<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, 1996

  [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1943 [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

Warrants to purchase Common Stock   NASDAQ National Market


 Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value

Warrants to purchase Common Stock


     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. [  ]
<PAGE>

      The  issuer's revenues for its most recent fiscal year
were $24,171,000.

      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 21, 1997, was $69,223,818.


               (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 21, 1997 was 8,925,102.

         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   also  provides  skilled  allied  healthcare  personnel,
including  radiology  technologists,  physical  and  occupational
therapists  and  other healthcare professionals, on  a  temporary
basis  to perform a variety of functions in  hospitals, long-term
care facilities, physicians' offices, clinics and home healthcare
settings.

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,   Tennessee,
Kansas,  New  Mexico,  Arizona, Nevada,  California  and  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 three 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 21, 1997:



                             [CHART APPEARS HERE]


In addition, DHSMS has an inactive wholly-owned subsidiary, HomeCare
International, Inc.

                                       3
<PAGE>

Business Operations

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  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  1996,  the  Company provided  shared  services  to
approximately  311  hospitals  and approximately  566  additional
clients  across  the healthcare  spectrum, including  physicians'
offices,  sub acute and long-term  care facilities, managed  care
systems,  and government facilities.

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  professional  (technologist) who staff
the  equipment  and  is  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, 1996,  the Company provided in-house services at
96 hospitals  throughout its operational  markets.

Ancillary Services
------------------
During  1996,  the  Company  reorganized  its  former  "TempTech"
division  into an operating unit that included (i) the provision
of  contract occupational and physical therapists on  a  long  or
short  term basis to healthcare facilities throughout the  United
States;  (ii) the provision of therapists and nurses  in  a  home
healthcare setting in Mexico City and surrounding areas, and (iii)
the  provision  of cardiac monitoring services,  such  as  Holter
monitoring, pacemaker monitoring and  event recording to patients
in several of the Company's markets.

                                       4
<PAGE>

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 durations 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  1995  and 1996, 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
approximately  9%  of  the  Company's  revenues   in   1995   and
approximately  6%  of the Company's revenues in  1996.   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  7%  and  15%  of  the
Company's revenue in  1995 and 1996, 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 adversely affect the receipt and timing of payments to  the
Company.

From 1991 to 1996, the Company's customer base increased from 323
(including  seven  in-house agreements)  to  approximately  1,200
(including  96 in-house agreements).  Customers in 1996  included
409 hospitals and 711 physicians' offices, clinics and healthcare
facilities in 12 states.

   In  1996,  the Company's revenues were attributable to  shared
services,  in-house   services and  ancillary  services,  in  the
following approximate proportions:

<TABLE>
<CAPTION>
                                    1996
                                    ----
  <S>                               <C>
  Shared                            32%
  In-House/Fixed Base               64%
  Ancillary                          2%
</TABLE>

Operating Structure
Through   the   implementation  of  a  deliberate   and   prudent
acquisition  strategy, the Company has established a  network  of
operational  facilities throughout the country.   These  division
offices,  located  in  Arlington, San  Antonio  and  Houston, TX,
Los Angeles and San Diego, CA,  Albuquerque, NM, Phoenix, AZ, Las
Vegas and  Reno, NV, Tulsa  and  Oklahoma  City OK, St. Louis MO,
Chicago IL,  Atlanta,  GA and Monroe LA,  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 system 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.

                                       5
<PAGE>

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 realistic quotations and pricing proposals to potential
customers and to provide management with information specific  to
existing  customers.  The Company believes that  its  information
technology   system  can  support  substantial   growth   without
requiring significant 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
of  existing relationships.  Additionally, each division  manager
as  well as the regional vice presidents devote 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.   Conversely,
revenues  from  the  Company's Ancillary Services  Division  have
generally  increased in holiday periods, due to increased  demand
for temporary personnel when regular staff is away.

                                       6
<PAGE>

Suppliers
Although  the  Company  has historically  acquired  most  of  its
imaging  and  other equipment through finance leases from  Acuson
Corporation and a small number of other suppliers, the Company is
not dependent upon any one supplier or group of suppliers.  While
the   Company  has  a  preference  for  the  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  and  the
"TempTech Services" tradename for the Company's allied healthcare
services  business,  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 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 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.

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).  Because of the breadth of this law, known as  the
"Stark  Law," a number of exceptions are included in the statute.
In  addition,  the Stark Law does not restrict a  physician  from
ordering  an  item  or service not reimbursable  by  Medicare  or
Medicaid.   Further,

                                       7
<PAGE>

payment for a service  provided in violation of the Stark Law may
be denied or money paid may be recouped.

Many  of  the services that the Company performs are reimbursable
by  Medicare or Medicaid and are included in the Stark Law's list
of designed healthcare services.  Therefore, the Company believes
that   the   Stark  law  applies  to  certain  of  its   business
relationships,  as does the federal kickback  law.   The  Company
believes that it is in  compliance with these laws.

Kickback Law
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,
involving  the  offering of Medicare and  Medicaid  services  may
trigger  the  application  of  the  law.   For  example,  if  the
opportunity  for a physician to provide interpretations  pursuant
to a personal services agreement with the Company was conditioned
upon  agreement  that  the  physician would  refer  his  Medicare
patients  for  diagnostic services to the Company,  the  personal
services  agreement could be construed as an inducement  for  the
physician's referrals.  However, the Company does not enter  into
any  professional services agreements for interpretation services
with  physicians who refer to the Company for diagnostic testing.
Further,  when  physicians contract with the Company  to  provide
diagnostic  testing, excluding any interpretation  services,  the
Company often bills for the technical component itself.  In  that
case,  nothing  of  value  is  exchanged  between  the  referring
physician  and the Company and the kickback law does  not  apply.
In  the  alternative, when the referring physicians purchase  the
diagnostic  service from the Company, the Company does  not  bill
the  Medicare  or Medicaid programs for the technical  component.
In  these  cases,  the physicians are required  to  disclose  the
amount charged by the Company for the technical component and the
physicians  are  reimbursed the amount charged  or  the  Medicare
RBRVS (resource-based relative value scale) amount, whichever  is
less.   The  Company believes that there is little, if any,  risk
that   its   purchased  diagnostic  testing   arrangements   with
physicians violate the federal kickback 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 with which it contracts and does not bill any third-
party payors (including Medicare or Medicaid) or individuals  for
the  technical  services provided at the hospitals' laboratories.
Therefore,  the  Company believes that the federal  kickback  law
does not apply to its contractual arrangements with hospitals  to
operate diagnostic laboratories.

Stark Law
The  Stark  Law prohibits physicians from referring  Medicare  or
Medicaid  patients to entities with which they have  a  financial
relationship  for the provision of certain designated  healthcare
services.   The  services  specified by  the  Stark  Law  include
ultrasound  procedures which are provided by the Company  as  the
result  of referrals from physicians who purchase the tests  from
the  Company.   This relationship between the physician  and  the
Company  constitutes a compensation relationship under the  Stark
Law.   However, the Company believes that its relationships  with
referring  physicians qualify for the Stark Law's  exception  for
compensation  relationships  which  involve  payments   made   by
physicians for items or services at prices consistent  with  fair
market value.

                                       8
<PAGE>

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 Law.  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

The  Company  also operates in states that regulate  and  license
independent  physiological laboratories (IPLs).   In  all  states
that currently have such licensing requirements, the Company  has
received  such  licensure.  Further, for the last several  years,
the Health Care Financing Administration (HCFA) has considered  a
federal  requirement  that  all IPLs that  provide  services   to
individuals  covered under the Medicare or Medicaid  programs  be
required  to obtain certification by HCFA.  Currently,  HCFA  has
not  initiated  the  formal rulemaking process  for  federal  IPL
certification and the Company does not anticipate that HCFA  will
require  federal  certification  of  IPLs  in  the  near  future.
However,   in   the   event  that  HCFA  will   require   federal
certification  of IPLs in order to provide services  to  Medicare
beneficiaries of Medicaid recipients, the Company expects that it
will  meet  the  requirements  to obtain  federal  certification.
However,  the  Company cannot guarantee with  absolute  certainty
that  its  IPLs  will meet any future federal  IPL  certification
requirements.  Failure to obtain federal certification could have
a severe adverse impact on the operations of the Company.

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" 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  materials  to
expand  the  half-life  of the isotopes. These  nuclear  imaging
operations  are  conducted in the States of  Illinois,  Indiana,
Michigan  and  Louisiana.  The  State  of  Illinois  requires  a
separate  permit for the handling of these radioactive materials
and  Indiana,  Michigan and

                                       9
<PAGE>

Louisiana  are  so  called  "agreement states"  which  recognize
compliance with applicable  guidelines of  the  federal  Nuclear
Regulatory   Commission.  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.

Employees
As of  March 21, 1997, the Company had 367 full-time employees,
41 part-time employees, and 81 contract employees for a total of
489 employees  (including  operations in Mexico).  None of the
Company's employees are represented by any labor union or other
collective bargaining unit.  The Company has not experienced any
significant degree of employee turnover and the Company believes
that its relations with its employees are satisfactory.

                                       10
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

Property
The  Company  maintains its headquarters in  approximately  8,781
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 offices at 15 leased locations, ranging in  size  from
approximately  1,200 square feet to approximately  11,300  square
feet,  at  rentals generally ranging  from $4 to $15  per  square
foot  per  year (although rental at the Company's newly  acquired
Los  Angeles  office  is approximately $32 per  square  foot  per
year).   The  Company  believes that its existing  premises  will
provide   the  Company  with  adequate  space  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 1996.

In   prior  years,  the  Company  held  its  annual  meeting   of
stockholders  in late November.  However, in 1996, the  Board  of
Directors  determined to amend the Company's  by-laws  so  as  to
provide for the annual meeting of stockholders to be held  during
the  last  week  of  May  in  each year,  to  coincide  with  the
publication  of  the  Company's annual financial  statements  and
annual   report.   As  a  result,  the  term  of  each   existing
directorship  of  the Company was extended by  approximately  six
months, to coincide with such rescheduled annual meeting.

                                       11
<PAGE>

                             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, 1995 through January 19, 1996, and the last sale price
from January 22, 1996 through March 21, 1997, 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.

<TABLE>
<CAPTION>
                                    High Bid   Low Bid
                                    --------   -------
<S>                                 <C>        <C>
1995
 1st Quarter                          $2.63     $1.88
 2nd Quarter                          $3.38     $1.94
 3rd Quarter                          $4.75     $2.94
 4th Quarter                          $5.25     $3.81

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  to  March 21, 1997      $10.125   $7.44
</TABLE>

On  March  21, 1997, the last reported sale price for the  Common
Stock was $8.625,  and the Company had 163 stockholders of record
as  of that date.  The Company believes that there are more  than
1,200 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

                                       12
<PAGE>

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 has
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. As of the date of this report, an aggregate
of 35,000 Bridge Warrants have been exercised, although
certificates for only 2,500 of such shares have been issued. 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  Texas Commerce Bank National Association  (TCB"),  in
conjunction with which the Company issued to TCB warrants  ("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 TCB's representations and warranties as  to  its
status as an "accredited investor."

In connection with the Company's acquisition of Advanced Clinical
Technology,  Inc.  and  Horizon  MDS  Corporation  (collectively,
"ACT")  in  November 1996 (see Note 11 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 ending 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 and  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.

                                       13
<PAGE>

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 Texas Commerce Bank National Association  ("TCB")
prohibits  the payment of dividends without TCB's 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.

                                       14
<PAGE>

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.

<TABLE>
<CAPTION>
                              Year Ended December 31,
                              -----------------------
                                  1996        1995
                                  ----       -----
<S>                              <C>         <C>
Net Sales                        100.0%      100.0%
Operating expenses                83.9        89.8
                                 -----       -----
Operating Income                  16.2        10.2
Interest Expense                  (3.6)       (2.5)
Other Income                       2.0         .05
                                 -----       -----
Income Before Income Taxes        14.6         8.2
Income Tax Expense                (4.4)        1.0
                                 -----       -----
Net Income                        10.2%        7.2%
                                 =====       =====
</TABLE>

NOTE:  Numbers may not add due to rounding.

Year  Ended  December 31, 1996 Compared With Year Ended  December
31, 1995

Gross revenues increased by 41.5% to approximately $24,171,000 in
1996  from approximately $17,083,00 in 1995.  Excluding  revenues
attributable to acquired businesses, gross revenues increased  by
25.5%  to  approximately $18,791,000 for 1996 from  approximately
$14,966,000 for 1995.

The  Company's  operating expenses increased  from  approximately
$15,336,000 in 1995 to approximately $20,268,000 in 1996.   As  a
percentage of net sales, operating expenses decreased from  89.9%
to  83.9%.   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  operations  increased by  123.4%  to  approximately
$3,903,540 in 1996 from approximately $ 1,747,035  in 1995.  As a
percentage  of  gross revenues, income from operations  increased
from 10.2% in 1995 to 16.2% in 1996.

Interest  expense increased by 96.8% from approximately  $442,000
in  1995 to approximately $870,000 in 1996, primarily as a result
of   new   obligations  acquired  in  connection  with  the   ACT

                                       15
<PAGE>

acquisition.   As  a  percentage of net sales,  interest  expense
increased from 2.5% in 1995 to 3.6% in 1996.

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

Net  income  approximately doubled from  $1,227,000  in  1995  to
$2,459,000 in 1996.  This increase is primarily due to  continued
consolidation  of  the  Company's administrative  functions,  and
increased   sales.   As  a  percentage  of  sales,  all   expense
categories  were  down  in  1996,  except  for  depreciation  and
amortization.

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  TCB,  providing for up to $2,500,000 in available revolving
credit  (or,  if less, 75% of the Company's and its subsidiaries'
eligible  accounts  receivable  from  time  to  time),   and   an
acquisition  term loan facility of up to $17,500,000 in  original
principal   amount.    At  December  31,  1996,   the   Company's
outstanding  borrowings under the loan agreement were  $1,572,000
under  the  revolving credit facility, and $8,569,573  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 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  July  1996, the Company also completed a public  offering  of
Common Stock, pursuant to which the Company realized net proceeds
of approximately $17,504,500.  The proceeds of this offering have
been  and  continue to be utilized to retire debt (including  the
Bridge  Notes)  and  lease financing liabilities,  to  consummate
acquisitions, and for working capital.

At December 31, 1996, the Company had approximately $5,220,000 in
cash, cash equivalents and  short-term investments and additional
unused  availability  of  $928,000  under  its  revolving  credit
facility.   From  February  1  to March  20,  1997,  the  Company
received  approximately  $4,379,000  from  the  exercise  of  its
publicly  traded  warrants and certain of  the  Bridge  Warrants.
Based  on the Company's operating plan, management believes  that
available resources and funds generated from operations  will  be
sufficient  to meet the Company's operating requirements  through
the close of the Company's fiscal  year ending December 31, 1997.

The Company has retained Prudential Securities, Inc. to effect  a
private   placement   of  $20,000,000  of   senior   subordinated
promissory  notes, in connection with (a) the Company's  proposed
acquisition  of  four  magnetic  resonance  imaging  centers   in
California  from Diagnostic Imaging Services, Inc.  ("DIS"),  and
(b) to retire a $5,500,000 advance made to the Company by TCB  in
connection  with  the  Company's acquisition  of  the  ultrasound
division of DIS consummated in March 1997.

                                       16
<PAGE>

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 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  policy changes and/or the effects thereof  on  the
Company.

                                       17
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

                                                       Page
                                                      Number
     Consolidated Financial Statements:

     Independent Auditors Report                       F - 2

     Consolidated Balance Sheet as
     of December 31, 1996 and 1995                     F - 3

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

     Consolidated Statement of
     Stockholders' Equity for the
     years ended December 31, 1996 and 1995            F - 6

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

     Notes to the Consolidated Financial Statements    F - 8

                                       18
<PAGE>

              DIAGNOSTIC HEALTH SERVICES, INC.
                      AND SUBSIDIARIES

             Consolidated Financial Statements

                 December 31, 1996 and 1995

                            and

                Independent Auditors' Report

                                      F-1
<PAGE>

      DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES

                Independent Auditors' Report



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,  1996  and  1995, 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, 1996 and 1995, 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

March 21, 1997

                                      F-2
<PAGE>

      DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES

                   CONSOLIDATED BALANCE SHEETS

                           ASSETS

<TABLE>
<CAPTION>
                                                             December 31,
                                                       -----------------------
                                                           1996         1995
                                                       ----------- -----------
<S>                                                    <C>         <C>
Current Assets:
  Cash and cash equivalents                            $   229,547 $   705,179
  Short-term investments                                 5,000,000          --
  Accounts receivable:
   Trade, net of allowance for doubtful accounts
     of $1,413,168 and $114,817, respectively           10,530,807   2,810,912
   Accrued interest and other                              701,438     177,054
   Stockholders                                             40,453      34,243
   Employees                                               185,892      56,795
   Contracts receivable - current                        1,317,146     434,008
  Prepaid expenses                                       1,359,596     397,807
  Deferred tax asset                                        57,876      55,023
                                                       ----------- -----------
      Total Current Assets                              19,422,755   4,671,021
                                                       ----------- -----------
Property & Equipment:
  Office furniture & equipment                           1,139,535     654,970
  Machinery & service equipment                         20,089,559   9,527,210
  Leasehold improvements                                    45,526      19,009
      Less: Accumulated depreciation and amortization   (5,425,437) (3,705,988)
                                                       ----------- -----------
      Total Property & Equipment                        15,849,183   6,495,201
                                                       ----------- -----------
Other Assets:
  Deposits and other                                       958,391     362,320
  Deferred acquisition costs                               164,199      57,523
  Contracts receivable - long-term                       1,739,587   1,458,481
  Goodwill                                              15,022,858   5,584,306
  Noncompete agreements                                  1,586,818   1,335,892
      Less: Accumulated amortization                    (1,423,418)   (673,215)
                                                       ----------- -----------
      Total Other Assets                                18,048,435   8,125,307
                                                       ----------- -----------
      Total Assets                                     $53,320,373 $19,291,529
                                                       =========== ===========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>

      DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES

           CONSOLIDATED BALANCE SHEETS (Continued)

               LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                          December 31,
                                                                  ------------------------
                                                                      1996         1995
                                                                  ------------ -----------
<S>                                                               <C>          <C>
Current Liabilities:
  Accounts payable                                                   1,957,758   $1,070,915
  Accrued liabilities                                                1,534,551      207,133
  Current lease obligations                                          2,154,035      759,079
  Current portion of long-term debt                                  1,991,824    1,403,463
  Notes payable                                                      1,572,000      700,000
  Current income taxes                                                 195,000       23,965
                                                                  ------------  -----------
   Total Current Liabilities                                         9,405,168    4,164,555
Long-term lease obligations                                          4,865,190    1,243,231
Long-term debt                                                       7,081,745    4,418,396
Deferred rent                                                          155,426           --
Other liabilities                                                      778,446      353,192
Deferred income taxes                                                1,057,779      205,961
                                                                  ------------  -----------
   Total Liabilities                                                23,343,754   10,385,335
                                                                  ------------  -----------

Commitments and Contingencies
Stockholders' Equity:
  Common stock, $.001 par value; authorized 15,000,000
   shares; issued 8,400,762 shares in 1996 and 5,206,361
   shares in 1995; outstanding 8,167,503 shares in 1996
   and  4,973,102 shares  in  1995                                       8,401        5,206
  Preferred stock, $.001 par value; authorized 3,000,000
   shares; issued and outstanding 648,986
   shares  in  1996  and zero shares  in  1995                             649           --
  Additional paid-in capital                                        27,617,425    9,018,442
  Retained earnings                                                  2,567,195      108,118
  Foreign  currency translation                                         (5,900)      (6,171)
  Stock   subscription   receivable                                         --       (8,250)
  Stockholder receivable                                              (103,500)    (103,500)
  Treasury stock (at cost)                                            (107,651)    (107,651)
                                                                   -----------  -----------
  Total Stockholders' Equity                                        29,976,619    8,906,194
                                                                   -----------  -----------
Total Liabilities & Stockholders' Equity                           $53,320,373  $19,291,529
                                                                   ===========  ===========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>

                DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               For the Years Ended
                                                   December 31,
                                             ----------------------
                                                 1996         1995
                                             ----------- -----------
<S>                                          <C>         <C>
Gross  revenues                              $24,171,286 $17,083,447
                                             ----------- -----------
Expenses:
  General & administrative                     1,385,305   1,112,212
  Salaries & employee benefits                11,898,905   9,449,639
  Legal & professional                           177,756     231,063
  Rent & utilities                               389,533     290,464
  Taxes & insurance                              420,375     400,213
   Technical operating expenses                3,158,037   2,380,849
   Provision for doubtful accounts                40,970      37,529
   Depreciation and amortization               2,796,865   1,434,443
                                             ----------- -----------
   Total operating expenses                   20,267,746  15,336,412
                                             ----------- -----------
Income from operations                         3,903,540   1,747,035
                                             ----------- -----------
Other income (expense):
  Other income                                   486,704      97,509
  Interest expense                              (869,601)   (441,928)
                                             ----------- -----------
    Total other income (expense)                (382,897)   (344,419)
                                             ----------- -----------
Income before taxes                            3,520,643   1,402,616

  Provision for income taxes                   1,061,560     174,903
                                              ----------  ----------
Net income                                    $2,459,083  $1,227,713
                                              ==========  ==========
Net income per share:
  Primary                                     $     0.32  $     0.23
                                              ==========  ==========
  Fully  Diluted                              $     0.30  $     0.21
                                              ==========  ==========
Weighted average common shares outstanding
  Primary                                      7,738,414   5,408,643
                                              ==========  ==========
  Fully Diluted                                8,133,401   5,816,188
                                              ==========  ==========
</TABLE>

The accompanying notes 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, 1996 and 1995


<TABLE>
<CAPTION>
                                              Additional    Retained    Foreign        Stock
                          Common  Preferred    Paid In     Earnings     Currency   Subscription Stockholder  Treasury
                           Stock    Stock      Capital    (Deficit)   Translation  Receivable   Receivable   Stock        Total
                          ---------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>       <C>          <C>          <C>          <C>         <C>         <C>          <C>
Balance, December 31,
  1994                     $5,034     --    $ 8,735,476  $  (769,595)     $(3,562)  $(8,250)   $(103,500)  $(107,651)   $ 7,747,952

Shares issued in
 connection with the
 following acquisitions:
  Alpha                        24                   (24)                                                                         --
  HomeCare                      8                15,992                                                                      16,000
  Medmark                      24                41,644                                                                      41,668
  Reliascan                    13                24,987                                                                      25,000
  HDI                          84               199,917                                                                     200,001
  SIS                          18                   (18)                                                                         --
Options exercised               1                   468                                                                         469
Foreign currency
 translations                                                              (2,609)                                           (2,609)

Distributions                                                (350,000)                                                     (350,000)

Net income                                                  1,227,713                                                     1,227,713
                           ---------------------------------------------------------------------------------------------------------

Balance, December 31,
 1995                       5,206     --      9,018,442      108,118      (6,171)    (8,250)    (103,500)    (107,651)   8,906,194

Shares issued in
 connection with
 secondary offering         2,955            17,494,019                                                                  17,496,974
Shares issued in
 connection with the
 following acquisitions:
  Alpha                        24                   (24)                                                                         --
  Medmark                      24                41,644                                                                      41,668
  Reliascan                    13                24,987                                                                      25,000
  NPE/PEDI                     85               425,915                                                                     426,000
  CCI                          23               149,977                                                                     150,000
  ACT                                643                                                                                        643
  DDI                          40               274,960                                                                     275,000
Options exercised               1                 1,468                                                                       1,469
MDI warrants exercised          3                 9,231                                                                       9,234
Foreign currency
 translations                                                                 271                                               271
Stock subscription
 collection                                                                            8,250                                  8,250

Shares issued in payment
 of debt                       27               176,806                                                                     176,833

Preferred stock dividend               6                           (6)                                                           --
Net income                                                  2,459,083                                                     2,459,083
                           ---------------------------------------------------------------------------------------------------------

Balance, December 31,
 1996                      $8,401   $649     $27,617,425    $2,567,195    $(5,900)  $    --    $(103,500)  $(107,651)   $29,976,619

                           =========================================================================================================

</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                --------------------------
                                                                   1996           1995
                                                                ------------   -----------
<S>                                                             <C>            <C>
Cash Flows from Operations:
Net income                                                      $  2,459,083   $ 1,227,713
Adjustments to Reconcile Net Income to
  Net Cash Provided by Operations:
   Depreciation and amortization                                   2,796,865     1,434,443
   Deferred federal income taxes                                     848,965       150,938
   Deferred rent expense                                             155,426        (6,747)
   Foreign currency translation                                          271        (2,609)
   Increase in trade receivable                                   (4,331,129)     (591,401)
   Increase in contracts receivable                               (1,164,244)   (1,892,489)
   Increase in prepaid expenses                                     (701,492)      (47,566)
   (Increase) decrease in other assets                              (590,986)       77,242
   Increase in accounts payable                                       14,404       432,385
   Increase (decrease) in accrued liabilities                        655,716      (201,426)
   Increase in income taxes payable                                  171,035        23,965
   Increase in other liabilities                                     279,411       152,830
                                                                ------------   -----------
        Net Cash Provided by Operations                              593,325       757,278
                                                                ------------   -----------

Cash Flows Used in Investing Activities:
   (Increase) decrease in cash investments                        (5,000,000)    1,750,100
   Cash payments for the purchase of property                     (1,487,178)     (211,669)
   Acquisition of businesses net of cash acquired                (13,003,736)     (278,222)
   Additional subsidiary acquisition costs                          (449,829)     (382,400)
   Increase in other receivables                                    (524,384)      (72,605)
   Increase in employee receivables                                  (87,587)       (6,763)
   Increase in stockholder receivable                                 (6,210)       (6,210)
   Decrease in minority interest                                          --        (6,235)
                                                                ------------   -----------
        Net Cash (Used in) Provided by Investing Activities      (20,558,924)      785,996
                                                                ------------   -----------

Cash Flows from Financing Activities:
   Proceeds from issuance of common stock                         17,751,177           469
   Net borrowings on line of credit                                  872,000       736,798
   Proceeds from issuance of bridge loans                          2,000,000            --
   Proceeds from banks loans                                       6,569,573            --
   Proceeds from stock subscription receivable                         8,250            --
   Principal payments on long-term debt                           (6,315,642)     (562,681)
   Principal payments on capital lease obligations                (1,395,391)     (941,000)
   Distributions                                                          --      (350,000)
                                                                ------------   -----------
        Net Cash (Used in) Provided by Financing Activities       19,489,967    (1,116,414)
                                                                ------------   -----------

Net increase (decrease) in cash                                     (475,632)      426,860
Cash balance, beginning of year                                      705,179       278,319
                                                                ------------   -----------
Cash balance, end of year                                       $    229,547   $   705,179
                                                                ============   ===========

</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                      F-7

<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------



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.  The  company
also   provides   temporary  placement  with  allied   healthcare
professionals throughout the U.S. and in the Federal District  of
Mexico.

Acquisitions are discussed in Note 11 of these Notes to Financial
Statements.

The  following  chart sets forth the corporate structure  of  the
Company and its subsidiaries at December 31, 1996:

                      [CHART APPEARS HERE]

In  addition  to  the above, DHSMS has one inactive  wholly-owned
subsidiary, HomeCare International, Inc.

                              F-8
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

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

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.

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.

Property and Equipment -- Property and equipment are stated at cost
and  are  depreciated  using  the  straight-line  method  over  the
estimated  useful lives of the related assets or terms  of  leases,
ranging from 3 to 7 years, whichever is less.

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.

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.

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.

                              F-9
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

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

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" ("SFAS 121"), the Company records  impairment
loses  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   Statement  of  Financial  Accounting  Standards   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.

Earnings  Per  Share  -- 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. The primary
weighted  average  common shares and common  share  equivalents  at
December   31,   1996  and  1995  were  7,740,622  and   5,408,643,
respectively.

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.

New Accounting Standards -- In October 1995, Statement of Financial
Accounting   Standards   No.   123,   "Accounting  for  Stock-based
Compensation" ("SFAS 123"), 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.   DHS  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.

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

At  December 31, 1996 and 1995, prepaid expenses consisted  of  the
following:
<TABLE>
<CAPTION>
                                               December 31,
                                           ---------------------
                                             1996         1995
                                           ---------   ---------
<S>                                        <C>         <C>
     Prepaid insurance                     $ 171,907   $  32,903
     Prepaid supplies                        509,471     191,411
     Other                                   678,218     173,493
                                           ---------   ---------

                                           $1,359,596  $ 397,807
                                           ==========  =========
</TABLE>

                              F-10
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


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

Notes payable consists of the following obligations at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
                                                          December 31,
                                                     --------------------
                                                        1996       1995
                                                     ----------  --------
<S>                                                  <C>         <C>
   $1,000,000 line of credit with bank, with
   interest at varying rates, due July 31, 1996.
   Secured by substantially all of the assets of
   the Company.                                      $      --   $700,000

   $2,500,000 line of credit with bank, with
   interest at varying rates (9.25% at
   December 31, 1996), due June 30, 1998.
   Secured by substantially all of the assets of
   the Company.                                       1,572,000        --
                                                     ----------  --------

                                                     $1,572,000  $700,000
                                                     ==========  ========
</TABLE>

In July 1995, the Company entered in a one-year loan agreement with
a bank whereby the Company was permitted to borrow up to $1,000,000
under  a  revolving credit note.  This revolving note replaced  the
existing credit facility in place at that time.  The loan agreement
(as  amended) also provided for three separate term notes  totaling
$5,350,000 in original principal amount, whose terms are  discussed
in Note 5.

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.

                              F-11
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 4 - NOTES PAYABLE (Continued)
----------------------------------

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.

At December 31, 1995, the Company was not in compliance with one of
these  restrictive covenants, namely the requirement to maintain  a
minimum current ratio of 1.20 to 1.00. The Company's current  ratio
at December 31, 1995 was 1.12 to 1.00.  However, the bank granted a
waiver of such noncompliance as of December 31, 1995.

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

Long-term debt at year-end consists of the following:
<TABLE>
<CAPTION>

                                                               December 31,
                                                         -----------------------
                                                            1996         1995
                                                         ----------   ----------
<S>                                                      <C>          <C>
   Note payable to bank in connection with
   the ACT acquisition, maturing June 1998,
   due in monthly installments of $142,826, plus
   interest at varying rates (7.5, 7.51, and 8.75% at
   December 31, 1996); secured by substantially
   all of the assets of the Company.                     $ 8,569,573  $       --

   Term note payable to bank maturing
   July 1998, due in monthly installments
   of $27,775 plus interest at varying rates
   (10.75% at December 31, 1995); secured
   by substantially all of the assets of the
   Company.                                                      --      888,900

</TABLE>

                              F-12
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

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

<TABLE>
<CAPTION>
                                                               December 31,
                                                         -----------------------
                                                            1996         1995
                                                         ----------   ----------
<S>                                                      <C>          <C>
   Note payable to bank in connection with
   the MICA acquisition, maturing July 1998,
   due in monthly installments of $62,500
   plus interest, from March 5, 1996 through
   July 1998 with a balloon payment of
   $2,000,000 at maturity, interest at
   varying rates (10.125% at December 31,
   1995); secured by substantially all of the
   assets of the Company.                                        --    3,750,000

   Note payable to bank in connection with
   the ADI acquisition, maturing December
   1998, due in monthly installments of $16,667,
   plus interest at varying rates (10.75% at
   December 31, 1995); secured by substantially
   all of the assets of the Company.                             --      600,000


   Notes payable to financial institutions, with
   interest from 7.0% to 8.5%, maturing through
   1998, requiring monthly payments of
   $1,046, including principal and
   interest. Secured by vehicles.                                --       31,221

   Notes payable to financial institutions, with
   interest from 7.0% to 10.0%, maturing through
   2000, requiring monthly payments of
   $2,440, including principal and
   interest. Secured by vehicles.                            51,917           --

   Noncompete agreements, with monthly
   payments of $27,628 and  $22,303, receptively,
   including principal and interest of 6% to 9%,
   maturing through 1998.                                   452,079      548,923

</TABLE>

                              F-13
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                        -----------------------
                                                           1996         1995
                                                        ----------   ----------
<S>                                                     <C>          <C>
   Note payable to individual in connection
   with HCI acquisition; interest at
   6%; matured February 1996.                                   --        2,815
                                                        ----------   ----------

                                                         9,073,569    5,821,859
     Less current maturities                            (1,991,824)  (1,403,463)
                                                        ----------   ----------

                                                        $7,081,745   $4,418,396
                                                        ==========   ==========
</TABLE>

Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>

    For the Years Ending
        December 31,
----------------------------
<S>                                       <C>

            1997                          $1,991,824
            1998                           1,923,743
            1999                           1,726,262
            2000                           1,717,826
            2001                           1,713,914
                                          ----------

                                          $9,073,569
                                          ==========
</TABLE>

                              F-14
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

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:
<TABLE>
<CAPTION>
                                               December 31,
                                        ------------------------
                                           1996          1995
                                        ----------    ----------
<S>                                     <C>           <C>

    Office furniture & equipment        $   56,783    $  325,399
    Machinery & service equipment        7,045,440     3,402,505
                                        ----------    ----------
                                         7,102,223     3,727,904
      Less: accumulated amortization      (695,199)     (864,669)
                                        ----------    ----------

                                        $6,407,024    $2,863,235
                                        ==========    ==========
</TABLE>

The  Company  leases its office space under operating  lease agree-
ments  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.

Future  minimum  lease  payments  under  non-cancelable  leases  at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
      For the Years Ending                   Capital       Operating
          December 31,                       Leases        Leases
      --------------------                 -----------    ----------
<S>                                        <C>           <C>

             1997                          $ 2,718,094    $  597,615
             1998                            2,439,875       496,552
             1999                            1,404,416       278,369
             2000                            1,084,011       205,871
             2001                              713,345       119,045
            Thereafter                              --        20,440
                                           -----------    ----------

  Total minimum lease payments               8,359,741    $1,717,892
                                           -----------    ----------

    Less: amount representing interest      (1,340,516)
                                           -----------

  Present value of minimum lease payments    7,019,225
                                           -----------

    Less: current portion                    2,154,035
                                           -----------

  Long-term capital lease obligation       $ 4,865,190
                                           ===========
</TABLE>

                              F-15
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


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

Rent expense during the years ended December 31, 1996 and 1995  for
all  operating leases was $758,351 and $727,371, respectively,  and
is included in operating expenses.

NOTE 7 - 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 theses  employment
agreements are as follows:
<TABLE>
<CAPTION>

    For the Years Ending
        December 31,
    --------------------
<S>                                        <C>

            1997                           $  653,332
            1998                              383,750
            1999                               75,000
                                           ----------

           Total                           $1,112,082
                                           ==========
</TABLE>

NOTE 8 - INCOME TAXES
---------------------

The  consolidated  provision  for  income  taxes  included  in  the
statement  of operations for the year ended December 31,  1996  and
1995 consisted of the following:
<TABLE>
<CAPTION>

                                             1996         1995
                                          ----------    ---------
<S>                                       <C>           <C>
Current taxes payable                     $  195,000    $  23,965
Deferred taxes payable:
  Long term                                  869,413      205,961
  Current (benefit)                           (2,853)     (55,023)
                                          ----------    ---------
Provision for income taxes                $1,061,560    $ 174,903
                                          ==========    =========
</TABLE>

                              F-16
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 8 - INCOME TAXES (Continued)
---------------------------------

Net  deferred tax assets and liabilities at December 31,  1996  and
1995 consisted of the following:
<TABLE>
<CAPTION>

                                            1996          1995
                                         ----------    ---------
<S>                                      <C>           <C>
Deferred tax liabilities:
  Property and equipment                 $  977,060    $ 215,161
  Goodwill                                  152,501       14,619
                                         ----------    ---------
Total deferred tax liabilities            1,129,561      229,780
                                         ----------    ---------
Deferred tax assets:
  Receivable allowance                           --       39,038
  Accrued vacation                           57,876       15,985
  Noncompete agreements                      71,782       23,819
                                         ----------    ---------
Total deferred tax assets                   129,658       78,842
                                         ----------    ---------
  Net deferred tax liability             $  999,903    $ 150,938
                                         ==========    =========
</TABLE>

The  difference  between the federal statutory  tax  rate  and  the
effective  tax  rate on continuing operations for  the  year  ended
December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>

                                             1996         1995
                                             ----         ----
<S>                                          <C>          <C>

Federal Statutory Rate                        35%          35%
  Premerger earnings of ADI                   --          (11)
  Property and equipment                      --           11
  Intangible assets                            2           --
  Utilization of tax loss carryforwards      (12)         (16)
  Other, net                                   5           (7)
                                             ----         ----
Effective tax rate                            30%          12%
                                             ====         ====
</TABLE>

NOTE 9 - 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-17
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 9 - 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 and will be used
for   acquisitions,  capital  expenditures,  working  capital   and
retirement of outstanding debt.

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------

Cash  paid  for  the  year ended December 31,  1996  and  1995  for
interest  was  approximately $921,512 and  $442,000,  respectively.
Cash paid for Federal income taxes for the year ended December  31,
1996 and 1995 amounted to zero.

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, 1996 and 1995:
<TABLE>
<CAPTION>
                                             1996          1995
                                         -----------     ---------
<S>                                      <C>             <C>
   Assets acquired                       $19,904,468     $ 932,482
   Liabilities assumed                    (6,032,525)     (273,676)
   Common stock issued                      (851,643)     (200,001)
                                         -----------     ---------
   Total cash paid                        13,020,300       458,805
   Fees and expenses                              --      (106,805)
   Less cash acquired                        (16,564)      (73,778)
                                         -----------     ---------
   Net cash paid                         $13,003,736     $ 278,222
                                         ===========     =========
</TABLE>


The   MICA   acquisition  was  effected  simultaneously  with   the
refinancing  of existing debt and the MICA acquisition  loan.   The
total  amount  of  the transaction was $5,034,133,  which  included
conversion  to  long-term debt of $645,373 of  revolving  lines  of
credit.   The  Company incurred $382,400 in acquisition  costs  and
expenses in connection with the transaction.

Property  and equipment acquired under capital leases for the  year
ended  December  31,  1996  and 1995, amounted  to  $5,285,069  and
$1,134,878, respectively.

                              F-18
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
--------------------------------------------------------

The  Company issued 60,831 and 88,197 shares of common stock valued
at  $66,668 and $82,668, in 1996 and 1995, respectively,   pursuant
to contingent stock bonus plans relating to various acquisitions.

NOTE 11 - ACQUISITIONS
----------------------

In  February  1994,  DHS-Mexico  and  DHSMS  acquired  88%  of  the
outstanding  common stock of HomeCare International de Mexico  S.A.
de  C.V. ("HCIM") and DHSMS acquired 100% of the outstanding common
stock  of HomeCare International, Inc. ("HCI").  HCIM and  HCI  are
collectively  referred  to  as  "HomeCare."   The  purchase   price
included  the  issuance of 140,711 shares of DHS  common  stock  in
exchange  for net liabilities valued at approximately $40,000.   In
addition,  the  Company entered into a noncompete agreement  and  a
consulting  agreement with a previous stockholder of HomeCare  that
extends  through  December 31, 1997.  Pursuant  to  the  consulting
agreement, the former stockholder was granted an option to purchase
up  to  60,000 shares of DHS common stock at a price of  $1.84  per
share,  of  which 44,000 options failed to vest in accordance  with
the  terms  of  such  option;  and the  former  stockholder  became
entitled  to  receive,  on January 1, 1996,  a  further  option  to
purchase up to an additional 60,000 shares of DHS common stock at a
price  equal  to  fair  market value at the close  of  business  on
December  31,  1995,  which option is subject  to  similar  vesting
requirements  related to the profitability of the Company's  Mexico
operations.   The  acquisition 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.  Goodwill  of  approximately
$442,000,  which includes $204,000 of capitalized acquisition  cost
at December 31, 1994, was recorded as a result of this transaction.
In  the  fourth quarter of 1995, DHS-Mexico acquired the  remaining
12%  minority interest in HCIM, in exchange for 9,622 shares of DHS
common stock.

On   June  28,  1994,  SIS  acquired  the  net  assets  of  Medmark
Associates,  Inc. ("Medmark"), an Illinois-based company  providing
services  similar to those provided by the Company.   SIS  acquired
net assets of approximately $64,000 in exchange for cash of $89,000
and  a  noncompete agreement with a present value of  approximately
$67,000.   The  purchase  includes  a  contingent  share  agreement
providing  for  the issuance of up to 71,427 shares of  DHS  common
stock,  subject to the acquired business achieving certain  revenue
goals.  The Company recognized goodwill of approximately $92,000 in
connection with the acquisition.

                              F-19
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 11 - ACQUISITIONS (Continued)
----------------------------------

On  August  20, 1994, effective August 1, 1994, Heart Institute  of
Tulsa,  Inc.  ("HIT", a wholly-owned subsidiary of DHSMS)  acquired
the  net assets of Reliascan Mobile Imaging, Inc. ("Reliascan"),  a
Tulsa, Oklahoma-based company engaged in services similar to  those
provided  by  the  Company.  The Company  acquired  net  assets  of
approximately  $40,000 in exchange for $150,000  and  a  contingent
payment  agreement.  The contingent payment agreement provides  for
three  annual  payments, each in the maximum amount of  $70,000  in
cash  and $25,000 in shares of DHS common stock (valued at  $1.9375
per  share),  subject  to the acquired business  achieving  certain
revenue  goals.   The  agreement also  provides  for  reduction  or
elimination  of  the  cash  payments  and  stock  issuance  if  the
specified  revenue  goals  are  not met.   The  Company  recognized
goodwill   of  approximately  $136,000  in  connection   with   the
acquisition.  Concurrent with the acquisition, the Company  entered
into a non-competition and non-disclosure agreement with the former
owner of Reliascan valued at approximately $80,000.

On  September 6, 1994, through a reverse triangular merger  between
MDI  Acquisition  Corp. (a wholly-owned subsidiary  of  DHSMS)  and
Mobile Diagnostic Imaging, Inc. ("Mobile"),  DHSMS acquired 100% of
the issued and outstanding capital stock of Mobile and, indirectly,
of  its wholly-owned subsidiary, St. Louis Mobile Ultrasound,  Inc.
(collectively, with Mobile, "MDI").  The business of  MDI  consists
primarily    of   performing   and   rendering   sonographic    and
neurodiagnostic testing services for various medical  applications,
primarily  on  a  mobile  basis  to hospitals,  clinics  and  other
healthcare  facilities  in  the  greater  St.  Louis,  Chicago  and
Indianapolis metropolitan areas.

The  Company  acquired  net  assets of  approximately  $497,000  in
exchange  for  488,889  shares of DHS common stock  and  three-year
warrants  (expiring September 6, 1997) for the purchase  of  75,000
additional shares of DHS common stock at an exercise price of $3.00
per  share.  Simultaneous with the closing of the acquisition,  the
Company entered into an employment agreement with James R. Angelica
(formerly  the  principal  stockholder  and  President  of  Mobile)
pursuant to which he has agreed to serve as Vice President-Sales of
the  Company through August 31, 1997, at a base salary  of  $85,000
per  annum  plus  customary benefits.  Also simultaneous  with  the
closing  of  the acquisition, Mobile entered into a non-competition
and  non-disclosure agreement with Mr. Angelica pursuant to  which,
among  other  things, Mr. Angelica has agreed not to  compete  with
Mobile  or the Company for a period of five years, in consideration
of  which Mobile has agreed to pay Mr. Angelica a total of  $90,000
in  equal  monthly  installments from September  30,  1994  through
August  31, 1997.  The Company recognized goodwill of approximately
$1,011,000 in connection with the acquisition.

                              F-20
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

NOTE 11 - ACQUISITIONS (Continued)
----------------------------------

Upon  closing of the acquisition, Mr. Angelica was elected  to  the
Board  of Directors of the Company for a term expiring on or  about
November 15, 1994.  Additionally, Mr. Angelica and his spouse  have
granted  to Max W. Batzer (the Chairman and Chief Executive Officer
of  the Company) a three-year proxy (expiring September 5, 1997) to
vote the 370,252 shares of common stock of the Company acquired  by
them  in  the  transaction.  Such proxy directs  that  the  subject
shares  be voted (a) with respect to election of directors  of  the
Company,  in  such  manner  as  Mr. Batzer  may  determine  in  his
discretion, and (b) as to all other matters, in the same manner  as
the   greatest   plurality  of  votes,  consents  or  ratifications
otherwise cast or given with respect to the particular matter.  Mr.
Batzer  voted such shares, as well as his own shares, in  favor  of
Mr.  Angelica's reelection as a Director at the 1994 annual meeting
of stockholders held on November 23, 1994.

On March 9, 1995, effective as of January 1, 1995, DHSMS (through a
new  wholly-owned subsidiary, HDI Acquisition Corp.)  acquired  the
businesses of three San Antonio, Texas-based companies which are in
similar  lines  of  business as the Company.  The  acquisitions  of
Sector-Echos   Inc.   ("SEI"),  Cardio-Graphic  Consultants,   Inc.
("CGCI")  and Heart Diagnostic Institutes, Inc. ("HDII") were  made
for  a  combination of $352,000 in cash and 84,211  shares  of  DHS
common  stock.   The Company acquired net assets  of  approximately
$659,000 including goodwill of approximately $399,000 in connection
with  the acquisitions.  The Company merged the acquired businesses
into another wholly-owned subsidiary of DHSMS in 1996.

On   July  31,  1995,  the  Company,  through  DHSMS'  wholly-owned
subsidiary SIS, purchased substantially all of the operating assets
(exclusive   of  cash  and  accounts  receivable)  of  the   mobile
ultrasound and nuclear imaging division of MICA Imaging, Inc.   The
purchase  included  approximately  $5,034,000  of  various   assets
including goodwill of approximately $2,528,000.  The purchase price
was  approximately $3,746,000 in cash, and SIS assumed  liabilities
of approximately $1,288,000.

Simultaneous with the closing of the acquisition, the  Company  and
its  subsidiaries entered into a loan agreement with Texas Commerce
Bank National Association, providing for an acquisition loan in the
principal amount of $3,750,000, a term loan in the principal amount
of  $1,000,000, and a revolving credit facility of up to $1,000,000
(or,  if  less, 75% of the Company's and its subsidiaries' eligible
accounts receivable from time to time).  In connection with the ADI
acquisition (see Note 12 below), the Company obtained an additional
$600,000  term  loan under the loan agreement.  All  of  the  loans
under  this loan agreement were refinanced with the same lender  in
June 1996, as described in Note 4 above.

                              F-21
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

NOTE 11 - ACQUISITIONS (Continued)
----------------------------------

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
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-22
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------


NOTE 12 - POOLING OF INTERESTS
------------------------------

On  December  7,  1995, the Company issued 240,000  shares  of  its
common stock in exchange for all of the outstanding common stock of
ADI.   The  transaction has been accounted  for  as  a  pooling  of
interests  and,  accordingly, the Company's consolidated  financial
statements   have  been  restated  to  include  the  accounts   and
operations  of  ADI  for  all  periods  presented  prior   to   the
consummation of the transaction.

ADI  was  a  Subchapter S corporation for income tax purposes  and,
therefore,  did not pay federal income taxes.  ADI is  included  in
the  Company's  federal  income tax return effective  November  30,
1995.   Deferred  income  taxes related  to  acquired  net  taxable
temporary differences were not material.

For  the eleven months ended November 30, 1995, ADI reported  gross
revenues  and  net income of $1,421,273 and $493,294, respectively.
Adjustments to the accounts of ADI to adopt accounting practices of
the  Company resulted in adjusted gross revenues of $1,391,902  and
adjusted  net  income of $463,923 for the year ended  December  31,
1995.  Substantially all of the required adjustments related to the
conversion  to the accrual basis of accounting.  During  1995,  ADI
distributed $350,000 to its sole shareholder.

NOTE 13 - 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 1996 and 1995 were $63,740 and $51,432, 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, 1996 and 1995, and $26,910 and $20,700, respectively,
of accrued interest on the stockholder receivables.

                              F-23
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

NOTE 14 - 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.  Substantially  all  of  the
available  options  under  the 1992 Plan  have  been  granted,  and
659,935  of  such awarded options contain optional price  reduction
provisions in connection with any change in control of the Company.

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, 1995, the  Company's  Board  of
Directors had awarded, under the 1995 Non-qualified Plan, (a) stock
options  for  an aggregate of 133,000 shares, all of which  provide
for   an  exercise  price  of  $1.9375  per  share,  are  currently
exercisable  and  expire  on  April  4,  2003  (subject  to   prior
termination  in  accordance  with  the  application  stock   option
agreements),  and (b) additional stock options for an aggregate  of
36,000 shares, all of which provide for an exercise price of  $4.25
per  share, are currently exercisable and expire on August 20, 2003
(subject  to prior termination in accordance with applicable  stock
option   agreements).   98,000  of  such  awarded  options  contain
optional  price reduction provisions in connection with any  change
in control of the Company.

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, 1995, no options had been granted  under  the
1995 Incentive Plan.

                              F-24
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

NOTE 14 - STOCK OPTION PLANS (Continued)
----------------------------------------

A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
                                             Year ended                   Year ended
                                         December 31, 1996            December 31, 1995
                                     -------------------------     -------------------------
                                                     Weighted                      Weighted
                                                     Average                       Average
                                                     Exercise                      Exercise
Stock Options                           Shares        Price          Shares         Price
-------------                        ----------    -----------     ----------    -----------
<S>                                  <C>           <C>             <C>           <C>

Outstanding, beginning of period      1,215,401       $2.55           869,930        $1.91
Granted                                 234,500       $6.30           364,750        $3.00
Exercised                                (1,125)      $3.65              (500)       $0.94
Forfeited/expired                       (73,316)      $2.96           (18,779)       $2.17
                                     ----------                    ----------

Outstanding, end of period            1,375,460       $3.81         1,215,401        $2.55
                                     ==========                    ==========

Options exercisable, end of period    1,358,960       $3.75         1,207,401        $2.53
                                     ==========                    ==========

Weighted average fair value of
 options granted during the year     $     6.30                    $     3.00
                                     ==========                    ==========
</TABLE>

 The  following  table  summarizes information about  stock  options
 outstanding at December 31, 1996:
<TABLE>
<CAPTION>

                             OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                    -------------------------------------------------   -------------------------------
Range of Exercise        Options        Weighted       Weighted          Options           Weighted
    Prices           Outstanding at      Average     Average Exercise    Exercisable    Average Exercise
                         12/31/98       Remaining        Price           at 12/31/96         Price
                                     Contractual Life
---------------------------------------------------------------------   -------------------------------
<S>                     <C>           <C>              <C>               <C>              <C>
$0.9375 TO $3.00        987,085         4.12             $ 1.91            987,085          $ 1.91
 $3.01 TO $5.50         225,875         6.91             $ 4.60            224,875          $ 4.60
 $5.51 TO $7.50         162,500         6.50             $ 6.30            147,000          $ 6.30
                     ----------                                         ----------
                      1,375,460         5.15             $ 3.81          1,358,960          $ 3.75
                     ==========                                         ==========
</TABLE>


Vesting  varies  by  agreement  ranging  from  zero th 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,
1996 and 1995, 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 $2,410,489  for the year ended December 31, 1996.  Accordingly,
primary and fully-diluted earnings per share would have amounted to
$0.31 per share and $0.30 per share respectively, as of December 31,
1996
                              F-25
<PAGE>

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

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

                   December 31, 1996 and 1995
                   --------------------------

NOTE 15 - SUBSEQUENT EVENTS
---------------------------

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

Effective  March 1, 1997, the Company, through its SoCal Diagnostic
Services,  Inc.  subsidiary, purchased  substantially  all  of  the
operating  assets of the ultrasound division of Diagnostic  Imaging
Services,   Inc.  ("DISI").   The  acquired  business  includes   a
mobile/fixed  ultrasound business serving  clients  in  San  Diego,
Orange  and  Los Angeles counties.  The acquisition  of  DISI  will
provide  DHS  with  a  firm foundation in the  southern  California
market,  which is contiguous with the Company's existing operations
in  Arizona  and Nevada, as well as departmental access to  leading
hospitals  in  this market.  Pursuant to long-term contracts,  DISI
provides  ultrasound services to 26 facilities and numerous  shared
service  accounts.   Simultaneous  with  such  acquisition,   DHSMS
received an option to purchase four hospital-based MRI centers from
the same seller.

On February 14, 1997, the SEC declared effective the Company's Form
S-3  Registration  Statement relating to an offering  of  1,791,150
Warrant  Shares, which are issuable upon exercise of (i)  1,375,000
Redeemable  Common Stock Purchase Warrants (the "Public  Warrants")
issued  in  connection  with  the  company's  1993  initial  public
offering  (the "IPO"), (ii) 316,150 underwriter warrants issued  in
connection with the IPO (the "Underwriters' Warrants"),  and  (iii)
100,000  warrants  issued in connection with 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.

The Warrants are exercisable at prices ranging from $7.50 per share
to  $5.48  per  share.  On February 25, 1997, the last  sale  price
quoted on NASDAQ for a share of DHS's common stock was $9.375.  The
Company  will not receive any proceeds from the sale of the Warrant
Shares,  although  it has received, and will continue  to  receive,
proceeds  from the exercise of the Warrants, if and to  the  extent
exercised.   In the event that all of the unexercised Warrants  are
exercised, the maximum aggregate net proceeds to the Company  would
be  approximately  $11.2  million.  To the  extent  received,  such
proceeds   may  be  utilized  to  repay  a  portion   of   existing
indebtedness  for  working capital, for general corporate  purposes
and  for possible acquisitions (none of which have been identified)
at the discretion of the Company's management.

                              F-26
<PAGE>

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

          None







                               19
<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:

<TABLE>
<CAPTION>
Name                   Age       Position
----                   ---       --------
<S>                    <C>       <C>
Max W. Batzer (1)(2)    53       Chairman of the Board of Directors and
                                 Chief Executive Officer

Brad A. Hummel          40       Director,  President,   Chief Operating
                                 Officer and Chief Financial Officer

Thomas M. Sestak (1)(2) 54       Director

Bo W. Lycke (1)(2)      51       Director

James R. Angelica       49       Director and Senior Vice President

Bonnie G. Lankford      41       Sr. Vice President - Operations

Don W. Caughron         41       Sr. Vice President - Finance

Carol J. Gannon         37       Sr. Vice President  -  Clinical Services
</TABLE>
(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.  Hummel's seat next comes up for election on or about  May  31,
1997,  Mr.  Batzer's  and Mr. Angelica's seats  next  come  up  for
election on or about May 31, 1998, and Mr. Sestak's and Mr. Lycke's
seats next come up for election on or about May 31, 1999.

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


                                20
<PAGE>

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 subsidiary of American  Airlines).
Mr.  Batzer  holds a B.S.E. degree from The Wharton School  at  the
University  of  Pennsylvania,  and  an  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 American Medical Finance, Inc.
and its affiliate, National Financial Corporation, each of which is
engaged   in  providing  financial  services  to  various   medical
businesses.   Mr. Lycke holds an 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 Senior 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.


                                21
<PAGE>

Don  W.  Caughron  has  been Senior 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.

The  Company is not aware of any person who, at any time during the
fiscal  year  ended December 31, 1996, 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, 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).


                                22
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

The  following table sets forth the amount of all compensation paid
by  the  Company to its Chief Executive Officer and each  executive
officer  whose  salary  and  bonus exceeded  $100,000  (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                1996   305,900     20,000        0              0            0          0            0
Chairman and CEO             1995   231,000      7,500        0              0       75,000          0            0
                             1994   173,666          0        0              0      128,500          0            0

Brad A. Hummel               1996   225,570     15,000
President and COO            1995   173,133      7,500        0              0       30,000          0            0
                             1994   127,750          0        0              0      103,500          0            0

James R. Angelica(2)         1996    89,824          0   25,000              0
Director and                 1995    89,824          0   27,500              0       25,000          0            0
Senior Vice President        1994    21,644          0        0              0            0          0            0

Carol J. Gannon              1996    85,102          0   65,000              0            0          0            0
Senior Vice President
</TABLE>
----------------------
(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 from commencement of Mr.  Angelica's
employment on September 6, 1994.

A  table indicating 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,
2001.   The employment agreement provides for a minimum base salary
of $360,000 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.


                                23
<PAGE>

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,  2001.   In
February  1994,  Mr.  Hummel  also  assumed  the  duties  of  Chief
Financial Officer of the Company, upon the resignation of the prior
CFO.   The employment agreement provides for a minimum base  salary
of $270,000 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 40% 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
December 5, 1994.

The  Company also has employment agreements with James R. Angelica,
Bonnie  G. Lankford and Carol J. Gannon.  Mr. Angelica's employment
agreement  (as  amended) calls for him to serve as  a  Senior  Vice
President of the Company through August 31, 1997, at a base  salary
of  $85,000 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 $110,000 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  $85,000 per annum, 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 859,085 shares of common stock  at  exercise
prices  ranging  from  $.93 to $7.50 per  share,  and  expiring  at
various  times from January 1998 through April 2003.  The  weighted
average  exercise  price under such options is approximately  $1.80
per  share.   The


                                24
<PAGE>

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 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).  All  but  39,000  of  the
690,935  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.

                                25
<PAGE>

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.  There are currently outstanding, under the  1995  Non-
Qualified Plan, stock options for an aggregate of 454,625 shares of
common  stock  at exercise prices ranging from $1.93 to  $6.25  per
share,  and  expiring at various times from December  2000  through
January  2005.   The  weighted average exercise  price  under  such
options  is $4.14 per share.  Of the outstanding options under  the
1995  Non-Qualified Plan, 60,000 (exercisable at $5.25  per  share)
are  subject  to  certain contingencies relating to  the  Company's
earnings,   and  225,000  other  options  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).  On the date  of  this
report,  61,750  options are  outstanding  under the 1995 Incentive
Plan  at an  exercise price of $6.25 per share and expiring on July
17, 2001.

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.   Options for an aggregate of 345,000 shares of Common  Stock
have  been issued and are outstanding  under the 1997 Non-Qualified
Plan  at  an  exercise  price  of  $7.44 per  share and expiring on
January 2,  2005.   235,000 of such options contain price reduction
provisions similar to those described above.

                               26
<PAGE>

The  table  set  forth  below lists information  on  stock  options
granted  to  each  of  the Company's Named Officers  and  directors
through December 31, 1996.
<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              Qualified         5,082         1.6%         $2.21     January 13, 1998
                       Non-qualified       101,645        32.5%         $2.21     January 13, 2001
                           Qualified         3,500         1.2%         $0.94        April 3, 1999
                       Non-qualified        75,000        24.8%         $0.94      April  3,  2002
                       Non-qualified        50,000        16.6%         $1.69       August 8, 2002
                           Qualified         5,000         1.7%         $1.94        April 4, 2000
                       Non-qualified        50,000        16.7%         $1.94       April 4,  2003
                       Non-qualified        20,000         6.7%         $4.25     December 4, 2003

Brad A. Hummel             Qualified         5,082         1.6%         $2.21     January 13, 1998
                       Non-qualified       101,645        32.5%         $2.21     January 13, 2001
                           Qualified         3,500         1.2%         $0.94        April 3, 1999
                       Non-qualified        50,000        16.6%         $0.94        April 3, 2002
                       Non-qualified        50,000        16.6%         $1.69       August 8, 2002
                       Non-qualified        30,000        10.0%         $4.25     December 4, 2003

Thomas   M.  Sestak    Non-qualified       101,645          N/A         $2.21     January 13. 2001
                       Non-qualified         5,000          N/A         $0.94      April  3,  2002
                       Non-qualified        50,000          N/A         $1.69       August 8, 2002
                       Non-qualified        10,000          N/A         $1.94       April 4,  2003
                       Non-qualified        15,000          N/A         $4.25     December 4, 2003

Bo  W.  Lycke          Non-qualified         2,000          N/A         $0.94      April  3,  2002
                       Non-qualified        50,000          N/A         $1.69       August 8, 2002
                       Non-qualified        10,000          N/A         $1.94       April 4,  2003
                       Non-qualified        15,000          N/A         $4.25     December 4, 2003

James R. Angelica          Qualified         2,000         0.7%         $1.94        April 4, 2000
                       Non-qualified        10,000         3.3%         $1.94        April 4, 2003
                       Non-qualified        15,000         5.0%         $4.25     December 4, 2003
</TABLE>
Through December 31, 1996, a total of 2,625 incentive stock options
granted  under the 1992 Plan  had been exercised (none by executive
officers or directors),  and no non-qualified stock options granted
under any of the Plans have been exercised.

                               27
<PAGE>

The  following  table  sets  forth all stock  option  exercises  by
executive  officers and directors of the Company during the  fiscal
year ended December 31, 1996, 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,  1996  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.
<TABLE>
<CAPTION>
                      Shares                       Number of        Value of Unexercised
                     Acquired      Value     Unexercised Options    In-The-Money Options
Name                on Exercise   Realized      at Fiscal Year       at Fiscal Year End
----                -----------   --------   -------------------    --------------------
<S>                 <C>           <C>        <C>                    <C>
Max W. Batzer            0           0              310,227              $1,895,960

Brad A. Hummel           0           0              240,227              $1,423,660

Thomas M. Sestak         0           0              221,645              $1,056,175

Bo W. Lycke              0           0               77,000                $446,470

James R. Angelica        0           0               27,000                $128,970

Carol J. Gannon          0           0                    0                       0
</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  has
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.

                               28
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

The following table sets forth, as of March 21, 1997, 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.
<TABLE>
<CAPTION>
                                         Beneficially
Name and Address of Beneficial Owner            Owned      Percentage
------------------------------------     ------------      ----------
<S>                                      <C>               <C>
Max W. Batzer                             591,395 (1)            6.4%
 2777 Stemmons
 Dallas, Texas 75207

Thomas M. Sestak                          338,066 (2)            3.7%
 1226 Ninth Avenue
 San Francisco, California 94122

Brad A. Hummel                            317,538 (3)            3.5%
 2777 Stemmons
 Dallas, Texas 75207

Bo W. Lycke                                83,000 (4)            0.9%
 2777 Stemmons
 Dallas, Texas 75207

James R. Angelica                         466,552 (5)            4.7%
 9717 Landmark Parkway Drive
 St. Louis, Missouri 63127

All directors and executive
 officers as a group
 (eight persons)            2,159,962 (1)(2)(3)(4)(5)           21.4%
</TABLE>
----------
(1)   Includes  410,227  shares  which  are  subject  to  currently
exercisable stock options.
(2)  Includes  452 shares held by Mr. Sestak as custodian  for  his
minor  children, and 191,645 shares which are subject to  currently
exercisable stock options and warrants.
(3)   Includes  315,227  shares  which  are  subject  to  currently
exercisable stock options.
(4)    Includes  82,000  shares  which  are  subject  to  currently
exercisable stock options.
(5) All 370,252 outstanding shares are held jointly by Mr. Angelica
and  his  spouse,  and total beneficial ownership  includes  56,800
shares which are subject to currently exercisable warrants held  by
Mr. Angelica and his spouse, and 39,500 shares which are subject to
currently  exercisable  stock options  and  warrants  held  by  Mr.
Angelica individually.  Mr. and Mrs. Angelica have granted  to  Max
W.  Batzer  a  proxy, expiring September 5, 1997, to  vote  370,252
shares  owned  by Mr. and Mrs. Angelica (a) as to the  election  of
directors, in such manner as Mr. Batzer may determine in  his  sole
discretion, and (b) as to all other matters, in the same manner  as
the  greatest plurality of votes otherwise cast or given by holders
of  Common  Stock  with  respect to  the  particular  matter  under
consideration.

                               29
<PAGE>

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,  1997.   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 while  they
remain  subject to such pledge, although the Company is prohibited,
under its loan agreement with TCB, to redeem or purchase any shares
of its common stock without TCB'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.


                               30
<PAGE>

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

<TABLE>
<CAPTION>
Exhibits         Description of Exhibit
--------         ----------------------
<S>              <C>
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. (6)

3.4              Certificate of Stock Designation, creating Series
                 A Preferred Stock. (8)

4.1              Form of Warrant Agreement. (1)

4.2              1992  Stock  Option  Plan,  including  forms   of
                 qualified  incentive stock     option agreement  and
                 non-qualified stock option agreement. (1)

4.3              Form of Underwriter's Warrant. (1)

4.4              [Reserved]

4.5              Specimen Form of Share Certificate. (1)

4.6              Specimen Form of Warrant Certificate. (1)

4.7              1995 Nonqualified Stock Option Plan.  (6)

4.8              1995 Incentive Stock Option Plan. (6)

4.9              Form of Bridge Warrant and Bank Warrant. (7)

4.10             1997 Non-Qualified Stock Option Plan.

10.1             Employment Agreement, dated November 1, 1991 (with amendment
                 dated February 17, 1992), between the Company and Max  W.
                 Batzer. (1)

10.2             Employment Agreement, dated November 1, 1991 (with
                 amendment dated February 17, 1992), between the Company
                 and Brad A. Hummel. (1)

10.3             Contingent Share Agreement between the Company and
                 the former shareholders of SIS. (1)

</TABLE>

                             31
<PAGE>

<TABLE>
<S>              <C>
10.4             Contingent Share Agreement between the Company and
                 the former shareholders of Alpha. (1)

10.5             Loan Agreement between the Company and North Park
                 National Bank of Dallas. (1)

10.6             Promissory Notes from HIT to Valley National Bank. (1)

10.7             Promissory Notes from SIS to Central National Bank
                 of Mattoon. (1)

10.8             [ Reserved ]

10.9             Promissory Note from Alpha to North Park National
                 Bank of Dallas.  (1)

10.10            Lease Agreement for Dallas headquarters. (1)

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

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

10.13            Amendments, dated September 20, 1993 and November 9, 1993,
                 to Employment Agreement between the Company and  Max W.
                 Batzer. (2)

10.14            Amendments, dated September 20, 1993 and November 9, 1993,
                 to Employment Agreement between the Company and Brad A.
                 Hummel. (2)

10.15            Renewal Revolving Line of Credit Promissory  Note between
                 the Company and North Park National Bank  of  Dallas. (2)

10.16            Loan Extension Agreement between SIS and  Central
                 National Bank of Mattoon. (2)

10.17            Stock   Purchase   Agreement, regarding the acquisition of
                 HCI and   HCIM. (3)

10.18            Contingent Share Agreement between the Company and
                 former owner of Medmark. (6)

</TABLE>

                             32
<PAGE>

<TABLE>
<S>              <C>
10.19             Contingent Payment Agreement between the  Company
                  and the former   owner of Reliascan.  (6)

10.20             Agreement  and  Plan  of  Merger,  regarding  the
                  acquisition  of  MDI,  and  form of Common Stock  Purchase
                  Warrant issued by the Company to the former stockholders of
                  MDI. (4)

10.21            Contingent Share Agreement between the Company and
                 the former stockholder of HDII.  (6)

10.22            Amendments, dated December 5, 1994 and  September
                 1, 1995, to Employment Agreement between the Company and
                 Max W. Batzer.    (6)

10.23            Amendments, dated December 5, 1994 and  September 1, 1995,
                 to Employment Agreement between the Company and Brad A.
                 Hummel.  (6)

10.24            Asset  Purchase  Agreement,  regarding  the  MICA
                 acquisition (5).

10.25            Loan Agreement, dated as of July 31, 1995,  among
                 the Company, its subsidiaries and TCB. (5)

10.26            First  Amendment to Loan Agreement, dated  as  of
                 December  7, 1995, among the Company, its subsidiaries
                 and  TCB. (6)

10.27            Amendment,  dated March 13, 1996,  to  Employment Agreement
                 between the Company and Max W. Batzer. (7)

10.28            Amendment,  dated March 13, 1996,  to  Employment Agreement
                 between the Company and Brad A. Hummel. (7)

10.29            Second Amendment to Loan Agreement, dated  as  of
                 April  16,  1996,   among the Company, its subsidiaries
                 and  Texas Commerce Bank. (7)

10.30            Form of Bridge Note. (7)

10.31            Amended and Restated Loan Agreement, dated as  of
                 July  24,  1996,    among the Company, its subsidiaries
                 and  Texas Commerce Bank.

10.32            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. (8)
</TABLE>
                             33
<PAGE>

<TABLE>
<S>              <C>
10.33            Amendment, dated January 3, 1997,  to  Employment Agreement
                 between the Company and Max W. Batzer.

10.34            Amendment, dated January 3, 1997,  to  Employment Agreement
                 between the Company and Brad A. Hummel.

11.1             Statement re: computation of per share earnings.

21.1             Subsidiaries of the Company.
</TABLE>
-------------------

(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 March 31, 1994.

(3)   Incorporated  by  reference,  filed  as  an  exhibit  to  the
Company's report on Form 8-K filed on February 25, 1994.

(4)   Incorporated  by  reference,  filed  as  an  exhibit  to  the
Company's report on Form 8-K filed on September 21, 1994.

(5)   Incorporated  by  reference,  filed  as  an  exhibit  to  the
Company's report on Form 10-KSB filed on August 15,  1995.

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

(7)   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.

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


                               34
<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 25, 1997

                    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 Officer       March  25, 1997
                     and Director


/s/ Brad A. Hummel
-------------------
Brad  A. Hummel      President, Chief Operating Officer,     March  25, 1997
                     Principal Financial Officer, Principal
                     Accounting Officer and Director


/s/ Bo W. Lycke
-------------------
Bo W. Lycke          Director                                March 25, 1997


                               35