The diagonally implicit harmonic balance method is developed in an overset mesh topology and applied to unsteady rotor flows analysis. Its efficiency is by reducing the complexity of a fully implicit harmonic balance method which becomes more flexible in handling the higher harmonics of the flow solutions. Applied to the overset mesh topology, the efficiency of the method becomes greater by reducing the number of solution interpolations required during the entire solution procedure as the method reduces the unsteady computation into periodic steady state. To verify the accuracy and efficiency of the method, both hovering and unsteady forward flight of Caradonna and Tung and AH-1G rotors are solved. Compared with wind-tunnel experiments, the numerical results demonstrate good agreements at computational cost an order of magnitude more efficient than the conventional time-accurate computation method. The proposed method has great potential in other engineering applications, including flapping wing vehicles, turbo-machinery, wind-turbines, etc.