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, 1996         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
 incorporation or organization)                           Identification No.)

       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 $22,555,570.

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 June 12, 1997 was $5,087,540.

As of June 12, 1997, the Issuer had 11,310,110  shares of Common Stock, $.01 par
value outstanding.

                       Documents Incorporated by Reference

                                      None

          Transitional Small Business Disclosure Format.  Yes __ No X





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                                     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
199 managed care payors  pursuant to contractual  arrangements.  The DIS network
currently consists of seven freestanding MRI and multi-modality  imaging centers
located  in  Santa  Monica ,  Thousand  Oaks,  Corona,  Temecula,  Chula  Vista,
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, an entity 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.


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<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 pre- September 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 21 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 Future Diagnostics 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 68%.

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.  Registrant expects to show a profit on the sales of approximately
$7.5 Million.  Included in the proceeds is One Million Dollars in  consideration
of DIS' agreement not to compete with the new owner.

As a result of a deteriorating  business  climate at  Registrant's  Santa Monica
facility,  on June 25,  1997,  Registrant  tentatively  determined  to close the
center  on or about  August  29,  1997.  While  the  Registrant  is  considering
alternatives  to closing the center it is likely none will be found.  Registrant
recorded  a  loss  as a  result  of the  discontinuance  of  the  operations  of
approximately $3.425 million.



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<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    RadiologyMedicine

Camarillo                                    *         *          *
Corona                        *      *       *         *          *        *
Riverside                     *      *       *         *          *
Scripps-Chula Vista (San Diego)*
Santa Monica                  *      *       *         *          *
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 cross-  sectional  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.


                                        4

<PAGE>







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

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 is the managing general partner and
owns 75% of VROC.  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.



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The DIS Network

The DIS network 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.

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.



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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.

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.


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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  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 three of Registrant's  centers and its oncology center the medical  services,
including medical  supervision,  are supplied by Beverly Radiology Medical Group
("BRMG"). The sole owner of BRMG 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 on or adjacent to major hospital sites,  which
the Registrant considers to be a competitive advantage.


                                        8

<PAGE>






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; 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).



                                        9

<PAGE>






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 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.


                                       10

<PAGE>







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.

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, 1996, Registrant had 176 full-time employees.  As of June 30,
1997, subsequent to Registrant's sale of its ultrasound business and four of its
imaging  centers  [See  "History"],  Registrant  had  122  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.


                                       11

<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                       1,200        1996         2001         36,000
Corona                          5,328        1996         1998         85,000
Murrieta                        4,926        1991         2001        120,000
Vista (North San Diego)         2,042        1988         2000         44,000
Riverside                       8,312        1996         2001        146,000
Santa Monica                    9,235        1991         2001        365,000
Scripps Chula Vista (San Diego) 1,512        1996         2000         60,000
Temecula                        4,247        1992         1999        141,000
Temecula Oncology Center        5,418        1994         1998        104,000
Thousand Oaks                   8,300        1983         2001        281,000

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.

     (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 has just received the complaint but
denies each and every  allegation  and intends to vigorously  defend against the
legal action.

                                       12

<PAGE>







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, 1996.



                                       13

<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  1995
   1st Quarter            3-29/32          2-1/2           4-1/4        2-3/4
   2nd Quarter             4-5/8             3             4-7/8        3-1/4
   3rd Quarter             3-7/8           3-1/4          4-3/16        3-3/4
   4th Quarter             3-5/8           1-5/8             4          1-7/8

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

On June 12, 1997, the last reported bid and ask price of the Common Stock by the
National Quotation Bureau,  Inc., was $.94 and $1.07. As of June 12, 1997, there
were 73 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 approximately 400.


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

Background:

Diagnostic  Imaging Services,  Inc. ("DIS" or the "Registrant") was incorporated
in California as a S- Corporation  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") and Temecula Valley Imaging Center
("Temecula"). 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.



                                       14

<PAGE>






During the months of January and February  1994,  DIS  purchased  the  remaining
limited partnership units of Tarzana, SGV and Inland. 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
is the general  partner and 75% owner of VROC. 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 the
first quarter of 1995, Inland was relocated from Montclair to Chino,  California
("Chino"). During this time, the center was closed for approximately two months.
In February 1995, DIS purchased the  outstanding  limited  partnership  units of
Santa Monica Imaging Center ("SMIC") and became its general  partner.  In August
1995, DIS purchased the assets of an X-Ray,  mammography,  and basic  ultrasound
center in Murrieta, California ("Murrieta"). (Murrieta has been largely inactive
since the third quarter of 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, 1996, through various transactions with related and unrelated
parties,  PHS  acquired  an  additional  4,031,314  shares of DIS  common  stock
bringing its total ownership to 6,778,807  shares,  or  approximately  59.1%. In
subsequent purchases through June 12, 1997, PHS acquired an additional 1,053,163
common shares in transactions with unrelated parties increasing its ownership of
DIS to approximately 68.3%, or 7,831,970 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.

In March 1997,  subsequent  to year-end,  DIS sold the  remaining  assets of its
Ultrasound Division and four  hospital-based MRI sites (Tarzana,  SGV, Chino and
SMIC) to Diagnostic Health Services,  Inc. ("DHS") for $22.5 million in cash and
$1.5 million in non-interest bearing receivables;  the cash proceeds included $1
million of covenants  not-to-compete.  Of the total  proceeds,  $7.6 million was
used to retire  existing debt. In addition,  DHS assumed the operating  lease of
the Registrant's  WLA center.  The assets of WLA were transferred to PHS' Radnet
Management Inc. in 1997.


                                       15

<PAGE>






As a result of a continuing  deteriorating  business  climate and other business
reasons at the  Registrant's  Santa Monica  ("Parkside")  facility,  on June 25,
1997, the Registrant  tentatively  determined to close  substantially all of its
operations at that center on or about August 29, 1997.  While the  Registrant is
considering  alternatives to closing the center it is likely none will be found.
Due  to  this  decision,  Registrant  recognized  a loss  in  December  1996  of
approximately  $3.425 million and reclassified the net assets and reserve losses
related to the center as "assets held for divestiture."

Discussion of Operations for the Year Ended December 31, 1996 vs. December 
31, 1995

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

Results of Operations

For the year ended  December 31, 1996,  DIS had an operating loss of $4,656,351.
For the year ended December 31, 1995, DIS had operating income of $2,030,122.

DIS generated net revenue of  $22,555,570  and  $28,219,847  for the years ended
December  31,  1996 and 1995,  respectively.  The  decrease  in net  revenue was
primarily  due to the sale of ICVS,  MBM and the  nuclear  medicine  business at
North County in 1996. In addition, DIS ceased operations of its Montclair mobile
MRI  business.  Other net revenue  decreases  were due to  reductions in patient
volume and  reimbursement  at Santa Monica and other sites. New centers acquired
in the third and fourth  quarters  had only limited time to improve net revenues
in 1996.

For the years ended  December  31,  1996 and 1995,  operating  expenses  totaled
$27,211,921  and  $26,189,725,  respectively.  A primary reason for the increase
(even though  variable  operating  expenses  decreased with the reduction in net
revenues) was the write-off of certain assets  associated with the  Registrant's
Santa Monica facility of approximately $3.425 million.

For  the  years  ended  December  31,  1996  and  1995,   interest  expense  was
approximately $3,550,000 and $3,675,000,  respectively.  Interest expense of DIS
was primarily attributable to equipment financing, acquisition notes payable and
lines of credit charges.  For the years ended December 31, 1996 and 1995, income
tax expense was approximately $-0- and $51,660, respectively.

For the years  ended  December  31,  1996 and  1995,  DIS had net  losses  after
interest and taxes of $8,142,910 and $1,697,290, respectively.

Liquidity and Capital Resources

Cash decreased for the year ended December 31, 1996 by $5,335.  Cash increased
for the year ended December 31, 1995 by $17,993.

Cash generated  from  investing  activities for the year ended December 31, 1996
was $158,568. Cash utilized for investing activities for the year ended December
31, 1995 was $3,107,976. The 1996 increase in cash was primarily due to proceeds
from the sale of ICVS and the  nuclear  medicine  business  at North  County for
$1,028,000.  In addition,  capital expenditures were approximately  $225,000 and
$1,760,000 and acquisitions of imaging centers were  approximately  $200,000 and
$890,000 for the years ended December 31, 1996 and 1995, respectively.



                                       16

<PAGE>






Cash  utilized  for  financing  activities  was  $1,114,342  for the year  ended
December 31, 1996.  Cash generated from financing  activities was $3,423,954 for
the year ended  December 31, 1995.  The  decrease in cash was  primarily  due to
reduced borrowings and increased principal payments on notes payable and capital
leases in 1996. For the years ended  December 31, 1996 and 1995,  $4,178,878 and
$10,316,076,  respectively,  was borrowed from lines of credit, related parties,
and from  notes  payable,  and  $3,000,000  and  $1,085,000,  respectively,  was
acquired  from the issuance of common  stock.  For the years ended  December 31,
1996 and 1995,  principal  payments on notes  payable  and  capital  leases were
$9,169,798 and $7,977,122, respectively.

At December 31, 1996, DIS had a working capital deficit of $14,270,257  compared
to a working  capital  deficit of $9,891,283 at December 31, 1995, a decrease of
$4,378,974.  The decrease was primarily due to approximately  $3,200,000 in line
of credit  payables and  approximately  $2,200,000 in acquisition  notes payable
reclassified  as current  liabilities as of December 31, 1996. In addition,  for
the year ended December 31, 1996, the Registrant had short-term loans due to PHS
of approximately  $2,000,000. In March 1997, DIS's working capital improved with
the sale of its Ultrasound  Division and its hospital-based MRI facilities to an
unrelated party.

DIS's future  payments for debt and equipment  under capital leases for the next
five  years,  assuming  lines  of  credit  are  paid  and not  renewed,  will be
approximately $13,830,000,  $6,640,000,  $6,570,000,  $6,190,000 and $4,165,000,
respectively.  Interest expense  (assuming lines of credit are paid in full) for
the Registrant for the next five years, included in the above payments,  will be
approximately  $3,150,000,   $1,915,000,   $1,375,000,  $780,000  and  $195,000,
respectively.  In addition,  DIS has noncancellable  operating leases for use of
its facilities and certain medical  equipment  which will average  approximately
$1,430,000 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 two lines of credit.
Under one  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.
Under the second agreement with DVI Business  Credit,  DIS may borrow the lesser
of  $4,000,000  or  approximately  53%  of  the  eligible  accounts  receivable.
Borrowings  under this line are  repayable  together  with interest at an annual
rate  equal  to  the  bank's  prime  rate  plus  3.5%.  At  December  31,  1996,
approximately  $3.2 million was outstanding  under this line. As of December 31,
1996, the bank's prime rate was 8.25%.  Under the formulas,  there were no funds
available for borrowing  under the two active lines of credit as of December 31,
1996.

In addition to the $1 million revolving loan [plus accrued interest], PHS, as of
December 31, 1996,  also  advanced to DIS  short-term  working  capital loans of
approximately $375,000 as well as deferring collection of $560,000 of management
service fees.

In  March  of  1997,  DIS  sold  its   Ultrasound   Division  and  four  of  its
hospital-based  MRI  facilities  for $22.5  million  in cash and a $1.5  million
non-interest  bearing  receivable;  the cash  proceeds  include  $1  million  of
covenants not-to-compete. Of the total proceeds, $7.6 million was used to retire
existing  debt. The related party  liabilities  due to PHS as of March 1997 were
repaid with the proceeds from the sale.

As a result of a continuing  deteriorating  business  climate and other business
reasons at the  Registrant's  Santa Monica  ("Parkside")  facility,  on June 25,
1997, the Registrant  tentatively  determined to close  substantially all of its
operations at that center on or about August 29, 1997.  While the  Registrant is
considering  alternatives to closing the center it is likely none will be found.
Due  to  this  decision,  Registrant  recognized  a loss  in  December  1996  of
approximately $3.425 million and reclassified the net assets to "assets held for
divestiture."


                                       17

<PAGE>






New Authoritative Pronouncements

The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of 
Financial Assets and Extinguishment of Liabilities."  SFAS No. 125 is 
effective for transfers and servicing of financial assets and extinguishment 
of liabilities occurring after December 31, 1996.  Earlier application is not
allowed.The provisions of SFAS No. 125 must be applied prospectively; 
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Registrant. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Registrant.

The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
 "Disclosure of Information about Capital Structure," in February 1997.

SFAS No. 128 simplifies the earnings per share ("EPS") calculations  required by
Accounting Principles Board ("APB") Opinion No. 15, and related interpretations,
by replacing the  presentation of basic and diluted EPS by entities with complex
capital  structures.  Basis EPS includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares  outstanding for the period.  Diluted EPS reflects the potential dilution
of  securities  that could share in the  earnings  of an entity,  similar to the
fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997,  including interim
periods;  earlier application is not permitted.  When adopted, SFAS No. 128 will
require  restatement  of all  prior-period  EPS  data  presented;  however,  the
Registrant has not  sufficiently  analyzed SFAS No. 128 to determine what effect
SFAS No. 128 will have on its historically reported EPS amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

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.

Inflation

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



                                       18

<PAGE>





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 - F-2

Consolidated Balance Sheet at December 31, 1996.....................  F-3 - F-4

Consolidated Statements of Operations for the years ended December 31, 1996
and 1995............................................................  F-5

Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1996 and 1995....................................  F-6

Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995............................................................  F-7 - F-8

Notes to Consolidated Financial Statements..........................  F-9 - F-23


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




<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  sheet of
Diagnostic Imaging Services,  Inc. and its subsidiaries as of December 31, 1996,
and the related consolidated  statements of operations,  shareholders'  deficit,
and cash flows for the year then ended. 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
audit.

            We  conducted  our  audit  in  accordance  with  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to  obtain  reasonable  assurance  about  whether  the  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 audit
provides a reasonable basis for our opinion.

            In our opinion,  the consolidated  financial  statements referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position  of  Diagnostic  Imaging  Services,  Inc.  and its  subsidiaries  as of
December 31, 1996, and the  consolidated  results of their  operations and their
cash  flows  for the year  then  ended 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 May 2, 1997,  except as to Note 7[B] for which the date is
June 4,  1997,  Note 15 for  which  the date is June 25,  1997 and Note 7[A] for
which the date is June 27, 1997


                                       F-1

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


The Shareholders of
  Diagnostic Imaging Services, Inc. and Subsidiaries


            We  have  audited  the   consolidated   statements  of   operations,
shareholders'  deficit, and cash flows of Diagnostic Imaging Services,  Inc. and
Subsidiaries  [the  "Company"]  for the year  ended  December  31,  1995.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

            In our opinion,  the consolidated  financial  statements referred to
above present fairly,  in all material  respects,  the  consolidated  results of
their  operations,  shareholders'  deficit,  and cash  flows for the year  ended
December 31, 1995, 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
continued  to suffer net losses,  and at December 31,  1995,  had a  significant
working capital deficit. Additionally, the Company has experienced difficulty in
meeting its  obligations  as they become due as a result of increases in working
capital  requirements,  capital  expenditures  and  debt  service  requirements.
Management's  plans in regards to addressing these matters are described in Note
16. The  consolidated  financial  statements do not include any adjustments that
might result from the outcome of this uncertainty.






                                          COOPERS & LYBRAND L.L.P.


Los Angeles, California
June 6, 1996


                                       F-2

<PAGE>

<TABLE>


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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
------------------------------------------------------------------------------



<S>                                                                   <C>    

Assets:
Current Assets:
  Cash                                                                  $    12,658
  Accounts Receivable - Net                                               5,399,872
  Other Current Assets                                                      236,658
  Net Assets Held for Divestiture                                           229,509
                                                                        -----------

  Total Current Assets                                                    5,878,697

Property and Equipment - Net                                             19,982,890
                                                                        -----------

Other Assets:
  Accounts Receivable - Net                                                 345,834
  Goodwill - Net                                                          5,679,898
  Other Intangible Assets - Net                                           1,520,863
  Other Assets                                                              654,604
                                                                        -----------

  Total Other Assets                                                      8,201,199

  Total Assets                                                          $34,062,786




See Notes to Consolidated Financial Statements.


                                        F-3
</TABLE>

<PAGE>


<TABLE>

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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
------------------------------------------------------------------------------

<S>                                                                    <C>  

Liabilities and Shareholders' Deficit:
Current Liabilities:
  Cash Overdraft                                                        $   990,636
  Accounts Payable                                                        1,809,685
  Accrued Expenses                                                        2,964,380
  Accrued Professional Fees                                               1,630,283
  Notes Payable and Capital Leases                                       10,683,300
  Due to Related Parties                                                  2,070,670
                                                                        -----------

  Total Current Liabilities                                              20,148,954

Long-Term Liabilities:
  Notes Payable and Capital Leases                                       19,463,471
  Accrued Professional Fees                                                  69,167

  Total Long-Term Liabilities                                            19,532,638

  Total Liabilities                                                      39,681,592

Minority Interest                                                                --

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                   226,409

  Additional Paid-in Capital - Preferred Stock - Series G                   182,441

  Stock Purchase Warrants                                                 1,175,317

  Subscriptions Receivable                                                  (10,994)

  Accumulated Deficit                                                   (11,600,959)

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

  Total Shareholders' Deficit                                            (5,618,806)

  Total Liabilities and Shareholders' Deficit                           $34,062,786

See Notes to Consolidated Financial Statements.

                                        F-4
</TABLE>

<PAGE>


<TABLE>

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


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


                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
                                                               -------     -------
<S>                                                         <C>          <C> 

Revenue:
  Net Patient Service Revenue                               $22,555,570 $28,219,847
                                                            ----------- -----------

Expenses:
  Cost of Services                                           17,034,067  19,167,770
  General and Administrative                                  3,350,666   2,555,837
  Depreciation and Amortization                               3,917,271   3,920,930
  [Gain] Loss on Sale/Assets Held for Divestiture             2,909,917     545,188
                                                            ----------- -----------

  Total Expenses                                             27,211,921  26,189,725
                                                            ----------- -----------

  Operating [Loss] Income                                    (4,656,351)  2,030,122

Interest Expense                                             (3,550,767) (3,675,011)
                                                            ----------- -----------

  Loss Before Income Taxes and Minority Interest in
   [Income] Loss of Subsidiaries                             (8,207,118) (1,644,889)

Provision for State Income Taxes: Current                            --     (51,660)

Minority Interest in [Income] Loss of Subsidiaries               64,208        (741)
                                                            ----------- -----------

  Net Loss                                                  $(8,142,910)$(1,697,290)

  Net Loss Per Share                                        $      (.77)$      (.22)
                                                            =========== ===========

  Weighted Common Shares Outstanding                         10,554,073   8,210,877
                                                            =========== ===========


See Notes to Consolidated Financial Statements


                                        F-5
</TABLE>

<PAGE>
<TABLE>

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


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






                                                              Preferred Stock
                              Common Stock           Series F            Series G             Treasury Stock
                            Shares     Amount   Shares    Amount     Shares     Amount       Shares     Amount
<S>                        <C>        <C>      <C>       <C>       <C>         <C>         <C>        <C>         

Balance - January 1, 1995  7,215,159 $ 72,151  2,482,000  $ 24,820  2,000,000  $ 20,000    (153,846)  $  (1,538)

Issuance of Shares         1,000,000   10,000         --        --         --        --          --          --

Debt Converted to Equity     501,304    5,013         --        --         --        --          --          --

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

Net Loss for the Year Ended
  December 31, 1995               --       --         --        --         --        --          --          --
                           --------- --------  ---------  --------  ---------  --------   ---------   ---------

Balance - December 31,1995 8,716,463   87,164  2,482,000    24,820  2,000,000    20,000    (153,846)     (1,538)

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

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

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

Net Loss for the Year Ended
  December 31, 1996               --       --         --        --         --        --          --          --
                           --------- --------  ---------  --------  ---------  --------   ---------   ---------

Balance - December 31,1996 11,463,956 $114,639  2,482,000  $ 24,820  2,000,000  $ 20,000    (153,846)  $  (1,538)
                           ========== ========  =========  ========  =========  ========   =========   =========


See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>

<TABLE>

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


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




                                       Paid-in  Paid-in
                            Paid-in   Capital -Capital -
                           Capital -  Series F Series G
                            Common    PreferredPreferred Purchase   Deferred  SubscriptionsAccumulated
                             Stock      Stock    Stock   Warrants Compensation Receivable    Deficit     Total
<S>                         <C>       <C>      <C>        <C>       <C>        <C>         <C>         <C>

Balance - January 1, 1995  $(213,981)$226,409  $ 182,441  $994,610  $(851,297) $(10,994)  $(1,760,759)$(1,318,138)

Issuance of Shares         1,075,000       --         --        --         --        --           --   1,085,000

Debt Converted to Equity     598,222       --         --        --         --        --           --     603,235

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

Net Loss for theYear Ended
  December 31, 1995               --       --         --        --         --        --   (1,697,290) (1,697,290)
                           --------- --------  ---------  --------  ---------  --------   ----------  ----------

Balance - December 31,1995 1,459,241  226,409    182,441   994,610   (816,785)  (10,994)  (3,458,049) (1,292,681)

Issuance of Shares
  [See Note 1[A]]          2,791,818       --         --   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 $4,251,059 $226,409  $ 182,441  $1,175,317  $   --  $(10,994)  $(11,600,959)$(5,618,806)
                           ========== ========  =========  ============ =======  ========   ============ ===========


See Notes to Consolidated Financial Statements.

</TABLE>

                                            F-6

<PAGE>


<TABLE>

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


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
<S>                                                         <C>          <C>                                                        
Operating Activities:
  Net Loss                                                  $(8,142,910)$(1,697,290)
  Adjustments to Reconcile Net Loss to Net Cash
   Provided by [Used In] Operating Activities:
   Depreciation and Amortization                              3,917,271   3,920,930
   Allowance for Contractual Adjustments                        445,873     616,942
   [Gain] or Loss on Sale of Equipment                         (633,210)    127,901
   Loss on Assets Held for Divestiture                        3,543,127     355,246
   Amortization of Deferred Purchase Credit                          --    (751,599)
   Amortization of Deferred Compensation                         34,512      34,512
   Minority Interest in Consolidated Subsidiaries               (64,208)        741
   Write-off Employment Contract                                121,923          --
   Other                                                         18,667      73,945
                                                            ----------- -----------

  Net [Loss] Income Adjusted for Noncash Items                 (758,955)  2,681,328

  Changes in Operating Assets and Liabilities:
   [Increase] Decrease in:
     Accounts Receivable                                        955,280  (1,474,050)
     Long-Term Accounts Receivable                              187,350    (658,191)
     Other Current Assets                                        60,271    (105,521)

   Increase [Decrease] in:
     Accounts Payable and Accrued Expenses                      506,493    (741,551)
                                                            ----------- -----------

  Net Cash - Operating Activities                               950,439    (297,985)
                                                            ----------- -----------

Investing Activities:
  Purchase of Property and Equipment                           (226,428) (1,761,527)
  Acquisitions of Operating Entities                           (200,000)   (890,000)
  Proceeds from Sale of Divisions                             1,028,000          --
  Payments for Intangible Assets                                (50,633)   (417,424)
  Payments for Deposits and Other Assets                       (392,371)    (39,025)
                                                            ----------- -----------

  Net Cash - Investing Activities                               158,568  (3,107,976)
                                                            ----------- -----------

Financing Activities:
  Cash Overdraft                                                990,636          --
  Proceeds from Borrowings on Notes Payable                   2,196,775  10,139,076
  Principal Payments on Notes and Leases                     (9,169,798) (7,977,122)
  Proceeds from Issuance of Common Stock                      3,000,000   1,085,000
  Loans from Related Parties                                  1,982,103     177,000
  Payments to Related Parties                                   (48,433)         --
  Payments to Joint Venture Partners                            (65,625)         --
                                                            ----------- -----------

  Net Cash - Financing Activities                            (1,114,342)  3,423,954
                                                            ----------- -----------

  Net [Decrease] Increase in Cash                                (5,335)     17,993

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

  Cash - End of Years                                       $    12,658 $    17,993
                                                            =========== ===========
See Notes to Consolidated Financial Statements.

                                        F-7
</TABLE>

<PAGE>

<TABLE>


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


CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------


                                                                   Years ended
                                                                  December 31,
                                                               1 9 9 6     1 9 9 5
                                                               -------     -------
<S>                                                         <C>         <C> 

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the years for:
   Interest                                                 $3,952,766  $ 3,164,659
   Income Taxes                                             $        -- $    12,000

Supplemental Schedule of Noncash Investing and Financing Activities:
  The Company converted $603,235 in debt to equity for the period ended December
31, 1995.

  The Company  entered into capital  leases of $1,316,110 and $1,407,370 for the
periods ending December 31, 1996 and 1995, respectively.

  During  the year  ended  December  31,  1996,  the  Company  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.

  The Company converted accrued  maintenance costs with two outside vendors into
various notes payable totaling approximately $1,100,000 during the twelve months
ended December 31, 1996.



See Notes to Consolidated Financial Statements.



                                        F-8
</TABLE>

<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,  1996,  the  Network,  operating  in  Southern
California,   was  composed  of  twelve  imaging  centers,   fifteen  ultrasound
laboratories and eight mobile  ultrasound units [the "Ultrasound  Division"] 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]]. Also in March of
1996,  PHS  acquired  an  additional  730,768  shares  of  common  stock  from a
stockholder  of the  Company,  giving PHS  approximately  31%  ownership  of the
Company.  In August of 1996,  PHS  acquired an  additional  3,228,046  shares of
common stock,  from existing  shareholders,  giving PHS approximately 59% of the
Company.  In December  1996,  PHS  acquired  an  additional  72,500  shares from
unrelated  parties.  Subsequent to December 31, 1996, PHS acquired an additional
1,053,163  shares  of  common  stock  from  existing  shareholders,  giving  PHS
approximately 68.3% of the Company.

[B] Consolidation - The accompanying  consolidated  financial statements include
the accounts of the Company and various  subsidiaries  and partnerships in which
the Company holds a majority ownership  interest.  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 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
depreciated  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, 1996 are shown net of  allowances  of
$2,873,171 of which  $2,700,235 has been deducted from current  receivables  and
$172,936 has been deducted from noncurrent receivables.

[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-not-  to compete are recorded at cost and are amortized over
their  estimated  useful  lives  ranging from two to twenty  years.  The Company
evaluates  whether  changes have  occurred  that would  require  revision to the
remaining  estimated  useful  life of the  assigned  goodwill  or  rendered  the
goodwill not recoverable.


                                       F-9

<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 cash
equivalents 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, 1996, the
Company had no credit  risk  related to cash and cash  equivalents.  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  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 or  projected
discounted cash flows.  Management also  reevaluates the periods of amortization
to  determine  whether  subsequent  events  and  circumstances  warrant  revised
estimates  of useful  lives.  [See Notes 5 and 15].  As of  December  31,  1996,
management expects these assets to be fully recoverable.

[J] Advertising - Advertising costs are expensed as incurred.

[K] 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.

[L] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. There
were no cash equivalents at December 31, 1996.

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



                                      F-10

<PAGE>



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


[2] Business Combinations, Acquisitions and Divestitures

In  January  1995,  DIS  acquired  West L.A.  MRI  ["WLA"]  from DVI  Healthcare
Operations in exchange for the Company  taking over payments  under the existing
building and equipment  financing  leases.  There was no goodwill  recognized in
this transaction.

On February 27, 1995,  DIS  acquired all of the  partnership  interests in Santa
Monica Imaging Center ["SMIC"], except those owned by Santa Monica Hospital, for
$864,000 in cash, notes payable and assumed liabilities resulting in goodwill of
approximately $702,000. The interest held by Santa Monica Hospital was purchased
in April 1997 for $300,000.

In May 1995, the Company and ScrippsHealth,  San Diego entered into an agreement
with Scripps Chula Vista Imaging  Center,  LLP ["SCV"] for the  development  and
operation of an outpatient  radiological  facility  providing MRI services.  The
Company and  ScrippsHealth  will be equal  partners with the Company  serving as
managing  partner.  The project  was  completed  at  December  31, 1996 with the
facility seeing its first patients in January 1997.

In August 1995, DIS purchased certain assets of Golden Triangle Radiology and
 Medical Group Imaging, Inc.["Murrieta"] for $220,000 in cash and notes payable.

In October  1995,  the Board of  Directors  approved  a plan for the  Company to
withdraw  from its  unprofitable  mobile MRI and North County  nuclear  medicine
businesses.  Upon  approval of the Plan, a provision of $189,942 was recorded to
reflect the operating losses expected on disposal of these businesses and a loss
of $355,246 on disposal of the assets.

The  following  pro forma  unaudited  information  presents  the  results of the
combined  operations of Diagnostic Imaging Services,  Inc. and its subsidiaries,
WLA,  SMIC,  and  Murrieta,  treating  WLA,  SMIC and  Murrieta  as if they were
subsidiaries  for the  entire  year  ended  December  31,  1995  with pro  forma
adjustments as if the  acquisitions  had been consummated as of January 1, 1995.
This pro forma  information does not purport to be indicative of what would have
occurred had the  acquisitions  been made as of January 1, 1995 or results which
may occur in the future.
                                                          Year ended
                                December 31, 1995

Net Revenue                                              $28,741,000
Net Loss                                                 $  (992,000)
Net Loss Per Share                                       $      (.12)

On March 1, 1996,  the  assets and  related  liabilities  of Mission  Bay Mobile
["MBM"]  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  of which a $220,607  loss was  recorded at
December 31, 1995 and the difference of $73,444 was recorded in 1996.

During 1996,  the Company  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 the Company reclaimed the unit
and  set-up an  additional  loss  reserve  of  approximately  $119,000  with the
intention  of selling the unit by  year-end.  Subsequent  to  year-end,  the PPS
mobile unit and related liabilities were transferred to RadNet Management, Inc.,
a 100%-owned subsidiary of PHS.

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 the facility on or about August 29, 1997. Due to this  decision,  the Company
recognized a loss in December 1996 of approximately  $3,425,000 and reclassified
approximately $230,000 in net assets to "assets held for divestiture." [See Note
15]

                                      F-11

<PAGE>



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


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

Substantially all of the remaining assets of Integrated  Cardiovascular Systems,
Inc.  ["ICVS"] 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.  ["HCI"  or
"Riverside"]  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  utilizing  equipment  transferred  from  other  sites.  The
facility  will  function as a satellite  office to the  Company's MDI center and
provides mammography, ultrasound and general diagnostic radiology services.

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.

All acquisitions in 1996 are immaterial to the financial statements.

For financial reporting purposes at December 31, 1996, the assets,  liabilities,
results  of  operations  and cash  flows of the  Company's  mobile MRI units and
Parkside  facility  [See Note 15] are  included  in the  Company's  consolidated
financial  statements  as net  assets  held for  divestiture.  Net assets of the
Company's operations held for divestiture at December 31, 1996 are as follows:

                                             Parkside  Mobile MRI's   Totals

Property and Equipment - Net                $3,654,057  $1,046,482  $4,700,539
Liabilities                                         --  (1,046,482) (1,046,482)
Loss on Divestiture                         (3,424,548)         --  (3,424,548)
                                            ----------  ----------  ----------

  Net Assets                                $  229,509  $       --  $  229,509
  ----------                                ==========  ==========  ==========

[3] Fair Value of Financial Instruments

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

                                        1 9 9 6
                                 Carrying      Fair
                                  Amount       Value

Cash                            $   12,658  $   12,658
Due to Related Parties - Current(2,070,670) (2,070,670)
Debt Maturing within One Year   (9,745,318) (9,745,318)
Long-Term Debt                  (14,908,454)(12,624,871)

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  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
long-term debt is based on current rates at which the Company could borrow funds
with similar remaining maturities.


                                      F-12

<PAGE>



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



[4] Property and Equipment and Depreciation and Amortization

Property and equipment  and  accumulated  depreciation  and  amortization  as of
December 31, 1996 are as follows:

Medical Equipment                                       $12,948,632
Office Equipment and Furniture and Fixtures                711,471
Leasehold Improvements                                   3,599,545
Property Held Under Capital Lease                        9,333,284
                                                        ----------

Total                                                   26,592,932
Less:  Accumulated Depreciation                         (6,610,042)

  Net Property and Equipment                            $19,982,890

Property and equipment  depreciation  expense was  approximately  $2,945,000 and
$2,925,000 for the years ended December 31, 1996 and 1995, respectively.

For property held under capital leases, depreciation expense for the years ended
December  31,  1996  and  1995  was   approximately   $1,090,000  and  $770,000,
respectively and accumulated depreciation at December 31, 1996 was $2,925,985.

Certain assets were written down during 1996 [See Notes 5 and 15].

[5] Goodwill and Intangible Assets and Amortization

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

Cost                                                    $6,566,335  $2,819,433
Less:  Accumulated Amortization                            886,437   1,298,570
                                                        ----------  ----------

  Net Intangible Assets                                 $5,679,898  $1,520,863
  ---------------------                                 ==========  ==========

For the year ended December 31, 1996, the Company recorded  additional  goodwill
related to  acquisitions  of  approximately  $65,000 and  wrote-off net goodwill
related to sold or "held for disposal" centers of approximately  $1,675,000.  In
addition, the Company wrote-off an employment contract of approximately $120,000
in 1996.

Amortization  expense relating to intangible assets was  approximately  $970,000
and $995,000 for the years ended December 31, 1996 and 1995, respectively.

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 consist  principally of the decision to close the
Parkside facility on or about August 29, 1997 [See Note 15]. 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 will be closed.

[6] Due to Related Parties

The Company owes Norman Hames, President of DIS, approximately $90,000,  without
interest,  for prior loans made by him to the Company. The amount is expected to
be paid within the next year.


                                      F-13

<PAGE>



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


[6] Due to Related Parties [Continued]

At December 31, 1996, DIS owed approximately  $1,980,000 to PHS as summarized by
the following:

In March  1996,  PHS loaned  $1,000,000  to DIS  pursuant  to a  revolving  loan
agreement.  The loan  bears  interest  at the prime  rate,  as quoted by Bank of
America, plus four percent.  Principal payments were to commence October 1996 at
the rate of $50,000 per month plus interest. All unpaid amounts are due on March
22, 2001. As of December 31, 1996, no principal payments had been made. Interest
of approximately $85,000 was accrued in 1996.

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

DIS entered into an  agreement  with PHS,  whereby PHS will  provide  management
services to DIS for a monthly fee of $45,000.  During March and April 1996,  the
Company was charged a management  fee of $100,000 per month.  Additionally,  DIS
and PHS 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. DIS will pay an amount equal to
10% of its  collections  for each  covered  center.  During  1996,  DIS incurred
$560,000 in management fees. The agreements  expire April 1, 2001 with an option
to renew for an additional year.

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

Interest  expense on amounts owed to related parties was  approximately  $85,000
for the year ended December 31, 1996.  There was no interest  expense to related
parties for the year ended December 31, 1995.

[7] Litigation

[A] On April 10, 1996, the Company 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 seeking payment of $116,056 plus
attorneys  fees  based upon the  alleged  failure  of the  Company to  discharge
medical bills of a Company employee covered under the Company's health insurance
program.  The Company then commenced legal action against the Company'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 Company alleging that it is owed $141,658,
which the Company denied.  The Company 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 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.

                                      F-14

<PAGE>



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



[7] Litigation [Continued]

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

[8] Long-Term Debt and Capital Leases

Long-term debt at December 31, 1996 consisted of the following:

Revolving line-of-credit to a financial institution, which is also a shareholder
  of the  Company,  due June 1997 with  interest  at the bank's  prime rate plus
  3.5%.  The Company may borrow the lesser of $4,000,000 or 53% of the Company's
  eligible  accounts  receivable.  At  December  31,  1996,  the  Company had no
  significant  availability under the line of credit. The line is collateralized
  by  substantially  all of the Company's  assets  including a first position in
  substantially all of the accounts$receivable.3,199,585

Notes payable to a financial  institution,  which is also a  shareholder  of the
  Company,  bearing interest from 10% to 12.75%; monthly principal plus interest
  is due until maturity at various dates through 2002;  collateralized primarily
  by medical equipment.13,603,012

Notes payable to three financial  institutions  bearing  interest at fixed rates
  ranging  from 9.5% to 11.25%;  monthly  principal  plus  interest is due until
  maturity at various dates through  2001;  collateralized  primarily by medical
  equipment.3,517,105

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 1999.2,596,694

Various notes  payable to financial  institutions;  bearing  interest at various
  rates ranging from 8.25% to 14.50%;  various payment  maturities through 2001;
  collateralized by medical equipment. 2,783,858

Obligations under capital leases, collateralized primarily by medical equipment,
  originally  costing  approximately  $9,600,000,  payable  in  various  monthly
  installments  including  interest at various rates from 9.5% to 12.75% through
  2002.5,492,999

Total                                                                 31,193,253
Less: "Net Assets Held for Divestiture" Notes                        (1,046,482)
         Current Portion Debt and Capital Leases                    (10,683,300)
                                                                     -----------

  Non-Current                                                        $19,463,471
The Company's loan agreements contain certain restrictive covenants that include
or require among other things,  the following:  (a) cross default provisions and
(b) approval for sale of collateralized equipment.

The Company is in default  under  various  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].

During 1996, the amount outstanding under the revolving  line-of-credit had from
time-to-time exceeded maximum borrowings available under the agreement.

The prime rate at  December  31,  1996 was 8.25%.  At  December  31,  1996,  the
weighted average interest rate on short-term borrowings was 11.75%.


                                        F-15

<PAGE>



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





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

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

 Years Ended
December 31,
   1997                                               $ 9,745,318
   1998                                                 3,683,260
   1999                                                 4,037,730
   2000                                                 4,142,080
   2001                                                 2,960,012
   Thereafter                                              85,372
                                                      -----------

     Total                                            $24,653,772

The Company leases property under capital leases.  The following  schedule shows
the minimum lease payments under capital leases as of December 31, 1996:

 Years Ended
December 31,
   1997                                               $ 1,488,371
   1998                                                 1,483,319
   1999                                                 1,483,319
   2000                                                 1,463,452
   2001                                                 1,077,019
   Thereafter                                              74,500
                                                      -----------

   Total                                                7,069,980
   Less:  Amount Representing Interest                 (1,576,981)

                                                        5,492,999
   Less:  Current Portion                                (937,982)

     Long-Term Portion                                $ 4,555,017
     -----------------                                ===========

The Company has been in default under  various of its capital lease  agreements,
and has from time to time either  made  agreements  to resolve  the  defaults or
brought the past due debt current by payment [See Note 16].

During the year ended December 31, 1995,  interim debt of $603,235 was converted
to $501,304  shares of common stock in exchange for  cancellation of the related
notes payable.





                                      F-16

<PAGE>



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




[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 $2,100,000 and $1,494,000 for the years ended
December 31, 1996 and 1995, 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, 1996:

 Year Ended
December 31,                                   Total     Equipment  Facilities

   1997                                     $2,092,723  $   68,996  $2,023,727
   1998                                      1,839,823      47,484   1,792,339
   1999                                      1,586,061          --   1,586,061
   2000                                      1,130,723          --   1,130,723
   2001                                        254,527          --     254,527
   Thereafter                                   30,000          --      30,000
                                            ----------  ----------  ----------

     Totals                                 $6,933,857  $  116,480  $6,817,377
     ------                                 ==========  ==========  ==========

[B] Physician and  Independent  Contractor  Agreements - The Company has certain
arrangements  for payment of professional  services based upon the percentage of
revenue collected from 15% to 24%.

[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, 1996 are as follows:

Deferred Tax Assets:
  Net Operating Loss Carryforwards                      $8,698,000
  Allowance for Doubtful Accounts                          230,000
  Tax Basis of Fixed Assets in Excess of Book Basis        301,000

  Net Deferred Tax Asset                                 9,229,000

Valuation Allowance for Deferred Tax Asset              (9,229,000)
                                                        ----------

  Net                                                   $       --
  ---                                                   ==========


                                      F-17

<PAGE>



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




[10] Income Taxes [Continued]

The valuation allowance of $9,229,000  represents an increase of $5,355,127 over
the preceding year. Net operating loss  carryforwards  of $21,745,000  expire as
follows:

Years ended
   2002                                                 $  164,000
   2003                                                    608,000
   2004                                                  1,055,000
   2005                                                    817,000
   2006                                                  4,053,000
   2007                                                  3,439,000
   2008                                                  1,226,000
   2010                                                  2,513,000
   2011                                                  7,870,000
                                                        ----------

     Total                                              $21,745,000

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.

[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.

As of December 31, 1996,  cumulative  preferred stock unpaid  dividends  totaled
$336,150 [$.075 per share].


                                      F-18

<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 the year ended December 31,
1996:

                                                              Weighted Average
                                                         Common   Exercise Price
                                                         Shares      Per Share

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, 1996715,917    $    1.78
  --------------------------------------------------------=======

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:

                                             Options Outstanding
                                    Number      Weighted-Average
  Range of                      Outstanding at      Remaining   Weighted-Average
Exercise Prices                December 31, 1996Contractual Life Exercise Price

$.01 - $1.00                          80,360       2.3 Years         $    .67
$1.01 - $2.00                        325,566       4.0 Years         $   1.15
$2.01 - $3.00                        309,991       1.8 Years         $   2.73
                                   ---------

                                     715,917       2.8 Years         $   1.78
                                   =========

The  exercise  prices of the  options  outstanding  at  December  31, 1996 range
between $.625 and $3.00.

No compensation cost was recognized in income during the year ended December 31,
1996.

Had  compensation  cost been  determined on the basis of fair value  pursuant to
SFAS No. 123, net income and earnings per share for the year ended  December 31,
1996 would have been as follows:

Net Loss:
  As Reported                                     $(8,142,910)

  Pro Forma                                       $(8,150,471)

Loss Per Share:
  As Reported                                     $     (.77)
                                                  ==========

  Pro Forma                                       $     (.77)
                                                  ==========


                                      F-19

<PAGE>



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




[12] Stock Options and Warrants [Continued]

[A] Stock Options  [Continued] - At the grant dates,  the weighted  average fair
value of the above options were $.76 during 1996.

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

1996             6.63%         5 Years        81.97%             N/A

[B] Stock  Warrants - The  following  table  summarizes  the  activity in common
shares subject to warrants for the year ended December 31, 1996 [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, 19961,841,$27.01 - 1.60
  ----------------------------------------------------------====== ==

[1] See Note 7[B].
[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, 1996 expire from  February  1999 to March
2001.

[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
1996 or 1995.



                                      F-20

<PAGE>



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




[14] Loss Per Share

The calculation of net loss per share  attributable to common  shareholders  for
the year ended December 31, 1996 and 1995, includes the effect of undeclared and
unpaid  dividends on Series F and G Preferred  Shares of $224,100 and  $112,050,
respectively.

[15] Subsequent Events

In January 1997, DIS transferred substantially all of the assets and liabilities
associated with its mobile MRI business  ["Montclair Mobile" or "PPS"] to RadNet
Management,  Inc.  ["RadNet"],  a 100% owned subsidiary of PHS. PPS's assets and
liabilities  were segregated in assets held for divestiture  with a net value of
$-0- as of December 31, 1996.

Effective March 1, 1997, DIS sold substantially all the assets of its ultrasound
division for approximately $8.5 million and sold substantially all of the assets
of four of its  hospital-based  MRI sites for approximately  $15.5 million.  The
total proceeds of $24 million include a non-interest  bearing  receivable in the
amount of $1.5 million to be received in annual  installments  of $500,000  over
the next  three  years  and  approximately  $1  million  in  ten-year  covenants
not-to-compete. Of the cash proceeds, approximately $7.6 million was used to pay
off existing debt.  These  transactions  will result in a gain of  approximately
$7.5 million.

During 1997,  the Company  repaid the  $1,982,103  loan from PHS and in addition
loaned PHS $5,500,000 bearing interest at 10% payable monthly with the principal
due on or before March 31, 1998.

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.  While the Company is  considering
alternatives to closing the center it is likely none will be found.  Due to this
decision, Company recognized a loss in December 1996 of approximately $3,425,000
and reclassified the net assets related to the center as "held for divestiture."
Net  assets  held  for   divestiture  are  presented  at  carrying  value  which
approximates  fair  value less costs to sell.  As a result of the  closing,  the
assets and related  liabilities  of WLA [See Note 2] will be transferred to PHS'
Radnet Management, Inc.

[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.

The Company has suffered  recurring losses from operations,  had 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  has taken the following  steps to revise its operating and financial
condition,  which it believes  are  sufficient  to provide the Company  with the
ability to continue in existence.



                                      F-21

<PAGE>



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




[16] Going Concern [Continued]

Effective March 1, 1997, DIS sold substantially all the assets of its ultrasound
division and four of its hospital-based MRI sites to Diagnostic Health Services,
Inc.  ["DHS"] for  approximately  $24,000,000.  Of the  proceeds,  approximately
$7,600,000 was used to pay existing debt resulting in approximately  $16,000,000
in cash and a $1,500,000 non-interest bearing receivable. The Company will use a
large  portion of the cash  proceeds to improve  its  working  capital in fiscal
1997.

On June 25, 1997, the Company, tentatively determined to close substantially all
of its operations at the Santa Monica ["Parkside"]  facility, on or about August
29, 1997.

The Company  acquired or opened four new  facilities in late 1996 and early 1997
in strategic locations.

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 Financial Accounting Standards Board ["FASB"] issued Statement of 
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers
 and Servicing of Financial Assets and Extinguishment of Liabilities.
"  SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996. 
 Earlier application is not allowed. The provisions of SFAS No. 125 must 
be applied prospectively; retroactive application is prohibited. Adoption on
 January 1, 1997 is not expected to have a material impact on the Company.  
The FASB deferred some provisions of SFAS No. 125, which are not expected to
 be relevant to the Company.

The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.

SFAS No. 128 simplifies the earnings per share ["EPS"] calculations  required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the  presentation  of primary EPS with a presentation of basic EPS.
SFAS No. 128  requires  dual  presentation  of basic and diluted EPS by entities
with complex capital structures.  Basic EPS includes no dilution and is computed
by dividing  income  available to common  stockholders  by the  weighted-average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution of securities that could share in the earnings of an entity,
similar  to the  fully  diluted  EPS of APB  Opinion  No.  15.  SFAS No.  128 is
effective for financial  statements issued for periods ending after December 15,
1997,  including  interim periods;  earlier  application is not permitted.  When
adopted,  SFAS No. 128 will require  restatement  of all  prior-period  EPS data
presented;  however,  the Company has not sufficiently  analyzed SFAS No. 128 to
determine  what effect SFAS No. 128 will have on its  historically  reported EPS
amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

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.


                                      F-22

<PAGE>



DIAGNOSTIC IMAGING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
------------------------------------------------------------------------------




[17] New Authoritative Pronouncements [Continued]

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.






                      .   .   .   .   .   .   .   .   .   .

                                      F-23

<PAGE>





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

Not Applicable.



                                       19

<PAGE>



                                    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, 1996,  the Board of Directors  held one meeting and took action by unanimous
written consent on six occasions.  Each director who served during 1996 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             41     President and Chief Financial Officer1994
Howard G. Berger, M.D.   52     Chairman of the Board of Directors   1996
Judy Perez-Haley         40     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 three 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.


                                       20

<PAGE>





Item 10.  Executive Compensation

                           Summary Compensation Table

Set forth below is the cash  compensation  paid by the Registrant during 1996 to
its President.  No other executive  officer  received  during 1996  compensation
which exceeded, on an annualized basis, $100,000.

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

Norman Hames, President    1996        150,000(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  1996.  See
     "Employment  Contracts and  Termination of Employment and Change in Control
     Arrangements."

Compensation of Directors

Non-officer  directors of the  Registrant  are to receive a fee of $300 for each
meeting  attended  and $100 for  each  meeting  in  which  they  participate  by
telephone.  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, 1996, 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, 1996, 215,500 options
under the plan have been granted.


                                       21

<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 $300,000
and a bonus to be determined by the Board based upon  Registrant's  performance.
Mr. Hames waived all  compensation  in excess of $150,000 during fiscal 1996 and
has continued to so waive, however, he is not required to continue such waiver.

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 June
12, 1997, (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          9,879,626(2)(3)                    72%

Primedex Health Systems, Inc.
1516 Cotner Avenue
Los Angeles, CA 90025             9,879,626(2)                    72%

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)                 9,879,626(2)                    72%

-----------------
(1)  Includes 11,310,110 shares outstanding as of June 12, 1997, and options and
     warrants  convertible  into an additional  2,557,144 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 13 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 525,917 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 13. 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.

                                       22

<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 provides the  Registrant  with a four million  dollar line of credit that at
December  31, 1996,  was  approximately  $3,200,000.  The line is secured by the
Registrant's accounts receivable. The line represents a two year commitment. The
Registrant  is  charged  interest  on the line of credit at bank rate prime plus
3.5%.

     2. Norman  Hames is owed by the  Registrant  $88,567 at  December  31, 1996
pursuant to a promissory note, principal and interest due December 31, 1997 [See
Note 6 to the consolidated financial statements]. The note accrues interest at a
rate of seven percent per annum.


                                       23

<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  $85,000 on this 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 1996,  DIS incurred  $560,000 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 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 $.60 per share.

     5. 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.

     6. Howard G. Berger, M.D. (See "Items 9 and 11") is the sole stockholder 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, 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.

     7. 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.
Subsequent to fiscal  year-end of December 31, 1996, 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.

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

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

     10. During 1997, DIS repaid the loan to PHS.

     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.

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)

                                       24

<PAGE>





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's 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).

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

16       Letter re Change in  Certified  Public  Accountants.  (Incorporated  by
         reference to the  Registrant's  Form 8-K for events  dated  November 4,
         1996 and January 4, 1997).

*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,  1996,  except  that  Form  8-K
         referenced in Exhibit 16 hereinabove.

*24      Consent of Independent Accountants

*28      Undertakings

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

                                       25

<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:  August 18, 1997                  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:  August 18, 1997
-----------------------------------
Norman Hames, President and Director




/s/ Howard G. Berger                     Dated:  August 18, 1997
-----------------------------------
Howard G. Berger, M.D., Director



                                       26