<PAGE>   1



                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

 [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 
        
          For the quarterly period ended  September 30, 1996
                                         --------------------------------------

                                       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   0-18158
                                ------------------


                  QUEST HEALTH CARE INCOME FUND I, L.P.
-------------------------------------------------------------------------------

            Formerly: Southmark/CRCA Health Care Income Fund I, L.P.
            --------------------------------------------------------

              Delaware                                   58-1697906
-------------------------------------------------------------------------------
     (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)                 Identification No.)


        1117 Perimeter Center West  E-210 Atlanta, GA 30338
-------------------------------------------------------------------------------
        (Address of principal executive offices)    (Zip code)


Registrant's telephone number, including area code       (770) 617-1014
                                                   ----------------------------

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, and (2) has been subject to such filing
requirements for the past 90 days.     Yes   X     No
                                            ---       ---

                             There are no exhibits.

                               TOTAL OF 14 PAGES





                                       1
<PAGE>   2





                     QUEST HEALTH CARE INCOME FUND I, L.P.
                                 BALANCE SHEETS

                         PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

                                     ASSETS

<TABLE>
<CAPTION>                                                
                                                          Sept. 30,          December 31,
                                                         -----------         ------------
                                                             1996                1995
                                                         -----------         ------------
<S>                                                      <C>                  <C>
CURRENT ASSETS:                                          
   Cash and cash equivalents                             $ 1,703,290          $ 1,546,363
   Accounts receivable, net of allowance                 
      for doubtful accounts of $25,530 and               
      $21,780 at September 30, 1996 and                  
      December 31, 1995, respectively                        970,164              998,120
   Prepaid expenses                                           46,406              279,088
                                                         -----------          -----------

         Total current assets                              2,719,860            2,823,571
                                                         -----------          -----------  
PROPERTY AND EQUIPMENT, at cost                          
   Land                                                      240,617              240,617
   Buildings and improvements                              1,872,215            1,872,215
   Equipment and furnishings                                 884,750              862,217
                                                         -----------          -----------
                                                           2,997,582            2,975,049
   Less accumulated depreciation and amortization          2,255,212            2,221,555
                                                         -----------          -----------  

      Net property and equipment                             742,370              753,494
                                                         -----------          -----------  

TOTAL ASSETS                                             $ 3,462,230          $ 3,577,065
                                                         ===========          ===========
</TABLE>                                                 





The financial information included herein has been prepared by management
without audit by independent public accountants.  See notes to financial
statements.





                                       2
<PAGE>   3

                     QUEST HEALTH CARE INCOME FUND I, L.P.
                                 BALANCE SHEETS



                        LIABILITIES AND PARTNERS' EQUITY




<TABLE>
<CAPTION>
                                                         Sept. 30,            December 31,
                                                       -----------         --------------
                                                           1996                  1995
                                                       -----------         --------------
<S>                                                    <C>                 <C>
CURRENT LIABILITIES:                               
   Current maturities of long-term debt                $     9,886         $     10,086
   Trade accounts payable                                  263,868              315,367
   Accrued compensation                                    250,507              254,743
   Accrued insurance                                        44,358              204,640
   Estimated third party settlements                       187,082               76,029
   Other                                                   185,363               90,414
   Payable to Quest and affiliates                          74,867               10,490
                                                       -----------         ------------

         Total current liabilities                       1,015,931              961,769
                                                   
                                                   
LONG-TERM OBLIGATIONS, less current maturities                   -                7,275
                                                       -----------         ------------

         Total liabilities                               1,015,931              969,044
                                                       -----------         ------------
                                                   
PARTNERS' EQUITY:                                  
   Limited Partners                                      2,612,979            2,773,084
   General Partner                                        (166,680)            (165,063)
                                                       -----------         ------------

        Total partners' equity                           2,446,299            2,608,021
                                                       -----------         ------------

TOTAL LIABILITIES AND PARTNERS' EQUITY                 $ 3,462,230          $ 3,577,065
                                                        ==========           ==========
</TABLE>





The financial information included herein has been prepared by management
without audit by independent public accountants.   See notes to financial
statements.





                                       3
<PAGE>   4
                     QUEST HEALTH CARE INCOME FUND I, L.P.
                            STATEMENTS OF OPERATIONS





<TABLE>
<CAPTION>
                                                             For the                               For the
                                                        Three Months Ended                    Nine Months Ended
                                                            September 30,                      September 30,
                                                    ---------------------------        ------------------------------
                                                      1996              1995               1996             1995
                                                    --------          ---------        -----------       ------------
<S>                                                 <C>               <C>               <C>              <C>
REVENUES:
   Operating revenue                                $1,976,960        $1,917,047        $ 5,874,199       $ 7,888,046
   Interest income                                      15,793            23,490             42,561            51,918
   Gain on sale                                              -                 -                  -           103,988
                                                    ----------        ----------        -----------       ----------- 
         Total revenues                              1,992,753         1,940,537          5,916,760         8,043,952
                                                    ----------        ----------        -----------       ----------- 
EXPENSES:
   Wages & salaries                                    983,386           996,877          2,876,550         4,071,641
   Payroll tax & employee benefits                     224,593           242,132            658,203           960,693
   Supplies                                            249,249           165,305            723,351           771,425
   Other operating expenses                            165,122           118,923            394,374           671,304
   Ancillary services                                  170,098           219,573            546,787           632,233
   Health benefits                                      64,440            29,590            184,810           144,541
   Management fees                                     101,479            96,218            295,395           391,451
   Management fees-affiliate                            20,860            19,244             59,643            76,669
   Property taxes                                       14,078            17,217             42,715            67,667
   Interest                                                276               505              1,041            16,335
   Depreciation and amortization                        11,278            12,346             33,657            45,138
   Partnership administration                          119,907            67,845            261,956           319,973
                                                    ----------        ----------        -----------       ----------- 

      Total expenses                                 2,124,766         1,985,775          6,078,482         8,169,070
                                                    ----------        ----------        -----------       ----------- 

Net income (loss)                                   $ (132,013)       $  (45,238)       $  (161,722)      $  (125,118)
                                                    ==========        ==========        ===========       ===========

Net income (loss) per Limited
   Partnership Unit                                 $     (.50)       $    (.170)       $      (.61)      $      (.47)
                                                    ==========        ==========        ===========       ===========
Weighted average Limited Partnership
   Units outstanding                                   262,183           262,183            262,183           262,183
                                                    ==========        ==========        ===========       ===========
</TABLE>




The financial information included herein has been prepared by management
without audit by independent public accountants.





                                       4
<PAGE>   5
                     QUEST HEALTH CARE INCOME FUND I, L.P.
                         STATEMENTS OF PARTNERS' EQUITY





<TABLE>
<CAPTION>
                                                                       Total
                                    General        Limited           Partners'
                                    Partner        Partners           Equity
                                   ----------     -----------      -----------
<S>                                <C>            <C>               <C>
Balance at December 31, 1994       $(163,756)      $3,689,007       $3,525,251
                                                                
Net loss                              (1,251)        (123,867)        (125,118)
                                                                
Distributions                              -         (786,489)        (786,489)
                                   ---------       ----------       ----------
Balance at September 30, 1995      $(165,007)      $2,778,651       $2,613,644
                                   =========       ==========       ==========
                                                                
                                                                
                                                                
                                                                
Balance at December 31, 1995       $(165,063)      $2,773,084       $2,608,021
                                                                
Net loss                              (1,617)        (160,105)        (161,722)
                                   ---------       ----------       ----------
                                                                
Balance at September 30, 1996      $(166,680)      $2,612,979       $2,446,299
                                   =========       ==========       ==========
</TABLE>                          





The financial information included herein has been prepared by management
without audit by independent public accountants.   See notes to financial
statements.





                                       5
<PAGE>   6

                     QUEST HEALTH CARE INCOME FUND I, L.P.
                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>

                                                        Nine Months Ended
                                                         September 30,
                                                   ---------------------------
                                                       1996           1995
                                                   -----------    ------------
<S>                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                           
   Cash received from residents and                             
      government agencies                           $5,902,155      $8,121,154
   Cash paid to suppliers and                                   
      employees                                     (5,729,863)     (8,008,143)
   Interest received                                    42,561          51,918
   Interest paid                                        (1,040)        (16,335)
   Property taxes paid                                 (26,878)        (76,835)
                                                    ----------      ---------- 
Net cash provided by                                                
   operating activities                                186,935          71,759
                                                    ----------      ---------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                               
                                                                    
   Proceeds from sale of facilities                          -       2,734,651
   Additions/retirements to property                                
      and equipment                                    (22,533)         (3,755)
                                                    ----------      ---------- 
Net cash provided by (used in)                                      
   investing activities                                (22,533)      2,730,896
                                                    ----------      ---------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                               
                                                                    
   Distributions to partners                                 -        (786,489)
   Principal payments on long-term debt                 (7,475)       (610,516)
                                                    ----------      ---------- 
Net cash used in financing                                          
   activities                                           (7,745)     (1,397,005)
                                                    ----------      ---------- 
INCREASE IN CASH AND                                                
   CASH EQUIVALENTS                                    156,927       1,405,650
                                                                    
Cash and cash equivalents at beginning of                           
   period                                            1,546,363         270,593
                                                    ----------      ---------- 
Cash and cash equivalents at end of period          $1,703,290      $1,676,243
                                                     =========       =========
</TABLE>




The financial information included herein has been prepared by management
without audit by independent public accountants.  See notes to financial
statements.





                                       6
<PAGE>   7

                     QUEST HEALTH CARE INCOME FUND I, L.P.
                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                        Nine Months Ended
                                                           September 30,
                                                     -------------------------
                                                       1996             1995
                                                     ---------       ---------
<S>                                                 <C>              <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH   
   PROVIDED BY (USED IN) OPERATING ACTIVITIES:    
                                                  
                                                  
   Net loss                                          $(161,722)      $(125,118)
                                                                    
   Adjustments to reconcile net loss to                             
      net cash provided by (used in)                                
      operating  activities:                                        
                                                                    
         Gain on sale of facilities                          -        (103,988)
         Depreciation and amortization                  33,657          45,138
                                                                    
   Cash provided (used) by changes in                               
           assets and liabilities:                                  
                                                                    
           Accounts receivable                          27,956         233,108
                                                                    
           Prepaid expenses                            232,682         442,773
                                                                    
           Accounts payable and accrued                             
              liabilities                              (10,015)       (371,765)
                                                                    
           Payable to Quest and affiliates              64,377         (48,389)
                                                     ---------       ---------
                                                                    
Net cash provided by                                                
   operating activities                              $ 186,935       $  71,759
                                                     =========       =========
</TABLE>                                                            





The financial information included herein has been prepared by management
without audit by independent public accountants.  See notes to financial
statements.





                                       7
<PAGE>   8


                     QUEST HEALTH CARE INCOME FUND I, L.P.
                         NOTES TO FINANCIAL STATEMENTS

                               September 30, 1996

NOTE 1

During interim periods, Quest Health Care Income Fund I, L.P. (the
"Partnership") follows the accounting policies set forth in its Annual Report
on Form 10-K filed with the Securities and Exchange Commission.  Users of
financial information provided for interim periods should refer to the annual
financial information and footnotes contained in the Annual Report on Form 10-K
when reviewing the interim financial results presented herein.

In the opinion of management, the accompanying unaudited interim financial
statements, prepared in accordance with the instructions for Form 10-Q, contain
all material adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial condition, results of operations,
changes in partners' equity and cash flows of the Partnership for the
respective interim periods presented.  The results of operations for such
interim periods are not necessarily indicative of results of operations for a
full year.

NOTE 2 CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, demand deposits, money market funds and investments in certificates of
deposit with original maturities, when purchased, of three months or less.

The Partnership maintains cash accounts with a variety of unrelated banks, all
of which are covered by the Federal Deposit Insurance Corporation (FDIC).  At
September 30, 1996, the Partnership maintained cash balances at these banks
aggregating $1,573,808 in excess of the $100,000 FDIC insured maximum.

Included in cash and cash equivalents is $633,100 invested in repurchase
agreements with underlying United States government backed securities, which
have original maturities of less than 30 days.

NOTE 3  TRANSACTIONS WITH AFFILIATES

The Partnership Agreement provides for payment of property management fees
based on 6% of gross property operating revenue.  An affiliate of Quest
receives 1% of gross operating revenue relating to services provided directly
to the facilities.  Total payments under this contract for the nine month
periods ended September 30, 1996 and 1995 were $59,643 and $76,669,
respectively.

Quest, in an effort to continue certain health benefits for Partnership
employees, created an employee benefit trust (the "Trust") in compliance with
the guidelines promulgated by VEBA and ERISA.  Amounts contributed to the Trust
by the Partnership and Partnership employees are strictly for the benefit of
employees of the participating employers, payment of excess loss reinsurance,
life insurance and accidental death and dismemberment and claims and plan
administration and employee medical claims.  Quest has engaged a claims
pre-certification organization to review all claims made by the Partnership's
employees.  Approximately $184,810 and $144,541 were recorded under this
arrangement for the nine month periods ended September 30, 1996 and 1995,
respectively.  The Trust is administered by an affiliate of Quest, however, no
profits accrue to the benefit of either the affiliate or Quest.





                                       8
<PAGE>   9


                     QUEST HEALTH CARE INCOME FUND I, L.P.
                         NOTES TO FINANCIAL STATEMENTS

NOTE 4  LITIGATION


In December 1994, the Partnership received a Notice and Demand for Payment from
the Idaho State Tax Commission resulting from sales tax audits for approximately
$90,000.  The Partnership is discussing a settlement of this matter and has
recorded a provision of approximately $67,000 in the Partnership's Financial
Statements.  Management is of the opinion that the final resolution will not
have a material adverse effect on the Partnership's financial position.  As a
result of selling facility interests in 1995, the liability and reserve were
reduced to $36,410 and $27,308, respectively.  The State of Idaho has still not
responded to the Partnership.  The Partnership is involved in certain other
routine litigation incidental to business.

Management does not expect settlements, if any, to have a material adverse
effect on the Partnership's financial position.

NOTE 5 SALE OF FACILITIES

On February 28, 1995, the Partnership sold its partnership interests in seven
of its facilities to an unaffiliated third party.  The Partnership reflected an
estimated loss on the sale of these facilities of $3,470,863 at December 31,
1994, and recognized a gain of $103,988 upon closing of the sale.  The contract
called for adjusting working capital, as defined, to exclude interpartnership
accounts and the current portion of long term debt and to reflect a 25%
discount on accounts receivable at closing.  The contract also provided for a
cash consideration adjustment based on changes in working capital including the
change in the 25% discount proportionate to changes in accounts receivable
occurring between December 31, 1994 and the date of closing of February 28,
1995.

At closing, the Partnership received initial consideration of $2,734,651,
consisting of cash of $2,133,359 and debt retired from sales proceeds of
$601,292.  Subsequently, the Partnership determined that $417,254 of additional
cash was due to the Partnership from post closing adjustments of which $377,058
was received in 1995, and the balance was collected in the first quarter of
1996.  In addition the purchaser assumed debt related to equipment of
approximately $102,000.  Total consideration was, therefore, $3,253,905.  The
Partnership made a final determination of adjusted working capital when the
Partnership's accountants completed certain agreed upon procedures during the
third quarter of 1995.  A distribution of $786,489 to the limited partners was
made during the third quarter of 1995.

The balance sheet of the Partnership reflects the effects of the sale of the
Partnership's interests in the seven facilities.  The Partnership is seeking to
liquidate the Partnership's interests in its remaining facilities.

NOTE 6 PRO FORMA INFORMATION (UNAUDITED)

Due to the impact of the Partnership selling its interests in seven of its
facilities in 1995, historical results of operations may not be indicative of
future results of operations and net income (loss) per limited partnership
unit.  The following unaudited pro forma condensed statement of operations is
presented as if the transactions previously described occurred as of January 1,
1995. In the opinion of the Partnership's management, all adjustments necessary
to reflect the effects of the sale have been made.

The pro forma condensed financial information does not purport to present what
actual results of operations would have been if the transactions previously
described had occurred on such dates or to project results for any future
period.  It is management of the Partnership's belief that all adjustments
necessary to reflect the effects of the sales have been made.





                                       9
<PAGE>   10


                     QUEST HEALTH CARE INCOME FUND I, L.P.
                         NOTES TO FINANCIAL STATEMENTS


NOTE 6 PRO FORMA INFORMATION (UNAUDITED) continued

                PRO FORMA CONDENSED STATEMENT OF OPERATIONS (B)
                  For the Nine Months Ended September 30, 1995
                            (Unaudited in thousands)

<TABLE>
<CAPTION>
                                      Historical      Adjustments     Pro Forma
                                     -----------     -------------    ---------
<S>                                    <C>            <C>              <C>
Revenues:                              $7,940         $(2,346)(A)      $5,594
                                       ------         -------          ------ 
Expenses:                                                           
 Wages and salaries                    $4,072         $(1,225)(A)      $2,847
 Operating expenses                     3,180            (894)(A)       2,286
 Management fees                          391            (116)(A)         275
 Management fees affiliate                 77             (22)(A)          55
 Property taxes and interest               84             (31)(A)          53
 Depreciation and amortization             45              (1)(A)          44
 Partnership administration               320               -             320
                                       ------         -------          ------ 
                                        8,169          (2,289)          5,880
                                       ------         -------          ------ 
                                                                    
Net income (loss) (B)                  $ (229)        $   (57)         $ (286)
                                       ======         =======          ====== 
</TABLE>                                                            
                                                                    
   (A)  The pro forma adjustments remove revenues and expenses directly related
   to the interests in seven nursing homes sold to an unaffiliated third party
   on February 28, 1995.

   (B)  The historical statement of operations for the period ended September
   30,1995 includes a gain from the sale of a facility of $104, in thousands.
   This amount is not included in the above pro forma condensed statement of
   operations due to its non-recurring nature.

   NOTE 7 GOING CONCERN

   The Partnership's financial statements have been presented on the basis that
   it is a going concern, which contemplates the realization of assets and the
   satisfaction of liabilities in the normal course of business.  The sale of
   the Partnership's interests in seven nursing homes and possible future sales
   of any or all of its remaining facilities will have an effect on cash flow
   from operations in the future.

   Management of the Partnership believes that successful control of the
   facility and Partnership expenses and establishing adequate reserves from
   the sales of facilities should enable the Partnership to meet its obligations
   and upon the final sale of its assets, liquidate in an orderly fashion.

   NOTE 8 ACCOUNTING POLICIES

   In March 1995, the Financial Accounting Standards Board issued Statement of  
   Accounting Standard No. 121 - "Accounting for the Impairment of Long-Lived
   Assets and for Long-Lived Assets to be Disposed of", which is effective for
   fiscal years beginning after December 15, 1995.  Since the Partnership has
   already recognized impairment losses, effectively adjusting the carrying
   value of its long-lived assets, as of December 31, 1994, to estimated net
   realizable value, no significant adjustment from net realizable value to fair
   value is expected.

   During 1995, the Company adopted Statement of Financial Accounting Standards 
   No. 107, "Disclosures about Fair Value of Financial Instruments," which
   requires disclosure of fair value information about financial instruments,
   whether or not recognized in the balance sheet.  The carrying value of cash
   and cash equivalents, accounts receivable, accounts payable and accrued
   expenses approximate fair value due to the short-term nature of these
   instruments. There are no off-balance sheet financial instruments to which
   the Partnership is subject.





                                       10
<PAGE>   11

                                     PART 1

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:


Revenue:

In February 1995, the Partnership's interest in seven facilities were sold.
Therefore, the revenues and expenses for the nine months ended September 30,
1996 are not directly comparable to the same period in 1995.  For the current
nine month period, on a pro forma basis, the three remaining facilities,
Burley, Hearthside and South Salem increased revenues $332,311.  The majority
of this increase came from Hearthside and South Salem, reflecting changing
patent mix and improved reimbursements.  Revenue in the first nine months of
1995 included $2,346,198 related to the interests in seven facilities sold by
the Partnership in 1995.

All resident receivables are recorded at their original face amount and are due
and payable under "normal" market terms and conditions.  In the event of
non-collection, the ultimate loss to the Partnership would be limited to the
recorded balance of the receivables as shown in the balance sheet.

The significant components of accounts receivable at September 30, 1996 and
December 31, 1995 are:
<TABLE>
<CAPTION>
                                                     1996           1995
                                                    ------         ------
<S>                                                  <C>            <C>
Medicaid                                              35%            52%
Private Pay                                           21%            11%
VA, Medicare and Other                                44%            37%
                                                     ---            ---
                                                     100%           100%  
                                                     ===            ===
</TABLE>


Payments by both the state and federal governments are normally received within
60-90 days. The sources of patient revenues for the nine month period ended
September 30, 1996 and 1995 are:

<TABLE>
<CAPTION>
                                                     1996           1995
                                                    ------         ------
<S>                                                  <C>            <C>
Medicaid                                              56%            58%
Private Pay                                           16%            19%
VA, Medicare and Other                                28%            23%
                                                     ---            ---
                                                     100%           100%  
                                                     ===            ===
</TABLE>

Expenses:

On a pro forma basis expenses, for the nine month period ended September 30,
1996 increased $198,351, when compared to the same period in 1995.  The primary
reasons for these increases were salary increases and staffing increases.
Salary increases were driven by market forces and as a result of final rules
published relating to OBRA 1987, staffing levels increased.  The new Federal
Minimum Wage Laws are not expected to materially effect the Partnership as most
employees already earned more than the newly established minimum wage.
Partnership administration expense was significantly less than the comparable
period in 1995 due to a decrease in outside professional fees.  For the three
month period ended September 30, 1996 Partnership Administration expense
increased mostly as the result of differences between when expenses were
recognizable in the second and third quarters of 1996 versus the comparable
periods in 1995.  In addition, legal expenses have been incurred associated
with negotiation of contracts to acquire Hearthside.

On February 28, 1995, the Partnership sold its partnership interests in seven
of its facilities to an unaffiliated third party.  The Partnership reflected an
estimated loss on the sale of these facilities of $3,470,863 at December 31,
1994, and recognized a gain of $103,988 upon closing of the sale.  The contract
called for adjusting working capital, as defined, to exclude interpartnership
accounts and the current portion of long term debt and to reflect a 25%
discount on accounts receivable at closing.  The contract also provided for a
cash consideration adjustment based on changes in working capital including the
change in the 25% discount proportionate to changes in accounts receivable
occurring between December 31, 1994 and the date of closing of February 28,
1995.





                                       11
<PAGE>   12


At closing, the Partnership received initial consideration of $2,734,651,
consisting of cash of $2,133,359 and debt retired from sales proceeds of
$601,292.  Subsequently, the Partnership determined that $417,254 of additional
cash was due to the Partnership from post closing adjustments of which $377,058
was received in 1995, and the balance was collected in the first quarter of
1996.  In addition the purchaser assumed debt related to equipment of
approximately $102,000.  Total consideration was, therefore, $3,253,905.  The
Partnership made a final determination of adjusted working capital when the
Partnership's accountants completed certain agreed upon procedures, during the
third quarter of 1995.  A distribution of $786,489 to the limited partners was
made during the third quarter of 1995.

Ancillary Revenue and Expense is a term that describes specialized services
provided by third party unaffiliated vendors.  These services include speech,
occupational, physical and occasionally intravenous therapies.  These revenues
and expenses are subject to certain cost limitations and do not materially
affect the profitability of a facility.  However, the ability to provide these
services enables a facility to accept residents reimbursed under the federal
Medicare system instead of the state Medicaid system.  Typically, the Medicare
system reimburses at a higher daily rate than Medicaid.  These Medicare
residents are people, not necessarily elderly, who, under another set of
regulations, must be discharged from hospitals before they are well enough to
go home.  The result is that nursing homes that once were a final stop in
life's journey have become more like auxiliary hospitals with a substantially
shortened length of stay.  The pursuit of high reimbursement Medicare residents
limits the number of Medicaid beds available to the indigent elderly.  These
people will be required to live with relatives or find low skilled "foster
care" or community based services.

The explosive nationwide growth in Ancillary expenditures funded through the
Medicare system has raised the level of scrutiny of the expense areas by HCFA.
The Partnership believes it has complied with the regulation of the ancillary
expense.  However, should HCFA substantially revise the ancillary programs or
reimbursement rates, the Partnership revenues could be substantially impacted
as well.  The actual effect cannot be determined until HCFA or Congress makes
more specific knowledge available.

Liquidity and Capital Resources:

At September 30, 1996, the Partnership held cash and cash equivalents of
$1,703,290, which represents an increase of $156,927 since December 31, 1995.
The cash increase is due primarily to cash from operating activities.  The cash
position of the Partnership remains highly variable.  While the Partnership's
remaining facilities have shown improvement, cash is being conserved wherever
possible to be used for capital improvements, payment of property taxes, and
any potential paybacks to Medicare and Medicaid that may arise.

The Partnership is seeking to liquidate the Partnership's interests in its
remaining facilities.  During the third quarter of 1996, the Partnership has
been entertaining competing offers for the Hearthside facility.  It is expected
a contract will be executed with the winning offerer before the end of 1996.
The Partnership has also received an offer on South Salem and certain interest
in Burley and Comanche View.

Medicare is a federal entitlement program and Medicaid (the source of the
majority of the Partnership's revenue) represents an entitlement program
administered differently by each state which is partially funded by the Federal
government.  In August 1993, Congress enacted Title XIII of OBRA 93.  This act,
among other things, taxed social security benefits received by the elderly and
further limited payments under state Medicaid programs for which federal
matching would be permitted.  In October 1993, the Health Care Financial
Administration (HCFA) implemented a freeze on Medicare reimbursement on routine
cost limits, certain Part B ancillaries and prospective payment system rates.
In addition, HCFA eliminated the return on equity component of the
reimbursement rate.  Further, by the end of 1993, several states, because of
federal actions and/or





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<PAGE>   13

budgetary difficulties, had either taken action to curtail the growth in
entitlement programs and/or had indicated that future action was possible.  The
latest concept continues to be "block grants" to the states.  What this means
to nursing facilities cannot currently be determined.

Despite the fact that health care reform proposals at the federal level have
been significantly reduced, activities at the state level continue and are
encouraged by HCFA.  An example of state level action is Oregon's plan, the
location of the Partnership's Hearthside and South Salem facilities, to convert
its Medicaid reimbursement system to a managed care program administered by
third parties such as Blue Cross/Blue Shield.  The effect on reimbursement
cannot currently be determined by management of the Partnership.

The Partnership has no established credit lines with outside lending sources
and relies solely on cash flow and cash reserves to conduct Partnership
business.  There are no material commitments for capital improvements at the
remaining facilities.

The Partnership's continued existence is dependent upon its ability to: (i)
generate sufficient cash flow to meet its obligations on a timely basis; and
(ii) obtain additional sources of funding as may be required. As stated above,
the Partnership will entertain offers to sell any or all of its four remaining
facilities and, if accepted and closed, plans to liquidate in an orderly
fashion.

In March 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 121 - "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which became effective for
fiscal years beginning after December 15, 1995.  Since the Partnership has
already recognized impairment losses, effectively adjusting the carrying value
of its long-lived assets, as of December 31, 1994, to estimated net realizable
value, no significant adjustment from net realizable value to fair value is
expected.

Effective as of September 30, 1996, Michael G. Hunter, president and a director
of the general partner of the general partner of the Partnership, resigned his
positions with such entity and is no longer involved in the management of the
Partnership.





                          PART II.  OTHER INFORMATION



ITEMS 1-5

                                      None


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  Exhibits.

        Exhibit 27 - Financial Data Schedule (for SEC use only)

(B)  Reports on Form 8-K

        None during the third quarter of 1996.





                                       13
<PAGE>   14




                                   SIGNATURES




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





                                        QUEST HEALTH CARE INCOME 
                                        FUND I, L.P.
                                        (Registrant)


                                        By:  QUEST RESCUE PARTNERS  I-1, L.P.
                                             General Partner

                                        By:  QUEST RESCUE PARTNERS  I-1 CORP,


Date: November 18, 1996                 By:/s/ Stuart C. Berry
      -----------------                 -----------------------------------
                                        CEO/CFO





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