<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                      ----------------------------------
                                  FORM 10-QSB

            [ X ] Quarterly Report pursuant to Section 13 or 15(d)
                  of the Securities Exchange Act of 1934
                  For the quarterly period ended June 30, 1997

            [   ] 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)


                              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 June 30, 1997, there were 9,884,314 issued and 9,651,055 shares
outstanding of Registrant's common stock,  $.001 per value.
<PAGE>
 
               DIAGNOSTIC HEALTH SERVICES, INC. AND SUBSIDIARIES

                        QUARTERLY REPORT ON FORM 10-QSB

                                     INDEX



PART I.  FINANCIAL INFORMATION                                   PAGE NO.

Item 1.  Financial Statements (Unaudited)

Consolidated Balance Sheet - June 30, 1997                          2-3
 
Consolidated Statements of Operations
Six months ended June 30, 1997 and 1996                               4
 
Consolidated Statements of Operations
Three months ended June 30, 1997 and 1996                             5
 
Consolidated Statements of Stockholders' Equity
June 30, 1997                                                         6
 
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996                               7
 
Consolidated Statements of Cash Flows
Three months ended June 30, 1997 and 1996                             8
 
Notes to Consolidated Financial Statements                         9-12
 
Item 2.  Management's Discussion and Analysis or
Plan of Operation                                                 13-16
 
 
PART II.  OTHER INFORMATION                                          17
 
Signatures                                                           18
 
Item 6. Exhibits and Reports on Form 8-K                             19
 
Exhibit 1 - Statement re:  computation of per share earnings         20

                                                                            
<PAGE>
 
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS



                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                    Consolidated Balance Sheet (Unaudited)
                                 June 30, 1997

                                    ASSETS
                                    ------
 
<TABLE>
<CAPTION> 
 
CURRENT ASSETS:
<S>                                                       <C>
  Cash and cash equivalents                                 $ 10,091,518
  Short term investments                                              --
  Accounts receivable:
         Trade, net of allowance for doubtful
            accounts                                          14,632,750
         Accrued interest and other                              609,263
         Stockholders                                             43,558
         Employees                                               305,101
  Contract receivables - current                               1,382,154
  Deferred federal income taxes                                   57,876
  Prepaid expenses and other                                   1,984,375
                                                             -----------
 
     TOTAL CURRENT ASSETS                                     29,106,595
                                                             -----------
 
PROPERTY & EQUIPMENT:
  Office furniture & equipment                                 1,535,470
  Machinery & service equipment                               33,522,827
  Leasehold improvements                                          80,733
       Less: Accumulated depreciation and amortization        (7,117,736)
                                                             -----------
 
         TOTAL PROPERTY & EQUIPMENT                           28,021,294
                                                             -----------
 
OTHER ASSETS:
  Deposits and other assets                                    3,487,556
  Deferred offering/acquisition                                  470,774
  Contract receivables - long-term                             2,709,084
  Goodwill                                                    29,513,229
  Noncompete agreements                                        3,746,818
       Less: Accumulated amortization                         (2,193,490)
                                                             -----------
 
     TOTAL OTHER ASSETS                                       37,733,971
                                                             -----------
 
TOTAL ASSETS                                                 $94,861,860
                                                             ===========
</TABLE>
                                                                               2
<PAGE>
 
                      LIABILITIES & STOCKHOLDERS' EQUITY
                      ----------------------------------
<TABLE>
<CAPTION>
 
CURRENT LIABILITIES:
<S>                                                           <C>     
 Accounts payable                                             $ 2,122,989
 Accrued liabilities                                            1,644,969
 Current lease obligations                                      4,067,028
 Current portion of long-term debt                              1,658,297
 Deferred liability                                               500,000
 Notes payable                                                         --
 Current income taxes                                           1,422,622
                                                              -----------
 
   TOTAL CURRENT LIABILITIES                                   11,415,905
 
Long-term lease obligations                                    12,222,971
Long-term debt                                                  4,893,200
Sr. Subordinated notes                                         20,000,000
Deferred rent                                                     152,627
Deferred liability                                              1,000,000
Other liabilities                                               2,402,002
Deferred income taxes                                           1,057,779
                                                              -----------
 
     TOTAL LIABILITIES                                         53,144,484
                                                              -----------
 
STOCKHOLDERS' EQUITY:
 Common stock, $.001 par value, authorized
  15,000,000 shares;  issued 9,884,314
  shares and outstanding 9,651,055 shares                           9,884
 Preferred stock, $.001 par value: authorized
  3,000,000 shares; issued and outstanding 648,986 shares;
     $4,542,903 liquidation preference                                649
 Additional paid-in capital                                    36,971,336
 Retained earnings                                              4,950,225
 Foreign currency translation                                      (3,567)
 Stockholder receivable                                          (103,500)
 Treasury stock (at cost)                                        (107,651)
                                                              -----------
 
TOTAL STOCKHOLDERS' EQUITY                                     41,717,376
                                                              -----------
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                      $94,861,860
                                                              ===========
</TABLE>
                                                                               
                                                                               3
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
               Consolidated Statements of Operations (Unaudited)

<TABLE>
<CAPTION>
 
 
                                       SIX MONTHS ENDED JUNE 30,
                                      ----------------------------
                                          1997          1996       
                                      ------------   -------------  
<S>                                   <C>           <C>            
REVENUES:                                                          
 Gross revenues                       $23,042,652    $10,573,587   
                                      -----------    -----------   
                                                                   
EXPENSES:                                                          
 General & administrative                 986,890        593,308   
 Salaries & employee benefits          10,493,117      5,370,342   
 Legal & professional                     113,154         51,635   
 Rent & utilities                         515,108        158,906   
 Taxes & insurance                        215,986        179,967   
 Technical operating expenses           3,062,121      1,429,844   
 Provision for doubtful accounts          275,519         (3,068)  
 Depreciation and amortization          2,590,231        982,827   
                                      -----------    -----------   
  TOTAL OPERATING EXPENSES             18,252,126      8,763,761   
                                      -----------    -----------   
                                                                   
INCOME FROM OPERATIONS                  4,790,526      1,809,826   
                                      -----------    -----------   
                                                                   
OTHER INCOME (EXPENSE):                                            
 Other income                             224,333        161,271   
 Interest expense                      (1,404,206)      (520,859)  
                                      -----------    -----------   
  TOTAL OTHER INCOME (EXPENSE)         (1,179,873)      (359,588)  
                                      -----------    -----------   
                                                                   
INCOME BEFORE INCOME TAXES              3,610,653      1,450,238   
                                                                   
PROVISION FOR FEDERAL INCOME TAXES      1,227,622        459,276   
                                      -----------    -----------   
                                                                   
NET INCOME                            $ 2,383,031    $   990,962   
                                      ===========    ===========   
                                                                   
EARNINGS PER SHARE :                                               
 Primary                              $      0.23    $      0.16   
                                      ===========    ===========   
 Fully diluted                        $      0.21    $      0.15   
                                      ===========    ===========   
                                                                   
Weighted average common shares -                                   
  primary                              10,336,096      6,197,175   
                                      ===========    ===========   
                                                                   
Weighted average common shares -                                   
  fully diluted                        11,125,739      6,480,446   
                                      ===========     ===========   

</TABLE> 

                                                                               4
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
               Consolidated Statements of Operations (Unaudited)

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED JUNE 30,
                                    --------------------------
                                        1997          1996      
                                    ------------  ------------  
<S>                                  <C>          <C>             
REVENUES:                                                      
 Gross revenues                      $12,532,676  $5,352,106   
                                     -----------  ----------   
                                                               
EXPENSES:                                                      
 General & administrative                439,616     275,705   
 Salaries & employee benefits          5,444,905   2,736,861   
 Legal & professional                     62,147      17,848   
 Rent & utilities                        315,836      82,258   
 Taxes & insurance                       109,725     101,759   
 Technical operating expenses          1,632,034     659,322   
 Provision for doubtful accounts         173,778       2,651   
 Depreciation and amortization         1,428,099     481,355   
                                     -----------  ----------   
  TOTAL OPERATING EXPENSES             9,606,140   4,357,759   
                                     -----------  ----------   
                                                               
INCOME FROM OPERATIONS                 2,926,536     994,347   
                                     -----------  ----------   
                                                               
OTHER INCOME (EXPENSE):                                        
 Other income                            150,455      81,919   
 Interest expense                     (1,012,750)   (301,404)  
                                     -----------  ----------   
  TOTAL OTHER INCOME (EXPENSE)          (862,295)   (219,485)  
                                     -----------  ----------   
                                                               
INCOME BEFORE INCOME TAXES             2,064,241     774,862   
                                                               
PROVISION FOR FEDERAL INCOME TAXES       701,842     242,735   
                                     -----------  ----------   
                                                               
NET INCOME                           $ 1,362,399  $  532,127   
                                     ===========  ==========   
                                                               
EARNINGS PER SHARE :                                           
 Primary                             $      0.13  $     0.08   
                                     ===========  ==========   
 Fully diluted                       $      0.12  $     0.08   
                                     ===========  ==========   
Weighted average common shares -                               
 primary                              10,804,493   6,551,889   
                                     ===========  ==========   
Weighted average common shares -                               
 fully diluted                        11,594,136   6,733,704   
                                     ===========  ==========   
</TABLE> 
                                                                               
                                                                               5
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
          Consolidated Statement of Stockholders' Equity (Unaudited)
                    For the Six Months Ended June 30, 1997
                   
<TABLE>
<CAPTION>
                                                    Additional                  Foreign
                                  Common Preferred   Paid-in       Retained    Currency   Stockholder   Treasury
                                  Stock    Stock     Capital       Earnings   Translation Receivable     Stock         Total
                                  ----------------------------------------------------------------------------------------------
<S>                              <C>     <C>        <C>            <C>           <C>        <C>         <C>         <C>
Balance, January 1, 1997           $8,401    $649   $27,617,425    $2,567,195    ($5,900)   ($103,500)  ($107,651)  $29,976,619

Net Income                                                          2,383,030                                         2,383,030

Warrants exercised                  1,392             8,661,177                                                       8,662,569

Foreign currency translation                                                       2,333                                  2,333

Shares issued in connection
with the UDS acquisition:              87               689,913                                                         690,000

Stock options exercised                 4                 2,821                                                           2,825


                                  ---------------------------------------------------------------------------------------------
Balance, June 30, 1997             $9,884    $649   $36,971,336    $4,950,225    ($3,567)   ($103,500)  ($107,651)  $41,717,376
                                  =============================================================================================


</TABLE>
                                                                               6
<PAGE>
 

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
               Consolidated Statements of Cash Flows (Unaudited)

<TABLE>
<CAPTION>  
                                                       Six Months Ended June 30,
                                                    ------------------------------
                                                         1997            1996
                                                    -------------   --------------  
<S>                                                 <C>              <C> 
Cash Flows from Operations:                                                    
 Net income                                         $  2,383,031      $   990,962   
Adjustments to Reconcile Net Income to                                             
 Net Cash Provided by Operations:                                                  
 Depreciation and amortization                         2,590,231          982,826   
 Deferred federal income taxes                                --               --   
 Increase (decrease) in deferred rent expense             (2,799)          11,151
 Foreign currency translation adjustments                  2,333              (96)  
 Increase in trade receivable                         (3,904,982)        (609,119)  
 Increase in contracts receivable                     (1,034,505)      (1,340,159)  
 Increase in prepaid expenses                           (624,779)        (411,102)  
 Increase in other assets                             (1,775,515)        (192,186)  
 Increase (decrease) in accounts payable                 127,294         (533,075)  
 Increase in accrued liabilities                         108,334          208,897   
 Increase in income taxes payable                      1,227,622          459,276   
 Increase in other liabilities                         1,623,556          274,452   
                                                    ------------     ------------   
NET CASH PROVIDED BY OPERATIONS                          719,821         (158,173)  
                                                    ------------     ------------   
                                                                              
CASH FLOWS USED IN INVESTING ACTIVITIES:                                      
 Decrease in cash investments                          5,000,000               --  
 Cash payments for the purchase of  property            (910,015)        (337,659)  
 Acquisition of businesses net of cash acquired      (14,357,147)        (114,575)  
 Additional subsidiary acquisition costs                (828,667)         (62,778)  
 (Increase) decrease in other receivables                 92,175          (78,296)  
 Increase in employee receivables                       (119,209)         (70,149)  
 Increase in stockholder receivable                       (3,105)          (3,105)  
                                                    ------------     ------------   
NET CASH (USED IN) PROVIDED BY INVESTING                                      
       ACTIVITIES                                    (11,125,968)        (666,562)  
                                                    ------------     ------------   
                                                                                   
CASH FLOWS FROM FINANCING ACTIVITIES:                                              
 Proceeds from issuance of common stock                8,665,394       15,429,332   
 Proceeds from stock subscription receivable                  --            7,259   
 Proceeds from issuance of bridge loans                       --        2,000,000   
 Proceeds from issuance of sr. subordinated debt      20,000,000               --     
 Deferred financing costs                               (745,060)              --      
 Net (payments) on line of credit                     (1,572,000)        (700,000)  
 Net paydown on line of credit                               --        (6,024,929)  
 Proceeds from bank loans                                    --                --   
 Principal payments on long term-debt                 (4,712,664)              --   
 Principal payments on capital lease obligations      (1,367,552)        (464,524)  
                                                    ------------     ------------   
NET CASH (USED IN) PROVIDED BY FINANCING                                           
 ACTIVITIES                                           20,268,118       10,247,138   
                                                    ------------     ------------   
                                                                                   
NET INCREASE (DECREASE) IN CASH                        9,861,971        9,422,403   
CASH BALANCE, BEGINNING OF PERIOD                        229,547          705,179   
                                                    ------------     ------------   
CASH BALANCE, END OF PERIOD                         $ 10,091,518     $ 10,127,582   
                                                    ============     ============   
</TABLE>
                                                                               
                                                                               7

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

<TABLE>
<CAPTION>
 
                                                         Three Months Ended June 30,
                                                       ------------------------------
                                                            1997            1996      
                                                       -------------    -------------  
<S>                                                     <C>             <C>             
CASH FLOWS FROM OPERATIONS:                                                          
 Net income                                             $ 1,362,399    $   532,127   
Adjustments to Reconcile Net Income to                                               
 Net Cash Provided by Operations:                                                    
 Depreciation and amortization                            1,428,099        481,355   
 Deferred rent expense                                       (1,687)          (913)  
 Foreign currency translation                                   (17)           (45)  
 Increase in trade receivable                            (3,639,038)       (61,061)  
 Increase in contracts receivable                          (623,072)      (655,056)  
 (Increase) decrease in prepaid expenses                     56,634       (216,591)  
 (Increase) decrease in other assets                       (669,463)       171,393   
 Decrease in accounts payable                               (37,546)      (867,230)  
 Decrease in accrued liabilities                         (4,980,004)      (403,165)  
 Increase in income taxes payable                           701,842        242,735   
 Increase in other liabilities                            1,008,786         47,923   
                                                        -----------    -----------   
NET CASH PROVIDED BY (USED IN) OPERATIONS                (5,393,067)      (728,528)  
                                                        -----------    -----------   
                                                                                     
CASH FLOWS FROM INVESTING ACTIVITIES:                                                
 Cash payments for the purchase of  property               (560,229)      (245,186)  
 Acquisition of businesses net of cash acquired                  --        (85,181)  
 Additional subsidiary acquisition costs                   (679,715)       (36,699)  
 Increase in other receivables                              (45,681)       (88,580)  
 Increase in employee receivables                           (80,092)       (67,429)  
 Increase in stockholder receivable                          (1,553)        (1,552)  
                                                         -----------   -----------   
NET CASH PROVIDED BY (USED IN) INVESTING                                          
       ACTIVITIES                                        (1,367,270)      (524,627)  
                                                        -----------    -----------   
                                                                                  
CASH FLOWS FROM FINANCING ACTIVITIES:                                             
 Proceeds from issuance of common stock                       2,825     15,429,332   
 Proceeds from stock subscription receivable                     --          7,259   
 Proceeds from issuance of bridge loans                          --      2,000,000   
 Net paydown on line of credit                           (2,287,000)      (910,000)  
 Proceeds from issuance of sr. subordinated debt         20,000,000            --   
 Deferred finance costs                                    (745,060)           --   
 Principal payments on long-term debt                    (8,110,504)    (5,721,637)  
 Principal payments on capital lease obligations           (876,397)      (254,361)  
                                                        -----------    -----------   
NET CASH PROVIDED BY (USED IN) FINANCING                                          
 ACTIVITIES                                               7,983,864     10,550,593   
                                                        -----------    -----------   
                                                                                  
NET INCREASE (DECREASE) IN CASH                           1,223,527      9,297,438   
CASH BALANCE, BEGINNING OF PERIOD                         8,867,991        830,144   
                                                        -----------    -----------   
CASH BALANCE, END OF PERIOD                             $10,091,518    $10,127,582   
                                                        ===========    ===========   
 
</TABLE>

                                                                              8
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & 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 1996 balances have been
reclassified to conform to the 1997 presentation.  These financial statements
include the accounts of the Company and its subsidiaries, which are set forth in
the following table.


                      [ORGANIZATIONAL CHART APPEARS HERE]


In addition to the above, DHSMS has one inactive wholly-owned subsidiary,
HomeCare International, Inc.  Through its ownership in DIS & DISI, the Company
owns all general partner and limited partner interests in Santa Monica Imaging
Center Limited Partnership.

The Company is a leading outsource provider of medical services to hospitals,
physicians' offices and other healthcare facilities in 20 midwestern, western
and southern states, as well as Mexico City.  The Company provides radiology and
cardiology diagnostic services and equipment, as well as departmental management
services, to healthcare facilities on an in-house and shared basis.  The Company
also provides skilled allied healthcare personnel, including radiology
technologists, physical and occupational therapists and other healthcare
professionals, on a temporary basis to perform a variety of functions in
hospitals, long-term care facilities, physicians' offices, clinics and home
healthcare settings.

                                                                               9
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
 
NOTE 2. SECONDARY OFFERING

On June 12, 1996, the Company completed a public offering (the "Secondary
Offering") of  3,000,000 shares of common stock at an offering price to the
public of $6.75 per share.  Of the shares sold, 2,555,000 were sold by the
Company, and 445,000 shares were sold by selling stockholders.  Net proceeds to
the Company, after incurred expenses, were approximately $14,972,500.

On July 5, 1996, the investment banking firm of Rodman & Renshaw, Inc., as
representative of the several underwriters in the Secondary Offering, exercised
their over-allotment option to purchase from the Company an additional 400,000
shares of common stock. The additional net proceeds to the Company were
$2,524,500.

The Company realized total net proceeds from the Secondary Offering of
approximately $17,497,000.  Such net proceeds have been and will be used for
acquisitions, capital expenditures, working capital and retirement of
outstanding debt.

NOTE 3. 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 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 the Company's 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.

The Warrants are exercisable at prices ranging from $7.50 per share to $5.48 per
share.  In the six months ended June 30, 1997, an aggregate of 1,353,032
Public Warrants and 40,000 Bridge Warrants were exercised.  The Company will not
receive any proceeds from the sale of the Warrant Shares, although the Company
did receive proceeds from the exercise of the Warrants.  Net proceeds to the
Company were approximately $8,423,993 from such exercise of Public Warrants and
$250,000 from such exercise of Bridge Warrants.  The remaining 21,968 Public
Warrants have been redeemed by the Company for $.05 per Public Warrant.

NOTE 4. ACQUISITIONS

In January 1996, Mobile Diagnostic Systems, Inc. ("MDS", a wholly-owned
subsidiary of DHSMS) acquired all of the outstanding capital stock of two
affiliated Dallas, Texas-based businesses, Neonatal Pediatric Echocardiography,
Inc. ("NPE") and Pediatric Echocardiagraphic Diagnostic Imaging, Inc. ("PEDI"),
in exchange for an aggregate of 85,200 shares of common stock of the Company.
The Company acquired net assets of approximately $426,000 including goodwill of
approximately $248,000 in connection with the acquisitions.

On June 28, 1996, MDS acquired all of the outstanding capital stock of Cardiac
Concepts, Inc.  ("CCI").  The purchase price consisted of 22,785 shares of the
Company's common stock, in consideration of which the Company received net
liabilities valued at approximately $430,000.  On the date of the acquisition,
the Company also issued 26,861 shares of common stock in payment of
approximately $177,000 of the debt and liabilities of CCI.  The acquisition of
CCI has been accounted for under the purchase method of accounting with the
purchase price being allocated to assets and liabilities based upon their fair
market value at the date of acquisition.  No goodwill was recognized with this
transaction.

                                                                              
                                                                              10
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
 
Effective October 31, 1996, MDS acquired by merger all of the outstanding
capital  stock of Dysrythmic Data, Inc. ("DDI), a Texas-based  provider of
ambulatory electrocardiographic monitoring services.  The consideration paid for
DDI consisted of 39,521 shares of common stock of the Company.

On November 13, 1996,  DHSMS purchased substantially all of the operating assets
(exclusive of cash and mobile X-ray assets) of Advanced Clinical Technology,
Inc. and Horizon/MDS Corporation (collectively "ACT"). The consideration paid
for ACT consisted of approximately $12,620,000 in cash and $4,500,000 in the
form of 642,857 shares of Series A Convertible Redeemable Preferred Stock of the
Company, with an aggregate liquidation preference of $4,500,000.  The Company
also assumed approximately $4,727,000 of liabilities.

In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary, 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 common stock of the
Company and a $400,000 cash payment to the former stockholders of UDS.

Effective March 1, 1997, the Company, through its SoCal Diagnostic Services,
Inc. subsidiary ("SoCal"), purchased substantially all of the operating assets
of the ultrasound division of Diagnostic Imaging Services, Inc. ("DIS"). The
acquired business includes a mobile/fixed ultrasound business serving clients in
San Diego, Orange and Los Angeles Counties of California. The purchase price
paid 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 related to the fixed assets purchased
in the aggregate principal amount of $1,519,261.

On April 17, 1997 (effective as of March 1, 1997), the Company, through its
SoCal subsidiary, 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.

The funds utilized to pay the cash portion of the purchase price in this
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)
                                                                              11
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
 
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.

NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for the six months ended June 30, 1997 for interest was approximately
$1,404 ,000.

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
consisted of the following:
<TABLE> 

<S>                                     <C>  
      Assets acquired                     $24,536,692
      Liabilities assumed                  (9,343,352)
      Common stock issued                    (690,000)
                                          ----------- 
      Total cash paid                      14,503,340
      Fees and expenses                             -
      Less cash acquired                     (146,192)  
                                          -----------  
      Net cash paid                       $14,357,148
                                          ===========
</TABLE> 

The Company also recognized assets and obligations under noncompete agreements
of approximately $2,160,000 for the six months ended June 30, 1997.



                                                                              12
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & 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
                                                June 30,
                                         ----------------------
                                            1997        1996
                                         ----------   ---------
<S>                                      <C>         <C> 
Gross revenues                              100.0 %    100.0 %

Operating expenses                           76.6       81.4
                                            -----      -----
Income from operations                       23.4       18.6

Interest expense                              8.1        5.6

Other expense (income)                       (1.2)      (1.5)
                                            -----      ----- 
Income before provision for income taxes     16.5       14.5

Income tax expense                            5.6        4.5
                                            -----      -----
Net income                                   10.9 %      9.9 %
                                            =====      =====

</TABLE> 
Note: Numbers may not add due to rounding.

Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996

Gross revenues increased by 134% to approximately $12,532,000 for the three
months ended June 30, 1997 from approximately $5,352,000 for the three months
ended June 30, 1996.  Excluding revenues attributable to acquired businesses,
gross revenues increased by 15.9% to approximately $6,203,000 for the three 
months ended June 30, 1997 from approximately $5,352,000 for the three months 
ended June 30, 1996.

Operating expenses increased by 120% to approximately $9,606,000 for the three
months ended June 30, 1997 from approximately $4,358,000 for the three months
ended June 30, 1996, due to the Company's expanded operations through its
acquisitions.  As a percentage of gross revenues, total operating expenses
decreased to 77% from 81%.  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 194% to approximately $2,926,000 for the
three months ended June 30, 1997 from approximately $994,000 for the three
months ended June 30, 1996.  As a percentage of gross revenues, income from
operations increased to 23% for the three months ended June 30, 1997 from 19% in
the comparable prior year period. Interest expense increased by 236% to
approximately $1,013,000 for the three months ended June 30, 1997 from
approximately $301,000 for the three months ended June 30, 1996. This increase
was attributable primarily to additional loan and lease liabilities assumed in
connection with acquisitions in the fourth quarter of 1996, and the issuance of
$20 million in senior subordinated debt in the second quarter of 1997.

                                                                             13
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & 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 156% to approximately $1,362,000 for the three months
ended June 30, 1997 from approximately $532,000 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.

Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996

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

<TABLE> 
<CAPTION> 
                                           Six Months Ended
                                                June 30,
                                         ----------------------
                                            1997        1996
                                         ----------   ---------
<S>                                      <C>         <C> 
Gross revenues                              100.0 %    100.0 %

Operating expenses                           79.2       82.9
                                            -----      -----
Income from operations                       20.8       17.1

Interest expense                              6.1        4.9

Other expense (income)                       (1.0)      (1.5)
                                            -----      ----- 
Income before provision for income taxes     15.7       13.7

Income tax expense                            5.3        4.3
                                            -----      -----
Net income                                   10.3 %      9.4 %
                                            =====      =====

</TABLE> 

Note: Numbers may not add due to rounding.


Gross revenues increased by 118% to approximately $23,043,000 for the six months
ended June 30, 1997 from approximately $10,574,000 for the six months ended June
30, 1996.  Excluding revenues attributable to acquired businesses, gross 
revenues increased by 14.3% to approximately $12,083,000 for the six months 
ended June 30, 1997 from approximately $10,574,000 for the six months ended June
30, 1996.

Operating expenses increased by 108% to approximately $18,252,000 for the six
months ended June 30, 1997 from approximately $8,764,000 for the six months
ended June 30, 1996, due to the Company's expanded operations.  As a percentage
of gross revenues, total operating expenses decreased to 79% from 83%.  This
reduction is attributable primarily to efficient utilization of personnel and
resources 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 165% to approximately $4,791,000 for the six
months ended June 30, 1997 from approximately $1,810,000 for the six months
ended June 30, 1996.  As a percentage of
                                                                              
                                                                              14
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
 
gross revenues, income from operations increased to 21% for the six months ended
June 30, 1997 from 17% for the six months ended June 30, 1996.

Interest expense increased by 170% to approximately $1,404,000 for the six
months ended June 30, 1997 from approximately $521,000 for the six months ended
June 30, 1996, which was attributable primarily to additional loan and lease
liabilities assumed in connection with acquisitions and the issuance of $20
million in senior subordinated debt in the second quarter of 1997.

Other income is primarily interest earned on liquid investments.

The Company's federal income tax net operating loss carryforwards were fully
utilized subsequent to the second quarter of 1995, and the Company recorded a
provision for federal income taxes of approximately $1,228,000 for the six
months ended June 30, 1997.

Net income increased by 140% to approximately $2,383,000 for the six months
ended June 30, 1997 from approximately $991,000 for the six months ended June
30, 1996.  This increase is due primarily to increased revenues and continued
consolidation resulting in efficient utilization of personnel and equipment and
internal growth of approximately 14.3%.


LIQUIDITY AND CAPITAL RESOURCES

On June 12, 1996, the Company completed a public offering (the "Secondary
Offering") of  3,000,000 shares of common stock at an offering price to the
public of $6.75 per share.  Of the shares sold, 2,555,000 were sold by the
Company, and 445,000 shares were sold by selling stockholders.  Net proceeds to
the Company, after incurred expenses, were approximately $14,972,500.

On July 5, 1996, the investment banking firm of Rodman & Renshaw, Inc., as
representative of the several underwriters in the Secondary Offering, exercised
their over-allotment option to purchase from the Company an additional 400,000
shares of common stock. The additional net proceeds to the Company were
$2,524,500.

The Company realized total net proceeds from the Secondary Offering of
approximately $17,504,500. The net proceeds have been and will be used for
acquisitions, capital expenditures, working capital and retirement of
outstanding debt, including approximately $4,827,000 which was utilized to
retire a portion of the indebtedness therefore outstanding under the Company's
senior credit facilities with Texas Commerce Bank National Association (the
"Bank"), and $1,000,000 utilized to retire subordinated promissory notes issued
in a private placement in April 1996 .

On July 24, 1996, the Company entered into an amended and increased credit
facility (the "Credit Facility") with the Bank which permits borrowings of up to
$20 million, including up to $17.5 million for acquisitions (the "Acquisition
Facility") and up to $2.5 million for working capital (the "Working Capital
Facility").  The Acquisition Facility will terminate on September 30, 2001 and
the Working Capital Facility will terminate on September 30, 1998.  Borrowings
under the Credit Facility are secured by substantially all of the assets of the
Company (including the capital stock of the Company's subsidiaries) and bear
interest at one of two variable rates selected by the Company based upon (i) the
reserve adjusted LIBOR rate plus a margin ranging from 1.75% to 2.5%, or (ii)
the greater of the Bank's prime rate or the federal funds rate plus 0.50%, plus
a margin ranging from 0.25% to 1.00%.  The Credit Facility requires ongoing
compliance with certain financial covenants, including a maximum ratio of funded
debt to adjusted earnings.  As of August 13, 1997, the outstanding principal
                                                                              
                                                                              15
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES

borrowings under the Credit Facility were in the amount of $6,121,094 all of
which are deemed to be outstanding under the Acquisition Facility.

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 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 the Company's 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.

The Warrants are exercisable at prices ranging from $7.50 per share to $5.48 per
share. In the six months ended June 30, 1997, an aggregate of 1,353,032 Public
Warrants and 40,000 Bridge Warrants were exercised. The Company will not receive
any proceeds from the sale of the Warrant Shares, although the Company did
receive proceeds from the exercise of the Warrants. Net proceeds to the Company
were approximately $8,423,993 from such exercise of Public Warrants and $250,000
from such exercise of Bridge Warrants. The remaining 21,968 Public Warrants have
been redeemed by the Company for $.05 per Public Warrant.

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 and to fund proposed expansion of the Company's
business through the close of the Company's fiscal year ending December 31,
1997.

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, 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.

                                                                              16


<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & 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 1:  Computation re: Computation of Earnings Per Share

(b) The Company filed the following reports on Form 8-K during the quarterly
    period ended June 30, 1997.

       1.  On April 4, 1997, the Company filed a current report on Form 8-K
           relating to the acquisition of the ultrasound division of DIS; and
           the Company filed an amendment to such report on June 20, 1997.

       2.  On May 2, 1997, the Company filed a current report on Form 8-K
           relating to the acquisition of the capital stock of DIS; and the
           Company filed an amendment to such report on July 1, 1997.

                                                                              
                                                                              17
<PAGE>
 
                DIAGNOSTIC HEALTH SERVICES, INC. & 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



                                                          Date:  August 13, 1997

                                                                              18