<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                     ------------------------------------

                                   FORM 10-Q
                                        


              [X] Quarterly Report pursuant to Section 13 or 15(d)
                  of the Securities Exchange Act of 1934
                  For the quarterly period ended March 31, 1998

              [ ] Quarterly report pursuant to Section 13 or 15(d)
                  of the Securities Exchange Act of 1934

                  For the transition period from _________  to  ____



                        Commission File Number 0-21758
                -----------------------------------------------
                        DIAGNOSTIC HEALTH SERVICES, INC.
             (Exact name of registrant as specified in its charter)



                Delaware                               22-2960048
       (State or other jurisdiction of              (I.R.S. Employer
       incorporation or organization)              Identification No.)


             2777 Stemmons Freeway, Suite 1525, Dallas, Texas 75207
          (Address of principal executive offices, including zip code)


                                 (214)634-0403
              (Registrant's telephone number, including area code)
            -------------------------------------------------------
   (Former name, former address and former fiscal year if changed since last
                                    report)


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 
                                  -----      -----
                                        
         APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                          DURING THE PAST FIVE YEARS.


Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                             Yes        No 
                                 -----     -----

As of March 31, 1998, there were 11,299,799 issued and 11,066,540 shares
outstanding of Registrant's common stock,  $.001 par value.
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

                         Quarterly Report on Form 10-Q

                                     INDEX



PART I.  Financial Information                                         Page No.


Item 1.  Financial Statements

Consolidated Balance Sheets                                               2-3
March 31, 1998 and December 31, 1997

Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997                                  4

Consolidated Statement of Stockholders' Equity
March 31, 1998                                                              5

Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997                                  6

Notes to Consolidated Financial Statements                               7-11

Item 2.  Management's Discussion and Analysis or

Plan of Operation                                                       12-14

 
PART II.  Other Information                                                15
 
Signatures                                                                 16
 
Item 6. Exhibits and Reports on Form 8-K                                   17
 
Exhibit 11.1 - Statement re:  computation of per share earnings            18
 
<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


                 DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                     ASSETS
                                     ------
                                                      (Unaudited)          (Audited)
                                                     March 31, 1998    December 31, 1997
                                                    ----------------   -----------------
<S>                                                  <C>               <C>          
CURRENT ASSETS:
   Cash and cash equivalents                         $   5,664,014      $   5,126,114
   Accounts receivable:  Trade, net of
       allowance for doubtful accounts                  16,207,993         17,294,128
   Accrued interest and other                              693,289            793,369
   Contract receivables - current                        2,230,576          2,167,265
   Deferred federal income taxes                            87,876             87,876
   Prepaid expenses and other                            1,440,721          1,528,931
                                                     -------------      -------------

   Total Current Assets                                 26,324,469         26,997,683
                                                     -------------      -------------

PROPERTY & EQUIPMENT:
   Office furniture & equipment                          2,098,414          2,015,749
   Machinery & service equipment                        35,932,977         35,286,844
   Leasehold improvements                                  289,299            273,968
   Less: Accumulated depreciation and amortization     (10,200,442)        (8,876,887)
                                                     -------------      -------------

      TOTAL PROPERTY & EQUIPMENT                        28,120,248         28,699,674
                                                     -------------      -------------

OTHER ASSETS:
   Deposits and other assets                             3,443,707          2,999,701
   Deferred acquisition costs                              140,582            122,536
   Contract receivables - long-term                     10,980,847         10,058,674
   Equity in unconsolidated partnership                  1,692,206                 --
   Goodwill                                             39,064,547         38,793,903
   Noncompete agreements                                 3,450,270          3,428,270
   Less: Accumulated amortization                       (3,802,757)        (3,240,266)
                                                     -------------      -------------

   Total Other Assets                                   54,969,402         52,156,818
                                                     -------------      -------------


TOTAL ASSETS                                         $ 109,414,119      $ 107,854,175
                                                     =============      =============
</TABLE>

                                                                               2
<PAGE>

                       LIABILITIES & STOCKHOLDERS' EQUITY
                       ----------------------------------

<TABLE>
<CAPTION>

                                                         (Unaudited)       (Audited)
                                                        March 31, 1998  December 31, 1997
                                                        --------------  -----------------
<S>                                                     <C>             <C>          
CURRENT LIABILITIES:
   Accounts payable                                     $   1,410,654     $   2,626,978
   Accrued liabilities                                      1,951,141         3,774,969
   Current lease obligations                                4,568,536         4,663,279
   Current portion of long-term debt                        1,361,559         1,485,113
   Deferred liability                                       1,500,000         2,362,554
   Notes payable                                            2,500,000         1,500,000
   Current income taxes                                     1,654,582         1,363,543
                                                        -------------     -------------

Total Current Liabilities                                  14,946,472        17,776,436

Long-term lease obligations                                 9,241,631        10,348,496
Long-term debt                                              4,640,871         4,961,570
Senior subordinated debt                                   20,000,000        20,000,000
Deferred rent                                                 147,567           149,253
Other liabilities                                           2,742,500         2,647,277
Deferred income taxes                                       2,018,480         2,018,480
                                                        -------------     -------------

   Total Liabilities                                       53,737,521        57,901,512
                                                        -------------     -------------

Stockholders' Equity:
   Common stock, $.001 par value, authorized
     15,000,000 shares; issued 11,299,799 and
     10,718,867 shares and outstanding 11,066,540
     and 10,485,608 shares at March 31, 1998 and
     December 31, 1997, respectively                           11,248            10,719
   Preferred stock, $.001 par value; authorized
     3,000,000 shares; issued and outstanding 695,593
     shares at March 31, 1998 and at
     December 31, 1997; $4.5 million
     liquidation preference                                       696               696
   Additional paid-in capital                              46,406,603        42,151,656
   Retained earnings                                        9,469,202         8,000,743
   Stockholder receivable                                    (103,500)         (103,500)
   Treasury stock (at cost)                                  (107,651)         (107,651)
                                                        -------------     -------------

Total Stockholders' Equity                                 55,676,598        49,952,663
                                                        -------------     -------------

TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY                                    $ 109,414,119     $ 107,854,175
                                                        =============     =============
</TABLE>

                                                                               3
<PAGE>

                 DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>

                                              Three Months Ended March 31,
                                              ----------------------------
                                                   1998            1997
                                              ------------    ------------
<S>                                           <C>             <C>         
REVENUES:
   Gross revenues                             $ 14,414,390    $ 10,509,976
                                              ------------    ------------

EXPENSES:
   General & administrative                        810,245         547,274
   Salaries & employee benefits                  6,490,857       5,048,212
   Legal & professional                             60,090          51,007
   Rent & utilities                                367,908         199,272
   Taxes & insurance                               271,072         106,261
   Technical operating expenses                  1,310,870       1,430,087
   Provision for doubtful accounts                 144,144         101,741
   Depreciation and amortization                 1,924,177       1,162,132
                                              ------------    ------------
     TOTAL OPERATING EXPENSES                   11,379,363       8,645,986
                                              ------------    ------------

   Equity in earnings of
      unconsolidated partnership                    85,675              --
                                              ------------    ------------

INCOME FROM OPERATIONS                           3,120,702       1,863,990

OTHER INCOME (EXPENSE):
   Other income                                     53,133          73,878
   Interest expense                             (1,014,338)       (391,456)
                                              ------------    ------------
     TOTAL OTHER INCOME (EXPENSE)                 (961,205)       (317,578)
                                              ------------    ------------

INCOME BEFORE INCOME TAXES                       2,159,497       1,546,412

PROVISION FOR FEDERAL INCOME TAXES                 691,038         525,780
                                              ------------    ------------

NET INCOME                                    $  1,468,459    $  1,020,632
                                              ============    ============

EARNINGS PER SHARE:
   Basic                                      $       0.14    $       0.10
                                              ============    ============
   Diluted                                    $       0.12    $       0.10
                                              ============    ============

Weighted average common shares outstanding:
   Basic                                        10,761,768       9,767,989
                                              ============    ============
   Diluted                                      12,366,956      10,475,910
                                              ============    ============

</TABLE>

                                                                               4
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
           Consolidated Statement of Stockholders' Equity (Unaudited)
                   For the Three Months Ended March 31, 1998

<TABLE>
<CAPTION>

                                                                Additional
                                          Common    Preferred     Paid-in      Retained    Stockholder   Treasury
                                           Stock     Stock        Capital      Earnings    Receivable      Stock         Total
                                        ------------------------------------------------------------------------------------------
<S>                                      <C>        <C>        <C>            <C>          <C>           <C>          <C>  
Balance, January 1, 1998                 $10,719      $696     $42,151,656    $8,000,743    ($103,500)   ($107,651)   $49,952,663

Net income                                                                     1,468,459                                1,468,459

Warrants exercised                           200                 1,297,800                                              1,298,000

Shares issued in connection 
with the following acquisitions:
    ICM                                       36                   289,178                                                289,214
    Sonomed                                   15                   169,985                                                170,000
   Chula Vista Partnership                   127                 1,606,404                                              1,606,531

Stock options exercised                      151                   891,580                                                891,731

                                        ------------------------------------------------------------------------------------------
Balance, March 31, 1998                  $11,248       $696    $46,406,603    $9,469,202    ($103,500)  ($107,651)    $55,676,598
                                        ==========================================================================================
</TABLE>

                                                                               5
<PAGE>
                 DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>



                                                       Three Months Ended March 31,
                                                       -----------------------------
                                                           1998             1997
                                                       ------------    -------------
<S>                                                    <C>             <C>         
CASH FLOWS FROM OPERATIONS:
    Net income                                         $  1,468,459    $  1,020,632
Adjustments to Reconcile Net Income to
    Net Cash Provided by Operations:
    Depreciation and amortization                         1,924,178       1,162,132
    Decrease in deferred rent expense                        (1,686)         (1,112)
    Gain on disposal of assets                                 (186)             --
    Foreign currency translation adjustments                     --           2,350
    (Increase) decrease in trade receivable               1,254,878        (265,944)
    Increase in contracts receivable                       (985,484)       (411,433)
    (Increase) decrease in prepaid expenses                  92,759        (681,413)
    Increase in other assets                               (444,007)     (1,106,052)
    Increase in equity in unconsolidated partnership        (85,675)             --
    Increase (decrease) in accounts payable              (1,234,303)        164,840
    Increase (decrease) in accrued liabilities           (1,825,596)      5,088,338
    Increase in income taxes payable                        291,039         525,780
    Increase in other liabilities                            95,223         614,770
                                                       ------------    ------------
NET CASH PROVIDED BY OPERATIONS                             549,599       6,112,888
                                                       ------------    ------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
    Decrease in cash investments                                 --       5,000,000
    Cash payments for the purchase of property             (516,908)       (349,786)
    Acquisition of businesses net of cash acquired           (4,472)    (14,357,147)
    Additional subsidiary acquisition costs                 (91,741)       (148,952)
    Decrease in other receivables                            37,215         137,856
    (Increase) decrease in employee receivables              64,958         (39,117)
    Increase in stockholder receivable                       (2,093)         (1,552)
                                                       ------------    ------------
    NET CASH  (USED IN) PROVIDED BY INVESTING
       ACTIVITIES                                          (513,041)     (9,758,698)
                                                       ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of common stock                2,189,731       8,662,569
    Net borrowings on line of credit                        137,446         715,000
    Proceeds from bank loans                                     --       5,980,000
    Principal payments on long-term debt                   (624,227)     (2,582,160)
    Principal payments on capital lease obligations      (1,201,608)       (491,155)
                                                       ------------    ------------
NET CASH  (USED IN) PROVIDED BY FINANCING
    ACTIVITIES                                              501,342      12,284,254
                                                       ------------    ------------

NET INCREASE IN CASH                                        537,900       8,638,444
CASH AND CASH EQUIVALENTS BALANCE,
    BEGINNING OF PERIOD                                   5,126,114         229,547
                                                       ------------    ------------
CASH AND CASH EQUIVALENTS BALANCE,
    END OF PERIOD                                      $  5,664,014    $  8,867,991
                                                       ============    ============
</TABLE>

                                                                               6
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTE 1. GENERAL

The unaudited consolidated financial statements included herein for Diagnostic
Health Services, Inc. and subsidiaries ("DHS" or the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include all adjustments which are, in the opinion of management,
necessary for a fair presentation. Certain information and footnote disclosures
required by generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Certain 1997 balances have been
reclassified to conform to the 1998 presentation.  These financial statements
include the accounts of the Company and its subsidiaries, which are set forth in
the following table.



                       [ORGANIZATION CHART APPEARS HERE]



In addition, DHS and DHSMS have two inactive wholly-owned subsidiaries,
Diagnostic Health Services de Mexico, S.A. de  C.V and HomeCare International,
Inc.

The Company is a leading outsource provider of medical services to hospitals,
physicians' offices and other healthcare facilities in the Midwest, West and
South Central United States.  DHS primarily provides radiology and cardiology
diagnostic services and equipment, as well as departmental management services,
to healthcare facilities on an in-house and shared basis.

                                                                               7
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTE 2. WARRANTS

On February 14, 1997, the SEC declared effective the Company's Form S-3
Registration Statement relating to an offering of 1,791,150 Warrant Shares,
which are issuable upon exercise, at prices ranging from $5.48 to $7.50 per
share, of (i) 1,375,000 Redeemable Common Stock Purchase Warrants (the "Public
Warrants") issued in connection with the company's 1993 initial public offering
(the "IPO"), (ii) 316,150 underwriter warrants issued in connection with the IPO
(the "Underwriters' Warrants"), and (iii) 100,000 warrants issued in connection
with DHS's equity private placement in April 1996 (the "Bridge Warrants") of
which 2,500 had been exercised prior to the effectiveness of the registration.
On February 18, 1997, the Company called all of the Public Warrants for
redemption.

On April 17, 1997, the Company issued 60,000 common stock purchase warrants to
Prudential Insurance Company of America in connection with the sale of
$20,000,000 in principal amount of senior subordinated promissory notes.  As of
March 31, 1998, no warrants under this agreement had been exercised.  At March
31, 1998, stock warrants outstanding amounted to 108,514 at exercise prices
ranging from $5.48 to $12.25 per common share.

NOTE 3. ACQUISITIONS

In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary ("HIT"), acquired Ultrasound Diagnostic Services, Ltd. ("UDS"), an
Arizona-based provider of non-invasive diagnostic ultrasound testing services.
The consideration paid for UDS consisted of 86,520 shares of DHS's common stock
and a $400,000 cash payment to the former stockholders of UDS.

On March 21, 1997 (effective as of March 1, 1997), the Company, through its
second-tier wholly-owned subsidiary, SoCal Diagnostic Services, Inc. ("SoCal"),
purchased substantially all of the operating assets (exclusive of cash) of the
ultrasound division of Diagnostic Imaging Services, Inc. ("DIS"), which business
consists primarily of providing hospital-based and mobile non-invasive
ultrasound and other diagnostic testing services to the acute and post-acute
care industry and primary care physicians in the greater Los Angeles and San
Diego, California metropolitan areas and in counties adjacent thereto.  The
purchase included $6,519,475 of various assets (including goodwill), including
approximately $2,579,158 of equipment, furniture and fixtures, $8,590 of
security deposits, and $3,931,721 of goodwill.  The purchase price paid to DIS
was $6,519,475 (subject to post-closing adjustment), which was paid entirely in
cash.  In addition, SoCal assumed capital lease obligations, financing
agreements and other commitments in respect of fixed assets in the aggregate
principal amount of $1,519,261.  The Company also agreed that it would,
subsequent to the closing, in the event of certain business developments, issue
certain common stock purchase warrants to DIS, and the Company and SoCal
obtained a 10-year non-competition agreement from DIS in consideration of the
cash sum of $1,000,000 paid to DIS and its ultimate corporate parent at the time
of closing.

On April 17,1997 (effective March 1, 1997), SoCal acquired all of the issued and
outstanding capital stock of DIS (which, together with its wholly-owned
subsidiaries, Diagnostic Imaging Services, Inc. I and Santa Monica Imaging
Center Limited Partnership, are collectively referred to herein as the "DIS
Companies"), whose business consists primarily of the ownership and operation of
four (4) hospital-based magnetic resonance imaging (MRI) centers located in
southern California.  The purchase price for the stock of DIS was $9,083,865
(subject to post-closing adjustment), of which $7,583,865 was paid in cash, and
the remaining $1,500,000 of which is payable either in cash or (at the seller's
option) in common stock of the Company (valued at $7.615 per share) in three
equal annual installments of $500,000 each on April 17 of each of 1998, 1999 and
2000.  In addition, the DIS Companies were acquired subject to capital lease
obligations, financing agreements and other commitments in respect of fixed
assets of the business in the aggregate principal amount of $6,046,755.

                                                                               8
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTE 3 - ACQUISITIONS (Continued)

The funds utilized to pay the cash portion of the purchase price in the second
DIS transaction were obtained through the simultaneous issuance and sale by the
Company to The Prudential Insurance Company of America ("Prudential") of
$20,000,000 in principal amount of senior subordinated promissory notes of the
Company (the "Notes").  The Notes bear interest at a fixed rate of 10.5% per
annum (payable quarterly), and mature as to principal in equal one-third
installments on April 17 of each of 2003, 2004 and 2005.  The Notes may be
prepaid at the Company's option (subject to certain "make-whole" prepayment
premiums in respect of the remaining stated term of the Notes), and the Company
may be required (at the Noteholders' option) to purchase the Notes in the event
of a change in control of the Company.  In addition to application to the
payment of the cash portion of the purchase price for the stock of DIS, the net
proceeds from the issuance and sale of the Notes were utilized to repay
$5,500,000 in borrowings obtained under the Company's senior credit facilities
with Texas Commerce Bank National Association (the "Bank") (utilized in
connection with the Company's March 1997 acquisition of the ultrasound business
of DIS), and for short-term investments pending other use of such net proceeds.

In connection with the issuance of the Notes, the Company paid Prudential a fee
in the amount of $54,590, and issued to Prudential a five-year redeemable common
stock purchase warrant (with piggyback registration rights) for 60,000 shares of
common stock of the Company at an exercise price of $12.25 per share.  In
addition, the Company paid to Prudential Securities, Inc. (as placement agent) a
fee in the amount of $690,470.

Effective as of October 17, 1997, HIT acquired CardioVision, Inc. ("CVI"), a Las
Vegas, Nevada-based provider of non-invasive diagnostic ultrasound testing
services.  The consideration paid for CVI consisted of 29,728 shares of DHS
common stock and a $340,000 cash payment to the former stockholders of CVI.

On November 19, 1997, SoCal acquired the assets and business of Valley
Diagnostic Services ("Valley"), a proprietorship providing mobile diagnostic
ultrasound testing services in southern California.  The consideration paid by
SoCal in this transaction consisted of 13,309 shares of DHS common stock and a
$100,000 cash payment to the former owner of Valley.

Effective as of December 2, 1997, HIT acquired Medical Diagnostic Imaging, Inc.
("MDII"), a Huntsville, Alabama-based provider of non-invasive diagnostic
ultrasound testing services.  The consideration for MDII consisted of 100,524
shares of DHS common stock and a $900,000 cash payment to the former
stockholders of MDII.

Effective as of December 9, 1997, SoCal acquired Mobil Diagnostics, Inc.
("Mobil"), a southern California-based provider of mobile non-invasive
diagnostic ultrasound testing services.  The consideration for Mobil consisted
of 39,720 shares of DHS common stock and a cash payment of $150,000 to the
former stockholder of Mobil.  In addition, SoCal agreed to cause DHS to issue
certain additional shares of DHS common stock to the former stockholder within
15 days after the first anniversary of the closing date, and to make cash
payments to the former stockholder of $50,000 and $28,000, respectively, within
15 days after the first and second anniversaries of the closing date.

                                                                               9
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTE 3 - ACQUISITIONS (Continued)

Effective as of December 30, 1997, the Company's second-tier wholly-owned
subsidiary Mobile Diagnostic Systems, Inc. ("MDS") acquired Medical Ancillary
Services, Inc. ("MASI"), a Fort Worth-based provider of non-invasive diagnostic
ultrasound and nuclear imaging testing services.  The consideration paid for
MASI consisted of 53,582 shares of DHS common stock and a cash payment of
$384,000 to the former stockholders of MASI.

Effective as of January 30, 1998, MDS acquired International Cardiac Monitoring,
Inc. ("ICM"), a Houston-based provider of medical testing and monitoring
services.  The consideration paid for ICM consisted of 26,946 shares of DHS
common stock.

On February 26, 1998, SoCal acquired from Diagnostic Imaging Services, Inc., a
Delaware corporation ("DIS-Delaware"), one-half of the outstanding general
partnership interests and one-half of the outstanding limited partnership
interests in Scripps Chula Vista Imaging Center, L.P. ("SCVIC"), whose business
consists of the operations of a magnetic resonance imaging center on the campus
of Scripps Hospital in Chula Vista, California.  The consideration paid for such
partnership interests consisted of 127,250 shares of DHS common stock, which DHS
has committed to include in its next registration statement filed with the
Securities Exchange Commission (other than a registration statement in respect
of any acquisition, merger or consolidation relating to DHS or any employee
benefit plan of DHS).

Effective as of March 2, 1998, the Company acquired Sonomed, Inc. ("Sonomed"), a
Birmingham, Alabama-based provider of medical testing and monitoring services.
The consideration paid for Sonomed consisted of 14,571 shares of DHS common
stock and a cash payment of $30,000 to the former stockholder of Sonomed.


NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for the three months ended March 31, 1998 and 1997 for interest was
approximately $1,014,000 and $391,000, respectively.

The Company paid $400,000 in cash for income tax payments for the three months 
ended March 31, 1998. No cash payments for income taxes were made for the three 
months ended March 31, 1997.

The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with the acquired businesses.
Cash and noncash investing and financing activities related to the acquisitions
for the three months ended March 31, consisted of the following:

<TABLE>
<CAPTION>
 
                                                            
                               1998              1997
                           ------------      ------------
<S>                        <C>               <C>
Assets acquired               $ 688,935      $ 24,536,692
Liabilities assumed            (199,721)       (9,343,352)
Common stock issued            (459,214)         (690,000)
                           ------------      ------------
Total cash paid                  30,000        14,503,340
Fees and expenses                     -                 -
Less cash acquired              (25,528)         (146,193)
                           ------------      ------------
Net cash paid                 $   4,472       $14,357,147
                           ============      ============
</TABLE>

                                                                              10
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES


NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION (Continued)

The Company also recognized assets and obligations under noncompete agreements
of approximately $22,000 and approximately $2,160,000 for the three months ended
March 31, 1998 and 1997, respectively.

For the three months ended March 31, 1998 and 1997, except in connection with
the UDS and DIS acquisitions, no property and equipment was acquired under
capital leases.


NOTE 5. SUBSEQUENT EVENTS

In March 1998, DIS-Delaware agreed to convert into DHS common stock certain
deferred liabilities owed in accordance with the DIS transactions described in
Note 3; therefore, $1,500,000 of deferred liabilities were recorded as current
liabilities at March 31, 1998 and December 31, 1997.  On April 8, 1998, the
deferred liabilities were converted to 200,000 DHS common shares.

The Company has concluded the negotiation of an amended credit facility with
Chase Bank of Texas, N.A. ("Chase").  Under the revised agreement, the
availability of new borrowings under the Company's term loan facility has been
extended to December 31, 1998 (subject to Chase's discretion in making
advances), and the outstanding borrowings of $2,500,000 under the Company's
$2,500,000 revolving credit facility have been added to the $5,815,039
outstanding under the term loan facility.  Additionally, certain debt ratio and
fixed charge coverage ratio covenants have been adjusted and modified so that
the Company can more readily meet current and future financial covenants.

Also subsequent to the first quarter close, the Company announced the execution
of a letter of intent to acquire the southwestern operations of WorldCare
Imaging, Inc. ("WCI"), for which closing is subject to the completion of the
Company's due diligence review and definitive documents.

On April 17, the Company filed an S-3 Registration Statement (which was declared
effective on April 24) of 501,163 shares of common stock in connection with the
proposed WCI transaction, the SCVIC transaction described in Note 3, and the
debt conversion described in the first paragraph of this Note 5. Of the 501,163
shares registered, 327,250 of these shares have been issued to DIS-Delaware, and
the remaining 173,913 shares are being held in reserve pending the completion of
the WCI transaction. All shares in the registration statement are subject to
substantial restrictions as detailed in the plan of distribution described in
the registration statement.

On May 11, 1998, the Company acquired Diagnostic Radiology Mobile Ultrasound,
Inc. ("DRMU"), an Edmond, Oklahoma-based provider of non-invasive diagnostic
ultrasound testing services.  The consideration paid to the former owners of
DRMU consisted of 13,484 shares of DHS common stock.

                                                                              11
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

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


RESULTS OF OPERATIONS


The following table sets forth operating data of the Company as a percentage of
net sales for the periods indicated:

<TABLE>
<CAPTION>
 
                                                                        Three Months Ended
                                                                             March 31,
                                                                        ------------------
                                                                          1998      1997
                                                                        --------  --------
<S>                                                                     <C>       <C>
                Gross revenues                                            100.0%     100.0%
                Operating expenses                                         78.9%      82.3%   
                Equity in earnings of unconsolidated partnership            0.6%        --
                                                                        -------    -------
                Income from operations                                     21.7       17.7
                Interest expense                                            7.0        3.7
                Other expense (income)                                     (0.3)      (0.7)
                                                                        -------    -------
                Income before provision for income taxes                   15.0       14.7
                Income tax expense                                          4.8        5.0
                                                                        -------    -------
                Net income                                                 10.2 %      9.7 %
                                                                        =======    =======
</TABLE>

Note: Numbers may not add due to rounding.

Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997

Gross revenues increased by 37.1% to approximately $14,414,000 for the three
months ended March 31, 1998 from approximately $10,510,000 for the three months
ended March 31, 1997.  Excluding revenues attributable to acquired businesses,
gross revenues increased by 12.0% to approximately $11,771,000 for the three
months ended March 31, 1998 from approximately $10,510,000 for the three months
ended March 31, 1997.

Operating expenses increased by 31.6% to approximately $11,379,000 for the three
months ended March 31, 1998 from approximately $8,646,000 for the three months
ended March 31, 1997, due to the Company's expanded operations through its
acquisitions.  As a percentage of gross revenues, total operating expenses
decreased to 78.9% for the three months ended March 31, 1998 from 82.3% for the
three months ended March 31, 1997.  This reduction is attributable primarily to
efficient utilization of personnel and resources, and absorption of fixed costs
over a broader revenue base, resulting from the Company's integration of
acquired businesses.  The Company has also experienced an increase in the number
of in-house contracts for the provision of radiology and cardiology services.
These contracts typically generate higher profit margins than the other services
provided by the Company.

Income from operations increased by 67.4% to approximately $3,121,000 for the
three months ended March 31, 1998 from approximately $1,864,000 for the three
months ended March 31, 1997.  As a percentage of gross revenues, income from
operations increased to 21.7% for the three months ended March 31, 1998 from
17.7% in the comparable prior year period.

Interest expense increased by 159.1% to approximately $1,014,000 for the three
months ended March 31, 1998 from approximately $391,000 for the three months
ended March 31, 1997. This increase was attributable primarily to the
$20,000,000 in subordinated debt obligations incurred in connection with the
Company's 1997 acquisitions from DIS, and new debt obligations acquired in
connection with those and other business acquisitions.  As a percentage of gross
revenues, interest expense increased to 7.0% for the three months ended March
31, 1998 from 3.7% for the three months ended March 31, 1997.

                                                                              12
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

Other income is primarily gain realized upon disposition of equipment at the end
of its lease term, and interest earned on liquid investments.

Net income increased by 43.9% to approximately $1,468,000 for the three months
ended March 31, 1998 from approximately $1,021,000 for the comparable prior year
period.  This increase is due primarily to increased revenues and continued
consolidation resulting in efficient utilization of personnel and equipment.

LIQUIDITY AND CAPITAL RESOURCES

In May 1998, the Company and its subsidiaries entered in to an amendment of the
revolving credit and term loan facility with Chase, providing for up to
$2,500,000 in available revolving credit (or, if less, 75% of the Company's and
its subsidiaries' eligible accounts receivable from time to time), and an
acquisition term loan facility of up to $17,500,000 in maximum principal amount.
At March 31, 1998, the Company's outstanding borrowings under the loan agreement
were $2,500,000 under the revolving credit facility (which borrowings have since
been rolled over into the term loan facility), and $5,815,039 under the term
loan facility.  These loans bear interest at varying rates, depending on the
Company's relative leverage from time to time.  The Company's right to make
additional borrowings under the acquisition term loan facility will terminate on
December 31, 1998, and the revolving credit facility is scheduled to expire on
June 30, 1998.  At March 31, 1998, the Company had approximately $5,664,000 in
cash and cash equivalents.  In connection with the amendment, Chase waived
certain prior financial covenant defaults.

In April 1997, the Company issued and sold to Prudential $20,000,000 in
principal amount of senior subordinated promissory notes (the "Subordinated
Notes").  The Subordinated Notes bear interest at a fixed rate of 10.5% per
annum, and mature as to principal in equal one-third installments on April 17 of
each of 2003, 2004 and 2005.  The Subordinated Notes may be prepaid by the
Company under certain circumstances (including the requirement of certain "make-
whole" prepayment premiums), and the Company may be required (at the option of
the holders of the Subordinated Notes) to purchase the Subordinated Notes in the
event of a change in control of the Company.  The Subordinated Notes also
require the Company and its subsidiaries to comply with certain financial
covenants, including limitations on certain other indebtedness.

The Company and its subsidiaries have also entered into various financing
arrangements with commercial leasing companies and equipment suppliers, bearing
interest ranging from 6% to 11% per annum.

The Company received net proceeds of approximately $1,298,000 in the three
months ended March 31, 1998 from the exercise of underwriter's warrants,
approximately $8,424,000 in fiscal year 1997 from the exercise of its
previously outstanding publicly traded warrants (which were called for
redemption in the first quarter of 1997), $562,500 in fiscal year 1997 from the
exercise of other warrants, and $891,731 in the three months ended March 31,
1998 and $1,492,801 in fiscal year 1997 from the exercise of options under the
Company's various stock option plans.

Based on the Company's operating plan, management believes that available
resources and funds generated from operations will be sufficient to meet the
Company's operating requirements through the close of the Company's fiscal year
ending December 31, 1998.

                                                                              13
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

EFFECTS OF INFLATION

Inflation is not a material factor affecting the Company's business.  General
operating expenses such as salaries and employee benefits are, however, subject
to normal inflationary pressures.

SEASONALITY

The Company's results of operations, have, in some years, varied significantly
from quarter to quarter, for reasons particular to each quarter.  For instance,
hospital admissions and doctor visits (and, therefore, the Company's imaging
revenues) are typically lower during holiday periods, and at other times when
physicians traditionally take their own vacations.  Conversely, prior to the
sale of such business in the fourth quarter of 1997, revenues from the Company's
allied healthcare services business have generally increased in holiday periods,
due to increased demand for temporary personnel when regular staff is away.

TRENDS AND UNCERTAINTIES

The Company's future revenues and results of operations may be substantially
affected by proposed reforms of the nation's healthcare system and by potential
reductions in reimbursement rates and policies imposed by Medicare and other
third-party reimbursement programs (from which the Company derives a material
portion of its receipts).  Continuing pressures on pricing structures applicable
to the Company's services, or inability to renew existing contracts, could have
the effect of reducing the Company's revenues and operating profit margins.  The
Company is unable to predict the nature or extent of any such changes and/or the
effects thereof on the Company.

                                                                              14
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

                                    Part II
                               OTHER INFORMATION



Items 1-5. Not Applicable

Item 6.  Exhibits and Reports on Form 8-K.

(a) Exhibits to this report:

Exhibit 11.1:     Computation re: Computation of Earnings Per Share

(b) The Company did not file any reports on Form 8-K during the quarterly period
 ended March 31, 1998.

                                                                              15
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES


                                  SIGNATURES

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


                        DIAGNOSTIC HEALTH SERVICES, INC.


                       /S/ MAX W. BATZER
----------------------------------------
                           Max W. Batzer
       Chairman, Chief Executive Officer
                            and Director



                      /S/ BRAD A. HUMMEL
----------------------------------------
                          Brad A. Hummel
      President, Chief Operating Officer
                            and Director



               /S/ CHRISTOPHER L. TURNER
----------------------------------------
                   Christopher L. Turner
                 Chief Financial Officer
        and Principal Accounting Officer



                         /S/ BO W. LYCKE
----------------------------------------
                             Bo W. Lycke
                                Director


                     Date:  May 15, 1998

                                                                              16