<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-KSB

     (Mark One)
     [X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1997

     [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
           For the transition period from.................to.................

                        Commission file number  0-21758

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

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

            2777 STEMMONS FREEWAY, SUITE 1525, DALLAS, TEXAS 75207
                   (Address of principal executive offices)

                   Issuer's telephone number:  (214)634-0403

        Securities registered under Section 12(b) of the Exchange Act:

     Title of each class           Name of each exchange on which registered
     -------------------           -----------------------------------------
 Common Stock, $.001 par value     NASDAQ National Market


         Securities registered under Section 12(g) of the Exchange Act:
  Common Stock, $.001 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 past 12 months (or such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.  Yes...X...  No.......

  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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 amendment to the Form 10-KSB. [  ]

  The issuer's revenues for its most recent fiscal year were $52,921,000.

  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
asked prices of such stock, as of March 19, 1998, was $134,031,395.

    (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)

  Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes...... No......

                  (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

The number of shares outstanding of the issuer's Common Stock, $.001 par value,
as of March 19, 1998 was 11,033,804.

                  Documents Incorporated By Reference:  None
<PAGE>

                                     PART I
                                     ------


ITEM 1. DESCRIPTION OF BUSINESS

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

The Company was incorporated in Texas in 1983 and was reincorporated in Delaware
in 1992.  The Company is headquartered in Dallas, Texas, and provides services
in Texas, Oklahoma, Illinois, Indiana, Louisiana, Mississippi, Missouri, Iowa,
Ohio, Michigan, Arkansas, Georgia, Alabama, Virginia, Kentucky, Tennessee,
Kansas, New Mexico, Arizona, Nevada and California.  Until the sale of such
operations in December 1997, the Company also provided services in the greater
Mexico City area.

In addition to significant internal growth, the Company has expanded its
business through numerous acquisitions.  Information regarding acquisitions in
the past two fiscal years is included in the footnotes to the audited financial
statements appearing at Item 7 below.

The following chart sets forth the corporate structure of the Company and its
subsidiaries at March 19, 1998:

                       [Organization Chart Appears Here]

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

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BUSINESS OPERATIONS

In-House  Services  (also referred to as Fixed Site Services)
--------------------------------------------------------------
In addition to the shared services, the Company provides diagnostic services
within hospitals and clinical radiology or cardiology departments. These
services include the provision of the allied healthcare professionals
(technologists) who staff the equipment and are responsible for image
acquisition; the provision and  management of diagnostic equipment or other
related instrumentation; the management and processing of data for the
procedures conducted within the respective department; and in some instances
the provision, via subcontracting, of the professional component
(interpretation) of the data by a physician.

These in-house services may include any or all of the aforementioned
responsibilities. The imaging modalities under management include, but are not
limited to, diagnostic ultrasound, computerized tomography, MRI, nuclear
medicine, and cardiac catherization services.

Generally, the Company is responsible for various quality assurance programs
related to the services it provides and assumes documentation responsibility and
management oversight of departmental compliance issues, licenses, accreditation
and certification requirements.

At December 31, 1997, the Company provided in-house services at 131 hospitals
throughout its operational markets.

Shared Services
---------------
The  Company operates a fleet of specially equipped vehicles (vans and trucks)
to transport its imaging equipment to hospitals, clinics, long-term care
facilities and other healthcare settings. The services provided via the shared
services delivery mechanism are predominantly diagnostic ultrasound, for which
the equipment is portable and service is rendered on an "as needed" basis. This
includes a large number of regular and routed schedules as well as "on call"
services to customers in response to emergent demand.

At year-end 1997, the Company provided shared services to 448 of its
approximately 579 hospital customers and approximately 957 additional clients
across the healthcare spectrum, including physicians' offices, sub acute and
long-term care facilities, managed care systems, and government facilities.

Ancillary Services
-------------------
At various of its service sites, the Company provides cardiac monitoring
services, such as Holter monitoring, pacemaker monitoring and event recording
for patients of the Company's customers. In addition, until the sale of such
operations in December 1997, the Company maintained an operating unit providing
contract occupational and physical therapists on a long or short term basis to
healthcare facilities throughout the United States, and provided (through a
separate subsidiary) therapists and nurses in a home healthcare setting in the
Mexico City and surrounding areas. The Company currently has no plans to re-
enter the therapist placement business or the Mexican market.

CUSTOMERS
Each of the Company's customers, irrespective of the method by which they are
served, has an agreement or contract specifying the terms of service, including
the nature of services, pricing, payment and other material terms. The Company's
agreements for in-house services typically have a duration of three to five
years and specify equipment and personnel requirements, the scope and types of
services to be provided and the pricing and payment structure. In addition
to longer term contracts, the Company performs a material portion of its work
under one-year contracts, or on a month to month basis. Non-renewal of such
contracts, or renewal on less favorable terms, could have a material adverse
effect on the Company's revenues, operating margins, and net income. If the
affected accounts were obtained in one of the company's acquisitions, the
goodwill related to that acquisition could also become materially impaired. If
such circumstances arise, the company records an impairment loss as the
difference between the estimate of the related after-tax income contribution, on
a discounted basis, and the carrying value of the goodwill. Any impairment loss
would be reported as a component of income from continuing operations before
tax.

In 1996 and 1997, no single customer of the Company accounted for more than 10%
of the Company's total revenues and the three largest customers of the Company
accounted in the aggregate for

                                       2
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approximately 6% of the Company's revenues in 1996 and approximately 3% of the
Company's revenues in 1997. In most cases, the hospital or healthcare facility
(which is the Company's customer) is the responsible payment party. Third party
payors accounted for approximately 15% and 9% of the Company's revenues in 1996
and 1997, respectively. Although the Company is not substantially reliant upon
third-party payment mechanisms, many of the Company's customers are reliant on
third-party payment, and delays or difficulties in third-party payments could
thereby adversely affect the receipt and timing of payments to the Company.

From 1991 to 1997, the Company's customer base increased from 323 (including
seven in-house agreements) to approximately 1,536. Customers in 1997 included
579 hospitals (which includes 131 in-house agreements), and 957 physicians'
offices, clinics and healthcare facilities in 21 states.

In 1997, the Company's revenues were attributable to shared services, in-house
services and ancillary services, in the following approximate proportions:



  In-House/Fixed Base                 56%
  Shared                              39%
  Ancillary                            5%

OPERATING STRUCTURE
Through the implementation of a deliberate acquisition strategy, the Company has
established a network of operational facilities throughout the country. These
division offices, located in Arlington, TX, San Diego, CA, Phoenix, AZ, Tulsa,
OK, St. Louis, MO, Chicago IL, Atlanta, GA, Monroe, LA and Huntsville, AL, serve
as an operations base for both clinical staff, local management and sales. By
keeping these functions local, the Company remains responsive to its customer
base as well as to opportunities for expansion and development within the
Company's markets.

The Company provides local personnel with a comprehensive range of support
services, including financial and administrative services, and employs a
mechanism which carefully monitors local operations through an extensive system
of controls, including regular financial reporting, accounts receivable analysis
and customer tracking. The Company provides administrative functions at the
corporate level, including receivables management, purchasing, human resources
and accounting, thereby eliminating the need for these services locally.

MANAGEMENT INFORMATION SYSTEMS
The Company has configured an information technology system that provides real-
time monitoring of services, procedures and other business activities at all of
the Company's divisional offices. This enables the Company to monitor services,
revenues and costs on a Company-wide basis. The Company has made substantial
investments in the development of this system and all of the Company's business
offices are networked into the information technology system and integrated with
the Company's centralized processing system. This system also contributes to the
Company's sales and marketing efforts by enabling the sales force to formulate
quotations and pricing proposals to potential customers and to provide
management with information specific to existing customers. The Company made
significant additional investments in the upgrade and expansion of this system
in 1997, and believes that its information technology system can support
substantial growth without requiring significant further capital expenditures.

SALES AND MARKETING
The Company directs its sales and marketing activities from its Dallas
headquarters, and out of each of its operating divisions. Each operating
division has at least one, and in some instances more than one, sales
representative devoted full time to promotion of the Company's business and
maintenance and expansion

                                       3
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of existing relationships. Additionally, each division manager as well as the
regional vice presidents devotes portions of their time to customer relations
and marketing functions.

COMPETITION
Radiology and cardiology diagnostic services, as well as the provision of allied
healthcare professionals, are characterized by a high degree of competition.
This competition comes from a number of independent local operators specializing
in one or two clinical applications, and from a few large diversified healthcare
companies (primarily larger hospitals having the resources and capability to
provide shared diagnostic services to other healthcare facilities) which provide
these services as part of their overall business.  Although the Company believes
that it has a competitive advantage over most of the small operators (primarily
because most of them do not provide the full range of services offered by the
Company, and do not have the same volume of revenues to absorb necessary fixed
overhead costs), the Company may be vulnerable to competition from the larger
healthcare companies, at least one of which can be found in each of the
Company's geographic markets, and all of which are substantially larger and
possess greater financial resources than the company.  There can be no assurance
that the Company will be able to compete successfully in its markets.

SEASONALITY
The Company's results of operations have, in some years, varied significantly
from quarter to quarter, for reasons particular to each quarter.  For instance,
hospital admissions and doctor visits (and, therefore, the Company's imaging
revenues) are typically lower during holiday periods, and at other times when
physicians traditionally take their own vacations.

SUPPLIERS
Although the Company has historically acquired most of its imaging and other
equipment through finance leases from a number of suppliers, the Company is not
dependent upon any one supplier or group of suppliers. While the Company has a
preference for the equipment manufactured by certain manufacturers, there are a
number of manufacturers of imaging equipment adequate for the Company's
purposes, and an even greater number of companies from whom such equipment can
be leased. The Company believes that alternate sources for its equipment and
supply needs are readily available at comparable costs, and that its
relationships with its suppliers are satisfactory.

PATENTS OR TRADEMARKS
Although the Company relies upon sophisticated equipment, instrumentation and
technology, the Company does not own, license or otherwise rely upon any patents
or trademarks for the operation of its business.  Other than corporate names,
the Company does not own or utilize any trademarks in its business.

GOVERNMENT REGULATION
Many aspects of the healthcare industry in the United States are presently
subject to extensive federal and state government regulation. Certain of these
laws and regulations are applicable to the Company's business. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with all applicable laws.

Federal Kickback Law
Federal law prohibits the offer, solicitation, payment or receipt of any
remuneration (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or Medicaid.  The law
also prohibits remuneration intended to induce the purchasing of, or arranging
for, or recommending the purchase or

                                       4
<PAGE>

order of any item, good, facility or service for which payment may be in whole
or in part under those programs. Under this statute, known as the "kickback
law," an offense may be punished by criminal prosecution or by excluding any of
the parties to the transaction or arrangement from participation in Medicare and
Medicaid. The law is very broad and has been interpreted to apply to otherwise
legitimate investment interests if one purpose of the offer of an opportunity to
invest is to induce referrals from the investors. Regulations implemented under
the kickback law provide certain "safe harbors" giving protection for certain
categories of relationships.

The breadth of the kickback law is such that virtually any financial
relationship between a practitioner and a healthcare provider, such as an
independent physiological laboratory (IPL) or an independent diagnostic testing
facility (IDTF), involving the offering of Medicare and Medicaid services may
trigger the application of the law.

A substantial portion of the Company's business arrangements involve the
management and staffing of in-house diagnostic laboratories at hospitals. The
Company does not lease space from the hospitals or any other providers with whom
it contracts and does not bill Medicare or Medicaid for the technical services
provided at the hospitals' laboratories. The Company believes that its
relationships with hospitals and other care providers are in compliance with the
Federal Kickback Law.

Federal Stark Laws
Federal law also prohibits physicians from ordering or prescribing certain
designated healthcare services or items if the service or item is reimbursable
by Medicare or Medicaid and is provided by an entity with which the physician
has a financial relationship (including investment interests and compensation
arrangements). Payment for a service provided in violation of these laws, known
as the "Stark Laws," may be denied, or money paid may be recouped.

The services specified by the Stark Laws include ultrasound procedures and other
designated services which are provided by the Company as the result of referrals
from physicians who purchase the tests from the Company. The Company believes
that its relationships with referring physicians are in compliance with the
Stark Laws.

State Law
A number of states, including states in which the Company does business, have
laws and regulations similar to the federal kickback laws and Stark Laws.  The
Company believes that it is in compliance with all of such laws, although, as is
the case with federal law, there can be no assurance that changes in such laws
or the interpretation or enforcement of such laws  will not have a material
effect on the Company.

IDTFs
Prior to July 1, 1998, the Company must satisfy certain rules set forth by the
Health Care Financing Administration ("HCFA") relating to the payment of
services to Medicare or Medicaid beneficiaries.  These rules state that the
carriers will pay for services under the Medicare fee schedule only when
performed by a physician, a group practice of physicians, an approved supplier
of portable x-ray services, or an IDTF.  The Company believes that its services
are provided according to the rules and specifications of an IDTF.

Potential National Healthcare Reform
Both the Clinton Administration and the Congress have periodically asserted a
need to overhaul or reform the nation's healthcare system. Such legislative
initiatives, if enacted, could impose pressures on the pricing structures
applicable to the Company's services. In particular, there is a possibility that
a significant portion of healthcare services will be rendered and administered
through "managed care"

                                       5
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systems, which could have the effect of forcing pricing concessions and
reductions on the part of service providers such as the Company. Moreover,
healthcare reform could also entail a greater analysis of each patient's need
for diagnostic testing, with the aim of reducing the total volume of testing and
the overall cost of medical care. The Company is unable to predict whether, when
or to what extent any new laws or regulations may be enacted, or existing laws
or regulations may be modified, any of which could have a material adverse
effect on the Company's revenues, operating margins and profitability.

ENVIRONMENTAL MATTERS
With the exception of the nuclear imaging services performed by the Company, the
Company's operations do not entail the handling, storage, use, transport or
disposal of any hazardous substances or hazardous materials within the meaning
of any environmental laws. The Company is not aware of any asbestos abatement
activity required with respect to any of its facilities, or any underground
storage tanks on any of the properties on which the Company's facilities are
located.

The Company's nuclear imaging services require the handling of radioactive
materials, either in the form of FDA-approved single-dose prepackaged isotopes,
or small lots of bulk materials which the Company mixes with other
pharmaceuticals to prepare radiopharmaceuticals to facilitate imaging of various
body organs. These nuclear imaging operations are conducted in the States of
Illinois, Indiana, Ohio, Missouri, Kentucky, Texas, Louisiana and Oklahoma.  The
"Agreement States" (Illinois, Texas, Kentucky and Louisiana) require a separate
license from the State to handle these radioactive materials.  The Nuclear
Regulatory Commission controls the use of byproduct materials in the other
states (Indiana, Missouri, Oklahoma and Ohio) through the issuance of licenses.
The Company believes that it holds all necessary permits required by state and
federal law and that it is in compliance with all applicable laws and
regulations relating to the handling, storage, use, transport and disposal of
nuclear materials. Based on advice from its insurance carriers, the Company
believes that this limited handling of radioactive materials does not warrant
any special insurance.

The Company has not experienced any environmental regulatory problems in the
past and has not been subject to any fines, penalties or other liabilities under
any environmental laws or regulations. However, no assurance can be given that
future changes in such laws or regulations, or interpretations thereof, or in
the nature of the Company's operations, will not have a material impact on the
Company.

YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 issue failures.  Year 2000 failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.  The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems, and
has established processes for evaluating and managing the risks and costs
associated with this problem.  The computing portfolio was identified and an
initial assessment has been completed.  The cost of achieving Year 2000
compliance is estimated to be approximately $40,000 over the cost of normal
upgrades and replacements, and will be incurred through fiscal 1999.

The Company believes that its financial reporting and billing systems are
substantially compliant with Year 2000 requirements. The Company has consulted
with its diagnostic equipment vendors and has been advised that certain items
will be supported at no cost, and that older items will be supported on a fee
basis. The cost of making the Company's diagnostic equipment Year 2000 compliant
is not known at this time.

EMPLOYEES
As of  March 19, 1998, the Company had 449 full-time employees, 42 part-time
employees, and 43 contract employees, for a total of 534 employees.  None of the
Company's employees are represented by any labor union or other collective
bargaining unit.  The Company has not experienced any significant

                                       6
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degree of employee turnover and the Company believes that its relations with its
employees are satisfactory.

ITEM 2.  DESCRIPTION OF PROPERTY

PROPERTY
The Company maintains its headquarters in approximately 13,119 square feet of
leased office space in Dallas, Texas. Base rental at that facility is $12 per
square foot per year, and the lease expires in January 1999. The Company also
maintains divisional, satellite and other operating offices at 25 leased
locations, ranging in size from approximately 214 square feet to approximately
7,700 square feet, at rentals generally ranging from $4 to $32 per square foot
per year. The Company believes that its existing premises will be adequate for
its current operations for the foreseeable future.

INVESTMENT POLICIES
The Company generally acquires its assets for the purpose of producing income
from the use of such assets in the Company's operations.  The Company invests
excess cash on hand primarily in short-term certificates of deposit and United
States Treasury instruments.

The Company does not have any real estate-related investments and does not
intend to make or acquire any such investments in the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

The Company is a party to litigation arising in the normal course of its
business.  No pending litigation involving the Company (taken singly or in the
aggregate) is expected to have a material adverse effect on the Company or its
consolidated financial position.  The Company is not aware of any contemplated
legal proceedings that may be brought against the Company in the future and
which would, if adversely determined, have a material adverse effect on the
Company or its consolidated financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders in the fourth quarter of
1997.

                                       7
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                                    PART II
                                    -------


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION
Since January 22, 1996, the Company's Common Stock has been listed on the NASDAQ
National Market.  From June 23, 1993 to January 19, 1996, the Common Stock was
listed on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System.  The range of reported high bid and low bid
quotations for the Common Stock on a quarterly basis from January 1, 1996
through January 19, 1996, and the last sale price from January 22, 1996 through
March 19, 1998, is reflected in the table below.  These quotations reflect
inter-dealer prices without adjustment for retail mark-up, mark-down or
commission and may not represent actual transactions.


                                  High Bid  Low Bid
                                  --------  -------
1996
 1st Quarter                       $  7.50  $ 4.875
 2nd Quarter                       $ 8.375  $  5.00
 3rd Quarter                       $ 8.375  $ 5.875
 4th Quarter                       $  8.50  $ 6.625

1997
 1st Quarter                       $10.125  $ 7.438
 2nd Quarter                       $ 9.125  $  7.25
 3rd Quarter                       $15.125  $  9.00
 4th Quarter                       $ 14.75  $10.375

1998
 1st Quarter to March 19, 1998     $13.938  $10.063


On March 19, 1998, the last reported sale price for the Common Stock was $13.25,
and the Company had 225 stockholders of record as of that date.  The Company
believes that there are more than 1,300 beneficial owners of Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, in addition to options granted under the Company's
various stock option plans (see Item 10 below) and securities issued in
connection with the Company's business acquisitions (see the notes to the
audited financial statements included in Item 7 below), the Company consummated
a private placement in April 1996 of unregistered promissory notes in an
aggregate amount of $1,000,000 (the "Bridge Notes"), and in connection
therewith, issued, to the purchasers of such Bridge Notes, warrants (the "Bridge
Warrants") entitling the holders thereof to purchase, at any time through April
15, 2001, up to an aggregate of 50,000 shares of common stock of the Company at
an exercise price of $6.25 per share, subject to adjustment upon the occurrence
of any stock dividends, stock splits, combinations of shares or
reclassifications of the Common Stock, or upon any consolidation or merger of
the Company with or into another corporation. Commencing October 15, 1997, the
Company had the right to call the Bridge Warrants for redemption at $.01 per
Bridge Warrant on 30 days' written notice if the average market price of the
Common Stock equals or exceed $9.00 per share (subject to adjustments in respect
of the aforedescribed events) for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. All of the Bridge Notes were repaid in full out of the
net proceeds of the Company's secondary public offering in June 1996, and as of
the date of this report, an aggregate of 40,000 Bridge Warrants have been
exercised

                                       8
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(leaving 10,000 Bridge Warrants outstanding). The issuance of the Bridge Notes
and the Bridge Warrants was exempt from registration under Regulation D
promulgated under the Securities Act of 1933, as amended (the "Act"), based upon
representations and warranties made by the eighteen purchasers thereof as to
their status as "accredited investors."

Simultaneously with the issuance of the Bridge Notes and the Bridge Warrants,
the Company borrowed an additional $1,000,000 from Chase Bank of Texas, N.A.,
formerly Texas Commerce Bank National Association ("Chase"), in conjunction with
which the Company issued to Chase warrants (the "Bank Warrants") entitling the
holders thereof to purchase up to 50,000 shares of Common Stock.  The exercise
price, adjustment provisions, call provisions and other terms and conditions of
the Bank Warrants are identical to the terms and conditions of  the Bridge
Warrants. The issuance of the Bank Warrants was exempt from registration
pursuant to Regulation D promulgated under the Act based upon Chase's
representations and warranties as to its status as an "accredited investor."
All of the Bank Warrants have been exercised.

In connection with the Company's acquisition of Advanced Clinical Technology,
Inc. and Horizon MDS Corporation (collectively, "ACT") in November 1996 (see
Note 13 to the audited financial statements included in Item 7 below), the
Company issued to ACT 642,857 shares of Series A Convertible Redeemable
Preferred Stock of the Company ("Series A Preferred Stock"), having an aggregate
liquidation preference of $4,500,000. The shares of Series A Preferred Stock
bear dividends at the rate of 7.25% per annum (payable in kind in additional
shares of Series A Preferred Stock), and all outstanding shares of Series A
Preferred Stock (including accrued dividends) are convertible, at the option of
the holder thereof, into Common Stock of the Company at the rate of one share of
Series A Preferred Stock for each share of Common Stock. In addition, in the
event that, commencing with the Company's fiscal quarter ended December 31,
1997, the mean average daily last reported sale price of the Common Stock (the
"Average Closing Price") in any fiscal quarter of the Company shall be less than
$7.00 per share, then, at any time and from time to time during the next
succeeding fiscal quarter of the Company, each outstanding share of Series A
Preferred Stock will be convertible into a number of shares of Common Stock
equal to $7.00 divided by the Average Closing Price during the preceding fiscal
quarter. The Company has reserved the right to limit ACT's holdings of
conversion shares to 4.9% of the total outstanding common stock (or 9.9% in the
event of and after giving effect to any conversion at the reduced price under
the immediately preceding sentence). The issuance of the Series A Preferred
Stock was exempt from registration pursuant to Regulation D promulgated under
the Act, and based on ACT's warranty as to the acquisition of such shares for
investment and not for resale or distribution.

In connection with the Company's sale and issuance of $20,000,000 in principal
amount of subordinated notes to The Prudential Insurance Company of America
("Prudential") in April 1997, the Company also issued to Prudential five-year
redeemable common stock purchase warrants exercisable for up to 60,000 shares of
common stock of the Company at an exercise price of $12.25 per share. The
issuance of such subordinated notes and warrants was exempt from registration
under Regulation D promulgated under the Act, based upon Prudential's
representations and warranties as to its status as an "accredited investor."

DIVIDEND POLICY
The Company has not previously paid any dividends on its common stock and for
the foreseeable future intends to continue its policy of retaining any earnings
to finance the development and expansion of its business.  In addition, the
Company's loan agreement with Chase and the Company's subordinated debt
agreements with Prudential prohibit the payment of dividends without such
lenders' prior consent.  In the future, the payment of dividends by the Company
on its Common Stock will also depend on the Company's financial condition,
results of operations and such other factors as the Board of Directors of the
Company may consider relevant.

                                       9
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ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
information set forth in the financial statements and notes thereto included in
this report.  All 1994 and 1995 information has been restated to reflect the
pooling-of-interests with ADI.

RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a percentage of
net sales for the years indicated.

                                                 Year Ended December 31,
                                                 -----------------------

                                                  1997            1996
                                                  ----            ----
Gross revenues                                   100.0%           100.0%
Operating expenses                                78.0             83.9
                                                 -----            -----
Operating income                                  22.0             16.2
Interest expense                                  (7.7)            (3.6)
Other income                                       0.7              2.0
                                                 -----            -----
Income from continuing operations
 before income taxes                              15.1             14.6
Income tax expense                                (4.2)            (4.4)
Net loss from disposal of operations              (0.6)              --
                                                 -----            -----
Net income                                        10.3%            10.2%
                                                 =====            =====
NOTE:  Numbers may not add due to rounding.


YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Gross revenues increased by 118.9% to approximately $52,921,000 in 1997 from
approximately $24,171,00 in 1996, primarily as a result of a full year of
operations in 1997 from the business acquired from ACT in November 1996, and the
two acquisitions from Diagnostic Imaging Services, Inc. ("DIS") effective in the
first quarter of 1997.  Excluding revenues attributable to acquired businesses,
gross revenues increased by 15.3% to approximately $27,869,000 for 1997 from
approximately $24,171,000 for 1996.

The Company's operating expenses increased from approximately $20,268,000 in
1996 to approximately $41,258,000 in 1997.  As a percentage of gross revenues,
operating expenses decreased from 83.9% to 78.0%.  The decrease was due to
increased efficiencies realized through consolidation of various overhead and
administrative functions, and absorption of fixed costs over an increased
revenue base.

Income from continuing operations increased by 126.6% to approximately
$7,976,000 in 1997 from approximately $3,521,000 in 1996.  As a percentage of
gross revenues, income from continuing operations increased from 14.5% in 1996
to 22.0% in 1997.

Interest expense increased by 366.5% from approximately $870,000 in 1996 to
approximately $4,056,000 in 1997, primarily as a result of the $20,000,000 in
subordinated debt obligations incurred in connection with the Company's 1997
acquisitions from DIS, and new debt obligations acquired in connection with
those and other business acquisitions.  As a percentage of gross revenues,
interest expense increased from 3.6% in 1996 to 7.7% in 1997.

"Other income" is primarily interest earned on liquid investments.

Results for 1997 reflect a net loss (net of income tax benefit) of approximately
$327,000, arising from the dispositions of the Company's therapist placement
division and Mexican subsidiary.

                                       10
<PAGE>

Net income from continuing operations increased by 121.0% from approximately
$2,459,000 in 1996 to approximately $5,434,000 in 1997. This increase is
primarily due to the two DIS and other business acquisitions, and continued
consolidation of the Company's administrative functions.

LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company and its subsidiaries entered in to an amended and
restated revolving credit and term loan facility with Chase, providing for up to
$2,500,000 ($3,500,000 during the period from February 11, 1998 through April
30, 1998) in available revolving credit (or, if less, 75% of the Company's and
its subsidiaries' eligible accounts receivable from time to time), and an
acquisition term loan facility of up to $17,500,000 in maximum principal amount.
At December 31, 1997, the Company's outstanding borrowings under the loan
agreement were $2,362,554 under the revolving credit facility, and $6,121,094
under the term loan facility. These loans bear interest at varying rates,
depending on the Company's relative leverage from time to time. The Company's
right to make additional borrowings under the acquisition term loan facility
terminated on December 31, 1997, and the revolving credit facility is scheduled
to expire on June 30, 1998. At December 31, 1997, the Company had approximately
$5,126,000 in cash and cash equivalents, and additional unused availability of
$137,446 under its revolving credit facility. Since September 30, 1997, the
Company has not been in compliance with certain financial covenants under the
Chase loan agreement. Chase has granted waivers or forebearance with respect to
such noncompliance through April 30, 1998. The Company is currently negotiating
new credit facilities with Chase, however, the Company has not concluded
definitive agreements with respect to such matters, and there can be no
assurance that the Company will be able to do so. If such agreements could not
be concluded with Chase or with another lender(s), this could have a material
adverse effect on the Company.

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

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

In 1997, the Company received net proceeds of approximately $8,423,993 from the
exercise of its previously outstanding publicly traded warrants (which were
called for redemption in the first quarter of 1997), $562,500 from the exercise
of other warrants, and $1,492,801 from the exercise of options under the
Company's various stock option plans.

Based on the Company's operating plan, and subject to the Company achieving
appropriate amendments of or replacements for its current financing arrangements
with Chase, management believes that available resources and funds

                                       11
<PAGE>

generated from operations will be sufficient to meet the Company's operating
requirements through the close of the Company's fiscal year ending December 31,
1998.

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

                                       12
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
                                                              Page
                                                            Number
                                                            ------
         Consolidated Financial Statements:

         Independent Auditors' Report                        F - 2

         Consolidated Balance Sheet as
         of December 31, 1997 and 1996                       F - 3

         Consolidated Statement of Operations
         for the years ended
         December 31, 1997 and 1996                          F - 5

         Consolidated Statement of
         Stockholders' Equity for the
         years ended December 31, 1997 and 1996              F - 6

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

         Notes to the Consolidated Financial Statements      F - 9

                                       13
<PAGE>

                       DIAGNOSTIC HEALTH SERVICES, INC.
                               AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1997 AND 1996

                                      AND

                        INDEPENDENT AUDITORS' REPORT




                                      F-1
<PAGE>

                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------

March 12, 1998

The Board of Directors
Diagnostic Health Services, Inc.

We have audited the accompanying consolidated balance sheets of Diagnostic
Health Services, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 audits.

We conducted our audit in accordance with generally accepted auditing standards.
These 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 audits provide a
reasonable basis for our opinion.

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



/S/ Simonton, Kutac & Barnidge, L.L.P.

Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas


                                      F-2
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                                    ASSETS


                                                           December 31,
                                                   ---------------------------
                                                       1997           1996
                                                   -------------  ------------
Current Assets:
  Cash and cash equivalents                        $  5,126,114   $   229,547
  Investment securities                                      --     5,000,000
  Accounts receivable:
    Trade, net of allowance for doubtful accounts
    of $612,437 and $1,413,168, respectively         17,294,128    10,530,807
    Accrued interest and other                          793,369       927,783
  Contracts receivable - current                      2,167,265     1,317,146
  Prepaid expenses                                    1,528,931     1,359,596
  Deferred tax asset                                     87,876        57,876
                                                   ------------   -----------

    Total Current Assets                             26,997,683    19,422,755
                                                   ------------   -----------

Property & Equipment:
  Office furniture & equipment                        2,015,749     1,139,535
  Machinery & service equipment                      35,286,844    20,089,559
  Leasehold improvements                                273,968        45,526
    Less: accumulated depreciation and
     amortization                                    (8,876,887)   (5,425,437)
                                                   ------------   -----------
    Total Property & Equipment                       28,699,674    15,849,183
                                                   ------------   -----------

Other Assets:
  Deposits and other                                  2,999,701       958,391
  Deferred acquisition costs                            122,536       164,199
  Contracts receivable - long-term                   10,058,674     1,739,587
  Goodwill                                           38,793,903    15,022,858
  Noncompete agreements                               3,428,270     1,586,818
    Less: accumulated amortization                   (3,246,266)   (1,423,418)
                                                   ------------   -----------

    Total Other Assets                               52,156,818    18,048,435
                                                   ------------   -----------

Total Assets                                       $107,854,175   $53,320,373
                                                   ============   ===========


      The following are an integral part of these financial statements.

                                      F-3
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

                    CONSOLIDATED BALANCE SHEETS (CONTINUED)
                    --------------------------------------

                      LIABILITIES & STOCKHOLDERS' EQUITY



                                                          December 31,
                                                 ---------------------------
                                                     1997           1996
                                                 -------------  ------------
Current Liabilities:
  Accounts payable                               $  2,626,978   $ 1,957,758
  Accrued liabilities                               3,774,969     1,534,551
  Current lease obligations                         4,663,279     2,154,035
  Current portion of long-term debt                 1,485,113     1,991,824
  Notes payable                                     2,362,554     1,572,000
  Accrued acquisition cost                          1,500,000            --
  Current income taxes                              1,363,543       195,000
                                                 ------------   -----------
     Total Current Liabilities                     17,776,436     9,405,168

Long-term lease obligations                        10,348,496     4,865,190
Long-term debt                                     24,961,570     7,081,745
Deferred rent                                         149,253       155,426
Other liabilities                                   2,647,277       778,446
Deferred income taxes                               2,018,480     1,057,779
                                                 ------------   -----------
    Total Liabilities                              57,901,512    23,343,754
                                                 ------------   -----------

Commitments and Contingencies
Stockholders' Equity:
  Common stock, $.001 par value; authorized
   15,000,000 shares; issued 10,718,867
   shares in 1997 and 8,400,762 shares in
   1996; outstanding 10,485,608 shares in 1997
   and 8,167,503 shares in 1996                        10,719         8,401
  Preferred stock, $.001 par value; authorized
   3,000,000 shares; issued and outstanding
   695,593 shares in 1997 and 648,986 shares
   in 1996                                                696           649
  Additional paid-in capital                       42,151,656    27,617,425
  Retained earnings                                 8,000,743     2,567,195
  Foreign currency translation                             --        (5,900)
  Stockholder receivable                             (103,500)     (103,500)
  Treasury stock at cost; 233,259 common shares      (107,651)     (107,651)
                                                 ------------   -----------
    Total Stockholders' Equity                     49,952,663    29,976,619
                                                 ------------   -----------

Total Liabilities & Stockholders' Equity         $107,854,175   $53,320,373
                                                 ============   ===========


      The following are an integral part of these financial statements.

                                      F-4
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

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


                                                 For the Years Ended
                                                     December 31,
                                              --------------------------
                                                  1997          1996
                                              ------------  ------------

Gross revenues                                $52,920,804   $24,171,286
                                              -----------   -----------
Expenses:
  General & administrative                      2,232,032     1,385,305
  Salaries & employee benefits                 23,658,464    11,898,905
  Legal & professional                            344,029       177,756
  Rent & utilities                              1,192,449       389,533
  Taxes & insurance                             1,103,643       420,375
  Technical operating expenses                  5,994,195     3,158,037
  Provision for doubtful accounts                 890,161        40,970
  Depreciation and amortization                 5,842,678     2,796,865
                                              -----------   -----------
    Total operating expenses                   41,257,651    20,267,746
                                              -----------   -----------

Income from operations                         11,663,153     3,903,540
                                              -----------   -----------
Other income (expense):
  Other income                                    369,403       486,704
  Interest expense                             (4,056,301)     (869,601)
                                              -----------   -----------

    Total other income (expense)               (3,686,898)     (382,897)
                                              -----------   -----------

Income from continuing operations
  before provision for income taxes             7,976,255     3,520,643

    Provision for income taxes                  2,215,726     1,061,560
                                              -----------   -----------

Income from continuing operations               5,760,529     2,459,083

Loss from disposal of operations,
  net of income tax benefit of $160,952          (326,934)           --
                                              -----------   -----------

Net income                                    $ 5,433,595   $ 2,459,083
                                              ===========   ===========

Net income per share:
  Basic                                       $      0.57   $      0.37
                                              ===========   ===========
  Diluted                                     $      0.48   $      0.29
                                              ===========   ===========
Weighted average common shares outstanding
  Basic                                         9,527,736     6,709,795
                                              ===========   ===========
  Diluted                                      11,221,358     8,446,335
                                              ===========   ===========


      The following are an integral part of these financial statements.


                                      F-5
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                ----------------------------------------------

                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996



<TABLE>
<CAPTION>

                                                                                                         Foreign
                                          Common     Preferred      Additional        Retained          Currency
                                           Stock       Stock     Paid-In Capital      Earnings         Translation
                                   -----------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>                 <C>           <C>
Balance, December 31, 1995                $ 5,206         --         $ 9,018,442      $  108,118          $(6,171)
Shares issued in connection
   with secondary offering                  2,955                     17,494,019
Common shares issued in
   connection with acquisitions               209                        917,459
Preferred shares issued in
   connection with acquisitions                          643
Stock options exercised                         1                          1,468
MDI warrants exercised                          3                          9,231
Foreign currency translations                                                                                 271
Stock subscription collection
Shares issued in payment of debt               27                        176,806
Preferred stock dividend                                   6                                  (6)
Net income                                                                             2,459,083
                                   -----------------------------------------------------------------------------------
Balance, December 31, 1996                  8,401        649          27,617,425       2,567,195           (5,900)
Common shares issued in
   connection with acquisitions               350                      3,548,946
Stock options exercised                       399                      1,382,403
Warrants exercised                          1,569                      9,602,882
Disposition of Mexico Operations                                                                            5,900
Preferred stock dividend                                  47                                 (47)
Net income                                                                             5,433,595
                                   -----------------------------------------------------------------------------------
Balance, December 31, 1997                $10,719       $696         $42,151,656      $8,000,743          $    --
                                   ===================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                          Stock
                                        Subscription       Stockholder       Treasury
                                        Receivable         Receivable         Stock         Total
                                   -----------------------------------------------------------------
<S>                                <C>                     <C>              <C>          <C>
Balance, December 31, 1995                $(8,250)          $(103,500)      $(107,651)   $ 8,906,194

Shares issued in connection
   with secondary offering                                                                17,496,974
Common shares issued in
   connection with acquisitions                                                              917,668
Preferred shares issued in
   connection with acquisitions                                                                  643
Stock options exercised                                                                        1,469
MDI warrants exercised                                                                         9,234
Foreign currency translations                                                                    271
Stock subscription collection               8,250                                              8,250
Shares issued in payment of debt                                                             176,833
Preferred stock dividend                                                                          --
Net income                                                                                 2,459,083
                                   -----------------------------------------------------------------
Balance, December 31, 1996                     --            (103,500)    (107,651)       29,976,619
Common shares issued in
   connection with acquisitions                                                            3,549,296
Stock options exercised                                                                    1,382,802
Warrants exercised                                                                         9,604,451
Disposition of Mexico Operations                                                               5,900
Preferred stock dividend                                                                          --
Net income                                                                                 5,433,595
                                   -----------------------------------------------------------------
Balance, December 31, 1997                $    --           $(103,500)   $(107,651)      $49,952,663
                                   =================================================================
</TABLE>


      The following are an integral part of these financial statements.

                                      F-6
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

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


                                                         For the Years Ended
                                                             December 31,
                                                     ----------------------------
                                                         1997           1996
                                                     -------------  -------------
<S>                                                  <C>            <C>
Cash Flows from Operations:
Net income                                           $  5,433,595   $  2,459,083
Adjustments to Reconcile Net Income to
  Net Cash (Used in) Provided by Operations:
  Depreciation and amortization                         5,842,678      2,796,865
  Deferred federal income taxes                           930,701        848,965
  Deferred rent expense                                    (6,172)       155,426
  Foreign currency translation                              5,900            271
  Provision for doubtful accounts                         890,161             --
  Net chargeoffs for bad debt                          (2,488,470)            --
  Increase in trade receivable                         (4,792,489)    (4,331,129)
  Increase in contracts receivable                     (9,169,206)    (1,164,244)
  Increase in prepaid expenses                            (93,686)      (701,492)
  Increase in other assets                             (1,279,409)      (590,986)
  Increase in accounts payable                            336,490         14,404
  Increase in accrued liabilities                         716,231        655,716
  Increase in income taxes payable                      1,168,543        171,035
  Increase in other liabilities                         1,786,249        279,411
                                                     ------------   ------------

       Net Cash (Used in) Provided by Operations         (718,884)       593,325
                                                     ------------   ------------

Cash Flows From Investing Activities:
  (Increase) decrease in cash investments               5,000,000     (5,000,000)
  Cash payments for the purchase of property           (3,550,845)    (1,487,178)
  Acquisition of businesses, net of cash acquired     (15,962,847)   (13,003,736)
  Additional subsidiary acquisition costs              (1,389,671)      (449,829)
  (Increase) decrease in other receivables                 91,691       (524,384)
  (Increase) decrease in employee receivables              49,473        (87,587)
  Increase in stockholder receivable                       (6,750)        (6,210)
                                                     ------------   ------------

       Net Cash Used in Investing Activities          (15,768,949)   (20,558,924)
                                                     ------------   ------------
</TABLE>

      The following are an integral part of these financial statements.

                                      F-7
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
               ------------------------------------------------


<TABLE>
<CAPTION>


                                                            For the Years Ended
                                                               December 31,
                                                        ---------------------------
                                                            1997           1996
                                                        -------------  ------------
<S>                                                     <C>            <C>

Cash Flows from Financing Activities:
  Proceeds from issuance of common stock                  10,987,254    17,751,177
  Net borrowings on line of credit                           790,554       872,000
  Proceeds from issuance of loans                          7,980,000     8,569,573
  Proceeds from senior subordinated lender                20,000,000            --
  Proceeds from stock subscription receivable                     --         8,250
  Deferred financing charge                                 (800,000)           --
  Principal payments on long-term debt                   (13,902,001)   (6,315,642)
  Principal payments on capital lease obligations         (3,671,407)   (1,395,391)
                                                        ------------   -----------

       Net Cash Provided by Financing Activities          21,384,400    19,489,967
                                                        ------------   -----------

Net increase (decrease) in cash and cash equivalents       4,896,567      (475,632)
Cash and cash equivalents, beginning of year                 229,547       705,179
                                                        ------------   -----------
Cash and cash equivalents, end of year                  $  5,126,114   $   229,547
                                                        ============   ===========
</TABLE>

      The following are an integral part of these financial statements.

                                      F-8
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
                -----------------------------------------------

                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------

                          DECEMBER 31, 1997 AND 1996
                          --------------------------


NOTE 1 - ORGANIZATION
---------------------


ORGANIZATION  Diagnostic Health Services, Inc. ("DHS") and its subsidiaries
(collectively, with DHS, the "Company") is an outsource provider of medical
services to hospitals, physicians' offices and other healthcare facilities in
the Midwest, South Central and Western United States.  Headquartered in Dallas,
Texas, DHS primarily provides radiology and cardiology diagnostics services and
equipment, and related management services to a broad range of healthcare
providers.

Acquisitions are discussed in Note 13 of these Notes to Financial Statements.

The following chart sets forth the corporate structure of the Company and its
100% owned subsidiaries at December 31, 1997:

                       [ORGANIZATION CHART APPEARS HERE]

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


                                      F-9
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Diagnostic Health Services, Inc. and its subsidiaries.  All
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.

REVENUE RECOGNITION - Revenues are recognized when services are performed and
are recorded at published charges, net of discounts and contractual allowances.
Revenues received under the Medicare program are subject to audit and possible
adjustment by third party reimbursement agencies.

CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company
considers any short-term cash investment with a maturity of three months or less
to be a cash equivalent.

INVESTMENT SECURITIES - Investment securities consist of commercial paper with a
maturity of 180 days.  All of the Company's investments are carried at cost and
classified as held-to-maturity securities.  As of December 31, 1996, cost
approximates market; hence, there were no unrealized gains or losses on
investment securities.  No realized gains or losses were recognized during the
years ended December 31, 1997 and 1996 since all securities were held to
maturity.

PREPAID EXPENSES - Prepaid expenses represent advance payments made or
liabilities incurred on various contracts and agreements with initial terms of
one year or less.  The carrying amount of prepaid expenses is determined by
comparing the remaining period of the agreement to its initial cost.

CONTRACTS RECEIVABLE - Contracts receivable represents future payments due on
long-term equipment and service agreements.  Expected profits or losses on
contracts are based on the Company's estimates of total revenue values and
related costs upon installation.  These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments resulting
from such revisions are recorded in the periods in which the revisions are made.
Losses on contracts will be recorded in full as they are identified.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Property and equipment are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets, ranging from 3 to 10 years.
Depreciation expense amounted to $3,535,037 and $2,090,648 for the years ended
December 31, 1997 and 1996, respectively.

                                     F-10
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------------

DEPOSITS AND OTHER ASSETS - Deposits and other assets include deferred finance
costs associated with the senior subordinated indebtedness which is amortized
over the life of the indebtedness.

GOODWILL - The excess of the aggregate purchase price over the fair market value
of net assets of businesses acquired is included in the accompanying balance
sheet as goodwill, and is amortized over a twenty-year period using the
straight-line method.  The Company periodically evaluates whether changes have
occurred that would require revision of the remaining estimated useful life of
the assigned goodwill or impair the recoverability of the carrying value of the
goodwill.  If such circumstances arise, the Company records an impairment loss
as the difference between the estimate of the related after-tax income
contribution, on a discounted basis, and the carrying value of the goodwill.
Any impairment loss would be reported as a component of income from continuing
operations before tax.

NONCOMPETE AGREEMENTS - Noncompete agreements are amortized over the life of the
agreements, which range from two to five years.

LONG-LIVED ASSETS - In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company records impairment losses on long-lived assets used in operations,
including goodwill and intangible assets, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
The adoption of SFAS 121 has had no material impact on the Company's financial
condition or results of operations.

INCOME TAXES - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires the use of the "liability
method" of accounting for income taxes. Deferred taxes are provided using the
liability method whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable
temporary differences.  Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.  Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.  The Company files consolidated income tax
returns.


                                     F-11
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------------

EARNINGS PER SHARE - Basic earnings per share has been computed by dividing net
income by the weighted average number of shares outstanding during the period.
Diluted earnings per share has been computed by dividing net income by the
weighted average number of shares plus common stock equivalents outstanding
during the period, computed using the treasury stock method.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash, cash
equivalents, receivables and accounts payable approximates fair value due to the
short maturity of these instruments.  The carrying value of short and long-term
debt approximates fair value based on discounting the projected cash flows using
market rates available for similar maturities.  None of the financial
instruments are held for trading purposes.

USE OF ESTIMATES AND ASSUMPTIONS - Management uses estimates and assumptions in
preparing its financial statements.  Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses.  Actual
results may vary from the estimates that were used.

STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123, "Accounting for Stock-
based Compensation" was issued.  This statement requires the fair value of stock
options and other stock-based compensation issued to employees, to either be
included as compensation expense in the income statement or the pro forma effect
on net income and earnings per share of such compensation expense to be
disclosed in the footnotes to the Company's financial statements, commencing
with the Company's 1996 fiscal year.  The Company adopted SFAS 123 on January 1,
1996.  The Company will continue to measure compensation  costs using the
"intrinsic value based method" of accounting for stock issued to employees.

NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement,
which is effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. Under this statement, the Company is
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings in the stockholders' equity section of
the balance sheet.


                                     F-12
<PAGE>

NOTE 3 - PREPAID EXPENSES
-------------------------

At December 31, 1997 and 1996, prepaid expenses consisted of the following:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                                  -----------------------
                                                                                      1997        1996
                                                                                  -----------  ----------
<S>                                                                               <C>          <C>

     Prepaid insurance                                                             $  176,708  $  171,907
     Prepaid supplies                                                                 860,279     509,471
     Other                                                                            493,538     678,218
                                                                                   ----------  ----------
                                                                                   $1,530,525  $1,359,596
                                                                                   ==========  ==========
</TABLE>

NOTE 4 - NOTES PAYABLE
----------------------

At December 31, 1997 and 1996, notes payable consisted of the following
 obligations:
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ----------------------
                                                                                      1997        1996
                                                                                   ----------  ----------
<S>                                                                                <C>         <C>
     $2,500,000 line of credit with bank, with
     interest at varying rates (9.0% at
     Secured by substantially all of the assets of
     the Company.                                                                  $2,362,554  $1,572,000
                                                                                   ----------  ----------
                                                                                   $2,362,554  $1,572,000
                                                                                   ==========  ==========
</TABLE>

In July 1996, the Company entered in a two-year loan agreement with a bank
whereby the Company is permitted to borrow up to $2,500,000 under a revolving
credit note.  This revolving note replaced the existing credit facility in place
at that time. The loan agreement (as amended) also provides for a separate term
loan facility totaling $17,500,000 in original principal amount, whose terms are
discussed in Note 5.

The Company's revolving credit and term note agreements contain certain
restrictive covenants which, among other things, (1) require the maintenance of
a minimum current ratio, (2) provide for a maximum funded debt ratio (as defined
in the loan agreement), (3) require the maintenance of a minimum fixed charge
coverage ratio (as defined in the loan agreement), and (4) place certain
restrictions on the Company's ability to declare or pay dividends, make certain
loans, advances or investments, or incur, create or assume additional debt or
other obligations.

                                     F-13
<PAGE>

NOTE 4 - NOTES PAYABLE (CONTINUED)
---------------------------------

At December 31, 1997, the Company was not in compliance with certain covenants
in its loan agreement with Chase Bank of Texas, N.A. ("Chase").  The Company did
not timely comply with the financial statement reporting and compliance
certificate covenants for two reporting periods. Additionally, the Company was
not in compliance with certain debt ratio and fixed charge coverage ratio
covenants. Chase has granted waivers or forbearance with respect to such non-
compliance at December 31, 1997, and has granted an extension of the deadlines.

NOTE 5 - LONG-TERM DEBT
-----------------------

Long-term debt at year-end consists of the following:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                              --------------------------
                                                                  1997          1996
                                                              ------------  ------------
<S>                                                           <C>           <C>
Note payable to bank in connection with acquisitions,
 maturing June 1998, due in monthly installments of
 $142,826, plus interest at varying rates (9.0% at
 December 31, 1997); secured by substantially all of
 the assets of the Company.                                   $  6,121,094  $  8,569,573

 Senior subordinated promissory notes payable in
 connection with DIS acquisitions, maturing April 17,
 2005, interest at 10.50% due in quarterly installments
 and principal of $6,666,667 due on April 17, 2003,
 2004, and 2005; unsecured.                                     20,000,000            --

 Notes payable to financial institutions, maturing through
 2000, due in monthly installments of $2,440 including
 principal and interest from 7.0% to 10.0%;  secured by
 vehicles.                                                          31,200        51,917

 Note payable to corporation, maturing May 15, 2001,
 due in monthly installments of $1,825 including principal
 and interest at 7.25%; secured by equipment.                       66,132            --

 Noncompete agreements, maturing through 1998, due
 in monthly payments of $17,083 and $27,628, respectively,
 including principal and interest of 6% to 9%; unsecured.          228,257       452,079
                                                              ------------  ------------
                                                                26,446,683     9,073,569
     Less current maturities                                    (1,485,113)   (1,991,824)
                                                              ------------  ------------
                                                              $ 24,961,570  $  7,081,745
                                                              ============  ============
</TABLE>

                                     F-14
<PAGE>

NOTE 5 - LONG-TERM DEBT (CONTINUED)
----------------------------------

Scheduled maturities of long-term debt are as follows:

          For the Years Ending
             December 31,
        -----------------------
                 1998                           $ 1,485,113
                 1999                             1,255,588
                 2000                             1,248,578
                 2001                             2,457,404
                 2002                                    --
             Thereafter                          20,000,000
                                                -----------
                                                $26,446,683
                                                ===========
NOTE 6 - LEASES
---------------

The Company, as lessee, has entered into and/or assumed various non-cancelable
leases for machinery, service equipment, vehicles, and office facilities.  The
following assets, subject to capital leases, are included in the balance sheet
under the corresponding asset categories at December 31:

                                             December 31,
                                       -------------------------
                                           1997         1996
                                       ------------  -----------

    Office furniture & equipment       $    56,783   $   56,783
    Machinery & service equipment       20,089,761    7,045,440
                                       -----------   ----------
                                        20,146,544    7,102,223
     Less: accumulated amortization     (2,687,782)    (695,199)
                                       -----------   ----------
                                       $17,458,762   $6,407,024
                                       ===========   ==========

Depreciation expense includes the amortization of assets acquired through
capital leases.

The Company leases its office space under operating lease agreements that
include a deferred rental period.  In accordance with generally accepted
accounting principles, rent expense is computed by the straight-line
amortization of the total lease payments.

                                     F-15
<PAGE>

NOTE 6  LEASES (Continued)
-------------------------

Future minimum lease payments under non-cancelable leases at December 31, 1997
are as follows:

           For the Years Ending                Capital    Operating
               December 31,                    Leases       Leases
           -------------------               -----------  ----------

                   1998                      $ 5,966,316   1,013,443
                   1999                        4,830,555     799,704
                   2000                        4,142,080     899,681
                   2001                        2,471,338     387,681
                   2002                          306,274     198,738
                Thereafter                            --       4,258
                                             -----------  ----------
  Total minimum lease payments                17,716,563  $3,303,505
                                                          ==========

    Less: amount representing interest         2,704,788
                                             -----------

  Present value of minimum lease payments     15,011,775

    Less: current portion                      4,663,279
                                             -----------
 Long-term capital lease obligation          $10,348,496
                                             ===========

Rent expense during the years ended December 31, 1997 and 1996 for all operating
leases was $1,084,054 and $758,351, respectively, and is included in operating
expenses.

NOTE 7  PREFERRED STOCK
-----------------------

The preferred stockholder is entitled to receive preferential and cumulative
annual preferred stock dividends at a rate 7.25% of liquidation preference value
of $4,500,000 and is entitled to a preference, in liquidation, in the amount of
$7 per share plus accrued and unpaid dividends.  As of December 31, 1997, there
were no cumulative preferred stock dividends in arrears. Preferred shares are
not entitled to vote except in certain circumstances.


                                     F-16
<PAGE>

NOTE 8 - EMPLOYMENT AGREEMENTS
------------------------------

The Company has entered into employment agreements, excluding corporate
executives, with certain employees from contracts established at the time a
corporation is acquired through purchase by the Company. Future minimum payments
under these employment agreements are as follows:

            For the Years Ending
                December 31,
        ----------------------------

                    1998                        $  717,683
                    1999                           370,333
                    2000                            66,367
                                                ----------
                                                $1,154,383
                                                ==========


NOTE 9 - INCOME TAXES
---------------------

The consolidated provision for income taxes included in the statement of
operations for the years ended December 31, 1997 and 1996 consisted of the
following:

                                            1997         1996
                                         ----------   ----------
Current taxes payable                    $1,363,543   $  195,000
Deferred taxes payable:
  Long term                                 882,183      869,413
  Current (benefit)                         (30,000)      (2,853)
                                         ----------   ----------
Provision for income taxes               $2,215,726   $1,061,560
                                         ==========   ==========

                                     F-17
<PAGE>

NOTE 9 - INCOME TAXES (CONTINUED)
--------------------------------

Net deferred tax assets and liabilities at December 31, 1997 and 1996 consisted
of the following:

                                                   1997        1996
                                                ----------  ----------

Deferred tax liabilities:
  Property and equipment                        $2,013,838  $  977,060
  Goodwill                                         176,403     152,501
                                                ----------  ----------
Total deferred tax liabilities                   2,190,241   1,129,561
                                                ----------  ----------
Deferred tax assets:
  Receivable allowance                              85,229          --
  Accrued vacation                                   2,647      57,876
  Noncompete agreements                            171,761      71,782
                                                ----------  ----------
Total deferred tax assets                          259,637     129,658
                                                ----------  ----------
  Net deferred tax liability                    $1,930,604  $  999,903
                                                ==========  ==========

The difference between the federal statutory tax rate and the effective tax rate
on continuing operations for the years ended December 31, 1997 and 1996 follows:

                                                   1997        1996
                                                   ----        ----
Federal Statutory Rate                               35%         35%
  Property and equipment                              5          --
  Benefit of net loss on discontinued operations     (2)         --
  Intangible assets                                  (1)          2
  Utilization of tax loss carryforwards              --         (12)
  Allowance for doubtful accounts                    (9)         --
  Other, net                                          1           5
                                                   ----        ----
Effective tax rate                                   29%         30%
                                                   ====        ====

NOTE 10 - SECONDARY OFFERING
----------------------------

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

                                     F-18
<PAGE>

NOTE 10 - SECONDARY OFFERING (CONTINUED)
---------------------------------------

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

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

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------

Cash paid for the years ended December 31, 1997 and 1996 for interest was
approximately $3,520,340 and $921,512, respectively.  Cash paid for Federal
income taxes for the years ended December 31, 1997 and 1996 amounted to $23,022
and $0, respectively.

The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with certain acquisitions. Cash
and noncash investing and financing activities related to acquisitions consisted
of the following for the years ended December 31, 1997 and 1996:

                                     1997           1996
                                 -------------  ------------
          Assets acquired        $ 30,628,401   $19,904,468
          Liabilities assumed     (11,000,061)   (6,032,525)
          Common stock issued      (3,351,000)     (851,643)
                                 ------------   -----------
          Total cash paid          16,277,340    13,020,300
          Less cash acquired         (314,493)      (16,564)
                                 ------------   -----------
          Net cash paid          $ 15,962,847   $13,003,736
                                 ============   ===========

Property and equipment acquired under capital leases for the years ended
December 31, 1997 and 1996 amounted to $14,642,967 and $5,285,069, respectively.

The Company issued 26,215 and 60,831 shares of common stock valued at $48,296
and $66,668, in 1997 and 1996, respectively, pursuant to contingent stock
issuance agreements relating to various acquisitions.

                                     F-19
<PAGE>

NOTE 12  COMMITMENTS AND CONTINGENCIES
--------------------------------------

The Company is involved in certain lawsuits arising in the ordinary course of
business.  In the opinion of the Company's legal counsel and management, any
liability resulting from such litigation would not be material in relation to
the Company's financial position.

NOTE 13 - ACQUISITIONS
----------------------

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

On June 28, 1996, MDS acquired all of the outstanding capital stock of Cardiac
Concepts, Inc.  ("CCI").  The purchase price consisted of 22,785 shares of the
Company's common stock, in consideration of which the Company received net
assets valued at approximately $150,000 including goodwill of approximately
$657,000.  On the date of the acquisition, the Company also issued 26,861 shares
of common stock in payment of approximately $177,000 of the debt and liabilities
of CCI.  The acquisition of CCI has been accounted for under the purchase method
of accounting with the purchase price being allocated to assets and liabilities
based upon their fair market value at the date of acquisition.

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

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

                                     F-20
<PAGE>

NOTE 13 - ACQUISITIONS (CONTINUED)
---------------------------------

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

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

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

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

                                     F-21
<PAGE>

NOTE 13 - ACQUISITIONS (CONTINUED)
---------------------------------

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

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

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

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

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

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

                                     F-22
<PAGE>

NOTE 14 - RELATED PARTY TRANSACTIONS
------------------------------------

A stockholder of the Company is a principal in a firm that provides financial
consulting services to the Company.  Fees paid to the firm in 1997 and 1996 were
$49,652 and $63,740, respectively.

The accounts receivable from stockholders consist of $13,543 of other advances
made to three of the Company's stockholders as of December 31, 1997 and 1996,
and $33,660 and $26,910, respectively, of accrued interest on the stockholder
receivables.

NOTE 15 - STOCK OPTION PLANS
----------------------------

On April 15, 1992, DHS adopted a stock option plan (the "1992 Plan") that
authorizes the granting of options to officers, directors and selected key
employees and/or consultants to acquire shares of DHS common stock.  The
aggregate number of shares with respect to which qualified incentive options may
be granted shall not exceed 180,702 shares, with the exercise price being not
less than the fair market value at the date of grant.  The aggregate number of
shares with respect to which non-qualified options may be granted shall not
exceed 722,807 shares.  The exercise price for the non-qualified options shall
not be less than 85% of the fair market value at the date of grant.  As of
December 31, 1997, substantially all of the available options under the 1992
Plan have been granted at exercise prices ranging from $0.9375 to $8.625 per
common share, and approximately 94% of such awarded options contain optional
price reduction provisions in connection with any change in control of the
Company.  Stock options outstanding under the 1992 Plan amounted to 639,308 and
793,585 as of the years ended December 31, 1997 and 1996, respectively.

In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan (the "1995 Non-
Qualified Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive non-qualified stock options to
purchase up to an aggregate of 500,000 shares of the Company's common stock.
The exercise price, expiration date and other terms of any options granted under
the 1995 Non-Qualified Plan are substantially similar to the requirements
applicable to non-qualified options under the 1992 Plan.  Through December 31,
1997, the Company's Board of Directors had awarded substantially all of the
available options under the 1995 Non-Qualified Plan at exercise prices ranging
from $1.9375 to $10.25 per common share.  Stock options outstanding under the
1995 Non-Qualified Plan amounted to 350,200 and 454,625 as of the years ended
December 31, 1997 and 1996, respectively. At December 31, 1997, approximately
75% of such awarded options contain optional price reduction provisions in
connection with any change in control of the Company.

                                     F-23
<PAGE>

NOTE 15 - STOCK OPTION PLANS (CONTINUED)
---------------------------------------

In November 1995, the stockholders of DHS approved the Company's 1995 Incentive
Stock Option Plan (the "1995 Incentive Plan") as previously adopted by DHS'
Board of Directors.  A total of 500,000 incentive stock options may be issued
from time to time to key employees of the Company under the 1995 Incentive Plan,
on terms and conditions (including an exercise price not less than fair market
value on the date of grant) satisfying the requirements of the Internal Revenue
Code with respect to incentive stock options.  Through December 31, 1997, the
Company's Board of Directors had awarded 298,800 options under the 1995
Incentive Plan at exercise prices ranging from $6.25 to $10.6875 per common
share.  Stock options outstanding under the 1995 Incentive Plan amounted to
159,789 and 127,250 as of the years ended December 31, 1997 and 1996,
respectively.

In January 1997, the Board of Directors of the Company adopted and approved the
Company's 1997 Non-Qualified Stock Option Plan (the "1997 Non-Qualified Plan"),
pursuant to which officers, directors, and/or key employees and/or consultants
of the Company can receive non-qualified stock options to purchase up to an
aggregate of 1,000,000 shares of the Company's common stock.  The exercise
price, expiration date and other terms of any options granted under the 1997
Non-Qualified Plan are substantially similar to the requirements applicable to
non-qualified options under the 1992 Plan. Through December 31, 1997, the
Company's Board of Directors had awarded, under the 1997 Non-Qualified Plan,
stock options for an aggregate of 696,061 common shares at exercise prices
ranging from $7.4375 to $10.6875 per common share.  Stock options outstanding
under the 1997 Non-Qualified Plan amounted to 657,161 as of the December 31,
1997. At December 31, 1997, approximately one-third of such awarded options
contain optional price reduction provisions in connection with any change in
control of the Company.

                                     F-24
<PAGE>

NOTE 15 - STOCK OPTION PLANS (CONTINUED)
---------------------------------------
A summary of the status of stock options is set forth below:

                                        Year ended             Year ended
                                     December 31, 1997      December 31, 1996
                                   ---------------------  ---------------------
                                                Weighted               Weighted
                                                Average                Average
                                                Exercise               Exercise
Stock Options                        Shares      Price      Shares      Price
-------------                      -----------  --------  -----------  --------

Outstanding, beginning of period    1,375,460      $3.81   1,215,401      $2.55
Granted                               897,890      $8.88     234,500      $6.30
Exercised                            (399,452)     $4.67      (1,125)     $3.65
Forfeited/expired                     (67,440)     $5.70     (73,316)     $2.96
                                   ----------             ----------

Outstanding, end of period          1,806,458      $7.53   1,375,460      $3.81
                                   ==========             ==========

Options exercisable, end of period  1,806,458      $7.53   1,358,960      $3.75
                                   ==========             ==========

Weighted average fair value of
options granted during the year         $8.88                  $6.30
                                   ==========             ==========

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

<TABLE>
<CAPTION>
                                     Options Outstanding                              Options Exercisable
                    ----------------------------------------------------  --------------------------------------------
                                      Weighted Average
 Range of Exercise      Options           Remaining     Weighted Average  Options Exercisable at    Weighted Average
 Prices             Outstanding at    Contractual Life   Exercise Price          12/31/97            Exercise Price
                       12/31/97
------------------------------------------------------------------------  --------------------------------------------
<S>                 <C>               <C>               <C>               <C>                       <C>
$0.9375 to $3.00        737,308              3.67            $ 1.94               737,308                 $ 1.94
$3.01 to $5.50          157,000              5.91            $ 4.48               157,000                 $ 4.48
$5.51 to $7.50          383,350              5.87            $ 7.18               383,350                 $ 7.18
$7.51 to $10.00         248,800              5.96            $ 8.12               248,800                 $ 8.12
$10.01 to $13.00        280,000              6.03            $10.69               280,000                 $10.69
                    -----------                                               -----------
                      1,806,458              5.26            $ 7.48             1,806,458                 $ 7.48
                    ===========                                               ===========
</TABLE>

                                     F-25
<PAGE>

NOTE 15 - STOCK OPTION PLANS (CONTINUED)
---------------------------------------

Vesting varies by agreement ranging from zero to three years.  Compensation
costs will be recognized as an expense over the periods of employment
attributable to the options at an amount equal to the excess of the fair market
value of the stock at the date of measurement over the amount the employee must
pay.  The measurement date is generally the grant date.  As of December 31, 1997
and 1996, no compensation cost was recognized as expense.  Had compensation cost
for the Company's stock-based compensation been determined on the fair value at
the grant dates for awards with the method of FASB Statement 123, the Company's
net income would have been $4,545,538 and $2,410,489 for the years ended
December 31, 1997 and 1996, respectively.  Accordingly, basic and diluted
earnings per share would have amounted to $0.36 per share and $0.31 per share,
respectively, as of December 31, 1996.  Accordingly, basic and diluted earnings
per share would have amounted to $0.48 per share and $0.47 per share,
respectively, as of December 31, 1997.

On October 31, 1997, the Company filed an S-8 registration statement with the
Securities and Exchange Commission registering an aggregate of 2,867,509 shares
underlying the Company's stock option plans, for which options covering
1,789,660 shares were then outstanding.  Executive officers and directors, who
collectively held approximately 71% of the outstanding options and option
shares, agreed to certain restrictions on the resale of their option shares
during the one-year period following the effective date of the registration.

NOTE 16 - WARRANTS
------------------

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

                                     F-26
<PAGE>

NOTE 16  WARRANTS (CONTINUED)
----------------------------

On April 17, 1997, the Company issued 60,000 common stock purchase warrants to
Prudential Insurance Company of America in connection with the sale of
$20,000,000 in principal amount of senior subordinated promissory notes.  As of
December 31, 1997, no warrants under this agreement had been exercised.  At
December 31, 1997, stock warrants outstanding amounted to 386,150, at exercise
prices ranging from $5.48 to $12.25 per common share.

NOTE 17  EARNINGS PER SHARE
---------------------------

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:

                                         For the year ended December 31, 1997
                                        --------------------------------------
                                           Income        Shares      Per Share
                                        (Numerator)   (Denominator)   Amount
                                        ------------  -------------  ---------
Income before extraordinary item         $5,433,595
Less: preferred stock dividend                  (47)
                                         ----------

BASIC EARNINGS PER SHARE
Income available to common stockholders  $5,433,548      9,527,736       $0.57
                                                                     =========

EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock                      47        695,593
Stock warrants                                   --        156,993
Employee stock options                           --        841,036
                                         ----------     ----------

DILUTED EARNINGS PER SHARE
Income available to common stockholders
  plus assumed conversions               $5,433,595     11,221,358       $0.48
                                         ==========     ==========   =========

                                     F-27
<PAGE>

NOTE 17  EARNINGS PER SHARE (Continued)
---------------------------------------

                                          For the year ended December 31, 1996
                                         --------------------------------------
                                            Income        Shares      Per Share
                                         (Numerator)   (Denominator)   Amount
                                         ------------  -------------  ---------

Income before extraordinary item          $2,459,083
Less:  preferred stock dividend                   (6)
                                          ----------

BASIC EARNINGS PER SHARE
Income available to common stockholders   $2,459,077      6,709,795       $0.37
                                                                      =========

EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock                        6        648,986
Stock warrants                                    --        126,463
Contingent stock options                          --         58,935
Employee stock options                            --        902,156
                                          ----------      ---------

DILUTED EARNINGS PER SHARE
Income available to common stockholders
  plus assumed conversions                $2,459,083      8,446,335       $0.29
                                          ==========      =========   =========

Options to purchase 5,000 shares of common stock at $7.50 per share were
outstanding at December 31, 1996, but were not included in the computation of
diluted earnings per share because the options had an antidilutive effect on
earnings per share. As of December 31, 1997, warrants to purchase 60,000 shares
of common stock at $12.25 per share were outstanding but were not included in
the computation of diluted earnings per share because the options had an
antidilutive effect on earnings per share.

NOTE 18  EMPLOYEE BENEFIT PLAN
------------------------------

Effective March 31, 1997, the Company adopted a defined contribution pension
plan for all eligible employees.  The plan provides for savings contributions by
employees of 1 to 15% of the their compensation, subject to limitations of the
Employee Retirement Income Security Act.  The Company may, at its discretion,
make a matching contribution and/or discretionary contribution to the plan, both
of which shall be determined by the Board of Directors.  Such contributions are
expenses and funded currently.  The Company made no discretionary contributions
during the year ended December 31, 1997.

                                     F-28
<PAGE>

NOTE 19  DISCONTINUED OPERATIONS
--------------------------------

In December 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of HomeCare International de Mexico S.A. de C.V. ("HomeCare.")
On December 30, 1997, the Company sold all of the outstanding stock of HomeCare
and terminated all operations within Mexico.  Accordingly, the loss of $392,674,
net of tax benefit, from the disposal of a business segment has been segregated
from continuing operations and reported as separate line item on the statement
of operations.  The net operating activity of HomeCare after the measurement
date through date of disposal on December 30, 1997, was not significant.

In November 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of providing temporary placement with allied healthcare
professionals throughout the U.S. and Mexico.  Effective as of December 1, 1997,
the Company sold certain assets associated with this business segment.
Accordingly, the gain of $65,738, net of tax expense, from the disposal of a
business segment has been segregated from continuing operations and reported as
separate line item on the statement of operations.  The net operating activity
of this segment after the measurement date through date of disposal on December
1, 1997 was not significant.

NOTE 20  SUBSEQUENT EVENTS
--------------------------

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

                                     F-29
<PAGE>

NOTE 20  SUBSEQUENT EVENTS (CONTINUED)
-------------------------------------

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

In March, 1998, DIS-Delaware agreed, in principal, to convert $1,500,000
deferred liabilities owed in accordance with the acquisition of the MRI centers
to common stock; therefore, the deferred liabilities were recorded as current
liabilities at December 31, 1997.

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

                                     F-30
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None

                                      14
<PAGE>

                                   PART III
                                   --------


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS


EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors, and key employees of the Company are as
follows:

Name                        Age                 Position
----                        ---                 --------
Max W. Batzer (1)            54  Chairman of the Board of Directors and
 Chief Executive Officer

Brad A. Hummel (2)           41  Director, President, Chief Operating
 Officer and Director

Thomas M. Sestak (1)(2)      55  Director

Bo W. Lycke (1)(2)           52  Director

James R. Angelica            50  Director and Senior Vice President

Bonnie G. Lankford           42  Sr. Vice President - Operations

Don W. Caughron              42  Vice President - Finance

Carol J. Gannon              38  Sr. Vice President - Clinical Services

Christopher L. Turner        37  Chief Financial Officer

Mark J. Foley                35  Vice President - Sales and Marketing

--------------------
(1)  Member of the compensation committee
(2)  Member of the audit committee

The Board of Directors of the Company is divided into three classes of an equal
(or as nearly equal as possible) number of Directors, with each Director serving
for a term of three years, and with elections for only one class of directors to
be held in each year.  Mr. Batzer's and Mr. Angelica's seats next come up for
election on or about May 31, 1998, Mr. Sestak's and Mr. Lycke's seats next come
up for election on or about May 31, 1999, and Mr. Hummel's seat next comes up
for election on or about May 31, 2000.

The following is a summary of the business experience of each executive officer,
director and key employee.

Max W. Batzer has been Chairman of the Board and Chief Executive Officer of the
Company since 1987, and a stockholder and Director of the Company since its
inception in 1983.  From 1981 to 1991, Mr. Batzer was also President of General
Hide & Skin Corporation, a worldwide commodity trading organization
headquartered in New York City.  In addition, Mr. Batzer has also, at various
times during the past 20 years, worked as an analyst for Pan American World
Airways, served as Vice President for Marketing for World Courier Inc., and
served as a director and executive committee member of Simmons Airlines, Inc.
(which was a publicly traded company that was purchased by and is now a

                                      15
<PAGE>

subsidiary of American Airlines).  Mr. Batzer holds a B.S.E. degree from The
Wharton School at the University of Pennsylvania, and a M.B.A. degree from the
University of Arizona.

Brad A. Hummel has been President and Chief Operating Officer of the Company
since January 1987, and Chief Financial Officer of the Company since February
1994, and was employed by the Company in other capacities from 1984 to 1986.
From 1981 to 1984, Mr. Hummel was an associate with Covert, Crispin and Murray
(a Washington, D.C. and London-based management consulting firm), and from 1979
to 1981, Mr. Hummel served as an executive assistant to United States Senator
John C. Culver.  Mr. Hummel holds a bachelor's degree (with honors) from the
University of Iowa.

Thomas M. Sestak has been a Director of the Company since its inception in 1983,
and was the Secretary of the Company from November 1987 to March 1993.  Mr.
Sestak has also been employed since 1972 as the Chairman and Chief Executive
Officer of Standard Construction of San Francisco, Inc. (a general construction
contractor operating in the greater San Francisco area). Mr. Sestak holds a
B.S.E. degree from The Wharton School at the University of Pennsylvania.

Bo W. Lycke has been a Director of the Company since April 1993.  Since February
1991, Mr. Lycke has been employed as Chairman of the Board and Chief Executive
Officer of Claimsnet.com and its affiliate, National Financial Corporation, each
of which is engaged in providing financial services to various medical
businesses.  Mr. Lycke holds a M.B.A. degree from the University of Goteborg,
Sweden.

James R. Angelica was appointed a Director and Vice President-Sales of the
Company in September 1994, upon the consummation of the Company's acquisition of
Mobile Diagnostic Imaging, Inc. ("MDI"), and was promoted to Senior Vice
President in January 1996.  From June 1991 through September 1994, Mr. Angelica
was the President and Chief Operating Officer of MDI.  From June 1990 through
June 1991, Mr. Angelica was an Executive Vice President of Cost Management
Technologies, a third-party insurance claims administrator headquartered in St.
Louis.  From May 1981 through January 1990, Mr. Angelica was an Executive Vice
President of Group Health Plan, a health insurance administrator headquartered
in St. Louis.  Mr. Angelica holds a bachelor's degree in business administration
from Pacific University.

Bonnie G. Lankford has been Vice President-Operations of the Company since
January 1996, and has been employed in other management capacities by the
Company at all times since 1985. Ms. Lankford has received a certification in
echocardiography from Grossmont College, and is a registered diagnostic medical
sonographer in both echocardiology and obstetrics/gynecology.

Don W. Caughron has been Vice President-Finance of the Company since January
1996, and has been employed in other financial capacities with the Company at
all times since April 1994. From May 1993 to April 1994, Mr. Caughron was a
self-employed accountant. From 1990 to 1993, Mr. Caughron was Corporate
Controller for Actuarial Computer Technology, Inc., a privately held Dallas-
based actuarial computer software company. Mr. Caughron is a Certified Public
Accountant in the State of Texas, and a member of the Texas Society of CPA's as
well as the American Institute of CPA's. Mr. Caughron holds a B.B.A. degree from
Texas Tech University.

Carol J. Gannon was appointed Senior Vice President of Clinical Services in
January 1996, upon the consummation of the Company's acquisition of Advanced
Diagnostic Imaging, Inc. ("ADI").  Ms. Gannon was the President and Chief
Operating Officer of ADI from September 1990 to December 1995.  She is a
registered nurse with additional ultrasound registries in vascular technology
and cardiac stenography.  From 1991 to 1995, she served on the Board of
Directors and the Executive Committee of the Society of Vascular Technology.
Ms. Gannon holds an Associate Degree in nursing from Rochester (Minnesota)
Community College.

                                      16
<PAGE>

Christopher L. Turner has been Chief Financial Officer of the Company since
April 1997.  Prior to joining the Company, Mr. Turner was a self-employed
certified public accountant from 1992 to 1997, and shareholder in the Dallas,
Texas firm of Turner & Turner, P.C.  Mr. Turner began his career as an internal
auditor for Interfirst Bank, and also worked for the Texas firm of Philip Vogel
& Co., and the national public accounting firm Grant Thornton.  He is a member
of the American Institute of Certified Public Accountants (AICPA) and the Texas
Society of Certified Public Accountants (TSCPA) where he has been active on
various committees.  Mr. Turner received his BSBA from Missouri Southern State
College in 1983, Master of Accountancy from the University of Missouri in 1984,
and was granted his CPA license in 1985.

Mark J. Foley has been Vice President - Sales and Marketing of the Company since
April 1997.  Prior to joining the Company, Mr. Foley was General Manager
(Midwest Region) of the Diagnostic Services Division of National Medical Care,
Inc. (and its predecessor company, Mediq Imaging Services) from 1989 to 1997,
where he was responsible for one of that company's largest geographic
territories.  He received a B.S. in Business Administration from Fitchburg State
College in 1984, and a M.B.A., Concentration in Marketing from the University
of Massachusetts, Boston, in 1994.

The Company is not aware of any person who, at any time during the fiscal year
ended December 31, 1997, was a director, officer, or beneficial owner of more
than 10% of the Company's common stock that failed to timely file any reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year, or prior years, except that (a) following the consummation of the
Company's initial public offering in June 1993, each of the directors and
officers of the Company was late in filing his or her Form 3 (all of which
filings have since been made), and (b) Christopher L. Turner and Mark J. Foley
were late in filing their respective Form 3s upon their becoming executive
officers of the Company (both of which filings have since been made).

ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth the amount of all compensation paid by the
Company to its Chief Executive Officer and its four most highly compensated
executive officers (the "Named Officers") during the past three calendar years:
<TABLE>
<CAPTION>

                                                         Other       Restricted
                                                        Annual         Stock     Options/    LTIP       All Other
Name & Principal Position    Year  Salary   Bonus   Compensation(1)    Awards    SAR's (#)  Payouts  Compensation(2)
--------------------------------------------------------------------------------------------------------------------
<S>                          <C>   <C>      <C>     <C>              <C>         <C>        <C>      <C>

Max W. Batzer                1997  345,000  15,000             0              0   210,000         0             0
Chairman and CEO             1996  305,900  20,000             0              0         0         0             0
                             1995  231,000   7,500             0              0    75,000         0             0

Brad A. Hummel               1997  260,000  10,000             0              0   183,000         0       269,389
President and COO            1996  225,570  15,000             0              0         0         0             0
                             1995  173,133   7,500             0              0    30,000         0             0

Christopher L. Turner (3)    1997  103,125       0             0              0   150,000         0        24,640
Chief Financial Officer      1996       --      --             0              0         0         0             0
                             1995       --      --             0              0     3,000         0             0

Carol J. Gannon              1997  133,750       0             0              0    35,000         0             0
Sr. V.P. - Clinical Services 1996   85,102       0        65,000              0         0         0             0
                             1995    7,433       0             0              0         0         0             0

Bonnie G. Lankford           1997  135,000  16,000             0              0    45,000         0       121,585
Sr. V.P. - Operations        1996   99,420       0             0              0         0         0             0
                             1995  103,750       0             0              0    34,000         0             0

</TABLE>
--------------------

                                      17
<PAGE>

(1)  Does not include benefits or perquisites in an aggregate amount, as to each
person, which is less than the lesser of $50,000 or 10% of the total salary and
bonus for the subject year.

(2)  Represents compensation arising from the exercise of non-qualified stock
options.

(3)  Represents compensation from commencement of such individual's employment
in 1997.

A table detailing the stock options granted to Named Officers and directors is
included under the heading "Stock Option Plans" below.

The Company does not pay directors' fees.  Rather, the Compensation Committee of
the Company's Board of Directors is authorized to consider the grant of non-
qualified stock options to members of the Board, consistent with the Company's
philosophy of incentivizing directors to foster, contribute to and participate
in the Company's growth.

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with Max W. Batzer, pursuant to which
Mr. Batzer is to serve as Chairman of the Board and Chief Executive Officer of
the Company through December 31, 2002.  The employment agreement provides for a
minimum base salary of $414,000 per annum, and benefits comparable to those
provided to other Company employees.  Although Mr. Batzer presently devotes his
full business time to the Company, his employment agreement permits him to
engage in other business activities that are not competitive with the business
of the Company and that do not materially interfere with his performance of his
duties and responsibilities to the Company.

The Company has an employment agreement with Brad A. Hummel, pursuant to which
Mr. Hummel is to serve as President and Chief Operating Officer of the Company
through December 31, 2002.  The employment agreement provides for a minimum base
salary of $310,500 per annum, and benefits comparable to those provided to other
Company employees.  The agreement further provides for Mr. Hummel to devote
substantially all of his business time to the performance of his duties and
responsibilities to the Company.

Each of Mr. Batzer's and Mr. Hummel's employment agreements grants to the
subject employee the right to elect, within one year after any change in control
of the Company, to terminate his employment on not less than 90 days' prior
written notice, and thereafter receive his salary and benefits for a period of
24 months or to the scheduled expiration date of such employment agreement
(whichever is later).  Such salary continuation is also applicable in the event
that the Company terminates such individual's employment (other than "for
cause") within one year after any change in control of the Company.  For
purposes of such agreements, a "change in control" is deemed to occur at such
time as 20% of the total outstanding votes eligible to vote for directors of the
Company are owned (legally or beneficially) by any person (or group of persons
acting in concert) who was not a stockholder of the Company as of March 13,
1996.

The Company also has employment agreements with James R. Angelica, Bonnie G.
Lankford, Carol J. Gannon, Christopher L. Turner and Mark J. Foley.  Mr.
Angelica's employment agreement (as amended) calls for him to serve as a Senior
Vice President of the Company through August 31, 1998, at a base salary of
$160,000 per annum, and benefits comparable to those provided to other Company
employees.  Ms. Lankford's employment agreement (as amended) calls for her to
serve as Senior Vice President-Operations of the Company through December 31,
1999, at a minimum base salary of $150,000 per annum, and benefits comparable to
those provided to other Company employees.  Ms. Gannon's employment agreement
calls for her to serve as Senior Vice President - Clinical Services of the
Company through December 31, 1998, and provides for a fixed annual salary of
$150,000 per annum, and benefits comparable to those provided to other Company
employees.  Mr. Turner's employment agreement calls for him to serve as Chief
Financial Officer of the Company through March 31, 1999, and provides for a
fixed annual salary of $165,000 per annum and benefits comparable to

                                      18
<PAGE>

those provided to other Company employees. Mr. Foley's employment agreement
calls for him to serve as Vice President - Sales and Marketing of the Company
through May 31, 1999, and provides for a fixed annual salary of $135,000 per
annum, commissions on certain new account revenues in excess of business
development budgets, and benefits comparable to those provided to other Company
employees.

Any increases in the annual rates of compensation of Messrs. Batzer, Hummel and
Angelica under their employment agreements must be approved by a majority of
both the disinterested directors and the Compensation Committee of the Company's
Board of Directors.

STOCK OPTION PLANS

On April 15, 1992, the stockholders of the Company approved the Company's 1992
Stock Option Plan, as previously adopted by the Company's Board of Directors
(the "1992 Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive incentive stock options and non-
qualified stock options to purchase up to an aggregate of 903,509 shares of the
Company's Common Stock (of which no more than 180,702 shares may be pursuant to
qualified incentive stock options, and no more than 722,807 shares may be
pursuant to non-qualified stock options).  There are currently outstanding,
under the 1992 Plan, stock options for an aggregate of 610,685 shares of common
stock at exercise prices ranging from $.93 to $8.625 per share, and expiring at
various times from January 1999 through April 2005.  The weighted average
exercise price under such options is approximately $1.97 per share.  The
exercise prices applicable under such outstanding stock options represent not
less than 100% of the fair market value of the underlying Common Stock as of the
date that such options were granted, as determined from the closing bid price
most recently quoted in the over-the-counter "pink sheets" or on the National
Association of Securities Dealers, Inc.  Automated Quotation System ("NASDAQ")
prior to the date that such options were granted.

With respect to incentive stock options, the 1992 Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock), and
requires that all such options have an expiration date not later than that date
which is one day before the tenth anniversary of the date of the grant of such
options (or the fifth anniversary of the date of grant in the case of 10%
stockholders).  However, with certain limited exceptions, in the event that the
option holder ceases to be associated with the Company, or engages in or is
involved with any business similar to that of the Company, such option holder's
incentive options immediately terminate.  Pursuant to the 1992 Plan, the
aggregate fair market value, determined as of the date(s) of grant, for which
incentive stock options are first exercisable by an option holder during any one
calendar year cannot exceed $100,000.

With respect to non-qualified stock options, the 1992 Plan requires that the
exercise price of all such options be at least equal to 100% of the fair market
value of the Common Stock on the date such option is granted, provided that non-
qualified options may be issued at a lower exercise price (but in no event less
than 85% of fair market value) if the net pre-tax income of the Company in the
full fiscal year immediately preceding the date of the grant of such option (the
"Prior Year") exceeded 125% of the mean annual average net pre-tax income of the
Company for the three fiscal years immediately preceding such Prior Year.  Non-
qualified options must have an expiration date not later than that date which is
the day before the eighth anniversary of the date of the grant of the subject
option.  However, with certain limited exceptions, in the event that the option
holder ceases to be associated with the Company, or engages in or becomes
involved with any business similar to that of the Company, such option holder's
non-qualified options immediately terminate.

The 1992 Plan further provides that non-qualified options may (but need not)
include a provision that, in the event of any change in control and management
of the Company or any sale of the business of the Company, except to the extent
that the subject option holder affirmatively elects, during a limited period of
time following such event, to permanently revoke and terminate the subject non-
qualified option (in

                                      19
<PAGE>

whole or in part) and/or to reaffirm all or any portion of such non-qualified
option without giving effect to the reduction in exercise price herein
described, then the otherwise applicable exercise price in respect of such
option may thereafter be reduced (but not by more than 50%) in the event that,
and at such time(s) as, the subject option holder thereafter exercises such
option (or the non-revoked and non-reaffirmed portion thereof, as the case may
be). Substantially all of the 572,135 outstanding non-qualified options under
the 1992 Plan contain such provision, and this could have the effect of delaying
or hindering potential change in control or sale transactions, and/or providing
additional compensation or consideration to the subject option holders in
connection with any such transaction that may be consummated.

In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan (the "1995 Non-
Qualified Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive non-qualified stock options to
purchase up to an aggregate of 500,000 shares of the Company's common stock.
The exercise price, expiration date and other terms of any options granted under
the 1995 Non-Qualified Plan are substantially similar to the requirements
applicable to non-qualified options under the 1992 Plan.  As of March 19, 1998,
there were outstanding, under the 1995 Non-Qualified Plan, stock options for an
aggregate of  308,950 shares of common stock at exercise prices ranging from
$1.93 to $10.25 per share, and expiring at various times from December 2000
through  January 2006.  The weighted average exercise price under such options
is $4.11 per share.  Approximately 75% of the outstanding options under the 1995
Non-Qualified Plan contain price reduction provisions similar to those described
in the immediately preceding paragraph.

The Company also maintains a 1995 Incentive Stock Option Plan ("the 1995
Incentive Plan"), as approved by the Company's stockholders on November 22,
1995, pursuant to which key employees of the Company can receive incentive stock
options to purchase up to an aggregate of 500,000 shares of common stock of the
Company.  The requirements of the 1995 Incentive Plan are substantially
identical to the provisions of the 1992 Plan which are specifically applicable
to incentive stock options, except that the 1995 Incentive Plan will expire on
August 31, 2005 (after which date no further options may be granted under the
1995 Incentive Plan).  As of March 19, 1998, there were outstanding, under the
1995 Incentive Plan, stock options for an aggregate of 147,539 shares of common
stock at exercise prices ranging from $6.25 to $10.69 per share, and expiring at
various times from July 2001 through December 2002.  The weighted average
exercise price under such options is $8.72 per share.

In January 1997, the Board of Directors of the Company adopted the Company's
1997 Non-Qualified Stock Option Plan (the "1997 Non-Qualified Plan"), pursuant
to which officers, directors and/or key employees and/or consultants of the
Company can receive non-qualified stock options to purchase up to an aggregate
of 1,000,000 shares of the Company's Common Stock.  The exercise price,
expiration date and other terms of any options granted under the 1997 Non-
Qualified Plan are substantially similar to the requirements applicable to non-
qualified options under the 1992 Plan.  As of March 19, 1998, there were
outstanding, under the 1997 Non-Qualified Plan, options for an aggregate of
649,911 shares of Common Stock at exercise prices ranging from $7.44 to $10.69
per share and expiring at various times from January 2005 through December 2005.
The weighted average exercise price under such options is $8.71 per share.
Approximately one-third of such options contain price reduction provisions
similar to those described above.

The table set forth below lists information on stock options granted to each of
the Company's Named Officers and directors during the year ended December 31,
1997.

                                      20
<PAGE>

<TABLE>
<CAPTION>

                                                   Percent of
                                                Total Options
                                                   Granted to  Exercise
                           Type of     Number    Employees In      Price         Expiration
Name                        Option  of Shares     Fiscal Year  Per Share               Date
-------------------------------------------------------------------------------------------
<S>                  <C>            <C>        <C>             <C>        <C>
Max W. Batzer        Non-qualified    100,000           16.0%     $ 7.44    January 2, 2005
                         Qualified     10,000            1.6%     $ 8.00        May 1, 2002
                         Qualified     11,221            1.8%     $10.69  December 21, 2002
                     Non-qualified     88,779           14.2%     $10.69  December 21, 2005

Brad A. Hummel       Non-qualified     75,000           12.0%     $ 7.44    January 2, 2005
                         Qualified      8,000            1.3%     $ 8.00        May 1, 2002
                         Qualified     12,718            2.0%     $10.69  December 21, 2002
                     Non-qualified     87,282           13.9%     $10.69  December 21, 2005

Thomas M. Sestak     Non-qualified      5,000            N/A      $ 7.44        May 1, 2005
                     Non-qualified     10,000            N/A      $10.69  December 21, 2005

Bo W. Lycke          Non-qualified      5,000            N/A      $ 7.44    January 2, 2005
                     Non-qualified     10,000            N/A      $10.69  December 21, 2005

James R. Angelica    Non-qualified     10,000            1.6%     $ 7.44    January 2, 2005
                         Qualified      1,000            0.2%     $ 8.00        May 1, 2002
                         Qualified     12,000            1.9%     $10.69  December 21, 2002
                     Non-qualified      8,000            1.3%     $10.69  December 21, 2005

Christopher L.       Non-qualified    150,000           24.0%     $ 8.19      April 3, 2005
Turner

Carol J. Gannon      Non-qualified     15,000            2.4%     $ 7.44    January 2, 2005
                         Qualified      5,000            0.8%     $ 8.00        May 1, 2002
                         Qualified      9,000            1.4%     $10.69  December 21, 2002
                     Non-qualified      6,000            1.0%     $10.69  December 21, 2005

Bonnie G.            Non-qualified     25,000            4.0%     $ 7.44    January 2, 2005
Lankford                 Qualified      5,000            0.8%     $ 8.00        May 1, 2002
                         Qualified      9,000            1.4%     $10.69  December 21, 2002
                     Non-qualified      6,000            1.0%     $10.69  December 21, 2005

</TABLE>
Through December 31, 1997, a total of 399,452 stock options granted under the
Plans had been exercised (214,875 by executive officers and directors).

The following table sets forth all stock option exercises by Named Officers and
directors of the Company during the fiscal year ended December 31, 1997, the
"value" (i.e., the amount by which the fair market value of the underlying
common stock exceeded the option exercise price on the date of exercise)
realized upon such exercises, the number of remaining options held by Named
Officers and directors of the Company as of December 31, 1997, and the "value"
(i.e., the amount by which the fair market value of the underlying common stock
exceeded the option exercise price) as of December 31, 1997 of all unexercised
stock options then held by Named Officers and directors of the Company.  All of
such stock options were then and now are currently exercisable.

                                      21
<PAGE>

<TABLE>
<CAPTION>
                        Shares                           Number of               Value of Unexercised
                       Acquired         Value           Unexercised                  In-The-Money
Name                 on Exercise      Realized   Options at Fiscal Year End   Options at Fiscal Year End
----                 -----------      --------   --------------------------   --------------------------
<S>                  <C>              <C>        <C>                          <C>
Max W. Batzer           13,582        $138,784             505,505                     $3,518,649
Brad A. Hummel          70,582        $778,574             352,645                     $2,058,796
Thomas M. Sestak        15,000        $127,163             181,645                     $1,637,946
Bo W. Lycke              8,200        $ 87,088              83,800                     $  688,788
James R. Angelica       38,000        $298,500              20,000                     $   22,500
Christopher L. Turner    3,000        $ 25,188             150,000                     $  543,750
Carol J. Gannon              0              --              35,000                     $  101,563
Bonnie G. Lankford      44,702        $525,375              82,209                     $  678,750

</TABLE>

Prior to April 16, 1993, the 1992 Plan was administered by the Company's Board
of Directors.  Beginning on April 16, 1993, administration of the 1992 Plan was
delegated to the Compensation Committee of the Company's Board of Directors,
which has wide discretion in determining the recipients of options, the amounts
of options awarded, and various other terms and conditions applicable to options
granted under the 1992 Plan.  The 1995 Non-Qualified Plan, the 1995 Incentive
Plan and the 1997 Non-Qualified Plan have at all times been administered by the
Compensation Committee, which has similar wide discretion in the administration
thereof.  In determining whether and to what extent specific employees or
consultants will be awarded options, the Compensation Committee takes into
account the value of the specific individual's services to the Company, the
individual's time in service, the long-term prospects for the individual to
handle additional responsibilities within the Company, and such other factors as
the Compensation Committee may deem relevant in order to reward and motivate the
Company's employees and consultants.


                                      22
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT

The following table sets forth, as of March 19, 1998, the number of shares of
the Company's Common Stock owned by each person (including any "group" as used
in Section 13(d)(3) of the Exchange Act) known to the Company to be the
beneficial owner of more than five percent of the Company's common stock, each
director of the Company, and all directors and executive officers of the Company
as a group.

                                                  Beneficially
Name and Address of Beneficial Owner                 Owned        Percentage
------------------------------------              ------------    ----------

Max W. Batzer                                       660,255(1)        5.7%
 2777 Stemmons
 Dallas, Texas 75207
Thomas M. Sestak                                    308,066(2)        2.7%
 1226 Ninth Avenue
 San Francisco, California 94122
Brad A. Hummel                                      361,238(3)        3.2%
 2777 Stemmons
 Dallas, Texas 75207
Bo W. Lycke                                          84,800(4)        0.8%
 2777 Stemmons
 Dallas, Texas 75207
James R. Angelica                                   414,052(5)        3.7%
 9717 Landmark Parkway Drive
 St. Louis, Missouri 63127

All directors and executive officers
 as a group (ten persons)             2,359,222(1)(2)(3)(4)(5)       19.0%

--------------------
(1) Includes 505,505 shares which are subject to currently exercisable stock
    options.
(2) Includes 452 shares held by Mr. Sestak as custodian for his minor children,
    and 181,645 shares which are subject to currently exercisable stock options.
(3) Includes 352,645 shares which are subject to currently exercisable stock
    options.
(4) Includes 83,800 shares which are subject to currently exercisable stock
    options.
(5) Includes 20,000 shares which are subject to currently exercisable stock
    options. Of the 394,052 outstanding shares, 356,052 are held jointly by Mr.
    Angelica and his spouse.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In October 1989, Max W. Batzer, Thomas M. Sestak and Brad A. Hummel borrowed
$66,000, $10,000 and $33,000, respectively, from the Company.  The proceeds of
these loans were utilized by Messrs. Batzer, Sestak and Hummel to purchase
shares of common stock.  The loans were amended and restated as of January 1,
1993, such that the loans now bear simple interest at a certain bank's prime
rate (adjusted annually for purposes of the loans), with payment of all
principal and accrued interest due on December 31, 2000.  Mr. Sestak's loan was
repaid in full in October 1993.  Mr. Batzer's and Mr. Hummel's loans are non-
recourse, and are secured solely by shares of common stock of the Company
having an aggregate market value equal to 50% of the outstanding loan
obligations (provided that the number of shares pledged as collateral will never
exceed the number of shares (185,265 in the case of Mr. Batzer, and 92,633 in
the case of Mr. Hummel) purchased with the proceeds of the loans.  The Company
has retained a right of first refusal in connection with any proposed sale of
the pledged shares

                                      23
<PAGE>

while they remain subject to such pledge, although the Company is prohibited,
under its loan agreement with Chase Bank of Texas, N.A. ("Chase"), to redeem or
purchase any shares of its common stock without Chase's prior consent.

In April 1996, in connection with the Company's private placement of the Bridge
Notes and Bridge Warrants, an aggregate of $50,000 of Bridge Notes and 2,500
Bridge Warrants were purchased by James R. Angelica, $100,000 of Bridge Notes
and 5,000 Bridge Warrants were purchased by Thomas M. Sestak, and $50,000 of
Bridge Notes and 2,500 Bridge Warrants were purchased by Carol J. Gannon. All of
such Bridge Notes have since been repaid, and all of such Bridge Warrants have
since been exercised.

                                      24
<PAGE>

ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K

Exhibits          Description of Exhibit
--------          ----------------------
3.1               Certificate of Incorporation of the Company, as amended. (1)

3.2               By-Laws of the Company. (1)

3.3               Certificate of Amendment of Certificate of Incorporation of
                  the Company, authorizing preferred stock of the Company. (2)

3.4               Certificate of Stock Designation, creating Series A Preferred
                  Stock. (4)

4.1               1992 Stock Option Plan, including forms of qualified incentive
                  stock option agreement and non-qualified stock option
                  agreement. (1)

4.2               Form of Underwriter's Warrant. (1)

4.3               Specimen Form of Share Certificate. (1)

4.4               1995 Nonqualified Stock Option Plan.  (2)

4.5               1995 Incentive Stock Option Plan. (2)

4.6               Form of Bridge Warrant and Bank Warrant. (3)

4.7               1997 Non-Qualified Stock Option Plan. (5)

10.1              Employment Agreement, dated November 1, 1991 between the
                  Company and Max W. Batzer. (1)

10.2              Amendment, dated March 13, 1996, to Employment Agreement
                  between the Company and Max W. Batzer. (3)

10.3              Amendment, dated January 1, 1998, to Employment Agreement
                  between the Company and Max W. Batzer.

10.4              Employment Agreement, dated November 1, 1991, between the
                  Company and Brad A. Hummel. (1)

10.5              Amendment, dated March 13, 1996, to Employment Agreement
                  between the Company and Brad A. Hummel. (3)

10.6              Amendment, dated January 1, 1998, to Employment Agreement
                  between the Company and Brad A. Hummel.

10.7              Lease Agreement for Dallas headquarters. (1)

10.8              Agreement between the Company and Northeast Community Hospital
                  (Bedford, Texas). (1)

10.9              Agreement between the Company and Central Texas Medical Center
                  (San Marcos, Texas). (1)

                                      25
<PAGE>

10.10             Contingent Share Agreement between the Company and former
                  owner of Medmark. (2)

10.11             Contingent Payment Agreement between the Company and the
                  former owner of Reliascan.  (2)

10.12             Contingent Share Agreement between the Company and the former
                  stockholder of HDII.  (2)

10.13             Amended and Restated Loan Agreement, dated as of July 24,
                  1996, among the Company, its subsidiaries and Chase Bank of
                  Texas, N.A., formerly Texas Commerce Bank National
                  Association. (5)

10.14             Asset Purchase Agreement, dated September 27, 1996, by and
                  among the Company, DHS Management Services, Inc., Advanced
                  Clinical Technology, Inc., Horizon MDS Corporation, and
                  Horizon/CMS Healthcare Corporation. (4)

10.15             Asset Purchase Agreement, dated March 21, 1997 (but as of an
                  effective date of March 1, 1997), relating to first DIS
                  acquisition. (6)

10.16             Stock Purchase Agreement, dated March 21, 1997, relating to
                  the second DIS acquisition. (7)

10.17             Note Agreement, dated as of April 16, 1997, between the
                  Company and Prudential. (7)

11.1              Statement re: computation of per share earnings.

21.1              Subsidiaries of the Company.

--------------------

(1)  Incorporated by reference, filed as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2 filed on June 11, 1993, SEC File
No. 33-61392-FW.

(2)  Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on April 1, 1996.

(3)  Incorporated by reference, filed as an exhibit to the Company's
Registration Statement on Form SB-2 filed on April 25, 1996, SEC File No. 333-
4034.

(4)  Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on November 26, 1996.

(5)   Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on March 31, 1997.

(6)   Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on  April 4, 1997.

(7)   Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on  May 2, 1997.

                                      26
<PAGE>

                                  SIGNATURES


        In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated:  March 31, 1998

                            DIAGNOSTIC HEALTH SERVICES, INC.



                            By:/S/ Max W. Batzer
                               -------------------------------------------------
                               Max W. Batzer, Chairman and
                               Chief Executive Officer

        In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

Signature                       Title                           Date
---------                       -----                           ----


/S/ Max W. Batzer
-------------------------
Max W. Batzer                   Chairman, Chief Executive       March 31, 1998
                                Officer and Director


/S/ Brad A. Hummel
-------------------------
Brad A. Hummel                  President, Chief Operating      March 31, 1998
                                Officer and Director


/S/ Christopher L. Turner
-------------------------
Christopher L. Turner           Chief Financial Officer and
                                Principal Accounting Officer    March 31, 1998


/S/ Bo W. Lycke
-------------------------
Bo W. Lycke                     Director                        March 31, 1998