<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
                   QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

                         Commission file number 0-21752

                         NORTHSTAR HEALTH SERVICES, INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                 25-1697152
(State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                   Identification No.)

              665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701
                    (Address of principal executive offices)

                                  724-349-7500
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                        YES __X__           NO ____

         State the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:

               CLASS                              OUTSTANDING AS OF May 5, 1999
--------------------------------------            ------------------------------
Common Stock, par value $.01 per share                      5,975,424

Transitional Small Business Disclosure Format (Check one):

                        YES   ____          NO __X__


<PAGE>   2

                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

INDEX                                                                    PAGE
-----                                                                    ----

Part I - FINANCIAL INFORMATION

    Item 1.

         Condensed Consolidated Balance Sheets as of
              March 31, 1999 and December 31, 1998                         1

         Condensed Consolidated Statements of Operations
              for the three months ended March 31, 1999 and 1998           3

         Condensed Consolidated Statements of Cash Flows
              for the three months ended March 31, 1999 and 1998           4

         Notes to Condensed Consolidated Financial Statements              5

    Item 2.

         Management's Discussion and Analysis of Financial
              Condition and Results of Operations                          9

    Item 3.

         Quantitative and Qualitative Disclosure About Market
              Risk Sensitive Instruments                                  13

Part II - OTHER INFORMATION

    Item 1. - Legal Proceedings                                           14

    Item 2. - Changes in Securities and Use of Proceeds                   14

    Item 3. - Defaults Upon Senior Securities                             14

    Item 5. - Other Information                                           14

    Item 6. - Exhibits and Reports on Form 8-K                            15
<PAGE>   3



Item 1. - Financial Statements


                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)

                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                A S S E T S                                          March 31,            December 31,
                                -----------                                           1999                    1998
                                                                                 -----------------     ------------------
                                                                                   (Unaudited)
<S>                                                                                  <C>                     <C>      
CURRENT ASSETS:
    Cash and cash equivalents                                                        $     1,709             $     901
    Accounts receivable-
       Patients, net of allowances for doubtful accounts of
           $ 522 and $ 497 respectively                                                    4,689                 4,624
       Management fees                                                                       209                   224
       Miscellaneous                                                                          80                   458
    Prepaid expenses and other current assets                                                154                   399
                                                                                    ------------          ------------

    Total current assets                                                                   6,841                 6,606
                                                                                    ------------          ------------

PROPERTY AND EQUIPMENT, net                                                                2,150                 2,231

INTANGIBLE ASSETS, net (Note 2)                                                           19,548                19,811

OTHER ASSETS                                                                                 144                   126

TOTAL ASSETS                                                                        $     28,683          $     28,774
                                                                                    ============          ============
</TABLE>




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




                                       1
<PAGE>   4



                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)

                    (Dollars in Thousands, Except Share Data)

<TABLE>
<CAPTION>
                   LIABILITIES AND STOCKHOLDERS' EQUITY                             March 31,            December 31,
                   ------------------------------------                               1999                   1999
                                                                                ------------------    ------------------
                                                                                   (Unaudited)
<S>                                                                                  <C>                   <C>       
CURRENT LIABILITIES:
    Current portion of long-term debt (Note 3)                                                         
       Senior Debt                                                                   $   14,083            $   14,083
       Thomas Zaucha and Zaucha Family Limited Partnership                                4,364                 4,069
       Other debt                                                                           360                   509
    Accounts payable                                                                        852                   833
    Accrued expenses
       Thomas Zaucha and Zaucha Family Limited Partnership                                8,784                 8,907
       Other Obligations                                                                  4,403                 4,318
    Contractual obligations to employees                                                    832                   915
                                                                                     ----------            ----------

                  Total current liabilities                                              33,678                33,634
                                                                                     ----------            ----------

LONG-TERM DEBT (Note 3)
    Thomas Zaucha and Zaucha Family Limited Partnership                                     580                   809
    Other debt                                                                              235                   242
                                                                                     ----------            ----------
                  Total long-term debt                                                      815                 1,051

MINORITY INTEREST                                                                           206                   181
                                                                                     ----------            ----------

                  Total liabilities                                                      34,699                34,866
                                                                                     ----------            ----------

STOCKHOLDERS' EQUITY
    Preferred stock, par value $.01 per share, 1,000,000 shares
       authorized, none issued                                                               --                    --
    Common stock, par value $.01 per share, 20,000,000 shares authorized;
       6,337,988 shares issued at March 31, 1999 and December 31, 1998                       63                    63
    Additional paid-in capital                                                           22,599                22,599
    Warrants outstanding                                                                  1,487                 1,487
    Retained deficit                                                                    (29,712)              (29,788)
    Less:  Treasury stock, 362,564 shares in 1999 and 1998, at cost                        (453)                 (453)
                                                                                     ----------            ----------

                  Total stockholders' equity/(deficit)                                   (6,016)               (6,092)
                                                                                     ----------            ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $   28,683            $   28,774
                                                                                     ==========            ==========
</TABLE>




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


                                       2
<PAGE>   5



                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)

                    (Dollars in Thousands, Except Share Data)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended March 31,
                                                                                --------------------------------------
                                                                                     1999                  1998
                                                                               ------------------    -----------------
<S>                                                                                <C>                 <C>          
REVENUE:
   Net patient service revenue                                                     $     6,660         $       7,782
   Management fee revenue                                                                  323                   384
                                                                               ------------------    -----------------
       Total revenue                                                                     6,983                 8,166

COSTS OF SERVICE                                                                         3,069                 3,729
                                                                               ------------------    -----------------
       Gross profit                                                                      3,914                 4,437

OPERATING EXPENSES:
    Selling, general and administrative expenses                                         2,477                 2,969
    Bad debt expense                                                                       108                   119
    Restructuring and other non-recurring expenses (Note 4)                                  -                   115
    Amortization of intangibles                                                            228                   232
    Depreciation and amortization                                                          138                   138
    Management fee expenses                                                                309                   400
                                                                               ------------------    -----------------
       Total operating expenses                                                          3,260                 3,973
                                                                               ------------------    -----------------

OPERATING INCOME                                                                           654                   464

NON-OPERATING EXPENSES:
    Interest expense, net                                                                  503                   527
    Other expense, net                                                                      (2)                  (11)
                                                                               ------------------    -----------------
                  Total non-operating  expenses                                            501                   516
                                                                               ------------------    -----------------

INCOME/(LOSS) BEFORE INCOME TAXES                                                          153                   (52)

INCOME TAXES                                                                               (14)                   --
                                                                               ------------------    -----------------

INCOME/(LOSS) BEFORE  MINORITY INTEREST                                                    167                   (52)

MINORITY INTEREST                                                                           91                   130
                                                                               ------------------    -----------------

NET INCOME/(LOSS)                                                                     $     76              $   (182)
                                                                               ==================    =================

NET INCOME/(LOSS) PER SHARE - BASIC                                                   $   0.01              $  (0.03)
                                                                               ==================    =================

NET INCOME/(LOSS) PER SHARE - DILUTED                                                 $   0.01              $  (0.03)
                                                                               ==================    =================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES                                             5,975,424             5,975,424
                                                                               ==================    =================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
                                                                                     6,065,801             5,975,424
                                                                               ==================    =================
</TABLE>



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



                                       3
<PAGE>   6




                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended March 31,
                                                                                 -------------------------------------
                                                                                      1999                 1998
                                                                                 ----------------     ----------------
<S>                                                                                     <C>                <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income/(loss)                                                                   $     76           $     (182)
    Adjustments to reconcile net income/(loss) to net cash provided by
       (used in) operating activities-
          Depreciation and amortization                                                      551                  584
          Provision for doubtful accounts                                                    108                  119
          Interest on discounted obligation                                                   38                   61
          Gain on sale of equipment                                                           --                   (7)
          Provision for (decrease)/increase in contractual obligations to
              employees                                                                      (50)                  51
          Minority interest                                                                   91                  130
          Change in current assets and liabilities-
              Decrease in receivables                                                        220                  163
              Decrease in other current assets                                               245                   20
              Increase/(decrease) in accounts payable                                         19                 (491)
              Decrease in accrued expenses                                                   (38)                (324)
                                                                                 ----------------     ----------------
                  Net cash provided by operating activities                                1,260                  124
                                                                                 ----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of equipment                                                            1                    3
    Capital expenditures                                                                    (172)                 (69)
    Deposits, loans and investments                                                          (18)                  12
                                                                                 ----------------     ----------------
                  Net cash used in investing activities                                     (189)                 (54)
                                                                                 ----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on long-term debt                                                               (164)                (439)
   Distributions to minority interests                                                       (66)                 (36)
   Payments of contractual obligations to employees                                          (33)                 (36)
   Borrowings on long-term debt                                                                -                   27
                                                                                 ----------------     ----------------
                  Net cash used in financing activities                                     (263)                (484)
                                                                                 ----------------     ----------------

NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS                                        808                 (414)

CASH AND CASH EQUIVALENTS, beginning balance                                                 901                  657
                                                                                 ----------------     ----------------

CASH AND CASH EQUIVALENTS, ending balance                                               $  1,709           $      243
                                                                                 ================     ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid                                                                           $    445           $      410
Income taxes (refunded)/paid                                                                 (14)                  10

NONCASH INVESTING ACTIVITIES:
Capital lease obligations                                                                     --                   28
</TABLE>

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



                                       4
<PAGE>   7


                NORTHSTAR HEALTH SERVICES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

General

These condensed consolidated financial statements of Northstar Health Services,
Inc. (the "Company") are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations for the interim
period. These statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the year ended December 31, 1998.

Management Fees

The Company manages a business on a contract basis that provides mobile
diagnostic services. In conjunction with this contract, the Company receives
compensation in the form of a monthly management fee. This fee is equal to the
net income or loss of the managed business after the payment of certain
agreed-upon salaries and benefits to certain parties.

Earnings Per Common Share

Earnings per share for the three months ended March 31, 1999 and 1998 were
calculated in accordance with Statement of Financial Accounting Standards No.
128 (SFAS No. 128), "Earnings per Share", using the weighted average number of
shares outstanding during the period and including the effect of stock options
outstanding. Pursuant to the Company's 1992, 1994, and 1997 Stock Option plans
and certain stock options granted outside of these plans, options for a total of
22,500 shares of the Company's common stock have been granted and no options
have been exercised for the three month period ended March 31, 1999.

The following table reconciles the number of shares utilized in the earnings per
share calculations for the three-month periods ended March 31, 1999 and 1998
(dollars in thousands):

<TABLE>
<CAPTION>
                                                              For the three months ended March 31,
                                                              ------------------------------------
                                                                   1999                   1998
                                                                   ----                   ----
<S>                                                                 <C>                   <C>      
   Basic earnings per share:
      Net income/(loss)                                                  $ 76               $ (182)
      Average shares outstanding                                    5,975,424             5,975,424
      Income/(loss) per share                                          $ 0.01              $ (0.03)
   Diluted earnings per share:
      Net income/(loss)                                                  $ 76               $ (182)
      Average shares outstanding                                    5,975,424             5,975,424
      Shares issuable for Keystone merger                                   -                     -
      Stock warrants                                                        -                     -
      Stock options                                                    90,377                     -
                                                          ------------------------------------------
      Diluted average shares outstanding                            6,065,801             5,975,424
      Income/(loss) per share                                          $ 0.01              $ (0.03)
</TABLE>

For the three month periods ended March 31, 1999 and 1998, options to purchase
580,800 and 967,974 and warrants to purchase 565,000 and 843,500 shares of
common stock, respectively, were outstanding, but were not included in the
computation of diluted earnings per share because the options' and warrants'
exercise prices were greater than the average market price of the Company's
common shares for the periods and due to the loss position of the Company for
the three month period in 1998. Also, not included in the calculation of diluted
earnings per share were the shares that may be issued to the 



                                       5
<PAGE>   8

Zauchas in connection with the Keystone merger that is subject to the approval
of the Special Committee and the Board of Directors. See Note 6. The Zaucha
Stock Guarantee could be satisfied by all cash, all stock, or a combination of
both cash and stock.

Reclassifications

Certain reclassifications have been made to prior year financial statements to
conform to the current year presentation.

2. INTANGIBLE ASSETS:

Intangible assets and the related amortization periods consist of the following
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                                 March 31,           December 31,
                                                                                   1999                  1998
                                                                             -----------------     ------------------
<S>                                                                             <C>                 <C>         
      Excess of cost over net assets acquired (40 years)                        $   18,708          $     18,708
      Employment agreements (2 to 7 1/2 years)                                         625                   625
      Keystone tradename (20 years)                                                  2,500                 2,500
      Covenant not to compete (5 years)                                                 78                    78
      Assembled Keystone workforce (5 years)                                           450                   450
      Deferred financing and other costs (5 years)                                     828                   831
                                                                             -----------------     ------------------

      Gross intangible assets                                                       23,189                23,192

      Less-accumulated amortization                                                 (3,641)               (3,381)
                                                                             -----------------     ------------------

      Net intangible assets                                                       $ 19,548              $ 19,811
                                                                             =================     ==================
</TABLE>

3.  DEBT:

Debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                         March 31,           December 31,
                                                                                           1999                  1998
                                                                                     ----------------     -------------------
<S>                                                                                    <C>                  <C>        
         Term loan with Senior Lender                                                  $     6,083          $     6,083
         Revolving line of credit with Senior Lender                                         2,000                2,000
         Acquisition facility with Senior Lender                                             6,000                6,000
         Non-interest bearing term notes to Thomas Zaucha and the Zaucha
              Family Limited Partnership                                                     2,625                2,625
         Term notes to Thomas Zaucha and the Zaucha Family Limited Partnership
                                                                                             2,400                2,400
         Capital lease obligations with interest rates ranging from 9% to 15.6%
                                                                                               424                  579
         Other debt                                                                            434                  441
                                                                                       -----------          -----------

         Total long-term debt                                                               19,966               20,128

              Less:
                  Current portion                                                          (18,807)             (18,661)
                  Debt discount                                                               (344)                (416)
                                                                                       -----------          -----------

         Long-term debt                                                                $       815          $     1,051
                                                                                       ===========          ===========
</TABLE>


As of March 31, 1999, the Company has no unused amounts under its existing
credit facilities. During the first quarter of 1999, the Company's weighted
average interest rate was 9.5%.



                                       6
<PAGE>   9

The Company is currently in default of its obligations under its credit facility
with its Senior Lender, Cerberus Partners, LP. In September 1997, Cerberus
purchased from IBJ Schroder Bank & Trust Company all of the Company's senior
debt amounting to $15.3 million, including principal and accrued interest. The
debt was purchased subject to an existing forbearance agreement that expired at
the end of September 1997. The Company has subsequently entered into extensions
of the forbearance agreement directly with Cerberus, the most recent of which is
effective through May 31, 1999. Please refer to the Liquidity and Capital
Resources section of Item 2 for further discussion.

4.  RESTUCTURING AND NON-RECURRING EXPENSES:

Since 1996, the Company has incurred significant legal, accounting and
consulting expenses arising out of its investigation of the actions of the
management team that controlled Northstar prior to 1996 and the resulting
litigation brought both against and by the Company. It has also incurred
significant expenses related to the consent solicitation that was conducted in
1997, and the reorganization of the management and operations of the Company
after the reinstatement of Thomas Zaucha as Chairman and CEO in May 1997.
Although the majority of these issues were resolved in 1997 and 1998, certain
matters are still subject to resolution in 1999. The amount of the expenses
related to these matters is not expected to be material on an ongoing basis.
Please refer to Note 6, Commitments and Contingencies, and to the Legal
Proceedings section in Part II for a discussion of any outstanding matters.

5. RELATED-PARTY TRANSACTIONS:

Keystone Acquisition

In connection with the Company's acquisition of Keystone Rehabilitation Systems,
Inc., on November 15, 1995, Mr. Thomas Zaucha, an officer of Northstar, and Mr.
Zaucha's family limited partnership, have debt and other amounts due directly to
them of $3,919,500 and $1,105,500, respectively, as of March 31, 1999. In
addition, Mr. Zaucha and the Zaucha Family Limited Partnership have other
amounts due directly to them of $7,057,000 and $1,727,000, respectively, as of
March 31, 1999.

The Company also rents office and clinical space in buildings owned by the
Zaucha Family Limited Partnership and other related entities. Through March 31,
1999, the Company has incurred an expense of $117,590 related to rent due on
these spaces.

6. COMMITMENTS AND CONTINGENCIES:

Zaucha Stock Guarantee

The Company guaranteed the value of certain stock issued to Mr. Zaucha and the
Zaucha Family Limited Partnership to be at least $5,600,000 through certain
periods ending no later than December 31, 1997. The Company has an obligation to
fund the shortfall in stock value through a cash payment equal to the shortfall
or, with shareholder approval, through the issuance of additional shares of
Common Stock in an amount equal to the shortfall. As of the December 31, 1997
final determination date, the Company was obligated to either make a cash
payment of $4,693,423 or issue approximately 4,888,982 additional shares of
Common Stock.

The Special Committee of the Board has been charged with the authority to
negotiate with the Zaucha's the obligations under the stock guarantee. The
Company presently does not have sufficient cash to meet its obligations under
the guarantee. This amount is recorded as a liability in accrued expenses. At
the Company's Annual Meeting held on June 11, 1998, the Company's stockholders
approved the issuance of up to 4,888,982 shares of Common Stock in order to
enable the Company to fully satisfy the obligations of the Company under the
guarantee in stock if deemed appropriate.

Other

David D. Watson, former President of the Company, has made claims against the
Company in excess of 



                                       7
<PAGE>   10

$500,000 in relation to an Employment Agreement and Note. Negotiations for
settlement of these claims have not been successful, and no legal action has
been taken. The Company believes and avers that Mr. Watson has breached the
Employment Agreement, was terminated for cause, and as a result thereof, the
Company has counterclaims against Mr. Watson. The Company has and will continue
to vigorously defend these claims.




                                       8
<PAGE>   11




Item 2.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Information Relating to Forward-Looking Statements

Management's Discussion and Analysis and other sections of this Quarterly Report
include forward-looking statements that reflect the Company's current
expectations relating to such matters as anticipated financial performance,
business prospects, and projected plans for and results of its operations. A
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations and performance of the Company's business include the following:
changes in regulatory, governmental and payor policies regarding reimbursement;
competition, both directly in terms of other providers of physical therapy and
other services, and the competition for qualified personnel; the outcomes of the
current litigation involving the Company; defaults in borrowing arrangements,
defaults in bank financing, including an inability to comply with various
covenants in connection with such financing; the ability of the Company to have
its Common Stock relisted on a national market or exchange; and the
uncertainties surrounding the healthcare industry in general.

Results of Operations

Three Months Ended March 31, 1999 and 1998

Total revenue

During the first quarter of 1999, the Company's total revenues declined by
$1,183,000, or 14.5%, from $8,166,000 for the first quarter of 1998 to
$6,983,000 for the first quarter of 1999. Revenues decreased approximately
$933,000 as the result of the closure or termination of certain clinics and
contracts. A decline in management fee revenues of approximately $61,000 is
attributable to the termination of services in unprofitable areas and a change
in the reimbursement of certain diagnostic services. The Company opened new
outpatient offices and entered into new contracts that resulted in an increase
in net patient service revenues of $287,000. Net patient service revenue from
continuing operations decreased $263,000 as a result of adverse weather
conditions experienced in January 1999 that contributed to a decrease in the
number of patient visits in the first quarter of 1999, and due to a change in
Medicare compensation for therapy services provided by outpatient rehabilitation
agencies that was effective January 1, 1999, that negatively affected net
reimbursement from Medicare and certain other payors. Revenues also declined
$213,000 as the result of the sale in 1998 of the Company's interests in two
joint ventures that provided mobile diagnostic services, including cardiac
services, in Western Pennsylvania.

Costs of service and Gross profit

Due to the decrease in total revenues and the Company's cost reduction program
initiated in 1998, costs of service decreased $660,000 from $3,729,000 for the
first quarter of 1998 to $3,069,000 for 1999, or 17.7%. As a percentage of net
patient service revenue, costs of service decreased from 47.9% in the first
quarter of 1998 to 46.1% in the first quarter of 1999. As a result of these
factors, gross profit declined $523,000, from $4,437,000 (54.3% of total
revenue) for the first quarter of 1998 to $3,914,000 (56.1% of total revenue)
for 1999.

Selling, general and administrative expense

Total selling, general and administrative expenses for the first quarter
decreased $492,000 from $2,969,000 in 1998 to $2,477,000 in 1999. The 16.6%
decrease can be attributed to the cost reduction program initiated in May 1998,
and the regional management reorganization that was completed in December 1998.



                                       9
<PAGE>   12

Bad debt expense

The Company incurred bad debt expense of $108,000 or approximately 1.6% of net
patient service revenue during the first quarter of 1999 versus $119,000 or
approximately 1.5% during the first quarter of 1998. Bad debt expense in both
years was reduced by the recovery of contract billings deemed uncollectible in
prior years. Bad debt expense without any recoveries would have been
approximately 2.9% and 3.1%, respectively, in the first quarter of 1999 and
1998.

Restructuring and non-recurring expense

In 1998, the Company continued to incur additional legal and other professional
fees resulting from the continuing reorganization of the Company and litigation
both against and on behalf of the Company in various matters. During the first
quarter of 1999, the expenses deemed non-recurring were considered immaterial.

Interest and other non-operating expenses

Interest expenses were $503,000 for the first quarter of 1999 compared to
$527,000 for 1998. This decrease can be attributed to a decline in the Company's
weighted average interest rate from 1998 to 1999. The Company reported net
non-operating income of $2,000 in the first quarter of 1999 compared to $11,000
in the first quarter of 1998.

Income taxes

The Company has recorded a tax benefit of $14,000 as the result of the receipt
of an income tax refund from prior years. The Company has not recorded a tax
provision during the first quarter of 1999. As a result of the losses
experienced in 1997 and prior years, the Company anticipates that taxable income
in 1999 will be offset by tax loss carryforwards.

Net income

The net income for the first quarter of 1999 was $76,000 compared to a loss of
$182,000 for the same period in 1998. This significant increase in profitability
is due to improved operations and the decrease in the amount of restructuring
and other non-recurring expenses from the first quarter of 1998 to the first
quarter of 1999.

Liquidity and Capital Resources

The Company is currently in default of its obligations under the credit facility
with Cerberus Partners, LP. Failure to reach an agreement with this senior
creditor relative to a restructuring of the Company's outstanding debt
obligations would likely result in acceleration of the loan and a filing of a
petition for relief under the Federal Bankruptcy Code. The Company has been
engaged in negotiations with Cerberus to reach a mutually agreeable
restructuring of this debt at various times since September 1997. During this
process, the Company has continued to enter into extensions of the forbearance
agreement with Cerberus, which is currently extended through May 31, 1999, and
has made monthly payments to Cerberus that approximate the monthly interest
expenses on the loan. In addition, on May 3, 1999, the Company made a payment of
$100,000 to be applied to loan principal as provided for in the current
extension of the forbearance agreement. However, there can be no assurance that
the Company will be able to reach a mutually agreeable restructuring of the
debt, or that it will continue to be able to enter into extensions of the
current forbearance agreement. In addition, the Company has other obligations,
including obligations incurred in the Keystone merger with the Zaucha's, that it
is currently unable to pay. The Company is attempting to reach payment
agreements with all of these parties; however, there is no assurance that it
will be able to do so on mutually agreeable terms.

During the three months ended March 31, 1999, the Company's operating activities
provided net cash of 



                                       10
<PAGE>   13

$1,260,000 compared to $124,000 provided during the first three months of 1998.
This change in cash provided from operations is the result of an improvement in
net income from a loss of $182,000 during the first three months of 1998 to
$76,000 in net income during the same period in 1999; the collection of other
current assets in the first quarter of 1998; and the decline in cash needed to
improve the payment status of accounts payable and accrued expenses that existed
in 1998.

The net cash used in investing activities increased from $54,000 in the first
three months of 1998 to $189,000 in the first three months of 1999 resulting
primarily from an increase in expenditures for capital items in 1999.

During the first three months of 1998, the Company made debt principal payments
of $439,000 which were primarily scheduled debt and lease payments as well as
payments on debt to former owners and managers of the Company. This amount
decreased to $164,000 for the first three months of 1999 due to the final
payment of certain debt after the first quarter of 1998. In addition, during the
first quarter of 1999, the Company paid approximately $66,000 to minority
interest holders in companies controlled by Northstar and $33,000 under
contractual obligations with certain employees. During the first three months of
1999, the Company made no additional material borrowings under any debt
arrangements.

Summary of Financial Condition and Results of Operations

The Company is presently experiencing a severe liquidity crisis as a result of
the expenses related to the contest for corporate control in 1997; the
investigation and litigation expenses arising out of certain actions taken by
the Company's pre-1996 management; prior year's operating losses; and prior
obligations to buy out profit-sharing interests in several of the Company's key
clinics. As a result of these circumstances, the Company's access to the capital
and debt markets has been severely impaired. If it is unable to raise additional
capital and/or effect a permanent restructuring of the terms of its outstanding
long-term debt obligations in the forseeable future, the Company could be
required to file a petition for relief under the provisions of the Bankruptcy
Code.

In response to these developments, the Company continues to focus its efforts on
improving the performance of its core physical therapy and rehabilitation
businesses. As the Company has been unsuccessful in selling it's mobile
diagnostic business, management is also committed to improving the efficiency
and profitability of this venture. The Company is also continuing to review all
expenses in an effort to reduce costs wherever possible, and to seek additional
sources of revenues. The Company's Chairman has indicated that he will not
demand immediate reimbursement of all amounts currently due to him and his
family partnership. While the Company is currently in default of its obligations
under its Credit Agreement, it has been engaged in negotiations with Cerberus
that the Company anticipates will lead to the execution of a permanent
restructuring of its debt.

There can be no assurance that the Company will be successful in raising
additional equity or other capital, or that it will be in a position to do so on
terms that will not significantly dilute the equity interest of the Company's
existing stockholders. The Company is not currently eligible to utilize Form S-3
to register offerings of securities under the Securities Act of 1933, and its
shares are not currently listed on either the NASDAQ National Market or the
NASDAQ Small Cap Market. These circumstances could adversely affect the
Company's ability to attract additional equity capital.

Year 2000 Issue

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.

The Company is aware of potential Year 2000 issues in its internal computer
systems and software, payor and supplier systems and software, Electronic Data
Interchange (EDI) software, and certain 



                                       11
<PAGE>   14

therapy and diagnostic equipment that contain computer operating systems. In
response to these issues, the Company has formed a Year 2000 Project Team (the
"Team") that is headed by the Director of Management Information Systems. This
Team includes members of senior management, Information Systems professionals,
department heads and outside consultants. The Year 2000 Project Team has
developed a work plan that includes inventory, assessment, planning,
implementation and testing. The scope of this plan encompasses many elements,
including hardware, operating systems, application software, end user computing,
communications, facilities, equipment and suppliers. Monthly status/progress
reports, including Y2K Compliance Status Worksheets, are issued to the Chief
Financial Officer who, in turn, updates the Board of Directors.

The Company's software systems, including its internal financial and billing
systems, have all been assessed. The Team has obtained compliance certificates
for the General Ledger (general accounting), Accounts Payable, Billing &
Accounts Receivable, Fixed Asset and Stock Option software packages. All
upgrades, if any, to these systems were done at no cost to the Company. The
Payroll system package requires an upgrade for customized features that is
anticipated to be completed by May 31, 1999. The cost for this upgrade is
estimated to be approximately $3,000. The Company generally utilizes Microsoft
based Office Suites and networking products for its office computing software
needs and upgrades to newer software as deemed necessary. The Company's current
standard products are Windows 95 and Office 97, which are Year 2000 compliant.

The Company has inventoried its computer equipment and identified potential Year
2000 issues. The upgrade on the Company's IBM RS/6000 operating system was
installed in April 1999. All Personal Computer hardware is Year 2000 compliant,
with the exception of a few older machines that require a "patch" that will be
installed by May 31, 1999, at a total cost of less than $1,000.

The Company has initiated formal communications with its significant payors and
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. These
communications ask for written assurances that they are or will be Year 2000
compliant. Currently, the Company does not believe the failure of such third
parties to remediate their own Year 2000 Issue will have a material adverse
effect on the Company. There can be no guarantee, however, that the systems of
other companies on which the Company's systems rely will be timely converted, or
that failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.

As of May 1, 1999, the inventory and assessment phases of the plan were close to
completion. The assessment of certain therapy, diagnostic and communications
equipment is still being performed, but is expected to be completed by May 31,
1999. The implementation and testing phases are expected to be completed by July
1, 1999.

Based on the assessment to date, the Company has determined that it will not be
required to invest significant funds to replace hardware or software in order
for its computer systems or equipment to properly utilize dates beyond December
31, 1999. Estimated costs to upgrade systems or equipment, either already
performed or necessary in the future, are not expected to exceed $25,000, which
will be provided out of internally generated cash flow. The Company presently
believes that if any additional modifications are required that are unknown at
this time, they will be insignificant in scope and cost. To the extent that the
Company's computer systems or equipment need to be modified to remediate any
Year 2000 Issue, the Company plans to complete such remediation by July 1, 1999.

The Company does not currently believe that it has any material exposure for the
Year 2000 issue. However, if the Company discovers any such exposure, it will
implement projects to correct or prepare contingency plans to address any such
issue. The Company believes that a material failure would occur if a major
payor, such as Blue Cross/Blue Shield, was unable to reimburse the Company in a
timely manner for services provided. The Company does not believe, based on its
current financial situation and access to capital, that it can produce an
adequate contingency plan if its significant payors are unable to reimburse the
Company on a timely basis for services provided.



                                       12
<PAGE>   15

The Company's assessment of its Year 2000 Issue and the associated costs are
based on management's best estimates, which were derived utilizing assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from these plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct relevant
computer codes and similar uncertainties. Therefore, there can be no assurance
that management's assessment that the Company's Year 2000 Issue is insignificant
is correct.

Item - 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments

The Company currently does not invest excess funds in derivative financial
instruments or other market risk sensitive instruments for the purpose of
managing its interest rate risk or for any other purpose.



                                       13
<PAGE>   16



Part II - OTHER INFORMATION

Item 1. - Legal Proceedings

On October 2, 1998, Nicholas P. Horoszko, a named defendant in the lawsuit filed
by the Company in September 1996 under the Racketeer Influenced and Corrupt
Organization Act ("RICO") in federal court in Pittsburgh, filed a demand for
arbitration against the Company for alleged breach of contract. Horoszko is
seeking damages of approximately $225,000. The Company plans to vigorously
contest this liability. No scheduling order has yet been entered on this claim.

Item 2. - Changes in Securities and Use of Proceeds

Chapter 1, Title 8, Section 170 of the Delaware Corporation Law provides that
the directors of every corporation may declare and pay dividends either out of
surplus or, in the event that there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Although the Company has experienced a small profit for fiscal year 1998 and the
first quarter of 1999, the Company has not had surplus during the past fiscal
year and does not have surplus during the first quarter of fiscal year 1998, and
therefore, the Company does not plan to declare and pay dividends on its Common
Stock.

In addition, the Company is prohibited from declaring any dividend, other than
dividends payable solely in common stock, on any shares of any class of stock
under the terms of the Company's Credit Agreement with Cerberus Partners, LP.

Item 3. - Defaults Upon Senior Securities

The Company is currently in default of its financial and other covenants and
payment obligations under its Credit Agreement with Cerberus Partners, LP. As of
the date of the filing of this report, the Company is in arrears on its
principal obligations in the amount of $7,067,000 and accrued interest in the
amount of approximately $940,000. Please refer to the Liquidity and Capital
Resources and Summary sections of the Management's Discussion and Analysis (Part
I, Item 2).

Item 5. - Other Information

Future Business Opportunities

From time to time, the Company engages in exploratory discussions with possible
candidates for a merger or joint venture in an effort to improve its liquidity
and operations and as part of its strategic planning to improve shareholder
value. However, there is no guarantee that the Company will decide to enter into
a merger or joint venture, or that it will find a suitable merger or joint
venture partner.





                                       14
<PAGE>   17



Item 6. - Exhibits and Reports on Form 8-K

(a)      Exhibits Required by Item 601 of Regulation S-K

         The following exhibits required by Item 601 of Regulation S-K are set
         forth in the following list and are filed either by incorporation or by
         reference from previous filings with the Securities and Exchange
         Commission or by attachment to this Form 10-Q.


3.1.1    Articles of Incorporation of Northstar Health Services, Inc., as filed
         in the state of Delaware, filed as an exhibit to the Company's Annual
         Report on Form 10-K for fiscal year ended December 31, 1996, is
         incorporated by reference.

3.1.2    Amendment to Certificate of Incorporation, as filed in the state of
         Delaware, filed as an exhibit to the Company's Quarterly Report on Form
         10-Q dated August 7, 1998, is incorporated by reference.

3.2.1    Bylaws of Northstar Health Services, Inc., filed as an exhibit to the
         Company's Quarterly Report on Form 10-Q dated August 14, 1997, is
         incorporated by reference.

3.2.2    Amendment to the Bylaws of Northstar Health Services, Inc., filed as an
         exhibit in the Company's Form 8-K, dated September 1, 1998, is
         incorporated by reference.

4.1      1997 Stock Option Plan, filed as an exhibit to the Company's Annual
         Report on Form 10-K for fiscal year ended December 31, 1997, is
         incorporated by reference.

4.2      1992 Stock Option Plan, as amended, filed as an exhibit to the
         Company's Annual Report on Form 10-K for fiscal year ended December 31,
         1996, is incorporated by reference.

4.3      Form S-8 Registration Statement (No. 33-94584), 1992 Stock Option Plan
         filed July 14, 1995, is incorporated by reference.

4.4      Form S-8 Registration Statement (No. 333-57051), 1997 Stock Option Plan
         filed June 17, 1998, is incorporated by reference.

4.5      Post Effective Amendment No. 1 to Form S-8 Registration Statement (No.
         33-94584), 1994 Stock Option Plan, filed June 17, 1998, is incorporated
         by reference.

10.1     Employment Agreement dated November 15, 1995, between Northstar Health
         Services, Inc. and Thomas W. Zaucha, filed as an exhibit to the
         Company's Form 8-K dated November 15, 1995, is incorporated by
         reference.

10.2     Employment Agreement dated September 1, 1997, between Northstar Health
         Services, Inc. and Lisa S. Guarino, filed as an exhibit to the
         Company's Quarterly Report on Form 10-Q dated November 14, 1997, is
         incorporated by reference.

10.3     Forbearance Agreement between Northstar Health Services, Inc. and IBJ
         Schroder Bank & Trust Co., dated August 18, 1997, filed as an exhibit
         to the Company's Annual Report on Form 10-K for fiscal year ended
         December 31, 1997, is incorporated by reference.

10.4     Extension Supplement between Northstar Health Services, Inc. and IBJ
         Schroder Bank & Trust Co. dated August 29, 1997, filed as an exhibit to
         the Company's Annual Report on Form 10-K for fiscal year ended December
         31, 1997, is incorporated by reference.

10.5     Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LLP and IBJ Schroder Bank & Trust Co. dated October 1, 1997,
         filed as an exhibit to the Company's Annual 



                                       15
<PAGE>   18

         Report on Form 10-K for fiscal year ended December 31, 1997, is
         incorporated by reference.

10.6     Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LLP and IBJ Schroder Bank & Trust Co. dated November 12,
         1997, filed as an exhibit to the Company's Annual Report on Form 10-K
         for fiscal year ended December 31, 1997, is incorporated by reference.

10.7     Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated August 28, 1998, filed as an
         exhibit to the Company's Quarterly Report on Form 10-Q dated November
         6, 1998, is incorporated by reference.

10.8     Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated October 29, 1998, filed as an
         exhibit to the Company's Quarterly Report on Form 10-Q dated November
         6, 1998, is incorporated by reference.

10.9     Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated December 21, 1998, filed as
         an exhibit to the Company's Annual Report on Form 10-K for fiscal year
         ended December 31, 1998, is incorporated by reference.

10.10    Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated January 26, 1999, filed as an
         exhibit to the Company's Annual Report on Form 10-K for fiscal year
         ended December 31, 1998, is incorporated by reference.

10.11    Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated February 22, 1999, filed as
         an exhibit to the Company's Annual Report on Form 10-K for fiscal year
         ended December 31, 1998, is incorporated by reference.

10.12    Extension Supplement between Northstar Health Services, Inc., Cerberus
         Partners, LP and Bear Sterns & Co., dated March 31, 1999.

10.13    Assignment and Acceptance Agreement between Northstar Health Services,
         Inc., and Cerberus Partners, LP, dated September 8, 1997, filed as an
         exhibit to the Company's Annual Report on Form 10-K for fiscal year
         ended December 31, 1997, is incorporated by reference.

27       Financial Data Schedule

(b)      Reports on Form 8-K

         None.



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<PAGE>   19



                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Northstar Health Services, Inc.
(Registrant)



By:  /s/ Thomas W. Zaucha
     -----------------------------
Thomas W. Zaucha
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 1999


By:  /s/ Lisa S. Guarino
     -----------------------------
Lisa S. Guarino, CPA
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: May 7, 1999



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