10% per year commencing in July 1992,
and are convertible into the MRI's Common Stock at any time prior to maturity
at $6.54 per share. As of December 31, 1996 $3,141,000 aggregate principal
amount of the NMR Debentures had been converted into the Company's Common
Stock. Subsequent to year end, the Company called for redemption of the NMR
Debentures at the conversion price of $6.54 per share on or before March 27,
1997. If the "1996 Debentures" and NMR Debentures called for on or before March
27, 1996 had taken place January 1, 1996 primary earnings per share would have
been $0.61 per share and fully diluted earnings per share would have been $0.58
per share.     
  The Company has three revolving lines of credit from a third party financing
corporation. In May 1996, the Company obtained two $4 million lines and in
October 1996, a $4 million line. The lines bear interest at prime plus 1.5%
(10% at December 31, 1996) and have a two year term. As of December 31, 1996,
no amounts were outstanding under these lines of credit.
 
  In 1996, the Company obtained a two year $7 million capital lease line of
credit, which bears interest at the 30-day T-bill rate plus 398 basis points.
As of December 31, 1996, no amounts were outstanding under this line of
credit.
 
7. NOTES AND MORTGAGE PAYABLE
 
  Notes and mortgage payable consist of the following:
 


                                                             DECEMBER 31,
                                                        ----------------------
                                                           1996        1995
                                                        ----------- ----------
                                                              
   Mortgage payable to bank from NMR Acquisition(A).... $   512,754        --
   Notes payable issued in connection with
    acquisitions(B)....................................   1,376,919        --
   Notes payable assumed in NMR Acquisition(C).........  11,858,164        --
   Note payable requiring monthly payments beginning
    January 1995; remaining balance of $2,498,216 is
    due January 2000(D)................................   3,397,589 $3,545,965
   Other notes payable for equipment, equipment
    upgrades and leasehold improvements(E).............   2,221,168  1,860,893
                                                        ----------- ----------
   Total...............................................  19,366,594  5,406,858
   Less, current installments..........................   6,728,668    957,884
                                                        ----------- ----------
   Notes and mortgage payable, less current
    installments....................................... $12,637,926 $4,448,974
                                                        =========== ==========

- --------
(A)  The Company has a thirty-year mortgage collateralized by the Union, New
     Jersey imaging center land and building. The mortgage bears interest at a
     variable rate, adjusted annually based on the one-year Treasury bill rate
     plus 2.75% (8.5% at December 31, 1996) and matures October 2019. The
     current monthly payments are $4,310, including interest. This mortgage
     was assumed in connection with the NMR Acquisition.
(B)  In January, 1996 as part of the purchase price for the acquisition of the
     business assets of MRI-CT, Inc., the Company issued a $88,000 note
     payable bearing interest at prime (8.25% at December 31, 1996) due
     January 9, 2001. Also in January 1996, as part of the purchase price for
     the acquisition of the common stock of NurseCare Plus,Inc. the Company
     issued a note payable for $1,250,000 bearing interest at prime plus one
     percent (9.25% at December 31, 1996) due January 12, 1999. In June, 1996
     the Company issued a $510,000 note payable as part of the purchase price
     of WeCare Allied Health Care, Inc. The note bears interest at prime plus
     one percent (9.25% at December 31, 1996) and is due August 1998.
(C)  In August 1996, in connection with the NMR Acquisition the Company
     assumed NMR's existing equipment debt obligations, aggregating
     $13,235,700. These notes bear interest at rates ranging from 7.0% to
     11.5% and require monthly payments ranging from $623 to $86,335,
     including interest (an aggregate of
 
                                     F-12

 
    $453,596 per month). The notes are payable over varying terms with the
    last note due in December 2000. One of the notes restricts the Company's
    ability to pay dividends. The foregoing notes are collateralized by the
    respective centers' imaging equipment.
(D)  Effective January 31, 1994, StarMed and a creditor renegotiated a note
     payable. Under the revised terms, the creditor forgave approximately
     $2,500,000 of principal and accrued interest and received a 16% ownership
     interest in the predecessor entity, which was ultimately exchanged for
     the Common Stock of the Company pursuant to the merger. The levels of
     undiscounted future cash payments under the renegotiated terms resulted
     in the recognition of a gain of $761,683, treated as extraordinary for
     reporting purposes in 1994. At the time of the restructuring, the note
     balance was adjusted to the amount of the projected undiscounted future
     cash payments based upon the prevailing interest rate and, accordingly,
     no interest expense has been recorded subsequent to the effective date of
     the renegotiation other than the amounts attributed to a change in the
     variable rate.
(E)  Represents various notes payable relating to the purchase of equipment,
     equipment upgrades and leasehold improvements. These notes bear interest
     at rates ranging from 3.0% to 11.7% and require monthly payments ranging
     from $4,875 to $16,382, including interest. The notes are payable over
     varying terms of four and five years with the last note due August 2000.
     The notes are primarily collateralized by the related imaging equipment.
 
  As of December 31, 1996, the Company has $7,880,975 outstanding obligations
with certain financial institutions under agreements which include a material
adverse change in financial condition or other similar subjective acceleration
clauses.
 
  Aggregate maturities of the Company's notes and mortgage payable for years
1997 through 2001 and thereafter are as follows: 1997--$6,728,668; 1998--
$5,039,896; 1999--$2,380,013; 2000--$4,736,300; 2001--$19,450; thereafter
$462,267.
 
8. STOCKHOLDERS' EQUITY
 
 Authorized Stock
 
  The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 100,000 shares of Preferred Stock,
par value $.01 par share ("Preferred Stock"). The Company has a Shareholders'
Rights Plan (described below) which may require the issuance of Series C
Junior Participating Preferred Stock, in connection with the exercise of
certain stock purchase rights. At December 31, 1996, there were no shares of
preferred stock issued or outstanding.
 
 Shareholders' Rights Plan
 
  Pursuant to the Shareholders' Rights Plan, holders of the Common Stock
received a distribution of one right (the "Rights") to purchase one ten
thousandth of a share of Series C Junior Participating Preferred Stock for
each share of Common Stock owned. The Rights will generally become exercisable
ten days after a person or group acquires 15% of the Company's outstanding
voting securities or ten business days after a person or group commences or
announces an intention to commence a tender or exchange offer that could
result in the acquisition of 15% of any such securities. Ten days after a
person acquires 15% or more of the Company's outstanding voting securities
(unless this time period is extended by the Board of Directors) each Right
would, subject to certain adjustments and alternatives, entitle the
rightholder to purchase Common Stock of the Company or stock of the acquiring
company having a market value of twice the $24.00 exercise price of the Right
(except that the acquiring person or group and other related holders would not
be able to purchase common stock of the Company on these terms). The Rights
are nonvoting, expire in 2006 and may be redeemed by the Company at a price of
$.001 per Right at any time prior to the tenth day after an individual or
group acquired 15% of the Company's voting stock, unless extended. The purpose
of the Rights is to encourage potential acquirers to negotiate with the
Company's Board of Directors prior to attempting a takeover and to give the
Board leverage in negotiating on behalf of the shareholder the terms of any
proposed takeover.
 
 
                                     F-13

 
 Preferred Stock
 
  The Company's Certificate of Incorporation provides that the Company may,
without further action by the Company's stockholders, issue shares of
Preferred Stock in one or more series. The Board of Directors is authorized to
establish from time to time the number of shares to be included in any such
series and to fix the relative rights and preferences of the shares of any
such series, including without limitation dividend rights, dividend rate,
voting rights, redemption rights and terms, liquidation preferences and
sinking fund provisions. The Board of Directors may authorize and issue
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of Common Stock. In addition, the issuance of
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company.
 
 Stock Options and Employee Stock Grants
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October 1995, establishing
a fair value-based method of accounting for stock-based compensation plans,
including stock options and stock purchase plans. SFAS No. 123 allows
companies to adopt a fair-value-based method of accounting for stock-based
compensation plans or, at their option, to retain the intrinsic-value based
method of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and supplement it with pro forma
disclosures of net earnings and earnings per share data as if the fair value
method had been applied. The Company has elected to continue to account for
stock-based compensation plans under APB No. 25 and, as such, the adoption of
this standard has not impacted the consolidated results of earnings or
financial condition.

   
  The Company's five stock option plans provide for the awarding of incentive
and non qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
Common Stock at the date of grant. In accordance with paragraph 8 of SFAS No.
123, options granted to consultants are accounted for based on the fair value of
the options issued. 

  In addition to these plans, the Company has issued 342,000 non-qualified
options at exercise prices ranging from $4.00 to $9.00 per share to certain
directors and executive officers of the Company. Such prices were not less
than the fair market value on the dates of the grant. 
 
  Under the terms of the merger agreement with NMR, all outstanding NMR
employee stock options (the "NMR Employee Options") were deemed to be
exercisable for that number of shares of the Company's Common Stock the option
holder would have received in the NMR Acquisition, had the holder exercised
the NMR Employee Options prior to the NMR Acquisition. At December 31, 1996,
78,627 stock option, related to the NMR Acquisition, to purchase the Company's
Common Stock at prices ranging from $3.27 to $6.55 per share were outstanding.
 
                                     F-14

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


                                                             1996       1995
                                                          ---------- ----------
                                                               
   Net income:
     As reported......................................... $7,254,208 $1,690,224
     Pro forma...........................................  6,732,000  1,651,700
   Primary earnings per share:
     As reported.........................................        .62        .22
     Pro forma...........................................        .58        .21
   Fully diluted earnings per share:
     As reported.........................................        .59        .22
     Pro forma...........................................        .52        .21

 
  The fair value of each option grant under all plans is estimated on the date
of grant using the Black-Scholes option-pricing model based on the following
assumptions:
 


                                                                       1996  1995
                                                                       ----  ----
                                                                       
   All Plans:
     Dividend yield...................................................   0%    0%
     Expected volatility..............................................  52%   52%
     Expected life (years)............................................   2     2

 
  The risk-free interest rates for 1996 and 1995 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were utilized. The
weighted average interest rate in 1996 and 1995 amounted to 5.93% and 6.41%,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1996 and 1995 amounted to $2.34 and $1.15,
respectively.
 
  Stock option share activity and weighted average exercise price under these
plans and grants for the years ended December 31, 1996, 1995 and 1994, were as
follows:
 


                                                     NUMBER OF  WEIGHTED AVERAGE
                                                      SHARES     EXERCISE PRICE
                                                     ---------  ----------------
                                                          
   Outstanding, December 31, 1993...................   122,675       $5.00
     Granted........................................   271,000        4.89
     Exercised......................................       --          --
     Forfeited......................................       --          --
                                                     ---------
   Outstanding, December 31, 1994...................   393,675        4.92
     Granted........................................   472,500        5.32
     Exercised......................................   (12,916)       4.00
     Forfeited......................................   (63,584)       4.50
                                                     ---------
   Outstanding, December 31, 1995...................   789,675        5.21
     Granted........................................ 1,073,140        7.94
     Granted as transfer of NMR Options.............   132,687        5.05
     Exercised......................................  (243,197)       5.42
     Forfeited......................................  (120,587)       6.58
                                                     ---------
   Outstanding, December 31, 1996................... 1,631,718        6.76
                                                     =========
   Exercisable at:
     December 31, 1994..............................   122,625       $5.00
     December 31, 1995..............................   301,209       $5.31
     December 31, 1996..............................   909,710       $6.40

 
  The exercise price for options outstanding as of December 31, 1996 ranged
from $3.27 to $12.00.
  
  The following table summarizes information about stock options outstanding at 
December 31, 1996:   

   
 

                                               Options Outstanding                                   Options Exercisable
                                               ----------------------                                -------------------

                                                 Weighted Average
   Range of             Number Outstanding     Remaining Contractual    Weighted Average       Number Exercisable  Weighted Average
Exercise Prices            at 12/31/96                Life               Exercise Price           at 12/31/96       Exercise Price
- ---------------            -----------                ----               --------------           -----------       --------------
                                                                                                       
$ 3.27 to 4.00            189,186                   4 years                  4.00                    103,019             $ 4.00 
                                                                                                                              
$ 4.18 to 4.73             60,827                   6 years                  4.54                     60,827             $ 4.54 
                                                                                                                               
$ 5.00                    215,125                   4 years                  5.00                    171,791             $ 5.00 
                                                                                                                               
$ 5.50                    290,000                   8 years                  5.50                    180,000             $ 5.50 
                                                                                                                               
$ 6.50 to 6.75            186,740                   5 years                  6.57                     32,407             $ 6.65 
                                                                                                                               
$ 8.50                    501,666                   9 years                  8.50                    361,666             $ 8.50 
                     
$ 9.00 to 12.00           188,174                   5 years                 10.18                      --                   -- 
                        ----------                                                                  ---------
$ 3.27 to 12.00         1,631,718                                                                    909,710
   
                                      F-15

 
 Stock Purchase Warrants

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

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

  As of December 31, 1996, the Company had granted warrants, which are
currently outstanding, to purchase its Common Stock with the following terms:
 


    NUMBER                                        
      OF                        EXERCISE                       EXPIRATION
    SHARES                       PRICE                            DATE
    ------                      --------                       ----------
                                                     
      68,750                     $11.64                    February 6, 1997
       4,813                     $ 7.27                    March 30, 1997
      17,188                     $ 4.50                    February 23, 1999
       2,750                     $ 5.70                    May 18, 1999
      17,188                     $ 7.27                    September 30, 1999
      37,500                     $ 8.00                    February 28, 2001
      37,500                     $12.00                    February 28, 2001
     110,000                     $ 4.73                    April 16, 2001
      27,500                     $ 3.36                    August 31, 2001
      10,313                     $ 4.00                    August 31, 2001
     110,000                     $ 4.18                    August 31, 2001
      68,750                     $ 4.73                    August 31, 2001
      90,000                     $ 8.00                    August 31, 2001
      34,375                     $ 9.27                    August 31, 2001
     120,000                     $ 9.00                    August 31, 2001
       5,000                     $ 9.00                    November 1, 2001
     130,625                     $ 9.27                    December 18, 2001
     200,000                     $ 9.50                    August 31, 2002
      51,563                     $ 4.36                    November 5, 2003
      20,625                     $ 5.70                    May 18, 2004
   ---------
   1,164,440
   =========

 
  In March 1996 a financial consulting firm doing business with the Company
was granted warrants to purchase 75,000 shares of the Company's Common Stock
consisting of 37,500 warrants with an exercise price of $8.00 per share and
37,500 warrants with an exercise price of $12.00 per share. These warrants
have a term of five years and are exercisable from date of grant.
 
  Under the terms of the merger agreement with NMR, all outstanding NMR
warrants were deemed to be exercisable for that number of shares of the
Company's Common Stock the warrant holder would have received in the NMR
Acquisition, had the holder exercised the NMR warrant prior to the NMR
Acquisition. As such, in connection with the NMR Acquisition the Company
assumed the following warrants:
 
    Warrants issued to purchase 17,188 shares of the Company's Common Stock
  at an exercise price of $7.27 per share to a radiology group providing
  services to one of its centers. These warrants have a term of five years
  and are exercisable from the date of grant.
 
    Warrants issued to purchase 4,813 shares of the Company's Common Stock at
  an exercise price of $7.27 per share in connection with the execution of a
  ground lease for one of its facilities. The warrants have a term of five
  years and are exercisable from the date of grant.
 
    Warrants issued to acquire 68,750 shares of the Company's Common Stock at
  $11.64 per share to a financial consulting firm. The warrants have a term
  of five years and are exercisable from date of grant.
 
    Warrants granted to non-employee directors of NMR to purchase 13,750
  shares (an aggregate of 130,625 shares) of the Company's Common Stock at
  $9.27 per share. The warrants have a term of ten years and are
  exercisable from date of the grant.
 

                                     F-16



 
    Warrants granted to a non-employee director of NMR to purchase 2,750
  shares of the Company's Common Stock at an exercise price of $5.70 per
  share. These warrants have a term of ten years and are exercisable from the
  date of grant.
 
    Warrants issued to purchase 17,188 shares of the Company's Common Stock
  at an exercise price of $4.50 per share to a professional corporation
  providing legal services to NMR. These warrants have a term of ten years
  and are exercisable from the date of grant.
 
    Warrants granted an officer and director of NMR to acquire 51,563 shares
  of the Company's Common Stock at an exercise price of $4.36, and 20,625
  share of common stock at an exercise price of $5.70. These warrants have a
  term of ten years and are exercisable from the date of grant.

  For services rendered by a financial advisory company owned by the Chairman
of the Board of Directors of the Company in connection with the NMR
Acquisition, the Company issued warrants to purchase 120,000 shares of the
Company's Common Stock at an exercise price of $9.00 per share. These warrants
have a term of five years and are exercisable from date of grant.
 
  As required by the merger agreement with NMR, the President of NMR was
granted (i) five year warrants to purchase 40,000 shares of the Company's
Common Stock at an exercise price of $8.00 per share and (ii) six year
warrants to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $9.50 per share, and (iii) in exchange for his NMR employee
stock options, three separate five year warrants to purchase 34,375, 68,750
and 34,375 shares of the Company's Common Stock at exercise prices of $9.27,
$4.18 and $4.73, respectively.
   
  As required by the merger agreement with NMR, the Executive Vice President--
Finance of NMR was granted (i) five year warrants to purchase 50,000 shares of
the Company's Common Stock at an exercise price of $8.00 per share and (ii) in
exchange for his NMR employee stock options, four separate five year warrants
to purchase 10,313, 27,500, 41,250 and 34,375 shares of the Company's Common
Stock at exercise prices of $4.00, $3.36, $4.18 and $4.73, respectively.  
  
        The warrants the Company issued to the officers of NMR in connection 
with the NMR Acquisition had an estimated fair value (determined in accordance
with FAS No.123) of approximately $650,000 and were considered part of the
consideration paid in connection with the NMR Acquisition and such value is
being amortized over the term of the officers' covenant not to complete
agreements. The 564,440 warrants the Company issued in exchange for previously
outstanding NMR options or warrants and the 120,000 warrants issued to the
financial advisory company had an estimated fair value (determined in accordance
with FAS No. 123) of approximately $210,000 and $325,000 respectively, and were
considered part of the NMR Acquisition purchase price. 
    
  The weighted average fair value of such warrants on the date of grant or
conversion, was $2.37. The fair value of each warrant was estimated using the
Black-Scholes option pricing model using the following assumptions: Dividend
yield 0%; Expected Volatility 52%; Expected Life 2 years and a risk-free
interest rate of 5.93% based upon the expected term of the warrants.     
         

9. INCOME TAXES  
 
  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"), which requires an asset and liability approach. The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the financial reporting basis and tax basis of the Company's assets
and liabilities.
 
  As of December 31, 1996, the Company for Federal income tax purposes, has
net operating loss carryforwards which begin to expire in the year 1999, of
approximately $8,028,613, all of which represent net operating losses of
acquired companies. Under Section 382 of the Internal Revenue Code, the
Company's acquired operating losses are subject to an annual utilization
limitation of approximately $2,282,068. Any unutilized annual limitation may
be carried forward to available future carryforward years.
 
  For Federal income tax purposes, the Company has investment tax credits of
$385,638 all of which represent investment tax credits of an acquired company.
The Company's investment tax credits begin to expire in the year 1999 and are
accounted for under the flow through method.

 
                                     F-17

 
  Significant components, tax effected, of the Company's deferred tax assets
and (liabilities) at December 31, 1996 and 1995 are as follows (in thousands):
 


                                                                 1996     1995
                                                                -------  ------
                                                                   
   Deferred tax liabilities:
     Fixed assets.............................................. $  (857) $   52
     Deferred rent.............................................     (59)    (89)
     Cash to accrual basis.....................................    (362)    --
                                                                -------  ------
   Deferred tax liabilities....................................  (1,278)    (37)
                                                                -------  ------
   Deferred tax assets:
     Net operating losses......................................   2,956     --
     Tax credits...............................................     385     --
     Accounts receivable.......................................   3,354   1,871
     Capital leases............................................     135     153
     Intangibles...............................................     220     544
     Capital loss carryforwards................................     133      74
                                                                -------  ------
   Deferred tax assets.........................................   7,183   2,642
   Valuation allowance.........................................    (200)   (200)
                                                                -------  ------
   Net deferred tax asset...................................... $ 5,705  $2,405
                                                                =======  ======

 
  Components of the provision for (benefit from) income taxes are as follows:
 


                                                1996        1995        1994
                                             ----------  -----------  ---------
                                                             
   Current:
     Federal................................ $3,764,000  $ 3,051,000  $ 575,000
     State..................................  1,239,000      769,000    150,000
                                             ----------  -----------  ---------
                                              5,003,000    3,820,000    725,000
                                             ----------  -----------  ---------
   Deferred:
     Federal................................   (704,000)  (1,789,000)  (244,000)
     State..................................   (137,000)    (372,000)       --
                                             ----------  -----------  ---------
                                               (841,000)  (2,161,000)  (244,000)
                                             ----------  -----------  ---------
                                             $4,162,000  $ 1,659,000  $ 481,000
                                             ==========  ===========  =========

 
  A reconciliation of the Federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
 
  

                                                         1996   1995    1994
                                                         ----   -----   -----
                                                               
   Taxes at Federal statutory rate...................... 34.0 %  34.0 % (34.0)%
   Effect of partnership status and amounts taxed to
    parties other than the Company...................... (1.1)%   2.0 %  (1.5)%
   State and local income taxes, net....................  6.1 %   4.5 %   6.0 %
   Net operating loss carryforwards.....................  --      --    (31.4)%
   Meals and entertainment..............................  1.9 %   3.6 %  19.5 %
   Change in valuation allowance........................  --    (12.9)%  93.2 %
   Goodwill.............................................  2.3 %   --      --
   Alternative minimum tax adjustment...................  --     (4.3)%  40.7 %
   Other................................................ (6.6)%   1.7 % (13.7)%
                                                         ----   -----   -----
   Effective income tax rate............................ 36.6 %  28.6 %  78.8 %
                                                         ====   =====   =====
  
 
                                     F-18

 
  Prior to the StarMed merger, the taxable income (loss) of StarMed was
included in the individual income tax returns of the partners. Accordingly,
for periods prior to the merger, no provision for income tax has been recorded
in the accompanying consolidated financial statements. The unaudited pro forma
information accompanying the consolidated statement of operations reflects the
income tax affects as if StarMed had been a taxable entity for all periods
presented. The income taxes are calculated at 39% of income before income
taxes, adjusted for nondeductible amortization of intangibles and other
nondeductible items.
 
  The provision for state income taxes for 1994 includes certain adjustments
related to payments of prior year state income taxes. All operating loss
carryforwards have been used at December 31, 1994.
 
  Discontinued operations in 1995 is net of a benefit for federal income taxes
of $750,000 and a benefit for state income taxes of $218,000. These tax
benefits are allocated $312,000 to loss from operations of discontinued
business and $656,000 to loss on sale of discontinued business. In periods
before the merger, the discontinued business operated under the form of
partnerships and, accordingly, no taxes are provided.
 
10. COMMITMENTS AND CONTINGENCIES
 
  The Company has entered into noncancelable leases for certain medical
diagnostic equipment and furniture and fixtures, and has capitalized the
assets relating to these leases. In most cases, the leases are collateralized
by the related equipment. Certain leases included renewal options for
additional periods. Additionally, at certain centers, the Company was liable
for additional rent payments based upon predetermined annual activity levels
where the medical diagnostic equipment is located. These additional rent
payments amounted to approximately $111,000 and $83,000 for the years ended
December 31, 1995 and 1994, respectively.
 
  The following is a summary of assets under capital leases:
 
  

                                                             DECEMBER 31,
                                                        -----------------------
                                                           1996        1995
                                                        ----------- -----------
                                                              
   Diagnostic equipment................................ $22,986,605 $15,732,224
   Furniture and fixtures..............................      49,464      87,658
                                                        ----------- -----------
                                                         23,036,069  15,819,882

   Less: Accumulated depreciation......................  12,095,671   7,745,386
                                                        ----------- -----------
                                                        $10,940,398 $ 8,074,496
                                                        =========== ===========
  
 
  Amortization expense relating to property and equipment under capital leases
at December 31, 1996, 1995 and 1994 was $3,377,000, $2,045,000 and $3,389,000,
respectively.
 
  The following is a schedule by fiscal year of the minimum future lease
payments under capital leases as of December 31, 1996:
 
                                                              
   Year ending December 31,
       1997........................................................ $ 7,167,189
       1998........................................................   4,642,623
       1999........................................................   3,090,601
       2000........................................................   1,495,485
       2001........................................................     303,112
     thereafter....................................................         --
                                                                    -----------
     Total minimum lease payments..................................  16,699,010
   Less: amount representing interest (imputed at an average rate
    of 9.8%).......................................................   2,333,703
                                                                    -----------
     Present value of minimum lease payments.......................  14,365,307
     Less: current installments....................................   5,991,626
                                                                    -----------
     Obligations under capital leases, less current installments... $ 8,373,681
                                                                    ===========

   
 
                                     F-19

 
  The Company leases its corporate offices and certain centers for periods
generally ranging from three to ten years. These leases include rent
escalation clauses generally tied to the consumer price index and contain
provisions for additional terms at the option of the tenant. The leases
generally require the Company to pay utilities, taxes, insurance and other
costs. Rental expense under such leases was approximately $2,597,000,
$2,238,000 and $2,296,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Ten of the offices are subleased to affiliated Physicians.
By reason of the sublease arrangements, if the respective Physicians should be
unable to pay the rental on the site, the Company would be contingently
liable. As of December 31, 1996, the Company has subleased the operating sites
to the Physicians for the base rental as stipulated in the original lease. For
the year ended December 31, 1996 the related sublease income has been offset
by the lease rent expense. The Company also has operating leases for
diagnostic imaging equipment installed in its Philadelphia, Pennsylvania and
Seabrook, Maryland centers. In addition, StarMed leases temporary housing for
its per diem employees under operating leases with terms of one to six months.
Total rent expense for temporary housing amounted to approximately $1,744,000,
$1,757,000 and $1,787,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
 
  The following summary of non-cancelable obligations includes the sublease
arrangements described above, certain equipment leases and the Company's
corporate rentals. As of December 31, 1996, the aggregate future minimum lease
payments and sublease rentals are as follows:
 


                   YEAR ENDED                              ORIGINAL
                  DECEMBER 31,                  LEASES    SUBLEASES      NET
                  ------------                ----------- ---------- -----------
                                                            
     1997.................................... $ 3,962,224 $  777,391 $ 3,184,833
     1998....................................   2,926,586    673,875   2,252,711
     1999....................................   2,417,041    593,738   1,823,303
     2000....................................   1,799,553    476,635   1,322,918
     2001....................................   1,236,167    291,274     944,893
   thereafter................................     984,783     36,861     947,922
                                              ----------- ---------- -----------
                                              $13,326,354 $2,849,774 $10,476,580
                                              =========== ========== ===========

 
  In September 1992, an individual brought an action in the Supreme Court of
the State of New York, County of Bronx, against a number of physicians, a
hospital and North Bronx Resources, Inc., a wholly owned subsidiary of the
Company ("North Bronx"), for damages in an unspecified amount resulting from
an alleged failure to diagnose a brain tumor at the time the imaging services
were performed for the plaintiff. The complaint alleges that North Bronx was
negligent in its rendering of medical care and treatment to the patient. In
December 1992, North Bronx answered, denying the substantive allegations of
the complaint, raising an affirmative defense that the plaintiff's action does
not state a claim against North Bronx for which relief can be granted, and
cross claimed against the defendants in the action. In 1996, North Bronx
settled for an immaterial amount.
 
  In 1996, an individual and his spouse brought an action in the Supreme Court
of the State of New York, King's County against Advanced MRA Imaging
Associates in Brooklyn, New York, a wholly owned subsidiary of the Company
("MRA Imaging"), for damages aggregating $12.5 million. The plaintiff alleges
negligent operations, improper supervision and hiring practices and the
failure to operate the premises in a safe manner, as a result of which the
individual suffered physical injury. The Company's general liability and
professional negligence insurance carriers have been notified, and it has been
agreed that the general liability insurance will pursue the defense of this
matter, however such insurers have reserved the right to claim that the scope
of the matter falls outside the Company's coverage. The parties to this matter
are engaged in discovery. The Company's legal counsel believes that it is more
probable than not that the plaintiffs will not recover the damages sought. The
Company has made no provision in its financial statements for this matter. In
the event the plaintiffs prevail, this matter may have a material adverse
effect on the Company's financial condition, results of operations and cash
flow.
 
                                     F-20

 
11. RELATED PARTIES
 
  The Company pays an annual financial advisory fee to an affiliate (the
"Affiliate") of the Company's Chairman of the Board and controlling
stockholders. Such fees amounted to $102,000, $225,000 and $225,000 in the
years ended December 31, 1996, 1995 and 1994, respectively. During the year
ended December 31, 1996, the Company also paid transaction related advisory
fees and expenses to the Affiliate of $363,000 and issued to the affiliate
warrants to purchase 120,000 shares of the Company's Common Stock exercisable
at $9.00 per share for services rendered to the Company, including services in
connection with the NMR Acquisition, the public offering of the Company's
Common Stock in October 1996 and other transactions.
 
  The Company believes that such fees were on terms no less favorable to the
Company than what the Company could have otherwise received from an
unaffiliated third party. In order to incentivize officers, directors and
employees of consultants to the Company, the Company from time to time grants
options at fair market value to such individuals. As of December 31, 1996,
stock options to purchase 754,666 shares of the Company's Common Stock have
been issued to board members, including the Chairman, who are also associated
with affiliated with the Affiliate. Options to purchase 15,000 shares of the
Company's Common Stock have been granted to an individual employed by an
affiliate of the Affiliate for consulting services rendered to the Company.
     
  In connection with the execution of four acquisitions in 1997 the Company
has issued warrants to purchase 281,000 shares of the Company's Common Stock to
the Affiliate. In addition, the Company has authorized the issuance of warrants
to purchase 168,000 shares of the Company's Common Stock to the Affiliate in
connection with the probable acquisition of ATI Centers, Inc. which is expected
to close in the second quarter of 1997. The exercise prices of such options and
warrants, referred to below, were no less than the fair market value of the
Company's Common Stock at the date of grant. Such warrants are being accounted
for as a component of each acquisition's purchase price at their fair value.    
     
  North Bronx Resources, Inc., a subsidiary of the Company and General Partner
of North Bronx Services Group, L.P. has entered into a noncancelable operating
lease for the rental of space from an affiliate, Inter-County Resources
Company, Inc. (a limited partner in North Bronx Services, L.P.). The lease
provides for scheduled increases in base rent at varying intervals during the
lease term and adjustments to the base rent based on increases in the consumer
price index. Under the terms of the agreement, the General Partner of North
Bronx Services Group, L.P. is responsible for the lease payments in the event
of default by the Partnership. Rental expense for the Partnership was
approximately $262,000, $306,000 and $418,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
 
  During the year ended December 31, 1996, the Company, in accordance with the
related partnership agreements, allocated certain corporate overhead costs to
the limited partnerships which resulted in $1,781 of such costs being
attributed to the minority interests.
 
12. SEGMENT INFORMATION
 
  The Company operates in two industry segments--diagnostic imaging services
and temporary staffing services. The operations of the diagnostic imaging
services segment involves operating and managing diagnostic imaging centers.
The operations of the temporary staffing services segment involves providing
temporary staffing of registered nurses, technicians and other medical
industry personnel to acute and sub-acute care facilities.
 
                                     F-21

 
  The following table shows net revenues, operating income and other financial
information by industry segment for the years ended December 31:
 


                                               1996        1995        1994
                                           ------------ ----------- -----------
                                                           
   Net revenues:
     Diagnostic imaging centers........... $ 64,762,017 $35,860,798 $30,607,729
     Temporary staffing services..........   29,023,100  16,132,960  14,571,216
                                           ------------ ----------- -----------
       Total.............................. $ 93,785,117 $51,993,758 $45,178,945
                                           ============ =========== ===========
   Operating income (loss) (a):
     Diagnostic imaging centers........... $ 13,699,824 $ 7,193,994 $ 1,168,896
     Temporary staffing services..........      992,971     312,917    (133,267)
                                           ------------ ----------- -----------
       Total.............................. $ 14,692,795 $ 7,506,911 $ 1,035,629
                                           ============ =========== ===========
   Identifiable assets:
     Diagnostic imaging centers........... $154,414,650 $36,549,946 $28,131,474
     Temporary staffing services..........   10,099,162   7,585,877   7,778,000
                                           ------------ ----------- -----------
       Total.............................. $164,513,812 $44,135,823 $35,909,474
                                           ============ =========== ===========
   Depreciation and amortization:
     Diagnostic imaging centers........... $  6,963,834 $ 4,274,140 $ 4,545,054
     Temporary staffing services..........      501,641     293,004     299,211
                                           ------------ ----------- -----------
       Total.............................. $  7,465,475 $ 4,567,144 $ 4,844,265
                                           ============ =========== ===========
   Capital expenditures (b):
     Diagnostic imaging centers........... $    910,099 $   771,090 $   476,648
     Temporary staffing services..........      159,771     105,928      86,426
                                           ------------ ----------- -----------
       Total.............................. $  1,069,870 $   877,018 $   563,074
                                           ============ =========== ===========

- --------
(a) The Company's 1994 charges to operations relating to the write-down of
    value of venture contracts and intangible assets, provision for minority
    interest in losses of joint venture, executive severance, write-down of
    medical diagnostic equipment and the gain on disposal of medical
    diagnostic equipment, were attributable to the operations of the
    diagnostic imaging services segment only.
(b) Equipment financed under capital leases and notes payable amounted to
    $3,698,000, $1,159,000 and $892,000 in 1996, 1995 and 1994, respectively.
 
13. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
 
  The following is a summary of unaudited quarterly consolidated financial
results for the years ended December 31:
 


                                1ST QTR      2ND QTR     3RD QTR      4TH QTR
                              -----------  ----------- -----------  -----------
                               (000'S OMITTED, EXCEPT FOR PER SHARE AMOUNTS)
                                                        
   1996
   Revenue, net.............. $    18,098  $    18,678 $    24,774  $    32,235
   Operating income..........       2,328        3,027       3,927        5,411
   Net income................       1,298        1,606       1,845        2,505
   Fully diluted income per
    share (1)................         .16          .16         .15          .14
   1995
   Revenue, net.............. $    12,140  $    12,759 $    13,430  $    13,665
   Operating income..........       1,631        2,223       2,109        1,544
   Net income (loss).........        (232)         997        (256)       1,181
   Fully diluted income
    (loss) per share (1).....        (.03)         .13        (.03)         .15

 
                                     F-22

 
- --------
(1) Quarterly income per fully diluted common share does not equal the annual
    amount due to changes in the common and equivalent shares outstanding.
 
  Quarterly results are generally effected by the timing of acquisitions,
including limited partner interests, and the number of operating days in the
quarter.
 
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
 

   
                                                            DECEMBER 31, 1995
                                                         -----------------------
                                                          CARRYING
                                                           AMOUNT    FAIR VALUE
                                                         ----------- -----------
                                                               
   Assets:
     Cash and cash equivalents.........................  $ 3,935,000 $ 3,935,000
     Accounts receivable, net..........................   13,838,000  13,838,000
   Liabilities:
     Notes payable.....................................  $ 5,407,000 $ 5,407,000
     Capital lease obligations.........................   11,310,000   9,952,000
     Convertible debentures............................    4,350,000   4,466,000

                                                            DECEMBER 31, 1996
                                                         -----------------------
                                                          CARRYING
                                                           AMOUNT    FAIR VALUE
                                                         ----------- -----------
                                                               
   Assets:
     Cash and cash equivalents.........................  $15,346,000 $15,346,000
     Short-term investments............................    6,163,000   6,163,000
     Restricted cash...................................    1,045,000   1,045,000
     Patient receivables and due from affiliated physi-
      cian associations, net...........................   39,878,000  39,878,000
   Liabilities:
     Notes payable.....................................  $19,367,000 $19,093,000
     Capital lease obligations.........................   14,365,000  14,681,000
     Convertible debentures............................    6,988,000   6,972,000
   
 
  The carrying amounts of cash and cash equivalents, short-term investments,
long- term investments and due from affiliated physician associations and
patient receivables, net are a reasonable estimate of their fair value. The
fair value of the Company's notes and mortgage payable, capital lease
obligations and convertible debentures are based upon a discounted cash flow
calculation utilizing rates under which similar borrowing arrangements can be
entered into by the Company.
 
15. ACQUISITIONS

1994
- ----  
  On August 3, 1994, the Company acquired directly and indirectly, full
ownership of StarMed a Delaware limited partnership based in Tampa, Florida. The
acquisition was consummated pursuant to a Partnership Interest Purchase
Agreement dated as of July 28, 1994 by and among the Company, StarMed and the
owners of partnership interests in StarMed. Pursuant to the Agreement, the
Company's wholly-owned subsidiary, MRI-StarMed Inc. and MRI, acquired all of the
partnership interest of StarMed from the Sellers, in exchange for an aggregate
of 2,500,000 restricted shares of the Company's Common Stock. At the time of
acquisition, the Company and StarMed were under common control through stock and
partnership interest ownership, respectively, and as a result, the acquisition
was accounted for as a transfer between entities under common control since
the date the common control existed. Under this method of accounting, when the
entities are under common control, the assets, liabilities and operations are
combined at historical cost in a manner similar to that in pooling-of-interests
accounting. Consequently, the consolidated financial statements of the Company
included herein have been restated for all periods prior to the effective date
of the merger to combine StarMed. In addition, the per share data and weighted
average number of common shares outstanding have been restated to reflect the
additional shares outstanding for all periods presented. There were no
adjustments necessary to conform accounting policies of the two companies. See
Note 12 Segment Information for further discussion of identifiable business
segments. 
      
1995
- ----
  On February 24, 1995, the Company consummated a merger (the "Merger") with 
Maternity Resources, Inc. ("Maternity Resources"), a Delaware corporation 
engaged in the wholesale, manufacture and retail sale of maternity apparel. The 
Merger was consummated pursuant to a Stock Purchase Agreement (the "Agreement") 
dated as of February 24, 1995 by and among the Company, Maternity Resources and
the other parties named therein (the "Sellers"). Maternity Resources was formed
on December 27, 1994 for the sole purpose of acquiring Maternity Retail
Partners, L.P. and Kik Kin, L.P. Pursuant to the Agreement, the Company acquired
(i) 100% of the issued and outstanding common stock of Maternity Resources from
the Sellers in exchange for an aggregate of 480,000 shares of the Company's
Common Stock, par value $0.01 and (ii) 100% of the issued and outstanding shares
of Series B and Series C Preferred Stock of Maternity Resources from the holders
thereof in exchange for shares of the Company's Series A Preferred Stock and
Series B Preferred Stock. At the time of the Merger, the Company and Maternity
Resources were under common control through stock ownership and, as a result,
the Merger was accounted for as a transfer between entities under common
control. Under this method of accounting, when entities are under common
control, the assets, liabilities and operations are combined at historical cost
in a manner similar to that in pooling-of-interests accounting. Consequently,
the financial information of the Company included herein has been restated for
all periods prior to the effective date of the merger to combine Maternity
Resources. The per share data and weighted average number of common shares
outstanding have also been restated to reflect the additional shares outstanding
for all periods. In November 1995, the Company sold its Maternity Resources
subsidiaries and consequently transferred all of Maternity Resources liabilities
to unaffiliated third parties. The Company has no material contingent
liabilities remaining with respect to Maternity Resources. Since the Maternity
operations have been sold, Maternity Resources has been reported as a
discontinued operation. Maternity apparel revenues were recognized on an accrual
basis as earned and realizable and consisted of net revenue derived from the
wholesale and retail sale of maternity clothing and apparel. Maternity apparel
revenues amounted to approximately $11,057,000 for the year ended December 31,
1995. Revenue for the year ended December 31, 1994 is unavailable. The initial
purchase price of $4,075,912 (the aggregate recorded fair value of the Common
Stock and the Preferred Stock issued by the Company in connection with the
Merger) exceeded the book value of net assets acquired of $1,120,415 by
$2,955,497. This amount could be considered a distribution to shareholders. On
December 27, 1995, preferred shares, which were included as part of the
$4,075,912, having a potential redemption value of $2,392,000 were redeemed by
the Company for an agreed upon aggregate amount of $24. The net amount paid in
excess of the net assets acquired after the redemption amounted to $563,520.
    
    
  The acquisition of Maternity was accounted for in a manner similar to that in
a pooling of interests. This accounting resulted in certain adjustments directly
to stockholders' equity. A credit of $1,022,000 was made to paid-in-capital
related to the foregiveness of certain debt owed by Maternity to affiliated
organizations that is accounted for as a capital contribution due to the related
party nature. A credit of $570,000 was made to retained deficit that represents
a portion of Maternity's January 1995 losses attributable to a subsidiary. These
losses were included in the Company's 1994 operations in recognition of the
then full year's operating results for the specific subsidiary's year ended
January 31, 1995. Accordingly, the amount duplicated in 1995 operating results
is reversed. A charge of $269,000 to paid-in-capital relates to a cash
redemption by Maternity of its then outstanding redeemable preferred stock.
prior to the merger.      
  
  The 1994 consolidated statement of operations has been restated to include the
operating results for the twelve-month period ending January 29, 1995 for 
Maternity Retail Partners, L.P. To conform to MRI's year end, the fiscal year 
end was changed to December 31. Accordingly, the operations for the month ended 
January 29, 1995 for Maternity Retail Partners L.P. has also been included in
the Company's consolidated operating results for the twelve months ended
December 31, 1995. Therefore, an adjustment has been made to retained earnings
in 1995 to avoid duplication of this net loss.  

  On May 26, 1995, the Company consummated the acquisition of the business
operations of New England MRI, Inc. ("New England MRI"), a Florida corporation
based in Fort Myers, Florida, which owned and managed two diagnostic imaging
centers (the "Centers"). The acquisition was consummated pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of May 17, 1995 by and among two
of the Company's wholly owned subsidiaries--Fort Myers Resources, Inc. ("FMR")
and Central Fort Myers Resources, Inc. ("CFMR"), and "New England MRI".
Pursuant to the Agreement, FMR acquired substantially all of the assets
 
                                     F-23

 
   
of one of the centers and CFMR acquired all of the assets of the other center
through the issuance of 1,200,000 shares of the Company's Common Stock valued
at $3,448,500. Of the 1,200,000 shares, 600,000 shares were issued at closing
with the remaining 600,000 shares to be issued within two years of closing
(600,000 of such shares were issued subsequent to December 31, 1996). The
excess of the purchase price over the fair value of net assets acquired
amounted to approximately $2,980,000 and is being amortized on a straight line
basis over 20 years. Subject to the Centers achieving certain earning
objectives within the next three years, an additional 200,000 shares may be
issued to New England MRI. These shares have not been included in the
allocated purchase price in light of the contingent nature of the arrangement.
If the earning objectives are ultimately achieved, the market value of the
shares upon issuance will be recorded as additional goodwill subject to
amortization over the stated period. The accompanying consolidated financial
statements include the operations of FMR and CFMR from the above date of
acquisition. The shares issued to New England MRI as consideration for the
purchased assets are subject to certain registration rights.  
 
  On June 19, 1995, the Company consummated the acquisition of the business
operations of PCC Imaging, Inc. ("PCC"), which owns and manages a diagnostic
imaging center. The acquisition was consummated pursuant to an Asset Purchase
Agreement (the "Agreement") dated June 19, 1995 by and among the Company's
wholly owned subsidiary, Hackensack Resources, Inc. ("HRI") and PCC. Pursuant
to the agreement, HRI acquired substantially all of the assets of the center
for $1,800,000 in cash. The acquisition was accounted for as a purchase, under
which the purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired amounted to
$751,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of PCC
from the above date of acquisition.

1996
- ----
  
  On January 9, 1996, the Company consummated the acquisition of the business
assets of MRI-CT, Inc., ("MRI-CT") comprised primarily of four diagnostic
imaging centers in New York City. The acquisition was consummated pursuant to
an Asset Purchase Agreement dated December 21, 1995 by and among the Company
and MRI-CT. Pursuant to the Agreement, a wholly owned subsidiary of the
Company acquired all of the business assets of MRI-CT for a combination of
$553,000 cash, 194,113 shares of the Company's Common Stock valued at $914,000
and a $88,000 note payable bearing interest at prime due January 9, 2001. The
acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired amounted to $1,540,000 and is being
amortized on a straight line basis over 20 years. The accompanying
consolidated financial statements include the operations of MRI-CT from the
above date of acquisition.  
   
  On January 12, 1996, the Company consummated the acquisition of the common
stock of NurseCare Plus, Inc. ("NurseCare"), a California corporation based in
Oceanside, California, which provides supplemental healthcare staffing
services for clients including hospitals, clinics and home health agencies in
Southern California. The NurseCare acquisition was consummated pursuant to a
Stock Purchase Agreement dated as of January 11, 1996 by and among StarMed
Staffing, Inc. ("StarMed") and NurseCare. Pursuant to the NurseCare agreement,
StarMed acquired from NurseCare all of the common stock of NurseCare for
$2,514,000, payable in $1,264,000 cash and a note payable for $1,250,000
bearing interest at prime plus one percent due January 12, 1999. The
acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired amounted to $2,087,000 and is being
amortized on a straight line basis over 20 years. The accompanying
consolidated financial statements include the operations of NurseCare from the
above date of acquisition.  
 
  On May 1, 1996, the Company entered into an Asset Purchase Agreement with
Americare Imaging Centers, Inc. and MRI Associates of Tarpon Springs, Inc.
("Americare"), which owns and operates imaging centers in the Tampa, Florida
area. Pursuant to the acquisition agreement, the Company acquired certain of
the assets and liabilities of Americare for $1,500,000 cash and 228,751 shares
of the Company's Common Stock
 
                                     F-24

 
valued at $1,275,000. The acquisition was accounted for as a purchase, under
which the purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired amounted to
$2,862,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of
AmeriCare from the above date of acquisition.
 
  On May 22, 1996, the Company entered into an Asset Purchase Agreement with
Clearwater, Florida based Access Imaging center, Inc. ("Access"). Pursuant to
the acquisition, the Company acquired certain of the assets and liabilities of
Access for $1,300,000 cash and 192,063 shares of the Company's Common Stock
valued at $1,445,000. The acquisition was accounted for as a purchase, under
which the purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired amounted to
$1,972,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of
Access from the above date of acquisition.
 
  On June 28, 1996, the Company entered into an Asset Purchase Agreement with
WeCare Allied Health Care, Inc. ("WeCare"), a healthcare staffing company.
Pursuant to the agreement, the Company acquired certain assets for $1,050,000
cash and a $510,000 note payable bearing interest at prime plus one percent
due July 1998. The acquisition was accounted for as a purchase, under which
the purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of
the purchase price over the fair value of net assets acquired amounted to
$1,769,000 and is being amortized on a straight line basis over 20 years. The
accompanying consolidated financial statements include the operations of
WeCare from the above date of acquisition.
 
  On July 3, 1996, the Company acquired a diagnostic imaging center in
Centereach, New York ("Centereach"). Pursuant to the acquisition, the Company
acquired certain of the assets for approximately $3,100,000 in cash. The
acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired amounted to $2,989,000 and is being
amortized on a straight line basis over 20 years. The accompanying
consolidated financial statements include the operations of Centereach from
the above date of acquisition.
     
  On August 30, 1996, the Company consummated the NMR Acquisition. NMR was
engaged directly and through limited partnerships in the operation of eighteen
diagnostic imaging centers. Pursuant to the acquisition agreement, NMR was
merged into a wholly owned subsidiary of the Company and each issued and
outstanding share of NMR Common Stock was converted into 0.6875 shares of the
Company's Common Stock resulting in the issuance of 4,456,500 shares of the
Company's Common Stock valued at $39,350,000. The transaction was accounted
for as a purchase transaction where the value of the shares issued was
allocated to the net assets acquired based upon their respective fair values.
The operating results of NMR are consolidated with the Company for the periods
following the acquisition. The excess of the purchase price and direct 
acquisition costs (including $200,000 in fees and 120,000 warrants, with an 
exercise price of $9.00, valued at $325,000 for financial advisory services 
issued to the Affiliate) over the fair value of net assets acquired amounted to 
approximately $35,286,000 and is being amortized on a straight line basis over 
twenty years.      
       
  On November 25, 1996 the Company consummated the acquisition of two diagnostic
imaging centers in Garden City and East Setauket, New York. Pursuant to the
acquisition agreement, the Company acquired certain assets and liabilities for a
$4,500,000 convertible promissory note due January 9, 1997 and $1,900,000 in
cash. The convertible promissory note is automatically convertible into 533,175
shares of the Company's Common Stock upon registration of the shares in
accordance with its terms at a conversion price of $8.44. The acquisition was
accounted for as a purchase, under which the purchase price was allocated to the
acquired assets and assumed liabilities based upon fair values at the date of
acquisition. The excess of the purchase price and direct acquisition costs, 
(including $60,000 in financial advisory fees paid to the Affiliate) over the
fair value of net assets acquired amounted to $6,042,000 and is being amortized
on a straight line basis over 20 years. The accompanying consolidated financial
statements include the operations of the centers from the above date of
acquisition.      

  On December 16, 1996, the Company acquired the Imaging Center of the
Ironbound in Newark, New Jersey from TME, Inc. for $216,000 in cash and 18,868
shares of Company Common Stock valued at $200,000. The
 
                                     F-25

 
    
acquisition was accounted for as a purchase, under which the purchase price was
allocated to the acquired assets and assumed liabilities based upon fair values
at the date of acquisition. The excess of the purchase price and direct
acquisition costs over the fair value of net assets acquired amounted to
approximately $440,000 and is being amortized on a straight line basis over 20
years. The accompanying consolidated financial statements include the operations
of the center from the above date of acquisition.     
     
16. SUBSEQUENT EVENTS      
 
 Acquisitions:
     
  On January 16, 1997, the Company acquired a diagnostic imaging center
located in Melbourne, Florida for approximately $1,125,000 in cash. The
acquisition will be accounted for as a purchase, under which the purchase
price will be allocated to the acquired assets and assumed liabilities based
upon fair values at the date of acquisition. The excess of the purchase price
over the fair value of net assets acquired is estimated to be approximately
$1,250,000 and will be amortized on a straight line basis over 20 years.      
       
  On January 28, 1997, the Company acquired two diagnostic imaging centers in
southern California; a multi-modality imaging center in San Clemente, California
and an imaging facility in Oceanside, California for approximately $1,025,000
payable in cash and contingent consideration based on the centers achieving
certain financial objectives during the one year period subsequent to the
closing of the transaction. Contingent consideration of up to $2,000,000 is
payable in shares of the Company's Common Stock within 90 days of the end of the
measurement period. The acquisition will be accounted for as a purchase, under
which the purchase price will be allocated to the acquired assets and assumed
liabilities based upon fair values at the date of acquisition. The excess of the
purchase price and direct acquisition costs over the fair value of net assets
acquired is estimated to be approximately $1,820,000 and will be amortized on a
straight line basis over 20 years. Any contingent consideration paid will be
accounted for as an incremental component of goodwill which will be amortized
over the acquisition's remaining goodwill life.        
    
  On February 28, 1997, the Company acquired a diagnostic imaging center located
in Jacksonville, Florida for 215,000 shares of the Company's Common Stock valued
at $2,300,000 and contingent consideration based on the center achieving certain
financial objectives during the one year period subsequent to the closing of the
transaction. Contingent consideration of up to $1,850,000 is payable in shares
of the Company's Common Stock within 90 days of the end of the measurement
period. The acquisition will be accounted for as a purchase, under which the
purchase price will be allocated to the acquired assets and assumed liabilities
based upon fair values at the date of acquisition. The excess of the purchase
price and direct acquisition costs (including 32,000 warrants, with an exercise
price of $10.31 valued at $96,000 issued to the Affiliate for financial advisory
services) over the fair value of net assets acquired is estimated to be
approximately $1,960,000 and will be amortized on a straight line basis over 20
years. Any contingent consideration paid will be accounted for as an incremental
component of goodwill which will be amortized over the acquisition's remaining
goodwill life.      
    
 On March 10, 1997, the Company acquired Advanced Diagnostic Imaging, Inc.
("ADI") for approximately $6,000,000 in cash consideration. ADI owned
interests in and operated nine diagnostic imaging centers throughout the
Northeast. As part of the transaction, the Company has acquired an option to
purchase an additional center located in the Northeast. The acquisition will
be accounted for as a purchase, under which the purchase price will be
allocated to the acquired assets and assumed liabilities based upon fair
values at the date of acquisition. The excess of the purchase price and direct 
acquisition costs (including 137,000 warrants with an exercise price of $10.60
valued at $411,000 issued to the Affiliate for financial advisory services) over
the fair value of net assets acquired is estimated to be approximately
$15,980,000 and will be amortized on a straight line basis over 20 years.      
     
  On March 10, 1997, the Company acquired a diagnostic imaging center located in
West Palm Beach, Florida for approximately $2,000,000 in cash and 56,670 shares
of the Company's Common Stock valued at $600,000. The acquisition will be
accounted for as a purchase, under which the purchase price will be allocated to
the acquired assets and assumed liabilities based upon fair values at the date
of acquisition. The excess of the purchase price and direct acquisition costs
(including 57,000 warrants with an exercise price of $10.64 valued at $171,000
issued to the Affiliate for financial advisory services) over the fair value of
net assets acquired is estimated to be approximately $2,440,000 and will be
amortized on a straight line basis over 20 years.     
     
  On March 14, 1997, the Company acquired a diagnostic imaging center located in
Rancho Cucamonga, California for approximately $2,605,000 in cash and 44,016
shares of the Company's Common Stock valued at $500,000. The acquisition will be
accounted for as a purchase, under which the purchase price will be allocated to
the acquired assets and assumed liabilities based upon fair values at the date
of acquisition. The excess of the purchase price and direct acquisition costs
(including 55,000 warrants with an exercise price of $11.25 valued at $165,000
issued to the Affiliate for financial advisory services) over the fair value of
net assets acquired is estimated to be approximately $3,520,000 and will be
amortized on a straight line basis over 20 years.     
    
  The Company on March 27, 1997 entered into an agreement (considered a probable
transaction)to acquire ATI Centers Inc. ("ATI") for approximately $12,900,000 in
cash consideration and contingent consideration based on the centers achieving
certain financial objectives during a one year period subsequent to the
transaction. Contingent consideration of up to $1,500,000 is payable within 90
days of the end of the measurement period. The estimated fair value of assets to
be acquired amounted to approximately $3,629,000 consisting of approximately
$3,605,000 of fixed assets and $24,000 of other assets. Liabilities of
approximately $3,982,000 are to be assumed consisting of approximately
$1,875,000 in capital lease obligations, $1,170,000 in notes payable and
$937,000 in accounts payable and accrued expenses. The Company expects the
acquisition to close in the second quarter of 1997. ATI owns and operates eleven
diagnostic imaging centers in New Jersey and Pennsylvania. The acquisition will
be accounted for as a purchase, under which the purchase price will be allocated
to the acquired assets and assumed liabilities based upon fair values at the
date of acquisition. The excess of the purchase price and direct acquisition
costs, (including 168,000 warrants with an exercise price of $11.06 valued at
$504,000 issued to the Affiliate for financial advisory services) over the fair
value of net assets acquired is estimated to be approximately $13,754,000 and
will be amortized on a straight line basis over 20 years.    

                                     F-26

 
 Debt Financing:
     
  On February 20, 1997 the Company completed a $52,000,000 private placement
of Senior Notes (the "Senior Notes") to a group of insurance companies led by
John Hancock Mutual Life Insurance Company. Dillon, Read & Co. Inc. acted as
agent in connection with the placement. The notes bear interest at an annual
rate of 7.77%, are subject to equal annual sinking fund payments commencing in
February 2001 and have a final maturity in February 2005. The Senior Notes are 
guaranteed by substantially all of the Company's diagnostic imaging subsidiaries
and collateralized by certain partnership interests owned through subsidiaries 
by the Company. In addition, the agreement relating to the issuance of the 
Senior Notes imposes certain affirmative and negative covenants on the Company
and its restricted subsidiaries. The Company used a portion of the proceeds from
the private debt placement to retire approximately $14,000,000 of existing
equipment debt. The balance of the net proceeds is being used to fund
acquisitions and for general corporate purposes. In connection with this
placement, the Company paid an advisory fee of $225,000 to the Affiliate of the
Company's Chairman of the Board and its controlling stockholder.    
     
17. PRO FORMA INFORMATION      
 
  The Company's consolidated financial statements for the year ended December
31, 1995, do not include the results of operations of MRI-CT, Inc., NurseCare,
Americare, Access, WeCare, Centereach, NMR, Long Island, and Ironbound and
include the results of operations of New England MRI Inc., and PCC from the
effective date of such transactions.
   
  The Company's consolidated financial statements for the year ended December
31, 1996 include the results of operations of MRI-CT, Inc., NurseCare,
Americare, Access, WeCare, Centereach, NMR, Long Island, and Ironbound from the
effective dates of such transactions. The following summarizes the unaudited pro
forma results of operations for the years ended December 31, 1996 and 1995,
assuming all of the foregoing acquisitions had occurred on January 1, 1996 and
1995 (in thousands, except per share data):  
 
      

                                                            1995        1996
                                                         (UNAUDITED) (UNAUDITED)
                                                         ----------- -----------
                                                               
   Revenue, net.........................................   $99,896    $122,692
   Operating income.....................................   $13,821    $ 20,258
     Income before income taxes.........................   $ 9,888    $ 16,835
   Primary net income per share.........................   $   .50    $    .67
   Fully diluted net income per share...................   $   .51    $    .69
       
 
  The Company's consolidated financial statements for the year ended December
31, 1996, do not reflect the impact of its acquisitions effected subsequent to
such date (See note 17). The following summarizes the unaudited pro forma
results of operations for the year ended December 31, 1996, as if such
acquisitions had occurred on January 1, 1996, as well as the Company's 1996
acquisitions:
 
      

                                                                        1996
                                                                     (UNAUDITED)
                                                                     -----------
                                                                  
   Revenue, net.....................................................  $163,730
   Operating income.................................................  $ 28,868
     Income before income taxes.....................................  $ 23,201
   Primary net income per share.....................................  $    .90
   Fully diluted net income per share...............................  $    .91
       
 
                                     F-27

 
                    MEDICAL RESOURCES, INC. AND SUBSIDIARIES
 
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
 


                                  BALANCE AT ADDITIONS               BALANCE
                                  BEGINNING  CHARGED TO              AT END
           DESCRIPTION            OF PERIOD   EXPENSE   DEDUCTIONS  OF PERIOD
           -----------            ---------- ---------- ---------- -----------
                                                       
Year ended December 31, 1994
 Total Allowance for Doubtful
  Accounts and Contractual
  Adjustments.................... $2,549,304 $2,495,413 $2,163,290 $ 2,881,427
                                  ========== ========== ========== ===========
Year ended December 31, 1995
 Total Allowance for Doubtful
  Accounts and Contractual
  Adjustments.................... $2,881,427 $3,377,862 $  427,772 $ 5,831,517
                                  ========== ========== ========== ===========
Year ended December 31, 1996
 Total Allowance for Doubtful
  Accounts and Contractual
  Adjustments.................... $5,831,517 $4,783,306 $  246,521 $10,368,302
                                  ========== ========== ========== ===========