<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                   FORM 10-QSB

[Mark One]

  X  Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
----
of 1934 For the quarterly period ended December 31, 1998.

-----Transition report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 For the transition period from ---------- to ---------         

Commission file number  333-1700

                          COMMUNITY CARE SERVICES, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

                        New York                           13-3677548
                  -----------------------               -----------------   
                 (State or other Jurisdiction            (I.R.S. Employer
                Incorporation or Organization).         Identification No.)
                

                                18 Sargent Place
                          Mount Vernon, New York 10550
                           (Issuer's Telephone Number)

                                (914) 665-9050

                                      NONE
                                    -------  
  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last
                                     Report)


Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.

Yes   x     No
    -----      -----


    APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
                              PRECEDING FIVE YEARS

Check whether the registrant filed all documented and reports required to be
filed by Section 13 or 15 (d) of the Exchange Act after the distribution of
securities under a Plan confirmed by a court.

Yes         No
    -----      -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,145,049
                                          -----------   
Transitional Small Business Disclosure Format (check one):

Yes   x     No
   -----      -----
<PAGE>   2
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                       THIRD QUARTER REPORT ON FORM 10-QSB
                     FOR THE QUARTER ENDED DECEMBER 31, 1998


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>                                                                                        <C>    
PART I. FINANCIAL INFORMATION

             Item I. Financial Statements

                     Condensed Consolidated Balance Sheets at
                     December 31, 1998 (unaudited) and March 31, 1998                          2

                     Condensed Consolidated Statements of Operations for the
                     Three and Nine Months Ended December 31,1998 (unaudited)
                     and 1997 (unaudited)
                                                                                               3

                     Condensed Consolidated Statements of Cash Flows for the
                     Nine Months Ended December 31, 1998 (unaudited) and 1997
                     (unaudited)                                                             4-5

                     Notes to Condensed Consolidated Financial Statements                   6-11

             Item 2. Management's Discussion and Analysis of Financial Condition and
                     Results of  Operations                                                12-17

PART II. OTHER INFORMATION

             Item 1. Legal Proceedings                                                        18
             Item 2. Changes in Securities                                                    18
             Item 3. Defaults Upon Senior Securities                                          18
             Item 4. Submission of Matters to a Vote of Security Holders                      18
             Item 5. Other Information                                                        18
             Item 6. Exhibits and Reports on Form 8-K                                         18
                                                                                             
Signatures                                                                                    19
</TABLE>
<PAGE>   3
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                              AT               AT
                                                                         DECEMBER 31,       MARCH 31,
                                                                             1998             1998
                                                                         ------------     ------------ 
                                                                         (UNAUDITED)
<S>                                                                      <C>              <C>         
                                                 ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                            $    287,000     $    276,000
    Accounts receivable,net of allowance for doubtful
       accounts of $1,802,000 and $1,401,000                                4,350,000        5,606,000 
    Income tax receivable                                                          --          268,000
    Inventory, net                                                            560,000          669,000
    Prepaid expenses and other current assets                                 206,000          127,000
    Deferred tax asset, net                                                   486,000          560,000
                                                                         ------------     ------------
              TOTAL CURRENT ASSETS                                          5,889,000        7,506,000

Rental equipment, net                                                       2,195,000        2,057,000
Property and equipment, net                                                 1,426,000        1,065,000
Excess of purchase price over fair value of  net assets acquired, net       2,191,000        2,272,000
Covenants not to compete, net                                                 381,000          487,000
Accounts and customer list, net                                               273,000          305,000
Other assets                                                                   63,000           57,000
Deferred taxes assets, net                                                     69,000           69,000
                                                                         ------------     ------------

              TOTAL  ASSETS                                              $ 12,487,000     $ 13,818,000
                                                                         ============     ============

                                  LIABILITIES AND STOCKHOLDERS' EQUITY   

                                              LIABILITIES
CURRENT LIABILITIES:
    Note payable - Bank                                                  $  2,500,000     $  2,403,000
    Accounts payable                                                        2,749,000        2,820,000
    Accrued expenses                                                          518,000        1,138,000
    Current portion of long term debt                                       1,234,000        1,865,000
    Current portion of capital lease obligations                              108,000          146,000
                                                                         ------------     ------------
              TOTAL CURRENT LIABILITIES                                     7,109,000        8,372,000

Long term portion of debt                                                     611,000          775,000
Long term portion of capital lease obligations                                142,000          161,000
                                                                         ------------     ------------
              TOTAL LIABILITIES                                             7,862,000        9,308,000
                                                                         ------------     ------------

COMMITMENTS AND CONTINGENCIES

                            STOCKHOLDERS' EQUITY

Preferred stock, $.01 par value; 1,000,000 shares none issued
Common stock, $.01 par value; authorized 20,000,000 shares,
    issued and outstanding  7,145,049 shares                                   71,000           71,000
Additional paid in capital                                                  9,951,000        9,931,000
Accumulated deficit                                                        (5,397,000)      (5,492,000)
                                                                         ------------     ------------
              TOTAL STOCKHOLDERS' EQUITY                                    4,625,000        4,510,000
                                                                         ------------     ------------

              TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY                $ 12,487,000     $ 13,818,000
                                                                         ============     ============
</TABLE>

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

                                        2
<PAGE>   4
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  - UNAUDITED -

<TABLE>
<CAPTION>
                                                                 FOR THE                           FOR THE
                                                            THREE MONTHS ENDED                NINE MONTHS ENDED
                                                               DECEMBER 31,                     DECEMBER 31,
                                                       ----------------------------     ----------------------------
                                                           1998            1997             1998            1997
                                                       ------------    ------------     ------------    ------------
<S>                                                    <C>            <C>               <C>            <C>           
NET REVENUES                                           $  4,398,000    $  5,017,000     $ 13,263,000    $ 14,254,000
                                                       ------------    ------------     ------------    ------------

COST AND EXPENSES:
    Cost of net revenues
       Product and supply costs                           1,527,000       1,458,000        4,746,000       4,808,000
       Rental equipment depreciation                        168,000         296,000          569,000         761,000
                                                       ------------    ------------     ------------    ------------

       Cost of net revenues                               1,695,000       1,754,000        5,315,000       5,569,000

    Selling, general and administrative                   2,156,000       2,336,000        6,452,000       7,357,000
    Provision for doubtful accounts                         291,000       1,122,000          721,000       1,400,000
    Amortization of intangible assets                       100,000         145,000          299,000         350,000
    Provision for impairment of long lived assets                --       4,813,000               --       4,813,000
                                                       ------------    ------------     ------------    ------------

    Total cost and expenses                               4,242,000      10,170,000       12,787,000      19,489,000

    OPERATING  INCOME (LOSS)                                156,000      (5,153,000)         476,000      (5,235,000)

    Interest expense,net                                     93,000         133,000          307,000         311,000
                                                       ------------    ------------     ------------    ------------

    Income (loss) before provision for income taxes          63,000      (5,286,000)         169,000      (5,546,000)

    Provision (benefit) for income taxes                     36,000        (616,000)          74,000        (730,000)
                                                       ------------    ------------     ------------    ------------

NET  INCOME (LOSS)                                     $     27,000    $ (4,670,000)    $     95,000    $ (4,816,000)
                                                       ============    ============     ============    ============ 

Per share data :

    Net income (loss) per common share:
        Basic and diluted                              $       0.00   ($       0.71)    $       0.01   ($       0.74)
                                                       ============    ============     ============    ============ 

    Weighted average number of shares outstanding         
        Basic and diluted                                 7,145,049       6,587,243        7,145,049       6,535,870
                                                       ============    ============     ============    ============ 
</TABLE>




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

                                        3
<PAGE>   5

                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  - UNAUDITED -

<TABLE>
<CAPTION>
                                                                                             FOR THE
                                                                                        NINE MONTHS ENDED
                                                                                           DECEMBER 31,     
                                                                                   ---------------------------
                                                                                       1998            1997
                                                                                   -----------     -----------
<S>                                                                                <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                $    95,000     $(4,816,000)
  Adjustments to reconcile net income (loss)
    to net cash provided by operating activities:
    Depreciation and amortization expense                                              996,000       1,111,000
    Write off of rental equipment                                                       54,000          31,000
    Provision for doubtful accounts                                                    721,000       1,400,000
    Provision for impairment of long lived assets                                           --       4,813,000
    Deferred tax asset                                                                  74,000              --
    Non cash compensation                                                               15,000              --
    Changes in operating assets and liabilities net of effects
      from Metropolitan Respirator Service, Inc. acquisition:
      Accounts receivable                                                              535,000      (1,251,000)
      Inventory                                                                        109,000         164,000
      Prepaid expenses and other current assets                                        189,000        (686,000)
      Other assets                                                                      (6,000)         61,000
      Accounts payable and accrued expenses                                           (691,000)        430,000       
                                                                                   -----------     -----------
          Net cash provided by operating activities                                  2,091,000       1,257,000
                                                                                   -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of rental equipment                                                     (699,000)       (720,000)
  Acquisition of property and equipment                                               (211,000)       (447,000)
  Acquisition, of Metropolitan Respirator Service, Inc.                                     --      (4,411,000)
                                                                                   -----------     -----------
          Net cash (used in) investing activities                                     (910,000)     (5,578,000)
                                                                                   -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from promissory note                                                         74,000              --
  Proceeds of bank borrowings under credit line                                        150,000       1,980,000
  Exercise of underwriters warrants                                                      6,000              --
  Repayments of credit line and term loan                                              (53,000)     (1,072,000)
  Principal repayments of notes payable to suppliers                                  (812,000)       (110,000)
  Repayments of former MRS stockholders notes                                         (184,000)             --
  Principal repayments of notes payable to Adam
    Health Care Equipment Corp.                                                       (212,000)       (189,000)
  Principal repayments of capital lease obligations                                   (139,000)       (286,000)
                                                                                   -----------     -----------
          Net cash (used in) provided by financing activities                       (1,170,000)        323,000
                                                                                   -----------     -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    11,000      (3,998,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                       276,000       4,648,000
                                                                                   -----------     -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         $   287,000     $   650,000
                                                                                   ===========     ===========
</TABLE>


                                   (continued)

                                        4
<PAGE>   6
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  - UNAUDITED -
                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                                      FOR THE
                                                                                 NINE MONTHS ENDED
                                                                                    DECEMBER 31,       
                                                                            ---------------------------
                                                                                1998            1997
                                                                            -----------     -----------
<S>                                                                         <C>             <C>        
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period
       Interest                                                             $   288,000     $   201,000
                                                                            -----------     -----------
       Taxes                                                                $    14,000     $    45,000
                                                                            -----------     -----------

SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
       Rental equipment acquired under capital lease                            115,000          24,000
       Property and equipment acquired under capital lease                      307,000         113,000
       Conversion of trade payables into notes payable                               --       1,381,000
       The Company purchased Metropolitan Respirator Service, Inc. 
         for $8,791,000 (including cash payments of $4,411,000)
         The purchase price was allocated to the assets and
         liabilities assumed based on their fair value as follows:

              Current assets                                                                  3,771,000
              Rental equipment                                                                  434,000
              Property, plant and equipment                                                     181,000
              Other assets                                                                      947,000
              Excess of purchase price over net assets acquired                               6,527,000
              Customer List                                                                     225,000
              Non Compete Covenant                                                              360,000
              Current liabilities                                                            (3,431,000)
              Long term liabilities                                                            (223,000)
                                                                                            -----------
                                                                                              8,791,000
              Less:
              Promissory notes issued                                                        (3,066,000)
              Common stock issued                                                            (1,314,000)
                                                                                            -----------
              Cash paid to acquire Metropolitan Respirator Service, Inc.                    $ 4,411,000
                                                                                            -----------
</TABLE>




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

                                        5



<PAGE>   7
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(NOTE A) - ORGANIZATION AND BACKGROUND

     [1] Organization

         Community Care Services, Inc., ("CCS") was incorporated in July 1992 in
the State of New York. CCS and its wholly owned subsidiary, Metropolitan
Respirator Service, Inc. ("MRS") (collectively, "The Company"), provide home
health care services and products consisting primarily of respiratory equipment,
rental and sale of durable medical equipment and sell home health care supplies
primarily in the five boroughs of New York City, and Westchester, Rockland and
Nassau Counties in New York State, as well as northern New Jersey. The condensed
consolidated financial statements include information regarding both CCS and its
wholly owned subsidiary, MRS. Intercompany balances and transactions have been
eliminated in consolidation.

         The condensed consolidated financial statements of the Company for the
three and nine months ended December 31, 1998 and 1997 included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the consolidated financial position at December 31, 1998, the results of
operations for the three and nine months ended December 31, 1998 and 1997, and
the cash flows for the nine months ended December 31, 1998 and 1997.

         The results of operations for the three and nine months ended December
31, 1998 and 1997 are not necessarily indicative of the operating results for
the entire respective years. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1998 as filed with the Securities and Exchange Commission.

     [2] Investigation by U.S. Department of Justice and New York State 
Department of Health

         On June 4, 1997, a search warrant was executed at the Company's
executive offices. The Company was informed that its then Chief Executive
Officer and then Chief Operating Officer and the Company itself are targets of a
Department of Justice criminal investigation for allegedly improper payments
relating to a contract, involving Medicare, to provide healthcare services
outside of New York State. If the Company is charged with criminal wrongdoing
and it is determined that the Company engaged in criminal wrongdoing, the
Company will be subject to criminal penalties, which may include a fines of up
to $1,000,000 or more and an order of restitution, would be terminated as a
Medicaid and Medicare services provider, and could also be at the risk of having
its contracts with private insurers and other non-governmental agencies
terminated. Additionally, even if the Company is not charged with criminal
wrongdoing itself, but one of its past or present officers or employees are
convicted of crimes related to their employment, the Company could be terminated
as a Medicaid and Medicare provider. In these circumstances, although the
Company would not be subjected to automatic exclusion from such programs, it
could be at risk of having its contracts with private insurers and other

                                        6
<PAGE>   8
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

non-governmental agencies terminated. If such occurred, it would have a material
adverse effect on the Company's business, results of operations, and financial
condition and the Company may not be able to continue as a going concern. The
Company has cooperated with the government in the Department of Justice criminal
investigation and has incurred legal expenses related thereto of $58,000 for the
nine months ended December 31, 1998 and $301,000 for the fiscal year ended March
31, 1998.

         The New York State Department of Health ("DOH") performs audits and
investigations of the New York State Medicaid Program. The New York State
Department of Social Services ("DSS") previously performed this function. The
DSS was abolished as a result of New York State legislation. Prior to the
abolishment of DSS, that agency, on May 16, 1997, issued a Draft Notice of
Proposed Agency Action and Draft Audit Report regarding the Company ("The Draft
Notice"). Pursuant to the Draft Notice, DSS sought recovery of $227,000 from the
Company as well as exclusion of the Company as a provider under the New York
State Medicaid program. Pursuant to DOH's process, the Company, through its
healthcare regulatory counsel, submitted a detailed response to the Draft
Notice. DOH thereafter reviewed its draft findings and recommendations and
issued a final Notice. Pursuant to which DOH reduced the amount of the proposed
audit recovery to $83,978. DOH has also withdrawn its intention to exclude the
Company as a provider under the New York State Medicaid program. DOH has issued
an advisory to the Company that continued performance issues of the type or
nature addressed in the audit could result in a severe sanction in the future.
As a further development, the Company has agreed to surrender its Medicaid
provider number, in favor of conducting its Medicaid business through MRS.
During the forth quarter of fiscal year 1999 the Company will be transferring
the majority of its Medicaid business to MRS. The Company has been advised by
the DOH that the effective date of the surrender of the Company Medicaid
provider number is March 1,1999. The Company has been further advised by DOH
that the MRS Medicaid provider number will continue in full force and effect.

     [3] Net Income Per Share

         The basic calculation is determined by dividing net income (loss)
attributable to common shares outstanding (the basic numerator) by the weighted
average number of common shares outstanding (the basic denominator) during the
period.

         The diluted calculation is determined by adjusting the basic numerator
to add back the after tax amount of interest recognized in the period associated
with potentially issued common shares and for any other changes in income or
loss that would result from the assumed conversion or exercise of potentially
issued common shares. Additionally, the basic denominator is increased to
include the additional number of common shares that would be outstanding if the
potentially issued common shares had been issued, if dilutive. Potentially
issued common shares, consisting of options, warrants and convertible notes are
not included in this calculation where the effect of the inclusion would be
antidilutive. The treasury stock method is used to reflect the dilutive effect
of outstanding options and warrants.




                                        7
<PAGE>   9
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         [4] Reclassifications

         Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.


(NOTE B) - ACQUISITIONS

     [1] Metropolitan Respirator Service, Inc.

         On May 10, 1997, the Company acquired 68% of the outstanding shares of
MRS. MRS was incorporated on April 15, 1974. The purchase price was
approximately $5,993,000, consisting of approximately $2,800,000 in cash, of
Promissory Notes ("Promissory Notes") with a face value of $2,967,000 accruing
interest at a rate of 6% per annum, a portion of which was issued to certain MRS
employees (including a Promissory Note for $444,000 issued to Wade Wilson, the
brother-in-law of Alan T. Sheinwald, who at the time was the President and Chief
Executive Officer of the Company), and 62,243 shares of the Company's common
stock with a value of $226,000. The notes are payable in two payments. On
January 2, 1999, one half of the principal and accrued interest is payable and
the remaining one half of the principal and accrued interest is payable January
2, 2000. In lieu of cash payment, the Promissory Notes holder ("Note Holder")
may elect to convert up to eighty percent (80%) of the outstanding principal
balance of the Promissory Notes and the accrued interest thereon payable on the
dates set forth above into shares of common stock, par value $.01 per share
based on a valuation of $4.00 per share, irrespective of the actual market value
of the shares on the date of such conversion. If the Note Holder does not make
such election, the Company may do so. With respect to the remaining twenty (20%)
of the payment due, the Note Holder may, but is not obligated to, require that
such amount be converted into shares or take such payment in cash. In the
aggregate, the Promissory Notes and accrued interest may be converted into a
maximum of 897,000 shares of common shares of the Company.

         Also on May 10, 1997, the Company purchased the remaining 32% of the
outstanding shares of MRS in a separate transaction. The purchase price was
approximately $2,487,000 consisting of $1,300,000 in cash, 300,000 shares of
common shares of the Company with a value of $1,087,000 and a one year
Promissory Note with a face value of $100,000 accruing interest at a rate of 6%
payable quarterly.

         On March 1, 1998, Messrs. Louis Rocco and Donald Fargnoli, officers of
the Company and former owners of MRS, who were issued Promissory Notes by the
Company in the amounts of $1,302,000 and $1,176,000, respectively, surrendered
their Promissory Notes. In consideration for such action, the Company converted
eighty percent of the Promissory Notes into shares of its common stock, with
Messrs. Rocco and Fargnoli receiving 293,056 shares and 264,750 shares,
respectively and cash payments of $73,000 and $66,000, respectively. The
remaining amount of the Promissory Notes and interest thereon will be repaid
monthly. Messrs. Rocco and Fargnoli will receive monthly payments of $10,000 and
$9,000, respectively. On May 8, 1998, Mr. Fargnoli resigned from his positions
with the Company and entered into a Consulting Agreement for a term of two years
expiring on May 9, 2000, for a fee of $55,000 per year.

                                        8
<PAGE>   10
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         Unaudited pro forma summary data for the nine months ended December
31, 1997, assuming the acquisition of MRS had taken place on April 1, 1997, is
as follows:


<TABLE>
<S>                                                                <C>         
Net revenues                                                       $ 15,252,000
Net (loss) income                                                  $ (5,564,000)
Net (loss) income
per common share - basic and diluted                               $      (0.75)
</TABLE>


     [2] Adam Health Care Equipment Corp.

         On April 14, 1997, the Company entered into a Settlement Agreement and
Release discharging its lawsuit against Adam Health Care Equipment Corp.
("Adam") and its principals and all counterclaims made by Adam against the
Company. As part of the settlement the Company agreed to pay Adam the sum of
$1,450,000, of which $725,000 was paid immediately, with the balance payable
over a 36-month period, bearing interest at the rate of 9% per annum.
Additionally, a new covenant not to compete covering a period of five years was
entered into with certain principals of Adam in exchange for $250,000, of which
$125,000 was paid immediately and the balance is payable over three years. As of
December 31, 1998 the outstanding balance of the note is approximately $378,000.

(NOTE C) - IMPAIRMENT OF LONG LIVED ASSETS

         In December 1997 the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS #121) "Accounting for Impairment of Long Lived Assets".
The Balanced Budget Act (the "Budget Act") was signed by President Clinton on
August 5, 1997. The Budget Act provides for reductions in Medicare reimbursement
rates for oxygen and certain oxygen equipment. Oxygen reimbursement rates will
be reduced to seventy five percent (75%) of their 1997 levels, beginning January
1, 1998 and to seventy percent (70%) of their 1997 levels beginning January 1,
1999. In addition, Consumer Price Index increases in oxygen reimbursement rates
will not resume until the year 2003.

         The Company analyzed the impact of the Budget Act's oxygen
reimbursement reduction on its operating plans, liquidity, cash flows and the
recoverability of long lived assets. The recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount including
associated intangible assets of such operations. This evaluation resulted in a
charge to the excess of purchase price over fair value of net assets acquired in
the period ended December 31, 1997. Also, this evaluation led the Company to
determine that the remaining amortization period for the goodwill should be
reduced from 30 to 20 years.




                                        9
<PAGE>   11
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(NOTE D) - PROVISION FOR DOUBTFUL ACCOUNTS

         During the third quarter of fiscal year 1998 the Company recorded a
provision for doubtful accounts of $1,400,000, including write-offs of
approximately $979,000. Management's decision to write off certain receivables
relate principally to its' determination that recovery of the receivable were
unlikely and that the additional costs of collections would not prove to be
economically beneficially.


(NOTE E) - CHANGES IN EXECUTIVE OFFICERS

         On October 5, 1998 the Company terminated the employment of Wade Wilson
Senior Vice President Operations Systems. Mr. Wilson is continuing to provide
consultant services on a per diem basis.

         The Company's Chief Financial Officer and Secretary, Joel Quall
resigned effective October 23, 1998. Elia Guarneri, the Company's Corporate
Controller was appointed to serve as the Interim Chief Financial Officer.

         On February 11, 1999 the Company appointed Elia Guarneri as its Chief
Financial Officer.


(NOTE F) - CONSULTING AGREEMENT

         On August 24, 1998, the Company entered into a six-month consulting
agreement with Harris G. LeRoy II ("the consultant") to provide a strategic
operating overview of the Company. Mr. LeRoy will receive $1,000 a day along
with 1,000 stock options per day. The exercise price of the options is $ 1.31,
which is the average closing price of the Company's common stock during the
month of August, 1998. The options shall accumulate and be issued to the
consultant upon the expiration or the earlier termination of the agreement.
Fifty percent (50%) of the total number of options that the consultant is
eligible to receive are guaranteed by the Company. The issuance of the remaining
fifty percent (50%) of the options are subject to the discretion of the Board of
Directors of the Company, which may elect to grant the consultant all, none, or
a portion of such options. The Company recorded a charge to earnings of
approximately $15,000 in the nine month period ended December 31, 1998,
representing the value of 35,500 options earned during such period. Also, the
Company paid cash compensation expense of approximately $101,000 in the nine
period ended December 31, 1998. The Company will incur additional future charges
to earnings as a result of the consulting agreement.


(NOTE G) - COMMITMENTS

         In March 1998, the Company entered into an agreement to finance a new
computer system with Tokai Financial Services, Inc. ("Tokai"). The agreement
allowed the Company to draw down $600,000 under a credit line, Tokai initially
capped the line at $480,000 until the federal investigation is resolved. Once
the $480,000 is drawn down under the credit line, it will then be converted into
a

                                       10
<PAGE>   12
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

master lease agreement payable over forty eight months. The credit line and
master lease agreement bears interest at 11.6%. The interest rate is computed on
a floating rate of 6.5% above the two-year U.S. Treasury Bill. The two-year U.S.
Treasury Bill rate at March 31, 1998 was 5.1%. As of December 31,1998, $300,000
has been drawn down under the credit line. The line is secured by a lien on all
of the Company's assets, subordinate to prior lienholders. On January 25, 1999
Tokai notified the Company that the line of credit was capped at $300,000.

         In October 1998, the Company applied for advance payment relief money
under the VIPS Medicare System ("VMS"). As a result the Company received
approximately $74,000 from the VMS program. The advance payment was based on
undue delays in processing claims. In December 1998, Medicare notified the
Company that the number of aged unprocessed claims had been reduced and the
advance payment must be recouped. The Company applied for a six month
installment payment plan on the advance. Medicare accepted the six month
installment plan in January 1999. The payments of approximately $13,000 will
begin on February 5,1999 and will be completed in July 1999.

         In December 1999, the Company entered into an eighteen month equipment
note from one of its suppliers for approximately $61,000 with an interest rate
of 9.0%. The note contains a six month payment deferral with the first monthly
payments of $3,600 due in July 99. The note will be paid in full in December
2000.




                                       11
<PAGE>   13
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY

PART 1 - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

FORWARD LOOKING STATEMENTS

         From time to time the Company may publish forward-looking statements
related to such matters as anticipated financial performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These statements are typically identified
by the inclusion of phrases such as "the Company anticipates," "the Company
believes", "Management believes", and other phrases of similar meaning. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company is subject to significant external factors which could significantly
impact its business, including changes in Medicare, Medicaid, and private pay
reimbursement, government fraud and abuse initiatives and other such factors
which are beyond the control of the Company. Certain of these factors are
discussed herein. These factors, as well as future changes in reimbursement and
changes in interpretations of regulations, could cause future results to differ
materially from historical trends and management's current expectations.

INVESTIGATIONS BY U.S. DEPARTMENT OF JUSTICE AND NEW YORK STATE DEPARTMENT OF
HEALTH

         If it is determined in the investigations by the U.S. Department of
Justice and the New York State Department of Health, that the Company engaged in
criminal wrongdoing, the Company would be subject to criminal penalties. In
addition, if it is determined that the Company engaged in criminal wrongdoing,
the Company would be terminated as a Medicaid and Medicare services provider,
and will be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. Additionally, even if the Company is not
charged with criminal wrongdoing itself, but one of its past or present officers
or employees are convicted of crimes relating to their employment, the Company
could be terminated as a Medicaid and Medicare provider. In these circumstances,
although the Company would not be subject to automatic exclusion from such
programs, it could be at risk of having its contracts with private insurers and
other non-governmental agencies terminated. If such occurred, it would have a
material adverse effect on the Company's business, results of operations, and
financial condition and the Company may not be able to continue as a going
concern.


MEDICAL REIMBURSEMENT FOR OXYGEN THERAPY SERVICES

         The Balanced Budget Act (the "Budget Act") was signed by President
Clinton on August 5, 1997. The Budget Act provides for reductions in Medicare
reimbursement rates for oxygen and certain oxygen equipment. Oxygen
reimbursement rates were reduced to seventy five percent (75%) of their 1997
levels, beginning January 1, 1998 and has been further reduced to seventy 
percent (70%) of their 1997 levels beginning January 1, 1999. In addition, 
Consumer Price Index increases in oxygen reimbursement rates will not resume 
until the year 2003.


                                       12
<PAGE>   14
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


         The results for the nine months ended December 31, 1998 reflect the
reduction for the aforementioned Medicare reimbursement rates as compared to the
nine months ended December 31, 1997 which does not reflect the reductions since
they did not go into effect until January 1, 1998.

THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31, 1997

         NET REVENUES - Net revenues decreased by approximately $619,000 or
12.3% to $4,398,000 for the three months ended December 31, 1998 from $5,017,000
for the three months ended December 31, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.

         COST OF NET REVENUES - Cost of net revenues decreased by approximately
$59,000 or 3.4% to $1,695,000 for the three months ended December 31, 1998 from
$1,754,000 for the three months ended December 31, 1997. Cost of net revenues
increased as a percentage of net revenues to 38.5% for the three months ended
December 31, 1998 from 34.9% for the three months ended December 31, 1997. This
increase in cost of net revenues, as a percentage of net revenues, for the three
months ended December 31, 1998 is primarily attributable to the change in the
mix of net revenues and the decrease in the oxygen reimbursement rates resulting
from the Budget Act.

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by approximately $180,000 or 7.7% to
$2,156,000 for the three months ended December 31, 1998 from $2,336,000 for the
three months ended December 31, 1997, and however increased as a percentage of
net revenues to 49.0% from 46.6%. The reduction in selling, general and
administrative expenses is primarily attributable to decreases in operating
expenses relating to the consolidation of operations, and the reduction of
personnel.

         For the three months ended December 31, 1998 and 1997, the Company
incurred approximately $21,000 and $16,000 respectively, of legal expenses
related to the investigation by the U. S. Department of Justice (See Note A[2]).

         OPERATING INCOME (LOSS) - The Company generated operating income of
approximately $156,000 for the three months ended December 31, 1998 as compared
to an operating loss of $5,153,000 for the three months ended December 31, 1997.

         INTEREST EXPENSE, NET - Interest expense, net decreased by
approximately $40,000 to $93,000 for the three months ended December 31, 1998
from $133,000 for the three months ended December 31, 1997. This decrease was
due to a lower overall outstanding debt balance as a result of the conversion of
MRS stockholders notes. (See Note B).

         NET (LOSS) INCOME - The Company had a net income of approximately
$27,000 for the three months ended December 31, 1998 as compared with net loss
of $4,670,000 for the three months ended December 31, 1997.



                                       13
<PAGE>   15
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


NINE MONTHS ENDED DECEMBER 31, 1998 VERSUS NINE MONTHS ENDED DECEMBER 31, 1997

         NET REVENUES - Net revenues decreased by approximately $991,000 or 7.0%
to $13,263,000 for the nine months ended December 31, 1998 from $14,254,000 for
the nine months ended December 31, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.

         COST OF NET REVENUES - Cost of net revenues decreased by approximately
$254,000 or 4.6% to $5,315,000 for the nine months ended December 31, 1998 from
$5,569,000 for the nine months ended December 31, 1997. Cost of net revenues
increased as a percentage of net revenues to 40.1% for the nine months ended
December 31, 1998 from 39.1% for the nine months ended December 31, 1997. This
increase in cost of net revenues as a percentage of net revenues for the nine
months ended December 31, 1998 is primarily attributable to the change in the
mix of net revenues, the reductions in the oxygen reimbursements rates and
having the results of MRS for the full period reported.

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by approximately $905,000 or 12.3% to
$6,452,000 for the nine months ended December 31, 1998 from $7,357,000 for the
nine months ended December 31, 1997, and also decreased as a percentage of net
revenues to 48.7% from 51.6%. The reduction in selling, general and
administrative expenses is primarily attributable to decreases in operating
expenses relating to the consolidation of operations and the reduction of
personnel.

         For the nine months ended December 31, 1998 and 1997, the Company
incurred approximately $58,000 and $289,000, respectively, of legal expenses
related to the investigation by the U. S. Department of Justice (See Note A[2]).

         OPERATING INCOME (LOSS) - The Company generated operating income of
approximately $476,000 for the nine months ended December 31, 1998 as compared
to an operating loss of $5,235,000 for the nine months ended December 31, 1997.

         INTEREST EXPENSE, NET - Interest expense, net decreased by
approximately $4,000 to $307,000 for the nine months ended December 31, 1998
from $311,000 for the nine months ended December 31, 1997. This decrease was due
to a decrease in outstanding indebtedness related to notes payable to vendors,
and notes issued to Adam and to former MRS stockholders (See Note B).

         NET (LOSS) INCOME - The Company had a net income of approximately
$95,000 for the nine months ended December 31, 1998 as compared with net loss of
$4,816,000 for the nine months ended December 31, 1997.




                                       14
<PAGE>   16
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


LIQUIDITY AND CAPITAL RESOURCES

         Working capital decreased to a deficiency of approximately $1,220,000
at December 31, 1998 from a working capital deficiency of $866,000 at March 31,
1998. The current ratio decreased to .83 at December 31, 1998 from .90 at March
31, 1998.

         Net cash provided by operating activities was approximately $2,091,000
for the nine months ended December 31, 1998 compared with net cash provided by
operating activities of approximately $1,257,000 for the nine months ended
December 31, 1997. The increase of approximately $834,000 was primarily
attributable to the decreases in accounts receivable, inventory, prepaid
expenses and other assets offset by decreases in accounts payable.

         Net cash used in investing activities was approximately $910,000 for
the nine months ended December 31, 1998, compared with approximately $5,578,000
for the nine months ended December 31, 1997. The decrease of approximately
$4,668,000 is primarily attributable to the acquisition of MRS in the nine
months ended December 31, 1997.

         Net cash used in financing activities was approximately $1,170,000 for
the nine months ended December 31, 1998, compared with net cash provided by
financing activities of approximately $323,000 for the nine months ended
December 31, 1997. The decrease of approximately $1,493,000 was primarily
attributable to an increase in repayments of notes to former MRS stockholders,
Adam, and supplier notes, in conjunction with net decreases in credit line
borrowings and repayments.

         The Company's future liquidity will continue to be dependent upon the
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable and accrued
expenses). In that regard, accounts receivable can have a significant impact on
the Company's liquidity. The Company has various types of accounts receivable,
such as receivables from patients and contracts. Accounts receivable are
generally outstanding for longer periods of time in the health care industry
than many other industries because of requirements to provide third party payors
with additional information subsequent to billing and the time required by such
payors to process claims. Certain accounts receivable frequently are outstanding
for more than 90 days.

         Recently there has been consolidation within the New York Metropolitan
area in the industry in which the Company operates. Such recent consolidation
may limit the Company's ability to maintain or increase its market share and
could materially adversely affect its business, results of operations and
financial condition.

         The Company currently has a $2,500,000 line of credit with the Bank of
New York with interest payable at the prime rate. As of December 31, 1998,
approximately $2,500,000 was drawn down under the line. In July 1997, The Bank
of New York notified the Company that it put a $2,500,000 cap on borrowings
until the uncertainty surrounding the Federal Investigation of the Company was
resolved.




                                       15
<PAGE>   17
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


         The Company entered into an agreement to finance a new computer system
with Tokai Financial Services, Inc. ("Tokai"). The agreement allowed the Company
to draw down $600,000 under a credit line, Tokai initially capped the line at
$480,000 until the federal investigation is resolved. Once the $480,000 is drawn
down under the credit line, it will then be converted into a master lease
agreement payable over forty eight months. The credit line and master lease
agreement bears interest at 11.6%. The interest rate is computed on a floating
rate of 6.5% above the two-year U.S. Treasury Bill. The two-year U.S. Treasury
Bill rate at March 31, 1998 was 5.1%. As of December 31,1998, $300,000 has been
drawn down under the credit line. The line is secured by a lien on all of the
Company's assets, subordinate to prior lienholders. On January 25, 1999 Tokai
notified the Company that the line of credit was capped at $300,000.

         The Company believes that internally generated funds will provide
sufficient liquidity and enable it to meet its currently foreseeable working
capital requirements for at least the next twelve months. However, the Company
may need to obtain additional financing to continue its operations. There can be
no assurance that additional financings will be available if and when needed by,
or on terms acceptable to, the Company. Potential sources for any such
financings have not yet been identified. Furthermore, as indicated above, if in
connection with the Federal Investigation, the Company is found to have engaged
in criminal wrongdoing and/or is terminated as a Medicaid and Medicare provider,
it would have a material adverse effect on the Company's business, results of
operations and financial condition, and the Company may not be able to continue
as a going concern.

SEASONALITY

         The Company generally has not experienced seasonal fluctuation.

INFLATION

         The Company has not experienced large increases in either the cost of
supplies or operating expenses due to inflation. Because of restrictions by
government and private medical insurance programs and the pressures to contain
the growth in the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Medical Reimbursement for Oxygen Therapy Services").

IMPACT OF THE YEAR 2000 ISSUE

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's 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 disruption of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.

         Based on a recent assessment, the Company determined that it would be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing

                                       16
<PAGE>   18
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


software and conversions to new software, the Year 2000 Issue can be mitigated.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.

         The Company is in the process of assessing the impact of the Year 2000
issue on its' information technology systems and devices that contain embedded
microprocessors to operate. The Company plans to complete this assessment by
March 31, 1999. Additional, the Company is in the process of developing a
contingency plan for the Year 2000 Issue and expects to complete the plan by the
first quarter of fiscal year 2000.

         The Company has inquired with all of its significant suppliers and
large customers to determine the extent to which the Company is vulnerable to
those parties' failure to remediate their own Year 2000 Issue. The Company's
total Year 2000 project cost and estimates to complete include the estimated
costs and time associated with the impact of relevant other parties' Year 2000
Issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.

         The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project by March 31, 1999. The total
cost of the Year 2000 modifications is estimated at $1,115,000 and is being
funded by a credit line and from operations. To date, the Company has incurred
costs of $806,000 related to the assessment of, and preliminary efforts in
connection with, its Year 2000 project and the development of a remediation
plan.

         The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
others factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those 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 all relevant computer codes, and similar uncertainties.

CORPORATE COMPLIANCE PROGRAM

         The complexity of the health care industry continues to increase. The
laws and regulations affecting the industry and reimbursement policies vary
among each individual payer. In addition to these regulations, the Company must
adhere to the guidelines established by the Office of Inspector General. In
order to assure that adequate systems are in place to facilitate ethical and
legal conduct the Company has recently chosen to implement a Corporate
Compliance Program. The first phase of the program implementation process the
Company has developed and delivered a compliance-training program to all of its
employees. In the second phase the Company will review all of its policies,
procedures, and practices to ensure that the activities of the employees and the
Company as a whole are in full compliance with relevant laws, standards, and
federal reimbursement guidelines.


                                       17
<PAGE>   19
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


PART II-OTHER INFORMATION

         ITEM 1 - LEGAL PROCEEDINGS

         Information concerning legal matters in incorporated by reference from
         Part I, Note A[2] of Notes to the Condensed Consolidated Financial
         Statements.

         The Company is currently subject to review by the New York State
         Attorney General's Medicaid Fraud Control Unit. In response to a
         subpoena duces tecum issued by the Medicaid Fraud Control Unit in
         September 1996, the Company has produced a substantial number of
         documents and provided its full cooperation. The review is pending and
         the Company has not been advised of any determination by the Medicaid
         Fraud Control Unit. Several other providers of medical equipment and
         supplies in the same geographic area have recently been subject to
         similar reviews.

         ITEM 2 - CHANGES IN SECURITIES

         None

         ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

         ITEM 5 - OTHER INFORMATION

         None

         ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K

         The Company filed a Current Report on Form 8-K on October 26, 1998 with
         respect to the resignation of the Company's Chief Financial Officer
         Joel Quall.




                                       18
<PAGE>   20
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY


                                   SIGNATURES


         In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th day of February 1999.



                                          COMMUNITY CARE SERVICES, INC
                                      -------------------------------------
                                                  (Registrant)
                                     
                                             /s/ Saverio D. Burdi
                                      -------------------------------------
                                                 Saverio D. Burdi,
                                             Chief Operating Officer
                                     
                                             /s/ Elia C. Guarneri
                                      -------------------------------------
                                                 Elia C. Guarneri
                                      Chief Financial Officer and Principal
                                         Financial & Accounting Officer         




                                       19