SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549
                                 --------------

                                   FORM 10-KSB

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

For fiscal year ended December 31, 1997      Commission File Number 33-37418

                        DIAGNOSTIC IMAGING SERVICES, INC.
                 (Name of small business issuer in its charter)

          Delaware                                      33-0443404
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

     1516 Cotner Avenue                                 90025-3303
   Los Angeles, California                               (Zip code)
(Address of principal executive office)

Issuer's telephone number, including area code:  (310) 479-0399

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

Securities registered pursuant to Section 12(g) of the Act: 
Common Stock, $0.01 par value

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the part 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

           Yes  __                           No  X

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. ________

State issuer's revenues for its most recent fiscal year $13,265,744.

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and ask prices of such stock as of March 9, 1998 was $2,782,140.

As of March 9, 1998, the Issuer had 11,310,110  shares of Common Stock, $.01 par
value outstanding [excluding treasury shares].

                       Documents Incorporated by Reference

                                      None

          Transitional Small Business Disclosure Format.  Yes __ No X





<PAGE>




                                     PART I

Item 1.  Description of Business.

Diagnostic  Imaging  Services,  Inc.,  a  Delaware  corporation  ("DIS"  or  the
"Registrant"), is an independent regional network of multi-modality radiological
imaging facilities.  The network provides  radiological imaging services through
90 managed care payors  pursuant to  contractual  arrangements.  The DIS network
currently  consists of six freestanding MRI and  multi-modality  imaging centers
located in Santa Monica , Thousand Oaks, Corona, Temecula,  Riverside and Vista,
California.  Registrant also operates an imaging center  providing  mammography,
ultrasound,  and general  radiology in  Camarillo.  These centers are staffed by
physicians who are specialists in diagnostic imaging. DIS also operates a cancer
care therapy center in Temecula,  California, which is staffed by physicians who
are medical oncologists and radiation therapists.

Registrant  provides   administrative   services,   non-physician   health  care
personnel,  facilities  and  equipment  to the  Registrant  network.  Registrant
contracts  with its  network  physicians  and with HMOs and other  managed  care
payors. The delivery of health care at the radiological  imaging and cancer care
centers are coordinated principally through professional medical corporations or
independent physicians (the "network physicians"),  the officers,  directors and
shareholders  of which are all licensed  physicians  specializing  in radiology,
neurology, medical oncology or radiation therapy.

The DIS network  arranges for health care  services in the State of  California,
which  prohibits  the  practice  of medicine  by  unlicensed  persons or general
business  corporations.  Registrant does not engage in the practice of medicine,
as  Registrant  neither  employs  any of the network  physicians  nor exerts any
control over their decisions  regarding  medical care.  These decisions are made
exclusively by network physicians and are rendered in connection with guidelines
and  policies  approved  and  administered  by  the  medical  directors  of  the
affiliated  physician  groups.  The affiliated  physician groups delegate to the
Registrant  the  performance  of those  administrative,  management  and support
functions which the network physicians  require in order to efficiently  conduct
the practice of medicine  for HMO  enrollees,  managed  care  patients and other
patients.  Substantially  all Registrant  revenue is derived from its management
agreements  with the  affiliated  physician  groups or from third party  payors.
References to the "DIS network"  refer to the separate  entities  which contract
with  Registrant to render  professional  medical  services and the  functioning
within a contractual  framework.  None of the affiliated  physician  groups is a
subsidiary of the Registrant. However, at some of Registrant's centers physician
services are provided by Beverly Radiology Medical Group, a partnership in which
one entity is wholly-owned by Howard G. Berger, M.D., an officer and director of
Registrant (See "Item 9" and "Item 12"). See  "Relationships  Among  Affiliates;
Management Agreements."

History

Prior to September 2, 1994, the Registrant,  then known as IPS Health Care, Inc.
("IPS") was an operator of mobile medical imaging systems. By February 1992, IPS
was experiencing  financial  difficulties.  Shortly thereafter,  DVI, Inc., (see
"Item 12 Certain  Relationships  and Related  Transactions")  provided  numerous
financing benefits to IPS (See "Item 1" of Registrant's Form 10-KSB for the year
ended December 31, 1995).

On September 2, 1994, pursuant to the Agreement and Plan of Reorganization dated
August 10, 1994, among IPS, IPS Acquisition Sub, Inc., a wholly-owned subsidiary
of IPS ("Merger  Sub") and Diagnostic  Imaging  Services,  Inc.,  Merger Sub was
merged with and into DIS and DIS  continued as the  surviving  corporation  (the
"IPS  Merger").  The name of the  Registrant  was then  changed  to  "Diagnostic
Imaging Services,  Inc." As a result of the IPS Merger,  the stockholders of DIS
received,  in the  aggregate,  an amount  equal to that  number of shares of IPS
Common  Stock  that  were  outstanding  immediately  prior  to the  IPS  Merger.
Accordingly,  as a result of the IPS Merger,  Norman Hames, the beneficial owner
of  approximately  85% of the  outstanding  capital  stock of DIS, and the other
stockholders  of DIS  acquired 50% of the issued and  outstanding  shares of IPS
Common Stock.


                                        2

<PAGE>




Following  completion of the IPS Merger, DVI Healthcare  Operations entered into
an  Agreement  for the  Exchange of Stock and Assets  dated  September  2, 1994,
pursuant to which the Registrant  returned to DVI Healthcare  Operations certain
equipment  previously  leased by Registrant from DVI and also transferred  other
assets,  in satisfaction of approximately  62% or $4.8 million of lease and debt
obligations  owed by  Registrant  to DVI  Healthcare  Operations.  The remaining
approximately  38% or $1.8  million of those  obligations  was  satisfied by the
issuance of convertible preferred stock to DVI. As a result of this transaction,
DVI Healthcare  Operations now owns  convertible  preferred  stock of Registrant
having  an  aggregate  liquidation   preference  of  $4.482  million,  which  is
convertible under certain circumstances (see "Item 12. Certain Relationships and
Related  Transactions")  into two million  shares of common stock of  Registrant
(subject to adjustment).

Between 1988 and 1993,  under the direction of Norman Hames (see  "Management"),
the preSeptember 2, 1994,  Diagnostic  Imaging  Services,  Inc.  established one
mobile and four  freestanding  imaging  centers  providing MRI and other imaging
services.  The four freestanding Centers were established with the collaboration
of local physicians. The Centers were financed through limited partnerships with
the  Registrant  as general  partner  and  operator  of the  imaging  center and
generally  with  referring  physicians  as  limited  partners.  As a  result  of
regulatory  initiatives  that  prohibit  ownership of health care  facilities by
referring physicians, the limited partners in each of the partnerships agreed to
sell  their  interests  to DIS at a  price  based  upon  a  determination  by an
independent appraiser.

In 1994, the pre-merger,  Diagnostic  Imaging Services,  Inc., also acquired two
previously  unaffiliated Centers, as well as establishing a cancer diagnosis and
treatment  center  (see  "Cancer  Therapy  Center").   In  1994  and  1995,  the
post-merger, DIS acquired an additional four previously unaffiliated centers.

On March 22,  1996,  Registrant  entered  into two  management  agreements  with
Primedex  Health Systems,  Inc., a New York  corporation  ("PHS,  O-T-C Bulletin
Board - PMDX). PHS, through its RadNet  subsidiary,  operates 22 imaging centers
that provide  diagnostic  radiology  services  throughout  California as well as
providing a broad array of healthcare  management services to contracted centers
and to others,  including,  through its Radnet Managed  Imaging  Services,  Inc.
subsidiary,   performing  utilization  reviews,   physician   certification  and
financial information  services.  PHS, subject to Registrant's ultimate control,
assumed  administrative  responsibility  for  many of  Registrant's  centralized
corporate activities. PHS will also, over time, assume management responsibility
for various  patient  services and billing and collection  activities at each of
Registrant's  imaging facilities.  PHS and Registrant intend to coordinate their
offering of imaging services throughout California.

On or about June 28, 1996,  Norman Hames, the president of Registrant  agreed to
transfer all of his shares of Registrant's  common stock and warrants to acquire
shares  of  common  stock to PHS in  exchange  for a five  year,  interest  only
promissory  note  from PHS  aggregating  $2,448,862  together  with a five  year
warrant to acquire 2,807,350 shares of PHS for $.60 per share. Subsequently, PHS
acquired  additional shares of the Registrant's  common stock from certain third
parties  so as to bring  its  aggregate  ownership  interest  in  Registrant  to
approximately 74%.

DIS acquired (Corona and Riverside) and/or opened (Camarillo and Scripps - Chula
Vista) four  additional  centers in 1996 and 1997.  Effective March 1, 1997, DIS
sold four of its imaging  centers and its  ultrasound  business to an  unrelated
third party for approximately $15.5 Million and $8.5 Million, respectively, less
outstanding  capital lease  obligations and other  liabilities of  approximately
$7.6  Million.  In February  1998,  effective  January 1, 1998,  that same buyer
acquired  the DIS  partnership  interest  in Scripps  Chula  Vista MRI Center in
exchange  for  127,250  shares of that  entity's  common  stock.  The shares are
restricted,  nevertheless the public market value of such stock is approximately
$1,400,000.

As a result of a deteriorating  business  climate at  Registrant's  Santa Monica
facility, Registrant closed substantially all of its operations at the center on
or  about  August  29,  1997.  Registrant  recorded  a loss as a  result  of the
discontinuance  of the  operations  of  approximately  $3.4  million.  In  1997,
Registrant  sold the  Center's  MRI for $65,000 and the bulk of its other assets
for $400,000.  Registrant still provides ultrasound,  mammography,  stereotactic
breast  biopsy and bone  densitometry  services at its  Women's  Center in Santa
Monica.

                                        3

<PAGE>



                        Multiple Modality Imaging Centers

The Registrant  provides  multi-modality  radiological  imaging  services at its
centers. The following chart lists modalities offered:

                                          Mammo-    Ultra-  Diagnostic  Nuclear
Center                       MRI    CT    graphy     sound   Radiology Medicine

Camarillo                                    *         *          *
Corona                               *       *         *          *        *
Riverside                     *      *       *         *          *
Santa Monica [Parkside Womens]               *         *
Temecula                      *      *       *         *          *
Thousand Oaks                 *      *       *         *          *        *
Vista (North San Diego)       *      *

Radiological  imaging  systems  facilitate  the  identification  of diseases and
disorders at an early stage, often minimizing the amount and cost of care needed
to  stabilize  or cure the patient and  frequently  obviating  the need for more
invasive  diagnostic  procedures,  such  as  exploratory  surgery.  Radiological
imaging  systems are based on the ability of radioactive  and other energy waves
to penetrate  human tissue and generate images of the body that can be displayed
either  on  film  or on a video  monitor.  Imaging  systems  have  evolved  from
conventional x-rays to the advanced  technologies of MRI, CT,  echocardiography,
nuclear medicine and ultrasound.

MRI is used to provide  high  resolution  images of the soft tissue of the body.
The MRI imaging  process causes atoms in various kinds of body tissue to respond
to a magnetic field,  enabling the differentiation of internal organs and normal
and diseased  tissue.  While MRI was initially  used  primarily for diagnosis of
neurological  disorders of the spine, head or neck, MRI is now used increasingly
for  other  applications,  such as  imaging  of the soft  tissue of the knee and
shoulder. In addition,  improvements in computer hardware and software,  coupled
with  improvements  in the  underlying  technology,  have  reduced  certain  MRI
procedure times from more than an hour to less than 30 minutes,  and have led to
an increased  ability of MRI units to provide  cardiac and blood vessel studies.
Contrast  agents have been and are being  developed to enhance MRI images and to
expand MRI applications.

CT is used to detect  tumors and other  conditions  affecting  the  skeleton and
internal  organs.  In  general,   CT  provides  higher  resolution  images  than
conventional  x-rays, but not as well defined as those produced by MRI. During a
CT procedure,  a patient is placed inside a ring on which a rotating  x-ray tube
is mounted.  A  dedicated  computer  directs  the  movement of the x-ray tube to
produce  multiple  crosssectional  images on a  particular  organ or area of the
body.

Ultrasound  systems provide a low risk,  non-invasive  procedure for determining
the primary diagnosis in renal, pancreatic,  vascular, abdominal and obstetrical
conditions.  Ultrasound  systems emit,  detect and process high frequency  sound
waves to generate  images of soft  tissues and internal  body organs.  The sound
waves used in ultrasound do not involve ionizing  radiation and are not known to
cause any harmful effects to the patient or unborn child. Ultrasound systems can
also provide increasingly useful information on the cardiovascular  system using
advanced doppler technology.

X-ray is the most  common  imaging  modality  and is  primarily  employed in the
following imaging methods:  (i) Conventional x-ray systems, the oldest method of
imaging,  are  typically  used to image  bone,  teeth,  vessels  and  organs and
constitute the largest number of installed systems; (ii) CT scanners utilize the
x-ray,  as well as computers to produce  cross-sectional  systems of  particular
organs or areas of the body;  and (iii) digital x-ray systems which add computer
image processing capability to conventional x-ray systems.

Nuclear  Medicine  is  a  diagnostic   imaging  system   utilizing   short-lived
radioactive  isotopes  injected  into  the  body  and,  together  with  computer
assistance,  then perform  various  examinations  to  establish  the presence or
absence of disease.  Nuclear  medicine  provides  an  anatomic  image as well as
functional  information  which cannot be provided by MRI or CT. Nuclear medicine
is used to provide  information  about organ  function as opposed to  anatomical
size and shape

                                        4

<PAGE>



Cancer Therapy Center

The Registrant opened its cancer therapy center, Valley Regional Oncology Center
("VROC"), in April 1994, in Temecula, California, near the Registrant's Temecula
Imaging  Center.  VROC is a limited  partnership  composed of the Registrant and
certain  radiation  therapists.  The Registrant was the managing general partner
and owned 75% of VROC.  During 1997, the Registrant  purchased the remaining 25%
interest in VROC for $260,000.  VROC provides services to cancer patients in San
Diego and  Riverside  Counties.  VROC  provides  diagnosis  and  treatment on an
outpatient  basis  reducing  the  need  for  hospitalization  or  multiple  site
evaluations  for  diagnosis  and  treatment.  VROC  services  include  radiation
therapy,  chemotherapy,  seed  implantation  therapy and  education,  as well as
substantially  all outpatient  treatment  services at a single site and permit a
patient to return home after treatment.

Managed Care Market

Overview.  A  sustained  and  continuing  increase  in  health  care  costs at a
significantly higher rate than overall inflation has caused insurers, employers,
and other payors  ("payors") to employ a number of strategies to contain  health
care expenditures.  These cost-containment strategies are designed to reduce the
price per unit paid for  health  care  services  and the  amount of health  care
utilized.  As a  result,  health  insurance  is  gradually  shifting  away  from
traditional  fee-for-service  based  benefit  plans  toward  alternative  health
insurance  products  believed  to manage the  delivery  of quality  health  care
services more efficiently.

At this time, the most prevalent of these alternative products is the HMO, which
provides  comprehensive  health  care  services  to its  enrollees  for a fixed,
prepaid monthly  premium that does not vary with the frequency,  cost or type of
services  utilized.  In addition to the HMO, many hybrid managed care plans have
also emerged.  The Registrant has experienced  its greatest  patient growth from
these alternative  contracting parties. PPOs, IPAs, insurance companies and many
others  contract  to provide  care  (although  not on a prepaid  basis)  through
loosely  organized  networks of  hospitals  and  physicians  that have agreed to
provide care to plan enrollees at reduced rates. While these hybrid plans do not
generally afford the degree of cost and utilization  control associated with the
HMO model, the Registrant  believes that these programs are the area of greatest
future  growth  and  has  determined  to  become  a  major  participant  in  the
contracting of radiological  imaging  services with those entities on a regional
basis.

The  Registrant's  Managed  Care  Market.  DIS  network  services  are  marketed
primarily to managed care  organizations  which have found it cost  effective to
contract out their radiological imaging work to groups organized to provide that
service with the  application  of quality  assurance,  together with the related
management  and  organizational  structures.  As a consequence of the widespread
managed care and HMO  acceptance in  California,  particularly  as the number of
managed care  organizations  and HMOs serving the region has  proliferated,  the
competition for enrollees has become  intense.  Managed care  organizations  and
HMOs compete  increasingly on the basis of the level of services offered and the
quality of the  delivery  network.  The  Registrant  believes  this  environment
benefits  Registrant by encouraging  managed care organizations and HMOs to seek
efficient,  high quality  physicians  together  with the efficient and respected
facilities  for their imaging  services  while  providing  convenience  to their
patients.

The DIS Network

The DIS  network  together  with the 22 RadNet  centers is  designed  to provide
managed care, HMO and other  providers with a high quality,  cost-effective  and
competitive vehicle for providing covered radiological imaging benefits to their
enrollees located in the DIS network's service area. The Registrant's  contracts
with  payors are  typically  non-exclusive  arrangements  (except in the case of
certain capitated  arrangements which require their enrollees to utilize the DIS
or  affiliated  facilities,   however,  the  number  is  not  large)  which  are
renegotiated on an annual basis.

In entering  into or renewing  managed care  contracts,  Registrant  considers a
number of specific  factors  which affect  capitation  rates and reduced fee for
service  agreements.  These factors include the demographic  risk profile of the
enrollee pool, prior financial  experience,  and the fee-for-service  equivalent
charges for anticipated care. In undertaking this process,  Registrant  analyzes
pertinent  data in order to assess  contractual  and  economic  opportunity  and
exposure,  and then  conducts  the  negotiations  on  behalf  of its  affiliated
physicians and the Registrant.


                                        5

<PAGE>



HMO contracts obligate  Registrant and the affiliated  physicians to provide for
the delivery of all covered outpatient  radiological imaging (and in the case of
the cancer center, all cancer therapy services)  benefits.  Under HMO contracts,
Registrant  and  the  affiliated  physicians  receive  a  fixed  monthly  dollar
capitation  payment for each HMO enrollee  regardless of whether the services of
Registrant or the affiliated physicians are utilized. All managed care contracts
obligate  Registrant  and the  affiliated  physicians  to  provide  radiological
imaging or cancer care treatment at a reduced fee for service.

The  loss  of any of  these  customers  could  have  an  adverse  effect  on the
Registrant until alternate sources for patient volume are substituted.

Quality Assurance

The  Registrant  believes  that the  quality of its  services is critical to its
success and has  initiated  several  programs to assure the  delivery of quality
radiological  imaging services.  Prior to hiring  technologists,  the Registrant
requires that applicants  perform sample imaging procedures in order to evaluate
their  capabilities,  and all  technologists  are required to be licensed by the
State  of  California  as  registered  x-ray  technologists.  In  addition,  the
Registrant   provides   quarterly   continuing   education   programs   for  its
technologists regarding imaging techniques and advances in technology,  and each
technologist  is required to attend ten hours of continuing  education each year
in order to maintain their license.  A physician  serves as medical  director of
each  imaging  center and reviews  medical and  professional  issues  arising in
connection with operation of the imaging center, including issues related to the
quality of service provided by the interpreting physicians.  The Registrant also
requires  that the  radiologists  and other  interpreting  physicians  providing
services  at the  imaging  centers  or  those  providing  radiation  therapy  be
specialists certified by the appropriate medical societies, such as the American
College of Radiology.

The Registrant also has a comprehensive  quality  assurance system in its cancer
center, including multiple levels of review for dose calculations and continuous
monitoring and checking of equipment,  designed to ensure accurate dose delivery
to the  patient.  The  linear  accelerators  themselves  utilize a  computerized
record-and-verify  system that prevents the machine from operating unless it has
been set in strict  accordance  with a patient's  treatment plan. The Registrant
has also adopted a peer review system whereby the treatment plans established by
each radiation oncologist are reviewed by another of the Registrant's  radiation
oncologists  on a weekly  basis.  The  Registrant  believes that its peer review
system is unusual for radiation therapy practices outside an academic setting.

The  Registrant  also  utilizes  the  following   additional  quality  assurance
initiatives:

Peer Review. The Registrant has established periodic peer reviews of the quality
of  services  rendered in each  imaging  center by having  unrelated  physicians
review  random  samples  of  images  together  with   interpreting   physicians'
diagnostic reports.  Any unsatisfactory  reports resulting from such reviews are
discussed with the interpreting physician by the imaging center administrator or
a vice-president of operations,  and the physicians' failure to take appropriate
corrective action could lead to termination of the interpreting physician at the
imaging center.

Medical  Advisory  Committee.  The Registrant has established  medical  advisory
committees in each community served by Registrant.  The committees are headed by
a physician and comprised of local physicians and imaging center  management and
meet  periodically  to focus on specific  areas of operations  such as equipment
evaluation,  marketing,  education,  instrumentation,  or one of the  diagnostic
modalities.

Patient  and  Physician  Surveys.  In order to assess  satisfaction  levels  and
solicit  input for  improvements,  each  patient  is asked to  complete a survey
related to his or her  experience at the imaging  center.  Additionally,  random
surveys are distributed to both patients and physicians on a quarterly basis.

Accreditation.  The Registrant  maintains  accreditation for each of its imaging
centers by the Joint Commission on the Accreditation of Healthcare Organizations
("JCAHO"),  an important aspect of the Registrant's business strategy.  JCAHO is
an independent  organization that reviews  outpatient health care facilities and
accredits those facilities that meet its guidelines. JCAHO accreditation reviews
include an  assessment  of the facility and  equipment,  interpreting  physician
credentials and operating policies and procedures.


                                        6

<PAGE>



Management Information Systems. The Registrant's  management information systems
are  designed to enable DIS  affiliated  physicians  to devote their time to the
practice of quality medicine.  The Registrant  maintains  internally or utilizes
through  its  contractual   arrangements  with  PHS  (See  "Management   Service
Contracts"   hereinbelow)  a  comprehensive   database  that  provides   patient
utilization  statistics,  complete patient encounter reporting and comprehensive
patient  tracking.  The  Registrant  believes  that the  availability  of timely
information  on  utilization   patterns  improves  physician   productivity  and
effectiveness.   This  data  also  plays  an  integral  role  in  the  physician
utilization  control process by enabling the  administrator and medical director
to monitor  case  management  decisions,  and  monitor  utilization  trends.  In
addition,  the  Registrant's  management  information  systems  perform  various
administrative   functions,   including   appointment   scheduling,    insurance
verification,  billing,  accounts  payable  and  receivable,  and  verification,
financial  reporting and all third party claims processing.  Additional services
include  billing and  reimbursement  assistance,  patient  and public  relations
support,  risk  management  and quality  assurance  consultation  and policy and
procedure review.

Management Service Contracts

On March 22, 1996, the Registrant  entered into two-five year management service
contracts with Primedex Health Systems,  Inc., a New York  corporation  ("PHS").
The first agreement  relates to Registrant's  corporate  operations and provides
that PHS arranges for maintenance for the Registrant's  facilities,  administers
its human resource functions,  provides certain bookkeeping and payroll services
as well as certain accounting  services.  PHS also provides advice to Registrant
with regard to its accreditation  program and negotiates on behalf of Registrant
for  equipment,  supplies,  service and insurance.  Registrant  pays $45,000 per
month for these services. Additionally, PHS and Registrant entered into a second
agreement  which is being phased in on a center by center  basis which  provides
for PHS to supply transcription  services,  patient scheduling,  and billing and
collection services.  All costs of equipment and training are the responsibility
of PHS.  Registrant will pay an amount equal to 10% of its collections from each
covered  center for such  services.  Registrant  anticipates  cost  savings  and
improved efficiency as a result of both of these agreements.

Relationships Among Affiliates; Management Agreements

The DIS network provides health care services in the State of California,  which
prohibits  the corporate  practice of medicine  except by  professional  medical
corporations.  Accordingly,  Registrant  contracts with all  Registrant  network
physicians on an independent  contractor basis. All decisions  regarding patient
health care are made exclusively by physicians who contract with Registrant, but
are  independent  and are rendered in connection  with  guidelines  and policies
developed and administered by the medical directors of the various centers.

Registrant  has entered into  agreements  with the affiliated  physicians  which
delegate to Registrant  administrative,  management and support  functions which
are  required  by  physicians  in  the  practice  of  medicine.  The  agreements
specifically  obligate Registrant to provide suitable  facilities,  fixtures and
equipment,  so that Registrant can adequately  provide for all medical services,
and delegates to Registrant those management and administrative  functions which
do not constitute  the practice of medicine.  Registrant is obligated to provide
to  the  physician   administrative,   bookkeeping  and  billing   services  and
non-physician  support personnel  (including nurses,  technologists,  marketing,
administrative  and  maintenance  personnel),  and to  assist  in all  phases of
contract administration and marketing.  The affiliated physicians are solely and
exclusively  in control of and  responsible  for all aspects of the  practice of
medicine and the delivery of medical  services,  including,  but not limited to,
diagnosis,  and in the  case  of  the  cancer  diagnosis  and  therapy  centers,
treatment,  surgery  and  therapy.  The  affiliated  physicians  generally  have
approval and authority over HMO and managed care contracts,  including the right
to decline to enter any HMO and managed care contract negotiated on their behalf
by Registrant.  If the physician so declines,  and Registrant  does not contract
with a  substitute  party,  future  growth  could  be  adversely  impacted.  The
agreements  are  generally  for  periods  of three to seven  years.  Thereafter,
contracts generally renew automatically  unless either party elects to terminate
them.

Pursuant to the agreement,  as payment for Registrant's  management services the
affiliated  physicians  have either  assigned to  Registrant a percentage of the
physician's  interest  in  substantially  all of  the  revenue  received  by the
physician  or the  physicians  and  Registrant  each bill  separately  for their
services.  The percentage paid to Registrant  varies between 76% and 85% of such
collections  "Revenue"  is  defined  in the  agreement  as all  sums  which  the
Registrant receives or becomes entitled to receive for the

                                        7

<PAGE>



performance of medical  services by physicians  under contract with  Registrant,
from services  performed by the  physicians  and from charges by Registrant  for
supplies and other items of which Registrant is entitled to charge. Amounts that
may not be assigned to  Registrant  under  applicable  law  (including  Medicare
payments) are not included in the revenue assigned to Registrant. The physicians
have sole and  exclusive  control of and  responsibility  for all aspects of the
practice of medicine and the delivery of medical services.

At four of Registrant's  centers and its oncology  center the medical  services,
including medical  supervision,  are supplied by Beverly Radiology Medical Group
("BRMG") a  partnership  where one entity's  sole owner is Dr.  Howard G. Berger
(See "Items 9 and 12").  Registrant  collects for and then  provides  payment to
BRMG for the medical services it provides at its centers.

Competition

The market for radiological  imaging services is highly competitive.  The market
is highly  fragmented,  with no dominant  national or regional  imaging services
provider.  The Registrant  competes with larger  healthcare  providers,  such as
hospitals,  as well as other private clinics and radiology practices that own or
lease  radiological  imaging  equipment.  Competition often focuses on physician
referrals at the local market level.  Successful  competition for referrals is a
result of many  factors,  including  pricing,  quality  and  timeliness  of test
results,  type and  quality of  equipment,  facility  location,  convenience  of
scheduling and  availability  of patient  appointment  times.  The  Registrant's
facilities are primarily located near major hospital sites, which the Registrant
considers to be a competitive advantage.

The  Registrant  believes  that the  principal  factors  influencing a patient's
choice of radiation therapy provider and that of its contracting organization is
primarily  the  location of the center,  cost of the service and the  provider's
reputation in the medical  community for high quality  medical care,  which,  in
turn, is based primarily upon the reputation of its radiation oncologist.  Other
factors include sensitivity to patient comfort and other needs. The Registrant's
center competes with other radiation therapy centers, which are more established
in the  community  and may have  financial  resources  greater than those of the
Registrant.  The  Registrant  attempts  to attract  radiation  oncologists  with
superior  academic  training and experience in their  specialty,  and encourages
their active  participation in the medical  community served by the center.  The
center is designed to provide a pleasant,  comfortable environment for patients,
and the entire staff is trained to be attentive to the patient's personal needs.

Regulation and Reimbursement

Overview.  The  health  care  industry  is highly  regulated  and is  undergoing
significant change as third party payors,  such as Medicare and Medicaid and the
Blue  Cross/Blue  Shield  plans,  increase  their  efforts to control  the cost,
utilization and delivery of health care services.  Legislation has been proposed
or enacted at both the federal and state levels to regulate health care delivery
in general and radiology  and  radiation  therapy  services in  particular.  The
Registrant  believes that reductions in reimbursement for Medicare services will
be  implemented  from  time to  time,  which  often  lead to  reductions  in the
reimbursement  rates of other third party payors as well. The Registrant  cannot
predict the effect health care reforms may have on its  business,  and there can
be no assurance that such reforms will not have a material adverse effect on the
Registrant's  operations.  The  Registrant's  diagnostic  and  cancer  radiation
therapy facilities are subject to governmental  regulation at the federal, state
and local levels.


Regulation of Outpatient  Imaging Services.  The operation of outpatient imaging
centers  requires  a  number  of  licenses,  including  licenses  for  technical
personnel  and  certain  equipment.  The  Registrant  believes  that  it  is  in
compliance  with  applicable  licensure  requirements.  The  Registrant  further
believes  that  diagnostic  testing  will  continue  to be  subject  to  intense
regulation  at the  federal  and state  levels and cannot  predict the scope and
effect thereof.

Radiological imaging centers performing  mammography services must meet federal,
and in some jurisdictions,  state standards for quality as well as certification
requirements.  All  mammography  facilities  are  required  by the Food and Drug
Administration ("FDA") to be accredited;  undergo an annual mammography facility
physical  survey;  be  inspected  annually;  meet  qualification  standards  for
interpreting physicians, mammography technologists, and medical physicists; meet
certification   requirements   for  adequacy  and  training  and  experience  of
personnel; meet quality standards for equipment and practices;

                                        8

<PAGE>



and meet  various  requirements  governing  record  keeping  of  patient  files.
Although the  Registrant's  centers are currently  accredited by the Mammography
Accreditation  Program of the American  College of Radiology and the  Registrant
anticipates   continuing  to  meet  the  requirements  for  accreditation,   the
withdrawal   of  such   accreditation   could  result  in  the   revocation   of
certification, if FDA so determines.
All facilities have received their FDA certifications.

Reimbursement of Radiology Services.  In general,  Medicare reimburses radiology
services under a physician fee schedule which covers services  provided not only
by physicians,  but also by freestanding  imaging  centers,  radiation  oncology
centers,  portable x-ray suppliers,  hospitals and other entities. The scheduled
amount is based on a  resource-based  relative  value scale,  recognizing  three
separate  components of the  physician's  service;  professional,  technical and
malpractice. For radiology there is a separate Medicare scheduled amount for the
professional  component of a service or procedure (i.e.,  the physician's  time)
and the  technical  component  of the service or procedure  (e.g.,  services and
supplies necessary to perform the procedure).

The  Omnibus  Budget   Reconciliation  Act  of  1993  proposed  to  establish  a
competitive bidding procedure for MRI services and CT scans. In addition,  there
have been and  continue  to be other  proposals  that  could  affect  Medicare's
reimbursement for radiology services. One proposal,  for instance,  would bundle
the  professional  fees paid to radiologists  for services  provided to hospital
inpatients into the DRG payment rates. Moreover, while research is underway that
could reform Medicare's  methodology for reimbursing  outpatient services in the
hospital  setting,  it is  possible  that  such  reform  could  be  extended  to
freestanding  imaging  centers as well.  This  research  could have an impact on
payments for radiology  services.  The Registrant is unable to predict which, if
any, proposals will be adopted.

Regulation  of  Radiology  Facility  Ownership.  Effective  January 1,  1992,  a
provision of the Omnibus Budget  Reconciliation  Act of 1989,  commonly known as
"Stark II,"  prohibits,  with  certain  exceptions,  physicians  from  referring
Medicare  patients,  effective January 1, 1995, to radiology or other diagnostic
services and radiation therapy services in which they have an economic interest.
On October 8, 1994,  Congress passed  legislation  deleting "or other diagnostic
services" from the federal  self-referral  law, and inserted instead  "including
magnetic resonance imaging,  CAT scans and ultrasound  services."  Violations of
the law may result in denial of  payments  for the  service,  an  obligation  to
refund  payment for the service,  payment of civil  monetary  penalties,  and/or
exclusion from the Medicare and Medicaid programs.

The Registrant has structured its acquisitions of physician-owned  ventures in a
manner  which  it  believes  does  not  raise   significant   issues  under  the
anti-kickback and self-referral regulations.  The Registrant anticipates that an
insignificant  portion of its revenues in 1996 is subject to loss as a result of
continuing   financial   relationships  with  physicians  who  previously  owned
Registrant centers,  as a result of such legislation.  Due to the nature of this
legislation, Registrant management is unable to specifically quantify the amount
of revenue that would be potentially foregone as a result.

In  addition  to  federal  restrictions,  California  law  (the  "Speier  bill")
prohibits a physician from  referring a patient for diagnostic  imaging goods or
services if the physician has a financial interest with the entity that receives
the referral.  The Registrant  believes that it has structured its operations so
as to ensure it complies with these requirements.

The  Registrant  is also subject to licensing and  regulation  under federal and
state  laws  relating  to  radioactive  materials,  as well as to the health and
safety  of its  employees.  The  sanctions  for  failure  to comply  with  these
regulations may be denial of the right to conduct  business,  significant  fines
and criminal penalties, any of which could have a material adverse effect on the
Registrant.  The Registrant  believes that it is in substantial  compliance with
all applicable laws and regulations relating to these areas.

Governmental Regulation

Federal law and the laws of most states, including those in which the Registrant
operates, specify who may practice medicine and limit the scope of relationships
between medical  practitioners and other parties such as Registrant.  Under such
laws,  Registrant is prohibited from practicing  medicine or exercising  control
over the provision of medical services. Accordingly, Registrant has entered into
agreements  which  delegate the  performance  of  administrative  management and
support functions which are required by affiliated physicians in the practice of
medicine.  Registrant  does not employ any  practicing  physicians  and does not
represent to the public that it offers medical services.  All physician services
are offered

                                        9

<PAGE>



through Registrant independent contractor  physicians.  Furthermore,  Registrant
does not exercise  control over the practice of medicine by the physician  under
contract with Registrant.  Registrant  believes that the services it provides to
the Registrant  network and to its  affiliated  physicians do not constitute the
practice of medicine under applicable law.

The DIS network and its affiliated physicians are subject to federal legislation
which  prohibits  activities  and  arrangements  which are  designed  to provide
kickbacks  or to induce the  referral of business  under  Medicare  and Medicaid
programs. California and many other states have similar laws. Noncompliance with
the federal  anti-kickback  legislation  can result in exclusion  from  Medicare
programs and civil and criminal  penalties.  Similar  penalties are provided for
violations  of state  anti-kickback  laws.  In July 1991 the federal  government
promulgated regulations which identify certain business and payment practices as
safe harbors under the federal anti-kickback  statutes.  The Registrant believes
that the Registrant network and its affiliated physicians are in compliance with
all such applicable laws in that the activities of the Registrant do not involve
conduct which is prohibited by the anti-kickback laws.

Risk Management

In recent years physicians,  hospitals and other participants in the health care
industry  have  become  subject to an  increasing  number of  lawsuits  alleging
medical  malpractice  and related legal  theories,  including the withholding of
approval for necessary  medical  services.  Many of these lawsuits involve large
claims and substantial defense costs. Although Registrant does not engage in the
practice of medicine or provide medical services and has not been a party to any
material  litigation  relating  to the  practice  of  medicine,  there can be no
assurance that  Registrant  will not become  involved in such  litigation in the
future.  Moreover,  its affiliated  physicians have been the subject of lawsuits
alleging medical malpractice and related claims.

As  part  of  its  management  services,   Registrant   negotiates  and  obtains
malpractice  insurance,  on a  "claims-made"  basis on behalf of Registrant  and
requires its  affiliated  physicians  with whom it  contracts  to maintain  such
insurance.  Registrant  believes such  insurance is adequate to cover claims for
medical  malpractice  which may arise out of the  practice  of  medicine  by the
affiliated  physicians.  The  physicians  provide  coverage  in  the  amount  of
$1,000,000  per  physician  per  claim,  subject  to a limit of  $1,000,000  per
physician per incident and an aggregate per  physician  limit of $3,000,000  per
year.  The  Registrant  maintains   $32,000,000  of  blanket  general  liability
insurance  covering each center and its own principal  offices as well as all of
its  employees.  Registrant,  PHS and BRMG are all  named  insureds  under  this
policy.   The  Registrant  also  maintains  two  medical  equipment  repair  and
maintenance  policies  through and in conjunction with Radnet  Management,  Inc.
covering  each  center  with  aggregate  annual  limits of  approximately  $10.6
million.

Registrant also requires physicians to obtain "tail" coverage for claims against
physicians  arising from  actions  which  occurred but were not reported  during
periods for which the related risk was covered by "claims-made" insurance.

The Registrant may encounter substantially higher insurance costs in the future,
as well as reductions in the amount or nature of insurance  coverage  available.
Should such conditions be encountered,  the  Registrant's  profitability  may be
adversely  affected  and the  Registrant  may be  unable to  maintain  insurance
coverage  for all  risks  against  which the  Registrant  network  is  currently
insured.  In addition,  there can be no assurance  that a future claim or claims
will not exceed the limits of available insurance coverage.  Furthermore, if any
of the  Registrant  network's  unrelated  insurance  carriers  are unable to pay
insurance on claims against the Registrant  network's  covered  physicians,  the
Registrant's financial condition could be materially adversely affected.

Employees

As of December 31, 1998,  Registrant had 82 full-time employees.  Although there
is intense  competition for qualified  personnel in the medical  profession,  to
date  Registrant  has  had no  significant  problems  recruiting  and  retaining
qualified  personnel.  None of the Registrant network's employees are subject to
collective  bargaining  agreements,  and the Registrant has  experienced no work
stoppages. Management believes that its employee relations are good.


                                       10

<PAGE>




Item 2.  Description of Property

Registrant's  properties  are leased and  (except  for  Camarillo)  provide  the
Registrant  with the  option  to  renew.  The  following  table  sets  forth the
location, approximate square footage and expiration dates of the leases covering
each of the Registrant's centers:
                                                          Lease
                                Square       Date      Expiration     Annual
  Location                       Feet       Opened        Date      Rental ($)
  --------                       ----       ------        ----      ----------

Camarillo                       2,035        1996         2002         34,000
Corona                          5,328        1996         1998         90,000
Vista [North San Diego]         2,042        1988         2000         52,000
Riverside                       8,312        1996         2001        156,000
Santa Monica [Parkside Womens]  3,103        1995         2000        106,000
Temecula                        4,247        1992         1998        141,000
Temecula Oncology Center        5,418        1994         1998         95,000
Thousand Oaks [MDI]             8,300        1983         2001        281,000
Warehouse/Other                 6,126       various      various      160,000

Item 3.  Legal Proceedings

The Registrant is not a party to any material legal proceedings, except that

      (a) On April 10, 1996, the Registrant was served with a complaint entitled
Midway Hospital Medical Center v. Diagnostic Imaging Services, Inc. filed in the
U.S.  District  Court,  Central  District  of  California  bearing  case  number
96-2414TJH brought by Midway Hospital Medical Center seeking payment of $116,056
plus  attorneys  fees  based  upon the  alleged  failure  of the  Registrant  to
discharge medical bills of a Registrant  employee covered under the Registrant's
health  insurance  program.  The Registrant  then commenced legal action against
Registrant's outside administrator of its health insurance program alleging that
it failed to properly administer that program and that if there is any liability
to Midway, it is the liability of its  administrator.  The administrator  denied
any liability and filed a counterclaim  against the Registrant  alleging that it
is owed $141,658,  which the Registrant  denied.  The Registrant has settled the
action  with  regard  to  the  claim  of  Midway  Hospital  Medical  Center  for
approximately  $60,000  and as to the  counterclaim  of  the  administrator  for
approximately $95,000.

      (b) On June 4, 1997, the  Registrant was served with a complaint  entitled
Gerald E.  Dalrymple,  M.D. and Gerald E.  Dalrymple,  M.D.,  Inc., a California
professional  corp.  v.  Primedex  Health  Systems,   Inc.,  Diagnostic  Imaging
Services,  Inc. and Diagnostic  Health  Services,  Inc. filed in the Los Angeles
Superior  Court and bearing case number SC 047 526. The  complaint  alleges that
Registrant  failed to properly pay plaintiff  fees for  performing  professional
services  to which he was  entitled  as well as  damages  for  violation  of the
implied covenant of good faith and fair dealing,  fraud,  conversion,  breach of
fiduciary duty,  interference with existing and prospective  business advantage,
negligent and  intentional  infliction of emotional  distress and defamation and
seeks damages for an unspecified amount in excess of $25,000. The complaint also
alleges that by virtue of the  investment by Primedex  Health  Systems,  Inc. in
Registrant  and  the  sale  of  four of  Registrant's  imaging  centers  and its
ultrasound  business to  Diagnostic  Health  Services,  Inc. (see "Item 1") that
Registrant has thereby effected either a reorganization,  consolidation,  merger
or transfer of all or substantially  all of its assets to another entity thereby
permitting  plaintiff  to convert a warrant for 319,488  shares of  Registrant's
Common  Stock  exercisable  at  $.01  per  share  which  plaintiff  received  in
connection with Registrant's  acquisition of its Santa Monica facility to either
$1,000,000 cash or stock with a market value of $1,000,000 in the new entity, at
the election of the Registrant.  Registrant denies each and every allegation and
intends to vigorously defend against the legal action.

The Registrant is currently party to other  litigation,  none of which is deemed
by management to be material in nature.

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

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

                                       11

<PAGE>



                                      PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

The Registrant's  Common Stock is traded in the  over-the-counter  market on the
Over-The-Counter   Electronic  Bulletin  Board  under  the  symbol  "DIAM".  The
following table sets forth, for the periods indicated,  the high and low bid and
ask prices for the Common Stock, as reported by the National  Quotation  Bureau,
Inc. Such quotations reflect  inter-dealer  prices without adjustment for retail
mark-up,  mark-down or  commission,  and may not  necessarily  represent  actual
transactions.

                                    BID                           ASK
                           High             Low            High          Low

Calendar Year  1996
   1st Quarter             1-7/8           1-1/2           2-1/8        1-3/4
   2nd Quarter             1-7/8             1             2-1/8        1-1/4
   3rd Quarter             1-3/8          1/2             1-5/8         3/4
   4th Quarter              7/8             3/8            1-1/8         5/8

Calendar Year  1997
   1st Quarter             1-21/32         1-21/32         1-23/32      1-23/32
   2nd Quarter             1-1/8           1-1/8           1-1/4        1-1/4
   3rd Quarter             1-1/4           1-1/4           1-3/8        1-3/8
   4th Quarter             1-1/16          1-1/16          1-3/32       1-3/32

On February 27, 1998, the last reported bid and ask price of the Common Stock by
the National Quotation Bureau,  Inc., was no bid and $1-1/16. As of February 27,
1998,  there  were  65  holders  of  record  of the  Common  Stock.  However,  a
substantial number of Registrant's outstanding shares of Common Stock were owned
of  record  on said  date by "Cede & Co.",  the  nominee  for  Depository  Trust
Company, the clearing agency for most  broker/dealers.  Management believes that
these shares are  beneficially  owned by customers of these  broker/dealers  and
that  the  number  of  beneficial   owners  of  Registrant's   Common  Stock  is
substantially greater than 65.

Item 6.  Management's Discussion And Analysis or Plan of Operation

Background:

Diagnostic  Imaging Services,  Inc. ["DIS" or the "Registrant"] was incorporated
in  California  on  June  27,  1986.  In  1992,  the  Registrant's  consolidated
operations consisted of non-invasive diagnostic imaging services, primarily with
the use of ultrasound technology ["Ultrasound Division"].  During 1992 and 1993,
DIS  established  one mobile MRI  business  and was the general  partner of four
limited  partnerships that provided  diagnostic  imaging  services:  San Gabriel
Valley Magnetic  Resonance  Imaging Center  ["SGV"],  Tarzana  Regional  Medical
Center Magnetic Resonance Imaging Center ["Tarzana"],  Inland Community Magnetic
Resonance  Imaging  Center  ["Inland" or "Chino"] and  Temecula  Valley  Imaging
Center ["TVIC"]. DIS also provided management services for these entities.

In June 1993, DIS became the general partner and 70% owner of Mission Bay Mobile
MRI Facility,  L.P.  ["MBM"].  In March 1996,  MBM's assets and liabilities were
assumed by an  unaffiliated  third  party;  the  transfer  resulted in a gain of
approximately  $296,000.  In December 1993, Norman Hames [see "Item 9"] assigned
his shares in a  privately  held  company,  Diagnostic  Imaging  Services,  Inc.
["Diagnostic"] to a newly established  corporation,  DIS Imaging, Inc., of which
he was the sole shareholder.  In January 1994, DIS Imaging,  Inc.  purchased the
shares  held by the  then  majority  shareholder  of  Diagnostic  and all of his
interests in certain partnerships which Diagnostic managed.



                                       12

<PAGE>



During the months of January and February  1994,  DIS  purchased  the  remaining
limited partnership units of Tarzana, SGV and Chino.  Additionally,  in February
1994,  DIS  purchased  the  assets of two  freestanding  multi-modality  imaging
centers: Thousand Oaks Medical Diagnostic Imaging ["MDI"] and Parkside Radiology
["Parkside"].  In April 1994, DIS opened Valley  Regional  Oncology Center Ltd.,
L.P. ["VROC"], a cancer care therapy center located in Temecula, California. DIS
was the general  partner and 75% owner of VROC until the  remaining 25% interest
was  purchased by DIS for $260,000  during the year ended  December 31, 1997. On
September 2, 1994, DIS merged its operations with IPS Health Care, Inc. pursuant
to an Agreement and Plan of Reorganization  and an Agreement for the Exchange of
Stock  and  Assets  [see  "Item  1"].  Registrant's  name  was then  changed  to
Diagnostic  Imaging  Services,  Inc.. On September  22, 1994,  DIS purchased the
assets  of  North  County  MRI  and  North  County   Mediscan   ("North  County"
collectively).  The nuclear  medicine  business  at North  County  Mediscan  was
subsequently sold for $230,000 in June 1996.

In January  1995,  DIS assumed  ownership  of West Los Angeles MRI  ["WLA"].  In
February 1995, DIS purchased the outstanding  limited partnership units of Santa
Monica Imaging  Center  ["SMIC"] and became its general  partner.  The remaining
interest in SMIC was purchased  for $300,000 in March 1997. In August 1995,  DIS
purchased the assets of an X-Ray,  mammography,  and basic ultrasound  center in
Murrieta, California ["Murrieta"]. Murrieta ceased its operations in late 1996.

On March 25,  1996,  DIS issued  2,747,493  shares of its common  stock  [with a
five-year warrant to purchase an additional  1,521,739 shares of common stock at
$1.60 per share] to Primedex Health Systems, Inc. ["PHS"] for $3,000,000 and the
establishment of a five-year revolving $1,000,000 line of credit for DIS. PHS is
a  publicly-traded  New York  corporation  organized in 1985 and is  principally
engaged in the healthcare services industry in California. DIS also entered into
two  five-year  management  service  agreements  with PHS.  The first  agreement
relates to DIS's overall corporate operations and provides that PHS will provide
for all office  maintenance  for the DIS  facilities,  administer  its personnel
program,  bookkeeping and payroll  services as well as certain of its accounting
services.  In  addition,   PHS  provides  advice  to  DIS  with  regard  to  its
accreditation  program and negotiates on behalf of DIS for equipment,  supplies,
service and insurance.  DIS agreed to pay $45,000 per month for these  services.
Additionally,  DIS entered into a second  agreement which will be phased in on a
center by center basis which provides for PHS to supply transcription  services,
patient scheduling,  billing and collection services. All costs of equipment and
training are the  responsibility of PHS. DIS will pay PHS an amount equal to 10%
of its collections from each covered center for such services.

As of December 31, 1997, through various transactions with related and unrelated
parties,  PHS  acquired  an  additional  5,327,477  shares of DIS  common  stock
bringing its total  ownership  to 8,074,970  shares,  or  approximately  71%. In
subsequent  purchases  through  February  27, 1998,  PHS acquired an  additional
453,000  common shares in  transactions  with unrelated  parties  increasing its
ownership of DIS to approximately  74%, or 8,527,970 shares  [excluding  warrant
shares].

In May 1996,  Integrated  Cardiovascular  Systems,  Inc. ["ICVS"] was sold to an
unaffiliated  third  party for  $798,000  resulting  in a gain of  approximately
$313,000. In addition,  the Registrant also consolidated SMIC's non-MRI business
with  Parkside  during the month.  In August  1996,  DIS acquired the assets and
liabilities of HealthCare  Imaging  Center ["HCI"] in Riverside,  California for
$200,000  resulting in goodwill of $10,000.  In September  1996,  DIS opened the
Camarillo Imaging Center ["Camarillo"], a start-up operation utilizing equipment
transferred  from other  sites.  In October  1996,  DIS  assumed  the assets and
liabilities of Corona Imaging Center ["Corona"] resulting in goodwill of $0.

Effective March 1, 1997, DIS sold the assets and related  liabilities of four of
its  hospital-based  MRI  facilities  [Tarzana,  SGV,  Chino  and  SMIC] and its
Ultrasound Division to Diagnostic Health Services,  Inc. ["DHS"] for $14,972,720
in cash including $1,000,000 for a ten-year covenant not-to-compete  [classified
as "Deferred Revenue" on the financial  statements].  In addition,  a discounted
receivable of approximately  $1,190,000 was recorded on the  Registrant's  books
for three post-closing payments of $500,000 each to be made by DHS to DIS on the
first,  second and third  anniversaries  of the closing date.  There was also an
option to receive  these  post-closing  payments in the form of DHS common stock
valued at the mean average of the reported closing price of such common stock as
reported on the NASDAQ  National  Market for the five  consecutive  trading days
ending on the third day  immediately  prior to the  closing  date  ["the  Agreed
Value"].  Effective  April 7, 1998, the Company  accepted  200,000 shares of DHS
common  stock  in  cancellation  of the  DHS  obligation  to make  post  closing
payments.  The shares are restricted,  however, the market value of the publicly
trading DHS common shares at April 7,

                                       13

<PAGE>



1998 was approximately  $2,300,000. In addition, DHS assumed the operating lease
of the Registrant's WLA center.  Effective January 1, 1998, the assets [net book
value $905,151] and related capital lease  obligations  [principal due $902,781]
of WLA were assumed PHS' Radnet Management,  Inc. subsidiary.  Effective January
1, 1997,  the  Registrant  opened its  Scripps  Chula  Vista MRI,  L.P.  ["SCV"]
servicing  patients in San Diego. The Registrant and Scripps were equal partners
with the Registrant  serving as managing partner.  In February 1998,  Registrant
sold its  interest  in SCV to DHS in exchange  for 127,250  shares of DHS common
stock. While the shares received are restricted, the current market value of the
shares  received if equated to the market  value of DHS shares is  approximately
$1,400,000 as of February 27, 1998.

As a result of a continuing  deteriorating  business  climate and other business
reasons at the Registrant's Santa Monica ["Parkside"]  facility, in August 1997,
the Registrant  closed  substantially  all of its operations at that center [the
Registrant continues to operate its Parkside Radiology Women's Center ["Parkside
Womens"] which provides ultrasound, mammography,  stereotactic breast biopsy and
bone densitometry services]. Due to this decision,  Registrant recognized a loss
in December  1996 of  approximately  $3.4  million.  In August 1997,  Registrant
recognized  a gain of $400,000 for the sale of certain  assets of Parkside.  The
buyer also assumed Parkside's building leases.

Forward Looking Information

The  forward-looking  statements  herein are based on current  expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Registrant will have adequate financial  resources
to fund the development and operation of its business, and that there will be no
material  adverse  change  in  the  Registrant's  operations  or  business.  The
foregoing assumptions are based on judgment with respect to, among other things,
information available to the Registrant, future economic, competitive and market
conditions  and  future  business  decisions,  all of  which  are  difficult  or
impossible to predict  accurately and many of which are beyond the  Registrant's
control.  Accordingly,  although the  Registrant  believes that the  assumptions
underlying the  forward-looking  statements are reasonable,  any such assumption
could prove to be inaccurate  and therefore  there can be no assurance  that the
results contemplated in forward-looking statements will be realized. There are a
number of other risks  presented by the  Registrant's  business  and  operations
which could cause the Registrant's  financial  performance to vary markedly from
prior  results  or  results  contemplated  by  the  forward-looking  statements.
Management decisions,  including budgeting,  are subjective in many respects and
periodic  revisions  must be made to  reflect  actual  conditions  and  business
developments,  the impact of which may cause the Registrant to alter its capital
investment  and  other  expenditures,   which  may  also  adversely  affect  the
Registrant's  results  of  operations.  In  light of  significant  uncertainties
inherent in forward-looking  information  included in this Annual Report on Form
10-KSB,  the  inclusion  of  such  information  should  not  be  regarded  as  a
representation  by the  Registrant  or any other  person  that the  Registrant's
objectives or plans will be achieved.

Discussion of Operations for the Year Ended December 31, 1997 vs.
December 31, 1996

The  following  discussion  relates to the  continuing  activities of Diagnostic
Imaging Services, Inc.

Results of Operations

For the year ended  December  31,  1997 and 1996,  DIS had  operating  losses of
$1,752,558 and $5,170,982, respectively.

DIS generated net revenue of  $13,265,744  and  $22,555,570  for the years ended
December  31,  1997 and 1996,  respectively.  The  decrease  in net  revenue was
primarily due to the sale of the Ultrasound Division and four hospital-based MRI
facilities to DHS and the closure of Parkside and West L.A. during 1997.  During
the years ended December 31, 1997 and 1996, the  Ultrasound  Division  generated
net  revenues  of  $536,057  and  $3,767,464,  respectively,  the four MRI sites
generated  net  revenues  of $699,550  and  $6,165,752,  respectively,  Parkside
generated net revenues of $1,121,911 and $3,034,404, respectively, and West L.A.
generated net revenues of $237,148 and $472,257, respectively.

The new sites  added in late 1996  generated  net  revenue  for the years  ended
December  31,  1997 and 1996 as  follows:  Camarillo  generated  net  revenue of
$241,055 and $49,381,  respectively,  HCI  generated net revenue of $538,963 and
$271,892, respectively, and Corona generated net revenue of $550,460 and

                                       14

<PAGE>



$231,660,  respectively.  In its start-up  year,  SCV  generated  net revenue of
$1,192,283  for the year  ended  December  31,  1997.  Sites  sold in early 1996
generated net revenue of approximately $410,000 in that year only. Both VROC and
MDI showed  1997 net  revenue  improvements  of  approximately  17.1% and 19.8%,
respectively.  North County's 1997 net revenue decreased  approximately 24% from
1996  primarily  due to the  sale of that  center's  nuclear  medicine  business
earlier that year.

For the years ended  December  31,  1997 and 1996,  operating  expenses  totaled
$15,018,302 and  $27,726,552,  respectively.  During the year ended December 31,
1996, Registrant  recognized an impairment loss for Parkside of $3,424,548.  The
remaining decrease in operating  expenses is primarily  attributable to the sale
of the Ultrasound  Division and MRI sites to DHS and reductions in  expenditures
at Corporate.  During the years ended  December 31, 1997 and 1996,  expenditures
for salaries and reading fees were  $5,497,567  and  $10,026,287,  respectively,
building and  equipment  rental was  $1,632,709  and  $2,088,408,  respectively,
depreciation and amortization was $2,441,358 and $3,917,271,  respectively,  and
other expenses were  $5,446,668 and  $8,270,038,  respectively.  Building rental
expense in 1997 included settlement costs for one building lessor of $245,000.

For  the  years  ended  December  31,  1997  and  1996,   interest  expense  was
approximately $2,190,000 and $3,550,000,  respectively.  Interest expense of DIS
was primarily attributable to equipment financing, acquisition notes payable and
lines of credit  charges.  The primary reasons for the 1997 decrease in interest
expense  was the  transfer  of  related  debt  with the  sale of the  Ultrasound
Division and MRI sites to DHS, the elimination of the line of credit and the pay
off of PHS for prior 1996 loans. For the years ended December 31, 1997 and 1996,
interest  income was  approximately  $474,000 and $-0-,  respectively.  Interest
income for 1997 consisted primarily of approximately  $131,000 was received from
DHS for the sale of the MRI facilities accrued for the period from the effective
sale date of March 1, 1997 and the receipt of the  proceeds  on April 17,  1997,
approximately $110,000 was earned on the discounted note receivable due from DHS
in three annual installments and approximately $232,000 was earned on loans made
to PHS during the year.

For the years ended December 31, 1997 and 1996 the gain on sale of  subsidiaries
and divisions was $8,658,259 and $514,631,  respectively.  1997's gain consisted
of the gain from the sale to DHS of $8,258,259 and the gain from the sale of the
remaining  assets at Parkside for $400,000.  1996's gain consisted  primarily of
net gains from the sales of ICVS, MBM and the nuclear medicine business at North
County.

For the year ended  December  31, 1997,  DIS had net income  after  interest and
taxes of  $5,104,287.  For the year ended  December 31, 1996, DIS had net losses
after interest and taxes of $8,142,910.

Liquidity and Capital Resources

Cash  decreased  for the years  ended  December  31, 1997 and 1996 by $6,518 and
$5,335, respectively.

Cash generated  from investing  activities for the years ended December 31, 1997
and 1996 was  $12,094,238  and  $158,568,  respectively.  During the years ended
December 31, 1997 and 1996,  DIS received  proceeds from the sales of divisions,
centers and equipment of $15,227,720 and $1,028,000,  respectively. During 1997,
DIS received  $6,519,475  from the sale of the Ultrasound  Division,  $7,453,245
from  the sale of the  four  hospital-based  MRI  facilities,  $1,000,000  for a
ten-year  covenant  not-to-compete  and  $255,000  for  the  sale of  assets  at
Parkside.  During 1996, DIS received  proceeds of $1,028,000  primarily from the
sale of ICVS and the nuclear medicine business at North County. During the years
ended December 31, 1997 and 1996, DIS made capital expenditures of approximately
$500,000 and $225,000,  respectively,  payments for deposits and other assets of
approximately $160,000 and $440,000, respectively, and acquisitions of operating
entities for approximately $490,000 and $200,000, respectively. During 1997, DIS
acquired  the  assets  of  Las  Posas  Medical  Imaging  for  $35,000,  acquired
additional units in TVIC for $196,875 and acquired the remaining 25% interest in
VROC for  $260,000.  During 1996,  DIS acquired HCI for  $200,000.  In addition,
during the year ended  December  31,  1997,  DIS loaned PHS  approximately  $5.5
million in short-term loans, at 10% interest, of which approximately  $3,525,000
was repaid by year end.

Cash utilized for financing activities for the years ended December 31, 1997 and
1996 was $10,193,566 and  $1,114,342,  respectively.  The primary reason for the
1997 increase was the overall  reduction in DIS  borrowings on notes payable and
from related parties. For the years ended December 31, 1997 and 1996,

                                       15

<PAGE>



DIS's borrowings on notes payable were $10,000 and $2,196,775, respectively, and
DIS received loans from related parties of $-0- and $1,982,103, respectively. In
addition,  during 1996, DIS received $3,000,000 in proceeds from the issuance of
common stock. For the years ended December 31, 1997 and 1996, DIS made principal
payments on notes payable and capital  leases of  approximately  $7,860,000  and
$9,170,000,  respectively, and made payments to related parties of approximately
$2,070,000  and  $50,000,  respectively.  Included  in 1997  payments to related
parties was approximately  $89,000 due to an officer of DIS at December 31, 1996
and approximately $1,980,000 for repayment of PHS's prior 1996 loans. During the
year ended December 31, 1997, DIS received proceeds from a joint venture partner
of $250,000 and decreased its cash overdraft by approximately  $520,000.  During
the year ended December 31, 1996, DIS increased its cash overdraft approximately
$990,000 and made payments to joint venture partners of approximately $65,000.

At December 31, 1997, DIS had a working capital  deficit of $2,997,074  compared
to a working  capital  deficit of  $14,270,257  at December  31, 1996, a deficit
decrease of  $11,273,183.  The improvement was primarily due to the sales of the
Company's  ultrasound  division  and four of its MRI sites to DHS and the use of
the proceeds to reduce short-term debt and eliminate lines of credit.

Effective  January 1, 1998, assets with a net book value of $905,151 and related
capital  lease  obligations  due of $902,781 of WLA were  assumed by PHS' Radnet
Management, Inc..

DIS's future  payments for debt and equipment  under capital leases for the next
five years, will be approximately $7,040,000, $4,630,000, $4,430,000, $3,480,000
and $240,000,  respectively.  Interest  expense for the  Registrant for the next
five years,  included in the above payments,  will be approximately  $1,780,000,
$1,040,000,  $630,000, $215,000 and $25,000,  respectively. In addition, DIS has
noncancellable  operating  leases for use of its facilities and certain  medical
equipment which will average approximately  $555,000 in annual payments over the
next five years.

In 1996,  DIS  renegotiated  some notes  payable and  obligations  under capital
leases in order to consolidate debt, reduce interest rates, obtain approximately
$2.2  million in working  capital  loans,  and pay off its second line of credit
with DVI Business Credit.

DIS's working capital needs are currently provided under one line of credit. The
remaining DVI line of credit was paid in full and terminated at DIS's request in
September  1997.  Under the agreement  with PHS, DIS may borrow up to $1,000,000
with interest  payable at 4% greater than the prime rate.  The revolving line is
due March 2001. At December 31, 1997, $-0- is due under this line.

In  February  of  1998,  DIS sold its  interest  in  Scripps  Chula  Vista  MRI,
L.P.["SCV"] to DHS in exchange for 127,250 shares of Diagnostic Health Services,
Inc. ["DHS"] stock. While the shares are restricted, the current market value of
the  shares   received  if  equated  to  the  market  value  of  DHS  shares  is
approximately $1,400,000 as of February 27, 1998.

New Authoritative Pronouncements

     The FASB has issued SFAS No. 130,  "Reporting  Comprehensive  Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted.  Reclassification of financial  statements for earlier
periods  provided  for  comparative  purposes is  required.  SFAS No. 130 is not
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise 
and Related Information."  SFAS No. 131 changes how operating segments are 
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to 
shareholders.  SFAS No. 131 is effective for periods beginning after 
December 15, 1997, and comparative  information for earlier years is to be 
restated.  SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application.  SFAS No. 131 is not expected to have a 
material impact on the Company.

In February  1998,  the FASB issued SFAS No. 132,  "Employees  Disclosure  about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure  requirements are not
expected  to have a material  impact on the  Company's  results  of  operations,
financial position or cash flows.


                                       16

<PAGE>



Inflation

To date, inflation has not had a material effect on the Registrant's operations.

Item 7.  Financial Statements

The Financial Statements are attached hereto and begin at page F-1.


Index to Consolidated Financial Statements and Supplementary Data     Page No.

Reports of Independent Accountants..................................  F-1

Consolidated Balance Sheet at December 31, 1997.....................  F-2 - F-3

Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996..........................................  F-4

Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1997 and 1996....................................  F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996..........................................  F-6 - F-7

Notes to Consolidated Financial Statements..........................  F-8 - F-21


All other  schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.



                                       17

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Stockholders and Board of Directors of
  Diagnostic Imaging Services, Inc.
  Dover, Delaware


            We have  audited the  accompanying  consolidated  balance  sheets of
Diagnostic Imaging Services,  Inc. and its subsidiaries as of December 31, 1997,
and the related consolidated  statements of operations,  shareholders'  deficit,
and  cash  flows  for  the  years  ended  December  31,  1997  and  1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

            In our opinion,  the consolidated  financial  statements referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position  of  Diagnostic  Imaging  Services,  Inc.  and its  subsidiaries  as of
December 31, 1997, and the  consolidated  results of their  operations and their
cash flows for the years ended  December 31, 1997 and 1996, in  conformity  with
generally accepted accounting principles.

            The  accompanying   consolidated   financial  statements  have  been
prepared  assuming  that  the  Company  will  continue  as a going  concern.  As
discussed in Note 16 to the consolidated  financial statements,  the Company has
suffered  recurring  losses from  operations,  has been in default under various
notes  and  capital  leases  and  has  negative  working  capital  which  raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 16. The consolidated
financial  statements do not include any adjustments  that might result from the
outcome of these uncertainties.




                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford,  New Jersey April 3, 1998,  Except as to Note 15[C] for which the date
is April 7, 1998


                                       F-1

<PAGE>

<TABLE>


DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
------------------------------------------------------------------------------




Assets:
Current Assets:
<S>                                                                     <C>        
  Cash                                                                  $     6,140
  Accounts Receivable - Net                                               3,242,282
  Other Receivables - Current                                               384,337
  Due from Related Party - PHS                                            1,978,829
  Other Current Assets                                                      218,430
                                                                        -----------

  Total Current Assets                                                    5,830,018
                                                                        -----------
Property and Equipment - Net                                             10,471,920
                                                                        -----------

Other Assets:
  Accounts Receivable - Net                                                 332,520
  Goodwill - Net                                                          1,996,674
  Other Intangible Assets - Net                                             755,285
  Other Receivables                                                         917,605
  Other Assets                                                               71,477
                                                                        -----------

  Total Other Assets                                                      4,073,561
                                                                        -----------
  Total Assets                                                          $20,375,499
                                                                        ===========



See Notes to Consolidated Financial Statements.

</TABLE>

                                        F-2

<PAGE>

<TABLE>


DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
------------------------------------------------------------------------------


Liabilities and Shareholders' Deficit:
Current Liabilities:
<S>                                                                     <C>        
  Cash Overdraft                                                        $   468,227
  Accounts Payable                                                          579,540
  Accrued Expenses                                                        2,180,851
  Accrued Professional Fees                                                 238,946
  Notes and Capital Leases Payable                                        5,259,528
  Deferred Revenue                                                          100,000
                                                                        -----------

  Total Current Liabilities                                               8,827,092
                                                                        -----------
Long-Term Liabilities:
  Notes and Capital Leases Payable                                       11,053,151
  Deferred Revenue                                                          816,667
  Accrued Professional Fees                                                  19,444
                                                                        -----------

  Total Long-Term Liabilities                                            11,889,262
                                                                        -----------
  Total Liabilities                                                      20,716,354
                                                                        -----------
Minority Interest                                                           397,764

Commitments and Contingencies                                                    --
                                                                        -----------
Shareholders' Deficit:
  Preferred Stock - Series F, $.01 Par Value, 5,000,000 Shares
   Authorized, 2,482,000 Shares Issued and Outstanding, Stated
   Liquidation Preference of $2,482,000                                      24,820

  Preferred Stock - Series G, $.01 Par Value, 5,000,000 Shares
   Authorized, 2,000,000 Shares Issued and Outstanding, Stated
   Liquidation Preference of $2,000,000                                      20,000

  Common Stock, $.01 Par Value, 20,000,000 Shares Authorized,
   11,463,956 Shares Issued, and 11,310,110 Shares Outstanding              114,639

  Additional Paid-in Capital - Common Stock                               4,251,059

  Additional Paid-in Capital - Preferred Stock - Series F                   102,309

  Additional Paid-in Capital - Preferred Stock - Series G                    82,441

  Stock Purchase Warrants                                                 1,175,317

  Subscriptions Receivable                                                  (10,994)

  Accumulated Deficit                                                    (6,496,672)

  Treasury Stock - 153,846 Shares of Common Stock, At Cost                   (1,538)
                                                                        -----------

  Total Shareholders' Deficit                                              (738,619)
                                                                        -----------
  Total Liabilities and Shareholders' Deficit                           $20,375,499
                                                                        ===========
See Notes to Consolidated Financial Statements.
</TABLE>


                                        F-3

<PAGE>

<TABLE>


DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------



                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 7     1 9 9 6
                                                               -------     -------

Revenue:
<S>                                                         <C>         <C>        
  Net Patient Service Revenue                               $13,265,744 $22,555,570
                                                            ----------- -----------

Operating Expenses:
  Cost of Services                                           10,344,189  17,034,067
  General and Administrative                                  2,232,755   3,350,666
  Depreciation and Amortization                               2,441,358   3,917,271
  Impairment Loss of Long-Lived Assets                               --   3,424,548
                                                            ----------- -----------

  Total Operating Expenses                                   15,018,302  27,726,552
                                                            ----------- -----------

  Operating Loss                                             (1,752,558) (5,170,982)
                                                            ----------- -----------

Other [Expenses] and Revenue:
  Interest Expense                                           (2,189,997) (3,550,767)
  Interest Income                                               242,123          --
  Interest Income - Related Party                               231,765          --
  Gain on Sale of Subsidiaries and Divisions                  8,658,259     514,631
  Other Income                                                   62,459          --
                                                            ----------- -----------

  Total Other Income [Expenses]                               7,004,609  (3,036,136)
                                                            ----------- -----------

  Income [Loss] Before Income Taxes and Minority Interest 
     in [Income] Loss of Subsidiaries                         5,252,051  (8,207,118)

Minority Interest in [Income] Loss of Subsidiaries             (147,764)     64,208
                                                            ----------- -----------

  Net Income [Loss]                                         $ 5,104,287 $(8,142,910)
                                                            =========== =============

Basic EPS Computation:
  Net Income                                                $ 5,104,287 $(8,142,910)
  Preferred Stock Dividends                                     224,100     224,100
                                                            ----------- -----------

  Net Income [Loss] Available to Common Shareholders        $ 4,880,187 $(8,367,010)
                                                            =========== ===========

Basic EPS:
  Net Income [Loss]                                         $       .43 $      (.79)
                                                            =========== ===========

Diluted EPS Computation:
  Net Income [Loss] Available to Common Shareholders        $ 4,880,187 $(8,367,010)
  Income Impact of Assumed Conversions of Preferred 
   Stock Dividends                                              224,100          --
                                                            ----------- -----------
  Income Available to Common Shareholders and
   Assumed Conversions                                      $ 5,104,287 $(8,367,010)
                                                            =========== ===========

Diluted EPS:
  Net Income [Loss]                                         $       .37 $      (.79)
                                                            =========== ===========


See Notes to Consolidated Financial Statements
</TABLE>

                                        F-4

<PAGE>

DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
------------------------------------------------------------------------------

<TABLE>




                                                                                                                            Paid-in
                                                                                                               Paid-in    Capital -
                                                        Preferred Stock                                        Capital -   Series F
                          Common Stock          Series F              Series G          Treasury Stock          Common     Preferred
                      Shares    Amount     Shares     Amount     Shares     Amount     Shares      Amount        Stock       Stock
                    ----------  -------   ---------   -------   ---------   ------    --------    -------    ---------    --------- 
Balance -
<S>                  <C>        <C>       <C>         <C>       <C>         <C>       <C>         <C>        <C>          <C>     
 December 31, 1995   8,716,463  $87,164   2,482,000   $24,820   2,000,000   $20,000   (153,846)   $(1,538)   $1,459,241   $226,409

Issuance of Shares
 and Warrants
 [See Note 1 - [A]]  2,747,493   27,475          --        --          --        --         --         --     2,791,818         --

Amortization of
 Deferred
 Compensation               --       --          --        --          --        --         --         --            --         --

Elimination of
 Deferred
 Compensation on
 Discontinuance of
   Center                   --       --          --         --          --       --         --         --            --         --

Net Loss for the
 Year Ended
 December 31, 1997          --       --          --         --          --       --         --         --            --         --
                    ---------- --------   ---------      -------  ---------  ------   --------     ------    ----------   --------

Balance -
 December 31, 1997  11,463,956 $114,639   2,482,000      $24,820  2,000,000 $20,000   (153,846)   $(1,538)   $4,251,059   $226,409

Dividends on
 Preferred Stock            --       --          --           --         --      --         --         --            --   (124,100)

Net Income for the
 Year Ended
 December 31, 1997          --       --          --           --         --      --         --         --            --         --
                    ----------  -------   ---------      -------  --------- -------   --------    -------     ---------   --------

Balance -
 December 31, 1997  11,463,956 $114,639   2,482,000      $24,820  2,000,000 $20,000   (153,846)   $(1,538)    $4,251,059  $102,309
                    ========== ========   =========      =======  ========= =======   ========    =======     ==========  ========

See Notes to Consolidated Financial Statements.

</TABLE>


<PAGE>


DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
------------------------------------------------------------------------------
<TABLE>





                                          Paid-in
                                          Capital -
                                          Series G
                                          Preferred  Purchase    Deferred   Subscriptions Accumulated
                                            Stock    Warrants  Compensation  Receivable     Deficit       Total
                                          --------   --------   -----------  ----------  ------------   ----------
Balance -
<S>                                       <C>        <C>        <C>          <C>         <C>            <C>        
 December 31, 1995                        $182,441   $994,610   $(816,785)   $(10,994)   $(3,458,049)   $(1,292,681)

Issuance of Shares and Warrants
 [See Note 1 - [A]]                             --    180,707          --          --             --      3,000,000

Amortization of  Deferred
 Compensation                                   --         --       34,512         --             --         34,512

Elimination of Deferred Compensation on
 Discontinuance of Center                       --         --      782,273         --             --        782,273

Net Loss for the Year Ended
 December 31, 1996                              --         --           --         --     (8,142,910)    (8,142,910)
                                           -------    -------   ----------   --------    -----------     ----------

Balance - December 31, 1996                182,441  1,175,317           --    (10,994)   (11,600,959)    (5,618,806)

Dividends on  Preferred Stock             (100,000)        --           --         --             --       (224,100)

Net Income for the Year Ended
 December 31, 1997                              --         --           --         --      5,104,287      5,104,287
                                          --------  ---------   ----------   --------     ----------      ---------

Balance - December 31, 1997                $82,441 $1,175,317           --   $(10,994)   $(6,496,672)      (738,619)
                                          ======== ==========   ==========   =========   ===========      =========


See Notes to Consolidated Financial Statements.
</TABLE>



<PAGE>




DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
<TABLE>


                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 7     1 9 9 6
                                                               -------     -------
Operating Activities:
<S>                                                         <C>         <C>         
  Net Income [Loss]                                         $ 5,104,287 $(8,142,910)
  Adjustments to Reconcile Net Income [Loss] to Net Cash
   Provided by [Used In] Operating Activities:
   Depreciation and Amortization                              2,441,358   3,917,271
   Allowance for Contractual Adjustments                      1,479,288     445,873
   [Gain] on Sale of Centers and Equipment                   (8,752,252)   (633,210)
   Loss on Assets Held for Divestiture                               --     118,579
   Write Down of Long-Lived Assets                                   --   3,424,548
   Imputed Interest Income                                     (109,312)         --
   Deferred Revenue - Covenant not-to-Compete                   (83,333)         --
   Gain on Early Extinguishment of Debt                         (22,756)         --
   Amortization of Deferred Compensation                             --      34,512
   Minority Interest in Consolidated Subsidiaries               147,764     (64,208)
   Write-off Employment Contract                                     --     121,923
   Write-off Other Assets                                       184,532      18,667
                                                            ----------- -----------
  Net Income [Loss] Adjusted for Noncash Items                  389,576    (758,955)

  Changes in Operating Assets and Liabilities:
   [Increase] Decrease in:
     Accounts Receivable                                        691,616   1,142,630
     Other Current Assets                                        58,800      60,271

   Increase [Decrease] in:
     Accounts Payable and Accrued Expenses                   (3,047,182)    506,493
                                                            ----------- -----------

  Net Cash - Operating Activities - Forward                  (1,907,190)    950,439
                                                            ----------- -----------

Investing Activities:
  Purchase of Property and Equipment                           (500,468)   (226,428)
  Acquisitions of Imaging Centers                              (491,875)   (200,000)
  Proceeds from Sale of Divisions and Equipment              15,227,720   1,028,000
  Loans to Related Parties                                   (5,500,000)         --
  Receipt on Loans to Related Parties                         3,521,171          --
  Payments for Deposits and Other Assets                       (162,310)   (443,004)
                                                            ----------- -----------

  Net Cash - Investing Activities - Forward                  12,094,238     158,568
                                                            ----------- -----------

Financing Activities:
  Cash Overdraft                                               (522,409)    990,636
  Proceeds from Borrowings on Notes Payable                      10,000   2,196,775
  Principal Payments on Notes and Leases                     (7,860,487) (9,169,798)
  Proceeds from Issuance of Common Stock                             --   3,000,000
  Loans from Related Parties                                         --   1,982,103
  Payments to Related Parties                                (2,070,670)    (48,433)
  Proceeds from Joint Venture Partners                          250,000          --
  Payments to Joint Venture Partners                                 --     (65,625)
                                                            ----------- ------------

  Net Cash - Financing Activities - Forward                $(10,193,566 $(1,114,342)

See Notes to Consolidated Financial Statements.

</TABLE>
                                        F-6

<PAGE>




DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
<TABLE>



                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 7     1 9 9 6
                                                               -------     -------

<S>                                                         <C>         <C>        
  Net Cash - Operating Activities - Forwarded               $(1,907,190)$   950,439

  Net Cash - Investing Activities - Forwarded                12,094,238     158,568

  Net Cash - Financing Activities - Forwarded               (10,193,566) (1,114,342)
                                                            ----------- -----------

  Net [Decrease] in Cash                                         (6,518)     (5,335)

Cash - Beginning of Years                                        12,658      17,993
                                                            ----------- -----------

  Cash - End of Years                                       $     6,140 $    12,658
                                                            =========== ===========

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the years for:
   Interest                                                  $2,380,594 $ 3,952,766
   Income Taxes                                             $        -- $        --
</TABLE>

Supplemental Schedule of Noncash Investing and Financing Activities:
  DIS entered into capital  leases or financed  equipment with notes payable for
$640,934 and $1,316,110 during 1997 and 1996, respectively.

  During 1997, DIS acquired the assets of Las Posas Medical Imaging for $35,000.
During 1996, DIS acquired medical equipment of approximately $804,000 as part of
the Corona Imaging and Healthcare  Imaging Centers  acquisitions  along with the
assumption  of notes  payable of  $567,518,  and  accounts  payable  and accrued
expenses of $44,575 thereon.

  DIS  converted  accrued  maintenance  costs with outside  vendors into various
notes payable  totaling  approximately  $560,000 and $1,100,000  during 1997 and
1996, respectively.

  During  1997,  distributed  dividends  on  preferred  stock in the  amount  of
$224,100 through the issuance of a note payable.



See Notes to Consolidated Financial Statements.

                                        F-7

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------



[1] Summary of Significant Accounting Policies

[A]  Organization,  Business  and Basis of  Presentation  -  Diagnostic  Imaging
Services, Inc. and its subsidiaries [the "Company" or "DIS"] provides management
systems and  services,  non-physician  health  care  personnel,  facilities  and
equipment  through a network of  facilities  owned or leased by the Company [the
"Network"].  As of  December  31,  1997,  the  Network,  operating  in  Southern
California,  was  composed of eight  imaging  centers and one cancer care center
[See Notes 15 and 16]. The Company primarily  contracts with health  maintenance
organizations, hospitals and other health care providers to perform the services
described  above.  The Company  does not engage in the  practice of medicine and
neither  employs any physicians nor exerts any control over decisions  regarding
medical care.

In March  of 1996,  Primedex  Health  Systems,  Inc.  ["PHS"]  [a  publicly-held
company] acquired 2,747,493 of previously unissued common shares of the Company,
for  $3,000,000  with a  five-year  warrant to acquire an  additional  1,521,739
shares of the Company's common stock at $1.60 per share [See Note 12[B]].  As of
December 31,  1997,  through  various  transactions  with related and  unrelated
parties  since March 1996,  PHS acquired an additional  5,327,477  shares of DIS
common stock for  approximately  $6 million  increasing  its total  ownership to
8,074,970 shares, or approximately 71%. Subsequent to December 31, 1997, through
February 27, 1998, PHS acquired an additional 453,000 shares of common stock for
approximately $510,000 from various unrelated parties,  increasing its ownership
to 8,527,970 shares, or approximately 74%.

[B] Consolidation - The accompanying  consolidated  financial statements include
the accounts of DIS and Scripps  Chula Vista Imaging  Center,  L.P.  ["SCV"],  a
joint venture. All significant  intercompany accounts and transactions have been
eliminated in consolidation.

[C] Property and  Equipment and  Depreciation  and  Amortization  - Property and
equipment are recorded at cost, less  accumulated  depreciation and amortization
and includes  equipment  held under capital lease  agreements.  Depreciation  is
computed by the straight-line  method and is based on the estimated useful lives
of  the  various  assets   ranging  from  three  to  sixteen  years.   Leasehold
improvements  are  amortized  over the shorter of the life of the lease or their
estimated useful life, using the straight-line  method.  When assets are sold or
retired, the cost and accumulated depreciation are removed from the accounts and
any gain or loss is included in operations.

[D]  Revenue  and  Related  Accounts  Receivable  and  Allowances  - Revenue  is
recognized when the related service is performed  [including physician services,
a portion of which are remitted to  physicians  in  accordance  with  underlying
service  agreements;  physician  services are included in cost of services] less
contractual  adjustments and reserves for doubtful  accounts  ["allowances"].  A
significant  portion of the Company's  accounts  receivable  involve third party
payors,   primarily  insurance  companies.   The  current  portion  of  accounts
receivable are the amounts which are reasonably  expected to be collected within
a year, based upon historical collection data.

Accounts  receivable  as of  December  31, 1997 are shown net of  allowances  of
$4,006,612 of which  $3,633,926 has been deducted from current  receivables  and
$372,686 has been deducted from noncurrent receivables.  The Company records its
allowances based on historical  collection  percentages.  While management feels
that these  percentages  are  reliable,  they are  subject to change in the near
term.

[E] Intangibles - Goodwill is recognized in business combinations  accounted for
under the  purchase  method  of  accounting  and  represents  the  excess of the
purchase price over the fair value of identifiable net assets acquired. Goodwill
is  amortized on a  straight-line  basis over  twenty-years  which is the period
during which the Company expects to receive benefits.  Organization  costs, loan
fees and  covenants-notto  compete are recorded at cost and are  amortized  over
their estimated useful lives ranging from two to twenty years.


                                       F-8

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
------------------------------------------------------------------------------


[1] Summary of Significant Accounting Policies [Continued]

[F]  Long-Term  Accrued  Professional  Fees  -  Accrued  professional  fees  for
physician services are classified as either long-term or short-term depending on
the  classification  of the related  amounts due from the patient or third-party
payor for the related services performed.

[G] Use of Estimates - The  preparation  of financial  statements  in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period.
Accordingly, actual results could differ from those estimates.

[H]  Concentrations  of Credit Risk - Financial  instruments  which  potentially
subject  the  Company to  concentrations  of credit  risk are cash and  accounts
receivable  arising from its normal business  activities.  The Company routinely
assesses the  financial  strength of its  customers  and third party payors and,
based upon factors  surrounding their credit risk,  establishes an allowance for
uncollectible  accounts,  and  as a  consequence,  believes  that  its  accounts
receivable  credit risk exposure  beyond such allowance is limited.  The Company
places  its  cash  and cash  equivalents  with  high  credit  quality  financial
institutions.  The  amount  on  deposit  in any  one  institution  that  exceeds
federally insured limits is subject to credit risk. As of December 31, 1997, the
Company had $51,597 with  financial  institutions  subject to credit risk beyond
the insured amount. The Company does not require collateral or other security to
support financial instruments subject to credit risk.

[I] Impairment - Certain  long-term assets  [including  goodwill] of the Company
are  reviewed  at least  annually  as to  whether  there are  indications  their
carrying  value  has  become  impaired,  pursuant  to  guidance  established  in
Statement of Financial  Accounting  Standards ["SFAS"] No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of."  Management  considers  assets to be impaired if the carrying value exceeds
the future  projected  cash  flows from  related  operations  [undiscounted  and
without interest charges].  If impairment is deemed to exist, the assets will be
written  down  to  fair  value.  Management  also  reevaluates  the  periods  of
amortization to determine whether  subsequent  events and circumstances  warrant
revised  estimates  of useful  lives.  [See Note 5]. As of  December  31,  1997,
management expects these assets to be fully recoverable.

[J] Stock  Options - On January 1, 1996,  the  Company  adopted  the  disclosure
requirements of Statement of Financial  Accounting  Standards  ["SFAS"] No. 123,
"Accounting for Stock-Based  Compensation," for stock options and similar equity
instruments [collectively,  "Options"] issued to employees, however, the Company
will  continue to apply the  intrinsic  value  based  method of  accounting  for
options issued to employees  prescribed by Accounting  Principles  Board ["APB"]
Opinion No. 25,  "Accounting for Stock Issued to Employees" rather than the fair
value based method of  accounting  prescribed by SFAS No. 123. SFAS No. 123 also
applies to  transactions  in which an entity  issues its equity  instruments  to
acquire  goods  or  services  from  non-employees.  Those  transactions  must be
accounted for based on the fair value of the consideration  received or the fair
value of the equity instruments issued, whichever is more reliably measurable.

[K] Earnings Per Share - The  Financial  Accounting  Standards  Board has issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  per
Share";  which is effective for financial  statements  issued for periods ending
after December 15, 1997.  Accordingly,  earnings per share data in the financial
statements  for the year  ended  December  31,  1997,  have been  calculated  in
accordance  with SFAS No. 128.  Prior periods  earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128.

SFAS No. 128 supersedes  Accounting  Principles  Board Opinion No. 15, "Earnings
per  Share,"  and  replaces  its  primary  earnings  per share  with a new basic
earnings per share  representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period.



                                       F-9

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------


[1] Summary of Significant Accounting Policies [Continued]

[K]  Earnings  Per  Share  [Continued]  - SFAS  No.  128  also  requires  a dual
presentation  of  basic  and  diluted  earnings  per  share  on the  face of the
statement of  operations  for all  companies  with complex  capital  structures.
Diluted  earnings  per share  reflects  the  amount of  earnings  for the period
available to each share of common stock outstanding during the reporting period,
while  giving  effect  to  all  dilutive   potential  common  shares  that  were
outstanding during the period,  such as common shares that could result from the
potential exercise or conversion of securities into common stock.

The  computation  of diluted  earnings  per share  does not  assume  conversion,
exercise,  or contingent  issuance of securities that would have an antidilutive
effect on earnings  per share (i.e.,  increasing  earnings per share or reducing
loss per share).  The dilutive  effect of  outstanding  options and warrants and
their   equivalents  are  reflected  in  dilutive  earnings  per  share  by  the
application  of the treasury  stock method which  recognizes the use of proceeds
that could be  obtained  upon  exercise of options  and  warrants  in  computing
diluted  earnings  per share.  It  assumes  that any  proceeds  would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive  effect only when the average  market price of the
common  stock  during the period  exceeds the  exercise  price of the options or
warrants.

[L] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid  investments with a maturity of three months or less when purchased.  The
carrying amount of cash and cash equivalents  approximates their fair value. The
Company has no cash equivalents at December 31, 1997.

[M] Reclassifications - Certain amounts in the prior-year consolidated financial
statements have been reclassified to conform to the current-year presentation.

[2] Business Combinations, Acquisitions and Divestitures

On March 1, 1996,  the assets and related  liabilities  of Mission Bay Mobile [a
prior joint venture of the Company] were assumed by Mobile Technology,  Inc., an
unrelated party. The transfer resulted in a net gain of approximately  $296,000.
On April 1, 1996, substantially all of the assets and liabilities of the nuclear
medicine  business at North County were sold to Tri-City  Hospital  District for
$230,000. The sale resulted in a net loss of $147,093.

During  1996,  DIS  rented  its PPS  mobile  MRI  unit to a  hospital  with  the
expectation of eventually  selling the unit to the hospital.  On April 30, 1996,
the hospital  terminated  its rental  agreement  and DIS  reclaimed the unit and
set-up an additional loss reserve of  approximately  $119,000 with the intention
of selling  the unit by  year-end.  In  January  1997,  the PPS mobile  unit and
related  liabilities were transferred to RadNet  Management,  Inc., a 100%-owned
subsidiary  of PHS.  DIS  recognized  a gain  of  approximately  $94,000  on the
transaction.

Substantially all of the remaining assets of Integrated  Cardiovascular Systems,
Inc. [a division of the Company] were sold on May 29, 1996 to Baxter  Healthcare
Corporation for approximately $798,000.
The sale resulted in a gain of approximately $313,000.

On July 31, 1996,  effective August 1, 1996, DIS acquired  substantially  all of
the business and assets of  Healthcare  Imaging  Center,  L.P. for $200,000 plus
assumed liabilities resulting in goodwill of $10,000.

In September  1996,  DIS opened the Camarillo  Imaging Center  ["Camarillo"],  a
start-up operation primarily  utilizing equipment  transferred from other sites.
The facility  functions as a satellite  office to the  Company's  MDI center and
provides mammography, ultrasound and general diagnostic radiology services.



                                      F-10

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
------------------------------------------------------------------------------


[2] Business Combinations, Acquisitions and Divestitures [Continued]

On September 30, 1996, effective October 1, 1996, DIS acquired substantially all
of the business and assets of the Corona Imaging  Center  ["Corona"] in exchange
for the Company taking over payments  under the existing  building and equipment
financing leases and other accrued liabilities. There was no goodwill recognized
in this transaction.

As a result of a continuing  deteriorating  business  climate and other business
reasons at the Company's Santa Monica ["Parkside"]  facility,  on June 25, 1997,
the Company tentatively  determined to close substantially all of its operations
at that center on or about August 29, 1997 [the Company continues to operate its
Parkside Radiology Women's Center ["Parkside Womens"] which provides ultrasound,
mammography,  stereotactic breast biopsy and bone densitometry services]. Due to
this  decision,  the Company  recognized an impairment  loss in December 1996 of
approximately  $3,425,000.  In August  1997,  the Company  recognized  a gain of
$400,000  for the sale of certain  assets of  Parkside.  The buyer also  assumed
Parkside's building leases.

Effective  January 1, 1997, the Company opened its Scripps Chula Vista MRI, L.P.
["SCV"]  servicing  patients  in San Diego.  The  Company  and Scripps are equal
partners with the Company serving as managing partner [See Note 15]. In February
1998,  effective January 1, 1998, the Company sold its interest in SCV to DHS in
exchange for 127,250 shares of DHS common stock.

Effective March 1, 1997, DIS sold the assets and related  liabilities of four of
its  hospital-based  MRI  facilities  [Tarzana,  SGV,  Chino  and  SMIC] and its
Ultrasound Division to Diagnostic Health Services,  Inc. ["DHS"] for $14,972,720
in cash, including $1,000,000 for a ten-year covenant not-to-compete [classified
as "Deferred Revenue" on the financial  statements],  and a non-interest bearing
note  receivable  valued  at  approximately   $1,190,000  which  represents  the
discounted  value at 11.75% of three $500,000  payments to be made by DHS to DIS
on the first,  second and third  anniversaries of the closing date. There was an
option to receive  these  payments in the form of DHS common stock valued at the
mean average of the reported  closing  price of such common stock as reported on
the NASDAQ National Market for the five  consecutive  trading days ending on the
third day  immediately  prior to the closing date ["the Agreed Value"] [See Note
15[C]].  In addition,  DHS assumed the operating lease of the  Registrant's  WLA
center. The company recognized a gain on the sale of $8,258,259.

During 1997,  DIS acquired the assets of Las Posas  Medical  Imaging for $35,000
and moved its Camarillo facility to its location. There was no goodwill recorded
in this transaction. The previous Camarillo space is now being used for storage.

Effective  January 1, 1998, assets with a net book value of $905,151 and related
capital  lease  obligations  of $902,781 of the West LA MRI Center  ["WLA"] were
assumed by PHS' Radnet Management, Inc. There was no consideration and a loss of
$2,370 was recorded in the transaction.

During 1997, DIS acquired the remaining 25% interest in Valley Regional Oncology
Center for  $260,000  cash,  resulting  in goodwill of  $260,000.  In 1997,  the
Company  acquired  the  remaining  units in TVIC for $196,875 in cash and a note
payable for $157,500, resulting in goodwill of $354,375.

All acquisitions in 1996  and 1997 are immaterial to the financial statements.



                                      F-11

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
------------------------------------------------------------------------------


[3] Fair Value of Financial Instruments

The estimated fair value of the Company's financial instruments are as follows:

                                        1 9 9 7
                                 Carrying       Fair
                                  Amount        Value

Notes Payable - Long-Term       $(9,421,107) $(9,354,228)

In assessing the fair value of these financial instruments, the Company has used
a variety of methods and  assumptions,  which were based on  estimates of market
conditions and risks existing at that time. For certain  instruments,  including
cash, due to/from  related  parties,  and debt maturing  within one year, it was
estimated that the carrying amount  approximated  fair value for the majority of
these instruments because of their short maturities. The fair value of the notes
payable  long-term is based on current  rates at which the Company  could borrow
funds with similar remaining maturities.

[4] Property and Equipment and Depreciation and Amortization

Property and equipment  and  accumulated  depreciation  and  amortization  as of
December 31, 1997 are as follows:

Medical Equipment                                       $8,870,787
Office Equipment and Furniture and Fixtures                638,982
Leasehold Improvements                                   2,085,367
Property Held Under Capital Lease                        4,136,295
                                                        ----------

Total                                                   15,731,431
Less:  Accumulated Depreciation and Amortization        (5,259,511)

  Net Property and Equipment                            $10,471,920

Property and equipment  depreciation  expense was  approximately  $1,990,000 and
$2,945,000 for 1997 and 1996, respectively.

For property held under capital leases, depreciation expense for the years ended
December  31,  1997  and  1996  was   approximately   $510,000  and  $1,090,000,
respectively and accumulated depreciation at December 31, 1997 was approximately
$1,695,000.

Certain assets were written down during 1996 [See Note 5].  Certain assets were
sold during 1997 [See Note 2].

[5] Goodwill and Intangible Assets and Amortization

A breakdown of goodwill and intangible assets is as follows:
                                                         Goodwill      Other

Cost                                                    $2,359,905  $1,523,091
Less:  Accumulated Amortization                            363,231     767,806
                                                        ----------  ----------

  Net Intangible Assets                                 $1,996,674  $  755,285
  ---------------------                                 ==========  ==========

Amortization  expense relating to intangible assets was  approximately  $450,000
and $970,000 for 1997 and 1996, respectively.



                                      F-12

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
------------------------------------------------------------------------------


[5] Goodwill and Intangible Assets and Amortization [Continued]

Pursuant to SFAS No. 121, the Company,  in 1996,  recorded an impairment loss of
$3,424,548  from  writing  down  goodwill,  property  and  equipment,   deferred
compensation,  covenants  not-to-compete  and loan fees. Facts and circumstances
leading to the impairment  loss  consisted  principally of the decision to close
the Parkside  facility on or about August 29, 1997. The impairment loss recorded
is the  carrying  values  of the  assets  and  deferred  compensation  less  the
estimated  depreciation  and  amortization  for 1997 up to the expected date the
center was closed.

Effective March 1, 1997, DIS wrote-off goodwill and accumulated  amortization of
$4,820,805  and $691,158,  respectively  and intangible  assets and  accumulated
amortization  of $1,291,343  and $787,157,  respectively  related to the sale of
four of its MRI facilities and its Ultrasound Division to DHS. These amounts are
included in the gain on sale of subsidiaries and divisions.

[6] Related Party Transactions

During  1997,  DIS repaid  Norman  Hames,  President  of DIS,  $88,567,  without
interest,  for prior  loans made by him to the  Company.  Also,  during the year
1997, DIS repaid PHS $1,982,103 for prior  short-term  working capital loans and
its revolving line of credit.  DIS loaned PHS $5,500,000,  with interest at 10%,
with the proceeds from the sale to DHS. PHS repaid DIS approximately  $3,520,000
including approximately $232,000 of interest. At December 31, 1997, PHS owed DIS
approximately $1,980,000.

DIS entered into an  agreement  with PHS,  whereby PHS will  provide  management
services to DIS for a monthly fee of $45,000. During 1997, DIS incurred $540,000
in management fees.

[7] Litigation

On June 4, 1997,  the Company was served  with a  complaint  entitled  Gerald E.
Dalrymple,  M.D. and Gerald E. Dalrymple,  M.D., Inc., a California professional
corp. v. Primedex Health Systems,  Inc.,  Diagnostic Imaging Services,  Inc. and
Diagnostic  Health  Services,  Inc. filed in the Los Angeles Superior Court. The
complaint  alleges that the Company failed to properly pay to the plaintiff fees
for performing professional services to which he was entitled as well as damages
for  violation of the implied  covenant of good faith and fair  dealing,  fraud,
conversion, breach of fiduciary duty, interference with existing and prospective
business advantage,  negligent and intentional  infliction of emotional distress
and defamation and seeks damages for an unspecified amount in excess of $25,000.
The  complaint  also  alleges  that by  virtue of the  investment  by PHS in the
Company and the sale of four of the Company's imaging centers and its ultrasound
business  to  Diagnostic  Health  Services,  Inc.,  that the Company has thereby
effected either a  reorganization,  consolidation,  merger or transfer of all or
substantially all of its assets to another entity thereby  permitting  plaintiff
to  convert  a  warrant  for  319,488  shares  of  the  Company's  Common  Stock
exercisable at $.01 per share which  plaintiff  received in connection  with the
Company's  acquisition of its Santa Monica facility to either $1,000,000 cash or
stock with a market value of  $1,000,000  at the  election of the  Company.  The
Company  denies  each and every  allegation  and  intends to  vigorously  defend
against the legal action.

A partial settlement was reached in August 1997. Pursuant to the settlement, Dr.
Dalrymple assumed ownership of Parkside Radiology and assumed responsibility for
expenses of the facility in the future.  Additionally,  the Company sold certain
of its equipment and leasehold  improvements to Dr. Dalrymple for  approximately
$400,000.  Plaintiff's  remaining claims, as well as the Company's  cross-claims
against Dr. Dalrymple alleging, among other things, that Dr. Dalrymple pursued a
plan to depress Parkside's business,  and therefore its value, thus enabling him
to acquire the facility he previously sold to the Company at a depressed  price,
are still in dispute.  Discovery is ongoing and trial is scheduled  for November
16,  1998.  It is too soon to predict  the outcome of this  matter.  The Company
intends  to  vigorously  defend  against  plaintiff's  claims  and to pursue its
cross-claims in the action.

The Company is currently party to other  litigation,  none of which is deemed by
management to be material in nature.

                                      F-13

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
------------------------------------------------------------------------------

<TABLE>


<S>                                                                                    <C>    

[8] Long-Term Debt and Capital Leases

Long-term debt at December 31, 1997 consisted of the following:

Notes payable to a financial  institution,  which is also the shareholder of the
  Series F and G Preferred Stock of the Company,  bearing interest from 9.75% to
  12.75%; monthly principal plus interest is due until maturity at various dates
  through 2003; collateralized primarily by medical equipment.                           $ 9,978,245

Notes  payable to a  financial  institution  bearing  interest  at fixed rate of
  11.25%;  monthly  principal  plus  interest  is due  until  maturity  in 1998;
  collateralized primarily by medical equipment.                                              36,464

Notes payable to former limited partners of acquired partnerships bearing
  interest at a fixed rate of 8%; varying payment terms until maturity at
  various dates through 1999.                                                              1,996,508

Various notes payable to financial institutions;  bearing interest at rates from
  10%   to   10.5%;   maturing   through   2001;   collateralized   by   medical
  equipment.                                                                               2,255,192

Obligations under capital leases, collateralized primarily by medical equipment,
  originally costing approximately  $4,100,000,  payable in monthly installments
  including interest at rates from 10% to 11.5% through 2004.                              2,046,270
                                                                                         -----------
  Total                                                                                   16,312,679
  Less:  Current Portion Debt and Capital Leases                                          (5,259,528)
                                                                                         -----------

  Non-Current                                                                            $11,053,151
                                                                                         ===========
The  Company  is  in  default  on  approximately   $1,830,000  under  four  note
agreements,  pertaining  to the  acquisition  of  centers,  for  non-payment  of
principal  and interest.  These notes have been  classified as current [See Note
16].

The following shows the future maturities of long-term debt exclusive of capital
leases:

 Years Ended
December 31,
   1998                                                                                 $ 4,845,302
   1999                                                                                   3,129,257
   2000                                                                                   3,279,412
   2001                                                                                   2,837,763
   2002                                                                                     136,020
   Thereafter                                                                                38,655
                                                                                        -----------

     Total                                                                              $14,266,409
                                                                                        ===========
</TABLE>



                                      F-14

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------


[8] Long-Term Debt and Capital Leases [Continued]

The Company leases property under capital leases.  The following  schedule shows
the minimum lease payments under capital leases as of December 31, 1997:

 Years Ended
December 31,
   1998                                               $   619,611
   1999                                                   619,611
   2000                                                   619,611
   2001                                                   474,787
   2002                                                    98,593
   Thereafter                                             156,106
                                                      -----------

   Total                                                2,588,319
   Less:  Amount Representing Interest                   (542,049)

   Total                                                2,046,270
   Less:  Current Portion                                (414,226)

     Long-Term Portion                                $ 1,632,044
     -----------------                                ===========

[9] Commitments and Contingencies

[A] Leases - The  Company and its  subsidiaries  have  noncancellable  operating
leases for use of their  facilities and certain  medical  equipment.  The leases
require  payment of various  expenses as  additional  rent and expire at various
times through 2002.  Certain leases provide for renewal options from two to five
years,  rent  increases  based on changes in the  Consumer  Price  Index and are
guaranteed  by certain  shareholders  and officers of the Company.  Rent expense
under the leases was approximately $1,630,000 and $2,100,000 for the years ended
December 31, 1997 and 1996, respectively.

The following  summarizes  future  minimum  rental  payments  required under the
operating  leases that have  initial or  remaining  lease terms in excess of one
year as of December 31, 1997:

 Year Ended
December 31,                                   Total     Equipment  Facilities

   1998                                     $1,059,100  $   32,396  $1,026,704
   1999                                        780,924      16,070     764,854
   2000                                        736,185         949     735,236
   2001                                        191,729          --     191,729
   2002                                         15,775          --      15,775
                                            ----------  ----------  ----------

     Totals                                 $2,783,713  $   49,415  $2,734,298
     ------                                 ==========  ==========  ==========

[B] Salary and  Consulting  Contractor  Agreements  - The  Company  has  certain
arrangements  for payment of professional  services based upon the percentage of
revenue collected from 15% to 20%.

The Company also has employment  agreements  with an officer and key employee at
annual compensation rates ranging from $50,000 to $200,000 and for periods up to
four years. Total commitments under the agreements are approximately $603,000 as
of December 31, 1997.



                                      F-15

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
------------------------------------------------------------------------------


[10] Income Taxes

Income  taxes have been  recorded  under SFAS No.  109,  "Accounting  for Income
Taxes."  Deferred  income  taxes  reflect  the  net  effects  of  (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and (b)
operating loss carryforwards.

The tax effects of significant  items  comprising the Company's net deferred tax
assets as of December 31, 1997 are as follows:

Deferred Tax Assets:
  Net Operating Loss Carryforwards                      $7,336,000
  Tax Basis of Intangible Assets in Excess of Book Basis   707,000
                                                        ----------
  Total                                                  8,043,000

Deferred Tax Liability:
  Book Basis of Property and Equipment in Excess of 
   Tax Basis                                             3,719,000
                                                        ----------
  Deferred Tax Asset                                     4,324,000

Valuation Allowance                                      4,324,000
                                                        ----------
  Net Deferred Tax Asset                                $       --
  ----------------------                                ==========

The valuation  allowance of $4,324,000  represents a decrease of $4,905,000 over
the preceding year. The decrease in the valuation  allowance is primarily due to
the disposal of a significant  amount of property and equipment upon the sale of
subsidiaries  and  divisions.  Net operating loss  carryforwards  of $18,340,000
expire as follows:

Years ended
  2004                                                  $  955,000
  2005                                                     817,000
  2006                                                   4,053,000
  2007                                                   3,439,000
  2008                                                   1,226,000
  2010                                                   2,513,000
  2011                                                   5,337,000
                                                        ----------

  Total                                                $18,340,000
                                                       ===========
A portion of the  available  losses is limited  according  to Section 382 of the
Internal  Revenue  Code.  Section 382 of the  Internal  Revenue  Code limits the
annual  utilization  of net  operating  losses  to  the  value  of  the  Company
immediately prior to an ownership change  [generally,  more than a 50% ownership
change at any time  within a  three-year  period  multiplied  by the  "long-term
tax-exempt  rate"].  Due to certain  significant  changes in  ownership of DIS's
stock,  the annual  utilization  of federal  NOL  carryforwards  may be limited,
depending  on the  determination  of the fair values of the Company  immediately
before the change in ownership.




                                      F-16

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
------------------------------------------------------------------------------


[10] Income Taxes [Continued]

Components of income tax expense:

                                                           1 9 9 7      1 9 9 6
                                                           -------      -------

Tax Expense Before Application of Operating Loss Carryforwards:
  Federal                                                $   269,980 $        --
  State                                                       78,533          --

Tax Benefit of Operating Loss Carryforwards:
  Federal                                                   (269,980)         --
  State                                                      (78,533)         --
                                                         ----------- -----------

  Totals                                                 $        -- $        --
  ------                                                 =========== ===========

A reconciliation  between statutory federal income tax and the effective rate of
income tax expense for each of the two years  during the period  ended  December
31, 1997 follows:

                                                           1 9 9 7      1 9 9 6
                                                           -------      -------

Statutory Federal Income Tax Rate                              (34)%       (34)%
Change in Valuation Allowance                                   --          34
Use of Net Operating Loss                                       34          --
                                                         ---------   ---------

  Totals                                                        --          --
  ------                                                 =========   =========

[11] Shareholders' Deficit

The Series F convertible preferred shares are redeemable at the Company's option
for $1.00 per share plus  accumulated  unpaid  dividends and are  convertible to
common  shares  at a  ratio  of  2.482  preferred  shares,  subject  to  certain
restrictions, in exchange for one common share, and accrued dividends, which are
cumulative,  of $.05 per share through July 15, 2000, $.07 per share  thereafter
through July 15, 2001, $.085 per share thereafter through July 15, 2002 and $.10
per share thereafter, payable quarterly.

The Series G convertible  preferred shares have  substantially the same terms as
the  Series F and are  convertible  to common  shares at a ratio of 2  preferred
shares in exchange for one common  share.  The Company and DVI have entered into
an agreement  which  provides that DVI would not convert its preferred  stock to
common stock  without the approval of the Chairman of the Company,  prior to the
price of the common stock in the public market in which it trades closing for 20
consecutive days at a price of five dollars per share or higher.

During 1997,  DIS  distributed  $224,100 for  dividends on preferred  stock.  At
December 31, 1997 and 1996,  cumulative preferred stock unpaid dividends totaled
$336,150 [$.075 per share].



                                      F-17

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
------------------------------------------------------------------------------


[12] Stock Options and Warrants

[A] Stock  Options - In October  1990,  the Company  adopted a stock option plan
covering up to 250,000 shares of the Company's common stock. Options to purchase
shares of the Company's  common stock may be granted to employees,  officers and
directors  at the fair  market  value at the date of grant for  incentive  stock
options or 85% of the fair  market  value at the date of grant for  nonqualified
stock options.

The  following  table  summarizes  the  activity  in common  shares  subject  to
incentive stock options and nonqualified options for 1997 and 1996:
<TABLE>
                                                                Weighted Average
                                                         Common   Exercise Price
                                                         Shares      Per Share

<S>                                                        <C>           <C>      
Options Outstanding and Exercisable at January 1, 1996     715,917       $    1.78

Options Granted                                             10,000       $    1.00
Options Exercised                                               --       $      --
Options Canceled                                            10,000       $     .63
                                                         ---------

Options Outstanding and Exercisable at December 31, 1996   715,917       $    1.78

Options Granted                                                 --       $      --
Options Exercised                                               --       $      --
Options Canceled                                             9,995       $    2.25
                                                         ---------

  Options Outstanding and Exercisable at December 31, 1997 705,922       $    1.78
  -------------------------------------------------------- =======
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

                                             Options Outstanding
                                    Number      Weighted-Average
  Range of                      Outstanding at      Remaining   Weighted-Average
Exercise Prices                December 31, 1997Contractual Life Exercise Price

$.01 - $1.00                          80,360       1.3 Years         $    .67
$1.01 - $2.00                        325,566       3.0 Years         $   1.15
$2.01 - $3.00                        299,996        .8 Years         $   2.75
                                   ---------

                                     705,922       1.9 Years         $   1.78
                                   =========

The  exercise  prices of the  options  outstanding  at  December  31, 1997 range
between $.625 and $3.00.

No compensation cost was recognized during 1997 or 1996.





                                      F-18

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
------------------------------------------------------------------------------


[12] Stock Options and Warrants [Continued]

[A] Stock Options  [Continued] - Had  compensation  cost been  determined on the
basis of fair value  pursuant to SFAS No. 123, net income and earnings per share
for 1997 and 1996 would have been as follows:

                                                   1 9 9 7      1 9 9 6
                                                   -------      -------
Net Income [Loss]:
  As Reported                                     $4,880,187  $(8,367,010)
                                                  ==========  ===========
  Pro Forma                                       $4,880,187  $(8,374,571)
                                                  ==========  ===========

Basic Income [Loss] Per Share:
  As Reported                                     $      .43  $     (.79)
                                                  ==========  ==========
  Pro Forma                                       $      .43  $     (.79)
                                                  ==========  ==========

Diluted Income [Loss] Per Share:
  As Reported                                     $      .37  $     (.77)
                                                  ==========  ==========
  Pro Forma                                       $      .37  $     (.77)
                                                  ==========  ==========

At the grant dates,  the weighted  average fair value of the above  options were
$-0- and $.76 during 1997 and 1996, respectively.

Generally,  stock  options are  exercisable  upon granting and expire five years
from the date of grant.

The fair  value  used in the pro  forma  data was  estimated  by using an option
pricing model which took into account as of the grant date,  the exercise  price
and the expected life of the option,  the current price of the underlying  stock
and its expected  volatility,  expected dividends on the stock and the risk-free
interest rate for the expected term of the option.  The following is the average
of the data used for the following items.
               Risk-Free      Expected       Expected         Expected
             Interest Rate      Life        Volatility        Dividends

1997              --             --              --               --
1996             6.63%         5 Years        81.97%            N/A

The following table summarizes the activity in common shares subject to warrants
for the year ended December 31, 1997 [See Note 1A]:
                                                             Common      Warrant
                              Shares Exercise Price

Warrants Outstanding and Exercisable at January 1, 1996 [1]  319,488  $     .01

Warrants Granted [2]                                       1,521,739  $    1.60
Warrants Exercised                                                --  $      --
Warrants Canceled                                                 --  $      --
                                                           ---------

Warrants Outstanding and Exercisable at December 31, 1996 1,841,227   $.01-1.60

Warrants Granted                                                 --   $      --
Warrants Exercised                                               --   $      --
Warrants Canceled                                                --   $      --
                                                          ---------

Warrants Outstanding and Exercisable at December 31, 1997 1,841,227   $.01-1.60
  ------------------------------------------------------- =========

[1] See Note 7.
[2] The 1,521,739 warrants,  valued at $180,707,  issued in 1996, were issued to
PHS [See Note 1[A]].

Warrants  outstanding  at December 31, 1997 expire from  February  1999 to March
2001.

                                      F-19

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
------------------------------------------------------------------------------



[13] Employee Benefit Plan

The Company  adopted a savings plan  pursuant to Section  401(K) of the Internal
Revenue Code, that covers  substantially all employees.  Eligible  employees may
contribute  on a tax deferred  basis a  percentage  of  compensation,  up to the
maximum  allowable  amount  under  the  tax  law.  Employee  contributions  vest
immediately.  The Plan does not require a matching  contribution by the Company.
The  Company  did not make a  contribution  to the plan or record any expense in
1997 or 1996.

[14] Income [Loss] Per Share

A  reconciliation  of weighted  average  common shares  outstanding  to weighted
average common shares outstanding assuming dilution follows:
                                                        1 9 9 7      1 9 9 6
                                                        -------      -------

Average Common Shares Outstanding                     11,310,010  10,554,073
Common Shares Issuable Pursuant to:
  Series F Convertible Preferred Stock                1,000,000          --
  Series G Convertible Preferred Stock                1,000,000          --
  Stock Options                                          44,154          --
  Purchase Warrants                                     316,826          --
                                                      ---------   ---------

Average Common Shares Outstanding Assuming Dilution  13,671,090  10,554,073

Stock options and purchase warrants outstanding at December 31, 1997 to purchase
309,996 and 1,521,739, respectively, shares of common stock were not included in
the  computation  of earnings per common  share  assuming  dilution  because the
options'  exercise  prices were  greater  than the average  market  price of the
common shares, however, the options could be dilutive in the future.

[15] Subsequent Events

[A] Effective January 1, 1998, assets with a net book value $905,151 and related
capital  lease   obligations  of  $902,781  of  WLA  were  assumed  PHS'  Radnet
Management,  Inc. There was no consideration  and the Company realized a loss of
$2,370 on the transaction.

[B] In February  1998,  subsequent  to  year-end,  the Company  entered  into an
agreement  to sell its  interest  in SCV to  Diagnostic  Health  Services,  Inc.
["DHS"] for 127,250 shares of DHS stock.  While the shares are  restricted,  the
current  market  value of the shares  received if equated to the market value of
DHS shares is approximately $1,400,000 as of February 27, 1998.

[C] Effective April 7, 1998, the Company  accepted  200,000 shares of DHS common
stock  in  cancellation  of the DHS  obligation  to make  post-closing  payments
pursuant to the March 1, 1997  agreement  whereby  the  Company  sold to DHS the
assets and related  liabilities of four of its hospital-based MRI facilities and
its Ultrasound  Division.  While the shares are  restricted,  the current market
value of the shares  received  if  equated to the market  value of DHS shares is
approximately $2,300,000 as of April 7, 1998.

[16] Going Concern

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles, which contemplates continuation of the
Company  as a  going  concern  and  realization  of  assets  and  settlement  of
liabilities and commitments in the normal course of business.



                                      F-20

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
------------------------------------------------------------------------------


[16] Going Concern [Continued]

The Company has suffered  recurring losses from operations,  has been in default
under various notes and has negative  working  capital which raises  substantial
doubt about its ability to  continue as a going  concern.  During 1997 and 1996,
DIS had net income  [loss] of $5,104,287  and  $[8,142,910],  respectively,  and
negative  working  capital of  $2,997,074  and  $14,270,257,  respectively.  The
improvements came from the sale of its ultrasound  division and MRI sites to DHS
as well as the closings of certain unprofitable centers.

Effective  January 1, 1998, assets with a net book value of $905,151 and related
capital lease  obligations  with principal due of $902,781 WLA were assumed PHS'
Radnet Management, Inc.. The current portion of WLA debt as of December 31, 1997
was approximately $200,000.

In February 1998,  subsequent to year-end,  Registrant entered into an agreement
to sell its interest in SCV to  Diagnostic  Health  Services,  Inc.  ["DHS"] for
127,250 shares of DHS stock. While the shares are restricted, the current market
value of the shares  received  if  equated to the market  value of DHS shares is
approximately $1,400,000 as of February 27, 1998.

Management  has  taken a number  of steps to  revise  the  profitability  of its
operations  and its  financial  condition,  which it believes are  sufficient to
provide the Company with the ability to continue in existence.

During 1997,  the Company  continued to streamline  and economize its operations
and make changes to enhance  revenues.  The Company  entered into two healthcare
equipment insurance policy service  arrangements where the Company's exposure to
medical equipment repairs and maintenance  expense would be limited,  and in the
worst case  scenario  still offer the Company  significant  savings.  The policy
includes  stop loss  limits on the annual  aggregate  loss  expectancies  of the
medical  equipment  contained  on each  policy.  Equipment  has  been or will be
upgraded if market conditions dictate the necessity of enhanced equipment.

The Company has reduced its Corporate salary costs by reducing staffing,  and by
eliminating its in-house legal  department  while retaining a formerly  employed
lawyer  with a  separate  consulting  fee  arrangement  at  significant  savings
overall.

The financial  statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.

[17] New Authoritative Pronouncements

     The FASB has issued SFAS No. 130,  "Reporting  Comprehensive  Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted.  Reclassification of financial  statements for earlier
periods  provided  for  comparative  purposes is  required.  SFAS No. 130 is not
expected to have a material impact on the Company.

     The FASB has  issued  SFAS  No.  131,  "Disclosures  About  Segments  of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are  reported in annual  financial  statements  and  requires  the  reporting of
selected  information  about  operating  segments in interim  financial  reports
issued to  shareholders.  SFAS No. 131 is effective for periods  beginning after
December  15,  1997,  and  comparative  information  for earlier  years is to be
restated.  SFAS No. 131 need not be applied to interim  financial  statements in
the  initial  year of its  application.  SFAS No. 131 is not  expected to have a
material impact on the Company.

In February  1998,  the FASB issued SFAS No. 132,  "Employees  Disclosure  about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure  requirements are not
expected  to have a material  impact on the  Company's  results  of  operations,
financial position or cash flows.
                        .   .   .   .   .   .   .   .   .

                                      F-21

<PAGE>



Item 8.  Changes In and Disagreements With Accountants on Accounting and 
         Financial Disclosure

Not Applicable.
                                    PART III

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

Directors  serve a term of one year and until their  successors are duly elected
and qualified.  The Registrant's  By-Laws  currently  provide for a Board of not
less than one.  Mr.  Hames and Dr.  Berger  currently  serve as  directors.  Two
positions  on the Board are vacant  which  Registrant  anticipates  filling when
competent and qualified individuals are located.  During the year ended December
31, 1997,  the Board of Directors  held one meeting and took action by unanimous
written consent on six occasions.  Each director who served during 1997 attended
all of the  meetings of the Board held during such fiscal  year.  The  following
table sets forth certain  information  concerning  the directors and officers of
the Registrant:

                                                                    Year First
                                                                      Elected
  Name                   Age          Position                       To Serve

Norman Hames             42     President and Chief Financial Officer  1994
Howard G. Berger, M.D.   53     Chairman of the Board of Directors     1996
Judy Perez-Haley         41     Vice President                         1994

Norman Hames,  a founder of the  Registrant,  has served as  President,  CEO and
Director of the Registrant since 1986. In 1996 he became an officer and director
of Primedex Health Systems, Inc.
("PHS").

     Howard G. Berger,  M.D.,  was appointed as a director of DIS in March 1996.
Dr. Berger was elected a director of PHS in July 1992 and in September 1996, was
appointed  president  and chief  executive  officer and is currently  serving in
those  capacities.  Dr.  Berger is the sole owner of Beverly  Radiology  Medical
Group which  supplies  the  medical  services  at four of  Registrant's  imaging
centers and at its oncology center.  Dr. Berger received his medical degree from
the  University  of Illinois  Medical  School and is Board  certified in nuclear
medicine.

Judy  Perez-Haley  has been the Vice  President-Central  Region of DIS since May
1993 and, prior to that, served as an administrator for DIS for eight years.

The  officers of DIS are elected  annually  and serve at the  discretion  of the
Board of Directors.  There are no family relationships among any of the officers
and directors.

The Board of Directors  intends to establish  an  Executive  Committee  which is
authorized  to exercise  the  authority  of the Board of Directors to the extent
permitted by Delaware law. The Board of Directors of Registrant  also intends to
establish an Audit  Committee,  which reviews the results and scope of the audit
and  other  services  provided  by  Registrant's  independent  auditors,  and  a
Compensation  Committee,  which makes  recommendations  concerning  salaries and
incentive compensation for employees of and consultants to Registrant.

Compliance  with  the  Securities  Exchange  Act of 1934.  Section  16(a) of the
Securities Exchange Act of 1934 requires the Registrant's directors and officers
and  persons  who own more than 10% of a  registered  class of the  Registrant's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission  ("SEC").  Directors and officers and greater
than ten percent  stockholders  are  required by SEC  regulation  to furnish the
Registrant  with copies of the reports they file.  Based solely upon a review of
the copies of such reports and the written  representations from certain persons
that  certain  reports  were  not  required  to be filed  by such  persons,  the
Registrant  believes  that all its  directors,  officers  and  greater  than ten
percent  beneficial owners complied with all filing  requirements  applicable to
them with respect to transactions during fiscal 1994.


                                       18

<PAGE>



Item 10.  Executive Compensation

                           Summary Compensation Table

Set forth below is the cash  compensation  paid by the Registrant during 1997 to
its President.  No other executive  officer  received  during 1997  compensation
which exceeded, on an annualized basis, $100,000.

                                                          Annual Compensation(1)
                         Fiscal Year    Salary ($)               Bonus ($)
                         -----------    ----------               ---------

Norman Hames, President     1997        200,000(2)                  --

-----------------------
(1)   The dollar value of prerequisites and other personal benefits, if any, for
      each  of  the  named  executive  officers  was  less  than  the  reporting
      thresholds established by the Securities and Exchange Commission.

(2)   Mr.  Hames  waived  compensation  in excess  of  $150,000  for  1997.  See
      "Employment  Contracts and Termination of Employment and Change in Control
      Arrangements."

                            Compensation of Directors

Directors who also serve as officers of the  Registrant  are eligible to receive
options to purchase Common Stock under the Registrant's  1990 Stock Option Plan,
which grants are made at the discretion of the Board of Directors or a committee
thereof which administers the plan.

                        Option Grants in Last Fiscal Year

There were no options  granted  nor  options  held  during the fiscal year ended
December 31, 1997, to or by any of the executive  officers  named in the Summary
Compensation Table hereinabove.

                                Stock Option Plan

The  Board  of  Directors  and  stockholders  of  the  Registrant   adopted  the
Registrant's 1990 Stock Option Plan (the "Plan") covering 250,000 Common Shares.
Options may be granted under the Plan to key employees  (including  officers who
may also be  directors)  of the  Registrant  and its  subsidiaries,  if any,  as
selected by the Board of Directors  or by a committee  appointed by the Board of
Directors  to  administer  the  Plan  (in  either  case,  the  "Administrator").
Non-Employee Directors are not eligible to participate in the Plan.

Options  granted to employees may either be incentive  stock options (as defined
in the Internal Revenue Code of 1986, as amended) or nonqualified stock options.
The  purchase  price of the Common  Shares made  subject to an option may not be
less than the fair market value of the Registrant's Common Shares on the date of
grant in the case of incentive stock options or 85% of such value in the case of
nonqualified stock options. The terms of each option and the increments in which
it is exercisable are determined by the  Administrator,  provided that no option
may be  exercised  after ten  years  from the date of  grant.  No option  may be
granted under the Plan after October 11, 2000.  The options are  nontransferable
during the life of the option holders.  As of December 31, 1997, 215,500 options
under the plan have been granted.


                                       19

<PAGE>



               Employment Contracts and Termination of Employment
                       and Change-in-Control Arrangements

The  Registrant  has a five year  employment  contract  with  Norman  R.  Hames,
expiring  January 31, 2001,  which provides for annual  compensation of $200,000
and a bonus to be determined by the Board based upon  Registrant's  performance.
Mr. Hames agreed to waive all  compensation  in excess of $150,000 during fiscal
1997 and has continued to so defer, however, he is not required to continue such
deferral.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The  following  table  sets  forth  certain  information   regarding  beneficial
ownership  of  Registrant's  Common  Stock as reported to the  Registrant  as of
February  27,  1998,  (i) by each  person  who is  known  by  Registrant  to own
beneficially  more than five percent of the outstanding  shares of Common Stock,
(ii) by each director of  Registrant  and (iii) by all officers and directors of
Registrant as a group.  Except as otherwise  indicated,  Registrant believes the
beneficial  owners  of the  Common  Stock  listed  below,  based on  information
furnished by such owners,  have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.

                                      Shares                   Percent
                                   Beneficially               of Common
Name/Address of Beneficial Owner       Owned                  Stock(1)

Howard G. Berger, M.D.
1516 Cotner Avenue
Los Angeles, CA 90025            10,565,631(2)(3)                76%

Primedex Health Systems, Inc.
1516 Cotner Avenue
Los Angeles, CA 90025              10,565,631(2)                 76%

DVI Healthcare, Inc.
One Park Plaza, Suite 800
Irvine, CA 92714                        (4)                      (4)

Norman Hames
1516 Cotner Avenue
Los Angeles, CA 90025                   ---                      ---

All officers and
directors as a group
(four persons)(3)                  10,565,631(2)                 76%

-----------------
(1)  Includes 11,310,110 shares outstanding as of February 27, 1998, and options
     and warrants  convertible  into an  additional  2,547,149  shares within 60
     days.  Does not include  Preferred  Stock held by DVI  Healthcare  which is
     convertible after September 1996, provided the price of the Common Stock is
     at least five  dollars  per share (see "Item 12 Certain  Relationships  and
     Related Transactions").

(2)  Includes  1,521,739  shares subject to a five year warrant expiring in 2001
     exercisable at a price of $1.60 per share and 515,922 shares  issuable upon
     exercise of options at varying  exercise prices between  $.62-1/2 and $2.50
     per share that are exercisable within 60 days.

(3) Dr. Berger is a director and major  stockholder of PHS which is the owner of
the securities.

(4)  DVI Healthcare owns Preferred  Shares (see "Item 12. Certain  Relationships
     and Related  Transactions")  convertible  into two million shares of Common
     Stock subject to certain requirements. Upon such conversions DVI Healthcare
     would then own 12.6% of the Registrant.


                                       20

<PAGE>




Item 12.  Certain Relationships and Related Transactions

    1. The Registrant  leases and operates  medical  equipment owned by DVI (see
"Item 11") or its subsidiary and leased to the Registrant.

    2. Following the September 2, 1994 merger with Diagnostic  Imaging Services,
Inc., the Registrant entered into the following transactions with DVI:

Issuance of Series F Convertible  Preferred  Stock:  The Registrant  executed an
agreement with DVI,  whereby the Registrant  issued to DVI Healthcare  2,482,000
shares  of a new  series  F  Redeemable  Convertible  Preferred  stock,  with an
aggregate  stated value of $2,482,000,  in exchange for the  cancellation of all
outstanding  shares  of Series B, C, D and E  Redeemable  Convertible  Preferred
Stock,  which shares have an aggregate stated value of $2,482,000 (see "Item 13"
of Registrant's  Form 10-KSB for the year ended October 31, 1995).  The Series F
Redeemable Convertible Preferred Stock has rights and preferences  substantially
similar to those applicable to the Series, B, C, D and E Redeemable  Convertible
Preferred Stock except that the dividend rate is now five percent per annum with
the shares  convertible  into  Common  Stock on the basis of one share of Common
Stock for each 2.482 shares of Preferred.

Forgiveness  of Debt:  Issuance of Series G  Convertible  Preferred  Stock:  DVI
forgave substantially all of the Registrant's pre-September 2, 1994, liabilities
to DVI and assumed the liabilities of the Registrant to unaffiliated  parties in
exchange for the  assignment  of certain  assets  consisting  of  equipment  and
accounts receivable of the Registrant and delivery to DVI of newly issued shares
of Series G Redeemable  Convertible  Preferred  Stock with an  aggregate  stated
value  of  $2,000,000.  The  Registrant  retained  the  assets  and  liabilities
associated  with a mobile  MRI  vehicle.  The  Series G  Redeemable  Convertible
Preferred Stock has rights and preferences substantially similar to the Series F
Redeemable  Convertible  Preferred Stock and is convertible into Common Stock on
the basis of one share of Common Stock for each two shares of  Preferred.  As of
April 30,  1994,  the account  balances  subject to the  transactions  with DVI,
approximately  $4,768,000  and  $1,494,000  was  owed  to DVI  and to  unrelated
parties,   respectively,   and  equipment  and  accounts  receivable  aggregated
approximately $2,781,000. Gains resulting from the reduction of the Registrant's
liabilities to unaffiliated  parties were recorded subsequent to April 30, 1994,
and net reductions in liabilities  resulting from the transaction  with DVI were
recorded as a capital contribution at the transaction date.

As a result of a Stockholders  Agreement  entered on September 2, 1994,  between
Norman  Hames and DVI, it was agreed  that DVI would not  convert its  Preferred
Stock to Common,  without the approval of Mr. Hames, prior to September 1996 and
prior to the price of the Common  Stock in the public  market in which it trades
closing for 20 consecutive  days at a price of five dollars per share or higher.
Additionally,  Mr. Hames retains the right to purchase the Preferred  Stock from
DVI for $4,482,000 plus accrued and unpaid  dividends.  In the event DVI sells a
portion of the converted Preferred Stock and recovers $4,482,000,  it has agreed
to assign any remaining shares to Mr. Hames.

Additionally,  DVI leased the Hitachi 7000 MRP MRI System to the  Registrant for
82 months with payments  commencing in the fourth month at $12,000 per month, in
the twelfth month at $20,000 per month,  in the  twenty-fourth  month at $22,000
per month,  with  monthly  payments of $23,075  commencing  in the  thirty-sixth
month.

DVI provided the  Registrant  with a four million  dollar line of credit that at
December 31, 1996,  was  approximately  $3,200,000.  The line was secured by the
Registrant's accounts receivable.  Interest was charged at the bank's prime rate
plus  3.5%.  The line was paid in full and  closed at the  Company's  request in
September 1997.

    2. Norman  Hames was owed by the  Registrant  $88,567 at  December  31, 1996
pursuant to a promissory note, which was repaid in full during 1997.


                                       21

<PAGE>




    3. On March 22, 1996, Primedex Health Systems,  Inc., a New York corporation
("PHS") acquired from the Registrant 2,747,493 shares of common stock and a five
year warrant to purchase an additional  1,521,739  shares for  $3,000,000  and a
five year  revolving  $1,000,000  line of credit  (all of which was  immediately
drawn down) bearing interest at four percent greater than the prime rate. During
1996, DIS incurred interest of approximately  $90,000 on this loan. During 1997,
DIS  repaid  the  loan.  Registrant  and PHS also  entered  into two  Management
Agreements on March 22, 1996.  Pursuant to the first  agreement PHS will provide
management  services  to DIS for a monthly  fee of  $45,000.  Under  the  second
agreement which is being phased in on a center by center basis, PHS will provide
transportation  services,   patient  scheduling,   and  billing  and  collection
services.  DIS  will pay an  amount  equal  to 10% of its  collections  for each
covered  center.  During 1997,  DIS incurred  $540,000 in management  fees.  The
agreements expire April 1, 2001 with an option to renew for an additional year.

    4. On or about June 28, 1996,  Norman Hames,  the  President of  Registrant,
transferred  all of his shares  [2,424,862]  of  Registrant's  common  stock and
warrants to acquire  shares of common  stock to PHS in exchange for a five year,
interest only promissory note from PHS  aggregating  $2,448,862  together with a
five year warrant to acquire  2,807,350 shares of Primedex for common stock $.60
per share.

    5. As of December 31, 1997,  through  various  transactions  with  unrelated
parties,  PHS  acquired  an  additional  2,902,615  shares of DIS  common  stock
increasing its total ownership to 8,074,970 shares, or approximately 71%.

    6. In connection with the sale of Registrant's  ultrasound business and four
of its imaging centers to DHS Health  Services,  Inc. (see Item 1") PHS received
$1,000,000  for its agreement not to compete with DHS near the locations sold by
Registrant.

    7. Howard G. Berger, M.D. (See "Items 9 and 11") is the sole owner of one of
the entities forming the partnership of Beverly Radiology Medical Group ("BRMG")
which has executed a Management and Service  Agreement with Registrant  pursuant
to which it supplies the medical  services at the  Registrant's  Thousand  Oaks,
Santa Monica,  Corona and Riverside imaging centers and Temecula Oncology Center
(See "Item 1") through 2002. The management  fees paid to the Registrant by BRMG
is 81% of collections.

    8. During 1996, the Registrant rented its mobile MRI unit to a hospital with
the  expectation  of eventually  selling the unit to the hospital.  On April 30,
1996, the hospital terminated its rental agreement and the Registrant  reclaimed
the unit with the  intention of selling the unit by year-end.  During 1997,  the
mobile unit and related liabilities were assumed by PHS. The Registrant believes
the related liabilities are at least equal to the units fair market value.

    9.  During  1996,  PHS loaned DIS  approximately  $375,000  in  non-interest
bearing short-term working capital loans.

    10.  In  1996,  DIS  sold  medical  equipment  to  PHS  for  $40,000,  which
represented book value of the equipment at the time of sale.

    11. On April 18, 1997,  Registrant loaned $5,500,000 to PHS, payable monthly
interest only at 10% per annum,  with the principal due and payable on or before
March 31, 1998. As of December 31, 1997,  approximately  $3,520,000 of this loan
was repaid by PHS.


                                       22

<PAGE>




Item 13.  Exhibits and Reports on Form 8-K

    (a)  Exhibits

Exhibit              Description

2.       Agreement   and  Plan  of   Reorganization   dated   August  10,   1994
         (Incorporated by reference to the Registrant's Form 8-K for event dated
         September 2, 1994)

3.1      The   Registrant's   Certificate   of   Incorporation,    as   amended.
         (Incorporated   by  reference  to  Exhibit  3.1  to  the   Registrant's
         Registration  Statement  on Form S-1,  as  amended  (the  "Registration
         Statement") (File No. 33-37418)

3.2      Bylaws, as amended.  (Incorporated by reference to Exhibit 3.2 to the
         Registrant's Registration Statement)

3.3      Certificate  of  Designations  of the  Series  B,  C and D  Convertible
         Preferred Stock of IPS Health Care, Inc.  (Incorporated by reference to
         the Registrant's Form 8-K filed on November 19, 1992.)

3.4      Certificate of Designations of the Series E Convertible Preferred Stock
         of IPS Health Care, Inc. (Incorporated by reference to the Registrant's
         Form 8-K filed on November 19, 1992.)

10.3     International Physical Systems, Inc. 1990 Stock Option Plan. 
         (Incorporated by reference to Exhibit 10.3 to the Registrant'
         Registration Statement.)

10.40    1990 Stock Option Plan.  (Incorporated by reference to Exhibit 10.40 to
         the Registrant's Form 10-K for the fiscal year ended April 30, 1992.)

10.58    Agreement  and  Plan of  Reorganization  by and  among  Registrant  and
         Diagnostic Imaging Services, Inc. dated August 10, 1994.  (Incorporated
         by reference to Exhibit 10.58 to the  Registrant's  Form 10-KSB for the
         fiscal year ended December 31, 1995.)

10.59    Agreement for the Exchange of Stock and Assets  between  Registrant and
         DVI Healthcare Operations,  Inc. dated September 2, 1994. (Incorporated
         by reference to Exhibit 10.58 to the  Registrant's  Form 10-KSB for the
         fiscal year ended December 31, 1995.)

10.60    Stockholders   Agreement   among  DVI  Healthcare   Operations,   Inc.,
         Registrant,  and Norman  Hames.  (Incorporated  by reference to Exhibit
         10.58  to the  Registrant's  Form  10-KSB  for the  fiscal  year  ended
         December 31, 1995).

10.61    Securities  Purchase  Agreement  among  Registrant and Primedex  Health
         Systems,   Inc.  ("PHS"),   Management  Services  Contracts  with  PHS,
         Revolving Loan Agreement  with PHS and  Stockholders  Agreement with PH
         and Norman Hames  (Incorporated  by reference to Registrant's  Form 8-K
         filed on March 28, 1996).

10.62    Asset  Purchase   Agreement  executed  March  21,  1997  by  and  among
         Registrant,  Registrant's  wholly-owned  subsidiary,  Diagnostic Health
         Services,  Inc., a Delaware corporation and its wholly-owned subsidiary
         (Incorporated by reference to Registrant's  Form 8-K filed on April 28,
         1997).

10.63    Stock  Purchase   Agreement  executed  March  21,  1997  by  and  among
         Registrant,  Diagnostic Health Services,  Inc., a Delaware  corporation
         and  its   wholly-owned   subsidiary   (Incorporated  by  reference  to
         Registrant's Form 8-K filed on April 28, 1997).

10.64    Purchase and Sale  Agreement  executed  February 27, 1998, by and among
         Registrant and Diagnostic Health Services, Inc., a Delaware corporation
         and  its   wholly-owned   subsidiary   (Incorporated  by  reference  to
         Registrant's Form 8-K filed on April 13, 1998).


                                       23

<PAGE>



13       Annual Report to Shareholders for the year ended December 31, 1996 - to
         be filed by amendment.

*21.1    Subsidiaries of the Registrant.

    (b)  Reports on Form 8-K

         There were no reports  on Form 8-K filed  during the fourth  quarter of
         the fiscal year ended December 31, 1997.

*24      Consent of Independent Accountants

*28      Undertakings
------------------------------
*Exhibits filed herewith.  Other exhibits are incorporated by reference to the
   previous filings.


                                       24

<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated:  April 13, 1998                 DIAGNOSTIC IMAGING SERVICES, INC.



                                       By: /s/ Norman Hames
                                           -----------------------------------
                                           Norman Hames, President and
                                           Chief Financial Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report  has been  signed  below by the  following  person on behalf of the
Registrant and in the capacities and on the dates indicated:

Signature and Capacity



/s/ Norman Hames                       Dated:  April 13, 1998
---------------------------------
Norman Hames, President and Director




/s/ Howard G. Berger                   Dated:  April 13, 1998
---------------------------------
Howard G. Berger, M.D., Director




<PAGE>



                                  Exhibit 21.1

                         Subsidiaries of the Registrant


GHS National, Inc., a Delaware corporation

Parkside Radiology, Inc., a California corporation

MDI Imaging, Inc., a California corporation

North County Mediscan Imaging, Inc., a California corporation

North County MRI, Inc., a California corporation

                                   Exhibit 24


Consent of Independent Accountants



<PAGE>


                                   Exhibit 28


To be Incorporated By Reference Into Form S-8 Registration Statement

UNDERTAKINGS

(a)  The undersigned registrant hereby undertakes:

     (1) To file,  during any period in which  offers or sales are being made, a
post-effective amendment to this registration statement:

     (i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

     (ii)To  reflect in the  prospectus  any facts or events  arising  after the
effective date of the registration  statement (or the most recent post-effective
amendment  thereto)  which,  individually  or in  the  aggregate,  represents  a
fundamental change in the information set forth in this registration statement;

     (iiiTo  include  any  material  information  with  respect  to the  plan of
distribution  not  previously  disclosed  in the  registration  statement or any
material change to such information in the registration statement;

Provided,  however, that paragraphs (a)(1)(I) and (a)(1)(ii) do not apply if the
registration  statement is on Form S-3 or Form S-8 and the information  required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.

     (2) That, for the purpose of determining any liability under the Securities
Act of 1933,  each  such  post-effective  amendment  shall be deemed to be a new
registration  statement  relating to the  securities  offered  therein,  and the
offering of such  securities at that time shall be deemed to be the initial bona
fide offering thereof.

     (3) To remove from registration by means of a post-effective  amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(b)  The  undersigned   registrant  hereby  undertakes  that,  for  purposes  of
determining  any liability  under the Securities Act of 1933, each filing of the
registrant's  annual  report  pursuant to section  13(a) or section 15(d) of the
Securities  Exchange  Act of 1934  (and,  where  applicable,  each  filing of an
employee  benefit  plan's  annual  report  pursuant  to  section  15(d)  of  the
Securities  Exchange  Act of 1934)  that is  incorporated  by  reference  in the
registration  statement  shall  be  deemed  to be a new  registration  statement
relating to the securities offered therein,  and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification  for liabilities arising under the Securities Act
of 1933 may be permitted to directors,  officers and controlling  persons of the
registrant pursuant to the foregoing  provisions,  or otherwise,  the registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such  indemnification  is against  public policy as expressed in the Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by registrant of expenses  incurred or
paid by a  director,  officer or  controlling  person of the  registrant  in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
director,  officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.