<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 June 30, 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).

                                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
                       FIRST QUARTER REPORT ON FORM 10-QSB
                       FOR THE QUARTER ENDED JUNE 30, 1998

                                TABLE OF CONTENTS

                                                                            Page

PART I. FINANCIAL INFORMATION

         Item I. Financial Statements

                  Condensed Consolidated Balance Sheets at
                  June 30, 1998 (unaudited) and March 31, 1998                 2

                  Condensed Consolidated Statements of Operations for
                  the Three Months Ended June 30,1998(unaudited) and
                  1997(unaudited)                                              3

                  Condensed Consolidated Statements of Cash Flows for
                  the Three Months Ended June 30, 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
<PAGE>   3
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                            AT                  AT
                                                                                         JUNE 30,            MARCH 31,
                                                                                           1998                1998
                                                                                       ------------        ------------
                                                                                        (UNAUDITED)
<S>                                                                                    <C>                 <C>         
   ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                          $    129,000        $    276,000
    Accounts receivable, net of allowance for doubtful
       accounts of $1,614,000 and $1,401,000                                              5,390,000           5,606,000
    Income tax receivable                                                                   268,000             268,000
    Inventory, net                                                                          556,000             669,000
    Prepaid expenses and other current assets                                               152,000             127,000
    Deferred tax asset, net                                                                 540,000             560,000
                                                                                       ------------        ------------
                TOTAL CURRENT ASSETS                                                      7,035,000           7,506,000

Rental equipment, net                                                                     2,009,000           2,057,000
Property and equipment, net                                                               1,144,000           1,065,000
Excess of purchase price over fair value of  net assets acquired, net                     2,241,000           2,272,000
Covenants not to compete, net                                                               452,000             487,000
Accounts and customer list, net                                                             294,000             305,000
Other assets                                                                                 62,000              57,000
Deferred taxes assets, net                                                                   69,000              69,000
                                                                                       ------------        ------------
             TOTAL  ASSETS                                                             $ 13,306,000        $ 13,818,000
                                                                                       ============        ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

                               LIABILITIES
CURRENT LIABILITIES:
    Note payable - Bank                                                                $  2,500,000        $  2,403,000
    Accounts payable                                                                      2,737,000           2,820,000
    Accrued expenses                                                                        899,000           1,138,000
    Current portion of long term debt                                                     1,575,000           1,865,000
    Current portion of capital lease obligations                                            111,000             146,000
                                                                                       ------------        ------------
                TOTAL CURRENT LIABILITIES                                                 7,822,000           8,372,000

Long term portion of debt                                                                   788,000             775,000
Long term portion of capital lease obligations                                              135,000             161,000
                                                                                       ------------        ------------
                TOTAL LIABILITIES                                                         8,745,000           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                                                                9,937,000           9,931,000
Accumulated deficit                                                                      (5,447,000)         (5,492,000)
                                                                                       ------------        ------------
                TOTAL STOCKHOLDERS' EQUITY                                                4,561,000           4,510,000
                                                                                       ------------        ------------
                TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY                            $ 13,306,000        $ 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
                                                               THREE MONTHS ENDED
                                                                    JUNE 30,
                                                          ----------------------------
                                                             1998              1997
                                                          ----------       -----------
<S>                                                       <C>              <C>        
NET REVENUES                                              $4,432,000       $ 4,232,000
                                                          ----------       -----------
COST AND EXPENSES:
    Cost of net revenues
       Product and supply costs                            1,589,000         1,916,000
       Rental equipment depreciation                         247,000            92,000
                                                          ----------       -----------
       Cost of net revenues                                1,836,000         2,008,000

    Selling, general and administrative                    2,111,000         2,234,000
    Provision for doubtful accounts                          213,000           177,000
    Amortization of intangible assets                         99,000            91,000
                                                          ----------       -----------
    Total cost and expenses                                4,259,000         4,510,000

    OPERATING  INCOME (LOSS)                                 173,000          (278,000)

    Interest expense, net                                    108,000            32,000
                                                          ----------       -----------
    Income (loss) before provision for income taxes           65,000          (310,000)

    Provision (benefit) for income taxes                      20,000          (137,000)
                                                          ----------       -----------
NET  INCOME (LOSS)                                        $   45,000       $  (173,000)
                                                          ==========       ===========
Per share data:

    Net income (loss) per common share:
        Basic and diluted                                 $     0.01       $     (0.03)
                                                          ==========       ===========
    Weighted average number of shares outstanding
        Basic and diluted                                  7,145,049         6,908,943
                                                          ==========       ===========
</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
                                                                         THREE MONTHS ENDED
                                                                              JUNE 30,
                                                                     ----------------------------
                                                                        1998              1997
                                                                     ---------        -----------
<S>                                                                  <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                  $  45,000        $  (173,000)
  Adjustments to reconcile net income (loss)
    to net cash provided by operating activities:
    Depreciation and amortization expense                              380,000            191,000
    Write off of rental equipment                                       19,000             21,000
    Provision for doubtful accounts                                    213,000            177,000
    Deferred tax asset                                                  20,000                 --
    Changes in operating assets and liabilities net of effects
      from Metropolitan Respirator Service, Inc. acquisition:
      Accounts receivable                                              217,000           (400,000)
      Inventory                                                        114,000             71,000
      Prepaid expenses and other current assets                        (26,000)          (141,000)
      Other assets                                                      (6,000)            40,000
      Accounts payable and accrued expenses                           (321,000)           111,000
                                                                     ---------        -----------
          Net cash provided by (used in) operating activities          655,000           (103,000)
                                                                     ---------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of rental equipment                                     (446,000)          (132,000)
  Acquisition of property and equipment                               (125,000)          (272,000)
  Acquisition, of Metropolitan Respirator Service, Inc.                     --         (4,411,000)
                                                                     ---------        -----------
          Net cash (used in) investing activities                     (571,000)        (4,815,000)
                                                                     ---------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from promissory note                                        147,000                 --
  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                  (226,000)           (67,000)
  Repayments of former MRS stockholders notes                         (128,000)                --
  Principal repayments of notes payable to Adam
    Health Care Equipment Corp.                                        (71,000)           (62,000)
  Principal repayments of capital lease obligations                    (56,000)           (47,000)
                                                                     ---------        -----------
          Net cash (used in) provided by financing activities         (231,000)           732,000
                                                                     ---------        -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS                           (147,000)        (4,186,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       276,000          4,648,000
                                                                     ---------        -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $ 129,000        $   462,000
                                                                     =========        ===========
</TABLE>

                                   (continued)


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

<TABLE>
<CAPTION>
                                                                                          FOR THE
                                                                                      THREE MONTHS ENDED
                                                                                          JUNE 30,
                                                                               ------------------------------
                                                                                  1998               1997
                                                                               -----------        -----------
<S>                                                                            <C>                <C>        
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period
        Interest                                                               $   104,000        $    40,000
                                                                               -----------        -----------
        Taxes                                                                  $        --        $    40,000
                                                                               -----------        -----------
SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
       Rental equipment acquired under capital lease                                    --             24,000
       Property and equipment acquired under capital lease                           7,000            103,000
       Conversion of trade payables into notes payable                                  --            281,000
       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)
              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 sells 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 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 months ended June 30, 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 financial position at June 30, 1998, the results of operations, and the cash
flows for the three months ended June 30, 1998 and 1997.

         The results of operations for the three months ended June 30, 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
non-governmental agencies terminated. If such occurred, it would have a material
adverse effect on the


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

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 $23,000 for the
three months ended June 30, 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 recently was abolished as a result of recent 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 ("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. By way of an audit process, the provider, in this case the
Company, is entitled to an opportunity to respond to the Draft Notice, with
regard to the financial recovery sought and any proposed sanctions such as
exclusion from the New York State Medicaid Program. After reviewing the
response, the agency then issues a final report either confirming or modifying
its draft findings and recommendations. Pursuant to this process, the Company,
through its healthcare regulatory counsel, submitted a detailed response to the
Draft Notice. Thereafter, discussions and negotiations with DSS, and, following
the abolishment of DSS, DOH, have occurred. At this point, DOH is reviewing its
draft findings and recommendations. No final Notice has been issued. The
exclusion of the Company from the New York State Medicaid Program 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.

         [3]      Changes in Executive Officers and Directors, Including
                  Termination of Chief Executive Officer and Chief Operating
                  Officer

         On July 1, 1997, the Company terminated the services of Alan T.
Sheinwald as the Company's President and Chief Executive Officer and Allan C.
Goldfeder as the Company's Chief Operating Officer. Dean L. Sloane and Bruce L.
Ansnes, directors of the Company, assumed supervision of management operations
of the Company on an interim basis pending further action by the Board of
Directors.

         As discussed in Note B, upon the closing of the MRS acquisition, Donald
Fargnoli was appointed to the Company's Board of Directors, Mr. Fargnoli and
Louis Rocco were appointed as Vice Presidents of the Company, Saverio D. Burdi
was appointed as Senior Vice President of the Company, and Wade Wilson was
appointed as Senior Vice President, Operation Systems, of the Company.

         On July 7, 1997, Messrs. Sloane and Ansnes were appointed Chairman and
Vice Chairman of the Company, respectively, and Mr. Fargnoli was appointed
Secretary of the Company. Mr. Sheinwald resigned as Chairman and a director of
the Company. Also in July 1997, Mr. Burdi was appointed as Chief Operating
Officer of the Company.

         On May 8, 1998 Mr. Fargnoli resigned as a director, Vice President and
Secretary of the Company.


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

         [4]      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.

         [5]      Reclassifications and Use of Accounting Estimates

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

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Such amounts include, among others, the allowance for doubtful accounts, other
asset valuation allowances and certain liabilities. Management periodically
reevaluates the estimates inherent in certain financial statement amounts and
may adjust accordingly. Actual results could differ from these estimates.

(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


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

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.

         At any time subsequent to the first anniversary of the execution of the
Promissory Note, if the Company conducts a secondary public offering of
Company's common stock, the Note Holder shall have the opportunity to sell the
shares in such offering to the same extent and in proportion to the rights of
executive officers.

         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.

         The Company also incurred direct transaction costs amounting to
approximately $311,000.

         Upon the closing of the MRS acquisition, Donald Fargnoli was appointed
to the Company's Board of Directors, Mr. Fargnoli and Louis Rocco were appointed
as Vice Presidents of the Company, Saverio D. Burdi was appointed as Senior Vice
President of the Company, and Wade Wilson was appointed as Senior Vice
President, Operation Systems, of the Company. The Company entered into
three-year employment agreements with Messrs. Fargnoli, Rocco, Burdi and Wilson,
providing for annual base compensation of $110,000 for Messrs. Fargnoli and
Rocco and $120,000 for Messrs. Burdi and Wilson. Messrs. Burdi and Wilson were
granted options to purchase 25,000 and 20,000 common shares, respectively, under
the Company's Incentive Stock Option Plan. Each of the agreements provides for
certain employee benefits and contains a noncompetitive provision covering the
term of the agreement plus one-year following termination. Messrs. Fargnoli,
Rocco, Burdi and Wilson also entered into Non-Competition Agreements with the
Company that runs through May 10, 2001, or the length of their respective
Employment Agreement plus one year, whichever is longer. Mr. Wilson is the
brother-in-law of Alan T. Sheinwald, who at the time was President and Chief
Executive Officer of the Company.


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

         The purchase price has been allocated to the assets and liabilities
assumed based on their estimated fair values as follows:

<TABLE>
<S>                                                                            <C>        
Purchase Price:
         Cash                                                                  $ 4,100,000
         Issuance of notes payable                                               3,066,000
         Common stock                                                            1,314,000
         Costs of acquisition                                                      311,000
                                                                               -----------
                  Total                                                        $ 8,791,000
                                                                               ===========
Allocation:
         Current assets                                                        $ 3,771,000
         Rental equipment                                                          434,000
         Property and equipment                                                    181,000
         Other assets                                                              947,000
         Excess of purchase price over fair value of 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)
                                                                               -----------
                  Total                                                        $ 8,791,000
                                                                               ===========
</TABLE>

         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.


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

         Unaudited pro forma summary of data for the three months ended June 30,
1997, assuming the acquisition of MRS had taken place on April 1, 1997, is as
follows:

<TABLE>
<S>                                                                 <C>        
Net revenues                                                        $ 5,230,000
Net (loss) income                                                   $  (451,000)
Net (loss) income per common share - basic and diluted              $     (0.06)
</TABLE>

         [2]      Adam Health Care Equipment Corp.

         In April 1993, the Company purchased certain assets and the business of
Adam for $1,500,000. The Company paid $150,000 at the execution of purchase
agreement and $300,000 at the closing. $1,000,000 of the balance was to be paid
in equal quarterly installments evidenced by promissory notes with interest at
6% per annum and a final payment due March 15, 1995. The remaining $50,000 would
be paid following the completion of a full Medicare billing cycle.

         In 1993, the Company commenced an action against Adam and its
principals arising out the acquisition of certain assets of Adam by the Company
in April 1993.

         On April 14, 1997, the Company entered into a Settlement Agreement and
Release discharging its lawsuit against 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.


                                       11
<PAGE>   13
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 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 to seventy percent (70%) of their 1997
levels beginning


                                       12
<PAGE>   14
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

January 1, 1999. In addition, Consumer Price Index increases in oxygen
reimbursement rates will not resume until the year 2003.

         The Company has 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 results for the three months ended June
30, 1998 reflect the reduction for the aforementioned Medicare reimbursement
rates as compared to the three months ended June 30, 1997 which does not reflect
the reductions since they did not go into effect until January 1, 1998.

THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997

         NET REVENUES - Net revenues increased by approximately $200,000 or 4.7%
to $4,432,000 for the three months ended June 30, 1998 from $4,232,000 for the
three months ended June 30, 1997. This increase was primarily due to the
acquisition of MRS in May 1997 and having the results of MRS in the quarter for
the full period reported for the three months ended June 30, 1998.

         COST OF NET REVENUES - Cost of net revenues decreased by approximately
$172,000 or 8.6% to $1,836,000 for the three months ended June 30, 1998 from
$2,008,000 for the three months ended June 30, 1997. Cost of net revenues
decreased as a percentage of net revenues to 41.4% for the three months ended
June 30, 1998 from 47.4% for the three months ended June 30, 1997. This decrease
in cost of net revenues as a percentage of net revenues for the year ended March
31, 1998 is primarily attributable to the change in the mix of net revenues and
the MRS acquisition, which enhanced the ability of the Company to procure
products at more competitive prices since the Company has a greater market share
and is able to negotiate better pricing with extended credit terms with its
major vendors.

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by approximately $123,000 or 5.5% to
$2,111,000 for the three months ended June 30, 1998 from $2,234,000 for the
three months ended June 30, 1997, and also decreased as a percentage of net
revenues to 47.6% from 52.8%. The reduction in selling, general and
administrative expenses is primarily attributable to decreases in operating
expenses relating to the consolidation of operations, reduction of personnel and
having the results of MRS in the quarter for the full period reported for the
three months ended June 30, 1998.

         For the three months ended June 30, 1998 and 1997, the Company incurred
approximately $23,000 and $178,000, 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 $173,000 for the three months ended June 30, 1998 as compared to
an operating loss of $278,000 for the three months ended June 30, 1997.


                                       13
<PAGE>   15
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         INTEREST EXPENSE, NET - Interest expense, net increased by
approximately $76,000 to $ 108,000 for the three months ended June 30, 1998 from
$32,000 for the three months ended June 30, 1997. This increase was due to an
increase in outstanding indebtedness related to the Company's line of credit
with the Bank of New York, 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
$45,000 for the three months ended June 30, 1998 as compared with net loss of
$173,000 for the three months ended June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Working capital decreased to a deficiency of approximately $787,000 at
June 30, 1998 from a working capital deficiency of $866,000 at March 31, 1998.
The current ratio remained constant at .90 at June 30, 1998 and March 31, 1998.

         Net cash provided by operating activities was approximately $655,000
for the three months ended June 30, 1998 compared with net cash used in
operating activities of approximately $103,000 for the three months ended June
30, 1997. The increase of approximately $758,000 was primarily attributable to
the decreases in accounts payable and accrued expenses, inventory and accounts
receivable.

         Net cash used in investing activities was approximately $571,000 for
the three months ended June 30, 1998, compared with approximately $4,815,000 for
the three months ended June 30, 1997. The decrease of approximately $4,244,000
is primarily attributable to the acquisition of MRS in the three months ended
June 30, 1997 offset by increases in rental equipment and property and equipment
in the three months ended June 30, 1998.

         Net cash used in financing activities was approximately $231,000 for
the three month ended June 30, 1998, compared with net cash provided by
financing activities of approximately $732,000 for the three months ended June
30, 1997. The decrease of approximately $963,000 was primarily attributable to
an increase in repayments under the Company's credit line, payments to former
MRS stockholders, Adam, supplier notes, and capital lease obligations.

         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.


                                       14
<PAGE>   16
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         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 $2,800,000 line of credit with the Bank of
New York with interest payable at the prime rate. As of June 30, 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 is
completed. Subsequently, on January 12, 1998, the credit line was increased by
$300,000 to $2,800,000

         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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 defines the concept of "comprehensive income"
and establishes the standards for reporting comprehensive income. Comprehensive
income is defined to include net income or (loss), as currently recorded, as
well as unrealized gains and losses on available-for-sale securities, foreign
currency translation adjustments and certain other items not included in the
statement of operations. SFAS 130 also sets forth requirements on how
comprehensive income should be presented as part of an issuer's financial
statements. The Company is currently assessing how it will disclose
comprehensive income in its financial statements. The adoption of SFAS 130 will
not affect the Company's earnings (losses), liquidity or capital resources.

         In June 1997, FASB issued Statement of Financial Accounting Standards
No.131 ("SFAS 131") "Disclosure About Segments of an Enterprise and Related
Information", which defines the criteria by which an issuer is to determine the
number and nature of its "operating segments" and sets forth the financial
information that is required to be disclosed about such operating segments. The
Company is currently assessing the manner in which it will disclose the required
information.


                                       15
<PAGE>   17
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1") "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" which will
become effective for financial statements for fiscal year 1999, with early
adoption encouraged. SOP 98-1 requires the capitalization of eligible costs of
specified activities related to computer software developed or obtained for
internal use. The Company is currently applying the guidance in SOP 98-1.

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No.133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities", requiring the recognition of all derivatives as either assets or
liabilities on the balance sheet and measure the derivatives at fair value. The
Company is currently assessing the effect, if any, of this pronouncement.

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.

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 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 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


                                       16
<PAGE>   18
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 December 31, 1998. The total
remaining cost of the Year 2000 modifications is estimated at $1,115,000 and is
being funded by a credit line. To date, the Company has incurred costs of
$519,000 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.


                                       17
<PAGE>   19
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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.

         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

         None


                                       18
<PAGE>   20
                  COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                   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 13th day of August 1998.

                                            COMMUNITY CARE SERVICES, INC
                                      -----------------------------------------
                                                    (Registrant)

                                                /s/ Saverio D. Burdi
                                      -----------------------------------------
                                                  Saverio D. Burdi,
                                               Chief Operating Officer

                                                   /s/ Joel Quall
                                      -----------------------------------------
                                                     Joel Quall,
                                               Chief Financial Officer
                                      Principal Financial & Accounting Officer


                                       19