<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, 1997.

[ ] 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: 7,166,823

Transitional Small Business Disclosure Format (check one):

Yes [X]   No [ ]
<PAGE>   2
                          COMMUNITY CARE SERVICES, INC.
                       Third Quarter Report on Form 10-QSB
                     For The Quarter Ended December 31, 1997




                                                    TABLE OF CONTENTS



<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION

           ITEM I.  FINANCIAL STATEMENTS
                                                                                                           Page
                                                                                                           ----
<S>                                                                                                       <C>
                    Condensed Consolidated Balance Sheets as at
                    December 31, 1997 (unaudited) and March 31, 1997                                         2

                    Condensed Consolidated Statements of Operations for
                    Three and Nine Months Ended December 31, 1997 (unaudited)
                    and 1996 (unaudited)                                                                     3

                    Condensed Consolidated Statements of Cash Flows
                    for the Nine Months Ended December 31, 1997 (unaudited)
                    and 1996(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                                           11 - 16


PART II.  OTHER INFORMATION

           ITEM 1.  LEGAL PROCEEDINGS                                                                       16
           ITEM 2.  CHANGES IN SECURITIES                                                                   16
           ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                         16
           ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                     16
           ITEM 5.  OTHER INFORMATION                                                                       16
           ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                        16

SIGNATURES                                                                                                  17
</TABLE>
<PAGE>   3
                         COMMUNITY CARE SERVICES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                   AS AT                AS AT               AS AT
                                                                                DECEMBER 31,         DECEMBER 31,         MARCH 31,
                                                                                    1997                 1997               1997
                                                                                    ----                 ----               ----
                                                                                (UNAUDITED)           (PRO FORMA)
                 ASSETS                                                                               (UNAUDITED)
                                                                                                        (NOTE I)
<S>                                                                                <C>                  <C>              <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                      $650,000             $520,000         $4,648,000
    Accounts receivable, net of allowance for doubtful accounts of
        $ 948,000 and $ 398,000, respectively                                     5,375,000            5,375,000          3,054,000
    Inventory                                                                       709,000              709,000            641,000
    Prepaid expenses and other current assets                                       939,000              939,000             72,000
                                                                                    -------              -------             ------
                TOTAL CURRENT ASSETS                                              7,673,000            7,543,000          8,415,000

Rental equipment, net                                                             2,121,000            2,121,000          1,261,000
Property and equipment, net                                                         833,000              833,000            322,000
Excess of purchase price over net assets acquired, net                            2,426,000            2,426,000                  -
Covenants not to compete, net                                                       523,000              523,000            261,000
Accounts and customer list, net                                                     315,000              315,000            120,000
Other assets                                                                         55,000               55,000             81,000
Deferred income taxes                                                               296,000              296,000                  -
                                                                                    -------              -------             ------

               TOTAL                                                            $14,242,000          $14.112,000        $10,460,000
                                                                                ===========          ===========        ===========
 
                 LIABILITIES

CURRENT LIABILITIES:
    Accounts payable and accrued expenses                                        $3,458,000            3,345,000         $1,767,000
    Note payable - Bank                                                           2,223,000            2,223,000            243,000
    Current portion of long term debt                                             1,066,000            1,066,000          1,163,000
    Current portion of capital lease obligations                                    567,000              567,000              4,000
    Income taxes payable                                                                  -                    -            117,000
                                                                                  ---------            ---------            -------
                TOTAL CURRENT LIABILITIES                                         7,314,000            7,201,000          3,294,000

Long term debt                                                                    3,783,000            1,304,000            591,000
Long term portion of capital lease obligations                                       90,000               90,000             17,000
Deferred income taxes                                                                 9,000                9,000              9,000
                                                                                      -----                -----              -----
                TOTAL LIABILITIES                                                11,196,000            8,604,000          3,911,000
                                                                                 ----------            ---------          ---------

COMMITMENTS AND CONTINGENCIES

                     STOCKHOLDERS' EQUITY

Common stock, $.01 par value; authorized 20,000,000 shares,
    issued and outstanding 7,166,823 shares at December 31, 1997,
    7,724,629 shares December 31, 1997 Pro Forma and
    6,225,000 shares at March 31, 1997                                               66,000               72,000             62,000
Preferred stock, $.01 par value; authorized 1,000,000 shares none issued
Additional paid in capital                                                        7,737,000           10,193,000          6,428,000
Retained (deficet) earnings                                                      (4,757,000)          (4,757,000)            59,000
                                                                                 ----------           ----------             ------
                TOTAL STOCKHOLDERS' EQUITY                                        3,046,000            5,508,000          6,549,000
                                                                                  ---------            ---------          ---------

                TOTAL                                                           $14,242,000          $14,112,000        $10,460,000
                                                                                ===========          ===========        ===========
</TABLE>


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



                                                                               2
<PAGE>   4
                         COMMUNITY CARE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                 - UNAUDITED -
<TABLE>
<CAPTION>

                                                                          FOR THE                             FOR THE
                                                                     THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                                        DECEMBER 31,                        DECEMBER 31,
                                                                        ------------                        ------------
                                                                      1997              1996              1997              1996
                                                                      ----              ----              ----              ----
<S>                                                                <C>               <C>              <C>                <C>
NET REVENUES                                                       $5,017,000        $2,383,000       $14,254,000        $7,437,000
                                                                   ----------        ----------       -----------        ----------

COST AND EXPENSES:
     Cost of net revenues
        Product and supply costs                                    1,458,000           930,000         4,808,000         2,968,000
        Rental equipment depreciation                                 296,000            88,000           761,000           253,000
                                                                      -------            ------           -------           -------

                                                                    1,754,000         1,018,000         5,569,000         3,221,000

Selling, general and administrative expenses
     (Includes in Fiscal Year 98 Legal Expenses - 
         Federal Investigation see Note E and 
         Management's Discussion and Analysis)                      2,336,000         1,045,000         7,357,000         3,079,000

Provision for doubtful accounts (Note D)                            1,122,000            58,000         1,400,000           238,000
Amortization of intangible assets                                     145,000            29,000           350,000           115,000
Provision for impairment of long lived assets (Note C)              4,813,000                 -         4,813,000                 -
                                                                    ---------           -------          --------           -------

         OPERATING (LOSS) INCOME                                   (5,153,000)          233,000        (5,235,000)          784,000

     Interest expense, net                                            133,000            91,000           311,000           214,000
                                                                      -------            ------           -------           -------

     (Loss) Income before provision for income taxes               (5,286,000)          142,000        (5,546,000)          570,000
     (Benefit) Provision for income taxes                            (616,000)           62,000          (730,000)          250,000
                                                                     --------            ------          --------           -------

(LOSS) NET INCOME                                                 ($4,670,000)          $80,000       ($4,816,000)         $320,000
                                                                  ===========           =======       ===========          ========

PER SHARE DATA:

     (Loss) net income per common share -- 
         basic and diluted                                             ($0.71)            $0.01            ($0.74)            $0.06
                                                                       ======             =====            ======             =====

     Weighted average number of shares outstanding                  6,587,243         5,948,750         6,535,870         5,137,272
                                                                    =========         =========         =========         =========

</TABLE>


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


                                                                               3
<PAGE>   5
                         COMMUNITY CARE SERVICES, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 - UNAUDITED -
<TABLE>
<CAPTION>

                                                                                                FOR THE
                                                                                           NINE MONTHS ENDED
                                                                                             DECEMBER 31,
                                                                                             ------------
                                                                                        1997               1996
                                                                                        ----               ----
<S>                                                                                 <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                                                 ($4,816,000)          $320,000

  Adjustments to reconcile net (loss) income
    to net cash provided by operating activities:
    Depreciation and amortization expense                                             1,111,000            358,000
    Amortization of deferred unit cost and
      debt discount                                                                           -             79,000
    Write off of rental equipment                                                        31,000             71,000
    Provision for doubtful accounts                                                   1,400,000            (62,000)
    Provision for impairment of long lived assets                                     4,813,000                  -
    Changes in operating assets and liabilities net of effects
      from acquisition:
      (Increase) in accounts receivable - trade                                      (1,251,000)          (268,000)
      Decrease (Increase) in inventory                                                  164,000           (177,000)
      (Increase) in prepaid expenses and other current assets                          (686,000)           (69,000)
      Decrease in other assets                                                           61,000                  -
       Increase in accounts payable and accrued expenses                               (654,000)          (275,000)
       Increase in income taxes payable                                                       -            134,000
                                                                                       --------            -------
          Net cash provided by operating activities                                     173,000            111,000
                                                                                        -------            -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of rental equipment                                                      (720,000)          (423,000)
  Acquisition of property and equipment                                                (447,000)           (89,000)
  Acquisition, net of cash acquired                                                  (4,437,000)                 -
                                                                                     ----------           --------
          Net cash (used in) investing activities                                    (5,604,000)          (512,000)
                                                                                     ----------           --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds of initial public offering                                                         -          6,079,000
  Issuance of common stock                                                                    -             15,000
  Proceeds from conversion of accounts payable to promissary notes to suppliers       1,110,000            300,000
  Principal repayment of promissory notes                                                     -           (300,000)
  Principal repayment of bank borrowings                                                      -           (200,000)
  Principal repayment of debt offering                                                        -           (637,000)
  Proceeds of bank borrowings under credit line                                       1,980,000                  -
  Repayments of credit line and term loan                                            (1,072,000)                 -
  Repayments of director and former stockholders loans                                        -           (255,000)
  Principal repayments of notes payable to suppliers                                   (110,000)          (649,000)
  Principal repayments of notes payable to Adam
    Health Care Equipment Corp.                                                        (189,000)                 -
  Principal repayments of capital lease obligations                                    (286,000)                 -
  Deferred offering costs                                                                     -            192,000
                                                                                       --------            -------
          Net cash provided by financing activities                                   1,433,000          4,545,000
                                                                                      ---------          ---------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                 (3,998,000)         4,144,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      4,648,000            190,000
                                                                                      ---------            -------

CASH AT END OF PERIOD                                                                  $650,000         $4,334,000
                                                                                       ========         ==========
</TABLE>


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

<TABLE>
<CAPTION>

                                                                                                 FOR THE
                                                                                             NINE MONTHS ENDED
                                                                                               DECEMBER 31,
                                                                                               ------------
                                                                                         1997                1998
                                                                                         ----                ----
<S>                                                                                 <C>                   <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period
        Interest                                                                       $201,000            $ 65,000
                                                                                       --------            --------
        Taxes                                                                           $45,000             115,000
                                                                                        -------            --------

SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
       Rental equipment acquired under capital lease                                    $24,000
       Property and equipment acquired under capital lease                             $113,000
       Conversion of trade payables into notes payable                               $1,381,000

       The Company purchased Metropolitan Respirator Service, Inc.
              for $4,100,000 of cash (including related costs of
              $337,000, less cash acquired).  The purchase price was
              allocated to the assets and liabilities assumed based on
              their fair value as follows:
              Current assets                                                         $3,772,000
              Rental equipment                                                          433,000
              Property, plant and equipment                                             182,000
              Other assets                                                              394,000
              Excess of purchase price over net assets acquired                       6,900,000
              Customer List                                                             225,000
              Non Compete Covenant                                                      360,000
              Current liabilities                                                    (3,157,000)
              Long term liabilities                                                    (292,000)
              Promissory notes issued                                                (3,067,000)
              Common stock issued                                                    (1,313,000)
                                                                                     ----------
              Cash paid to acquire Metropolitan Respirator Service, Inc.             $4,437,000
                                                                                     ----------
</TABLE>

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

                                                                               5
<PAGE>   7
                         COMMUNITY CARE SERVICES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(NOTE A) - BASIS OF PRESENTATION

        (1) Community Care Services ("the Company") is a provider of an
extensive variety of home health care products and services. The Company sells
and rents durable medical equipment and respiratory products, and sells
rehabilitation products and disposable medical supplies in the five boroughs of
New York City, Westchester, Rockland and Nassau counties of New York State, as
well as the northern region of New Jersey. The Company services the home health
care market by coordinating with various health care workers and payor case
managers to determine the home health needs of patients.

        The condensed consolidated financial statements of the Company for the
three and nine months ended December 31, 1997 and 1996 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 December 31, 1997, the
results of operations for the three and nine months ended December 31, 1997,
the cash flows for the nine months ended December 31, 1997 and 1996.     

         The results of operations for the three and nine months ended December
31, 1997 and 1996 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 financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
March 31, 1997 as filed with the Securities and Exchange Commission.

         (2) Net income per common share is computed based on the weighted
average number of shares and common equivalent shares outstanding that pertain
to each period.

         (3) Reclassifications have been made to the December 31, 1997 statement
of operations to conform to the financial statements presented in the financial
year ended March 31, 1997 Form 10-K as filed with the Securities and Exchange
Commission.


(NOTE B)  -  ACQUISITION OF METROPOLITAN RESPIRATOR SERVICE, INC.:

         On May 10, 1997, the Company acquired 68% of the outstanding shares of
Metropolitan Respirator Service, Inc. ("MRS"). The purchase price was
approximately $5,993,000, consisting of approximately $2,800,000 in cash, of
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 approximately $444,000 issued to Wade Wilson, the
brother-in-law of Alan T. Sheinwald, the former President and Chief Executive
Officer of the Company, See Note E & F), and 62,243 shares of the Company's


                                                                               6
<PAGE>   8

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 Note Holder ("Note Holder")
(See Note I - Subsequent Events - Conversion of Certain Promissory Notes) may
elect to convert up to eighty (80%) percent of the outstanding principal balance
of the Promissory Note 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%) 
percent 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 may be converted into 835,000 shares of
common shares of the Company. See (Note I) Subsequent Events - Conversion of
Certain Promissory Notes.

         At any time subsequent to the first anniversary of the execution of the
Promissory Note, if the Company conducts a secondary public offering of the
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 that
the other executive officers of the Company have.

         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 $337,000.

         As part of the acquisition, the Company made customary representations
to the sellers, including representations regarding government regulations.

         MRS was incorporated on April 15, 1974 and is engaged in the sale and
rental of medical supplies and durable medical equipment within the New York
metropolitan area.

         The Company intends to continue operating MRS's existing business and
will treat MRS as a wholly owned subsidiary.

         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/Operations Systems of the Company. The Company entered into three-year
employment agreements with Messrs. Fargnoli, Rocco, Burdi and Wilson, providing
for annual base compensations of approximately $222,000 for Mr. Fargnoli as
amended, aproximately $234,000 for Mr. Rocco as amended, and $120,000 for 
Messrs. Burdi and Wilson, respectively. 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 non-competitive provision covering the
term of the agreement, plus one year, following termination. Messrs. Fargnoli,
Rocco, Burdi and Wilson also entered into Non-Competitive Agreements with the
Company which runs through May 10, 2001, or the length of their respective
Employment Agreement, plus one year, whichever is

                                                                              7
<PAGE>   9

longer. Mr. Wilson is the brother-in-law of Alan T. Sheinwald, the former
President and Chief Executive Officer of the Company.

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


<TABLE>
<CAPTION>

<S>                                                                <C>         
     Purchase Price:
           Cash                                                    $  4,100,000
           Issuance of notes payable                                  3,067,000
           Common Stock                                               1,313,000
           Cost of acquisition                                          337,000
                                                                   ------------
                                       Total                       $  8,817,000
                                                                   ============
     Allocation:                                             
           Current assets                                          $  3,772,000
           Rental Equipment                                             433,000
           Property and Equipment                                       182,000
           Other assets                                                 394,000
           Excess of purchase price                             
           over net assets acquired                                   6,900,000
           Customer List                                                225,000
           Non-Compete Covenant                                         360,000
           Current liabilities                                       (3,157,000)
           Long term liabilities                                       (292,000)
                                                                  -------------
                                       Total                      $   8,817,000
                                                                  =============
</TABLE>

                                                                      
         The following unaudited pro forma condensed summary information
reflects the consolidated results of operations of the Company and the MRS
acquisition, assuming this acquisition had occurred at the beginning of each of
the following periods:

<TABLE>
<CAPTION>
                                                       Nine months Ended
                                                          December 31,
                                                     1997                1996
                                                --------------------------------
                                                           (unaudited)

<S>                                             <C>                  <C>        
Net revenues                                    $ 15,252,000         $12,601,000
Net (loss) income                               $ (5,564,000)        $   337,000
Net (loss) income per common share              $      (0.75)        $      0.06
</TABLE>



(NOTE C) - IMPAIRMENT OF LONG LIVED ASSETS

         The Company has chosen to adopt Statement of Financial Accounting
Standards No. 121 (SFAS #121) "Accounting for Impairment of Long Lived Assets".


                                                                               8
<PAGE>   10
         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 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 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.

         The evaluation resulted in a $4,401,000 write down. Also, the
evaluation led the Company to determine that the remaining amortization period
for the goodwill should be reduced from 30 to 20 years.


(NOTE D) - PROVISION FOR DOUBTFUL ACCOUNTS

         After an evaluation of the accounts receivable, it was determined
that, a charge to earnings for approximately $979,000 was to be recorded in
the current period to write down the accounts receivable to its estimated
realizable value. This charge has been included in the provision for doubtful
accounts.


(NOTE E) - INVESTIGATION BY U.S. DEPARTMENT OF JUSTICE:

         On June 4, 1997, the Company was informed that its then Chief Executive
Officer and Chief Operating Officer and the Company itself are targets of a
Department of Justice Criminal investigation for allegedly improper payments
relating to a contract to provide healthcare services outside of New York State
involving Medicare. A search warrant was executed at the Company's executive
offices. If it is determined that the Company engaged in criminal wrongdoing,
the Company will be subject to criminal penalties which may include a fine up to
$1,000,000 and an order of restitution, 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,
if the Company is not found to have committed any criminal wrongdoing itself,
but it is determined that any of the Company's past or present Officers or
employees engaged in criminal wrongdoing during their employment by the Company,
the Company could be terminated as a Medicaid and Medicare provider (but is not
subject to automatic exclusion from the programs under this circumstances), and
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. The
Company has offered its complete cooperation and the cooperation of all of its
employees in the federal probe.


                                                                               9
<PAGE>   11
9 (NOTE F) - 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
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 stated above, 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/Operations Systems of the Company.

         On July 17, 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.

         On July 28, 1997, Saverio D. Burdi was appointed Chief Operating
Officer of the Company.


(NOTE G) - SETTLEMENT OF ADAM LITIGATION:

         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.


(NOTE H) - INITIAL PUBLIC OFFERING:

         In October, 1996, the Company completed an Initial Public Offering of
1,495,000 units at a price of $5.20 per unit, each unit consisting of one share
of common stock and one Class A Warrant pursuant to a registration statement
which was declared effective by the Securities and Exchange Commission on
October 18, 1996, resulting in net proceeds of $6,115,000. The Company used the
proceeds of the offering for the repayment of approximately $255,000 of loans
payable to a director and former stockholders; repayment of 8% promissory notes
in the aggregate principal amount of approximately $937,000 plus accrued
interest of approximately $39,000; repayment of a bank note of $200,000 and
accrued interest of approximately $1,000 and repayments of notes payable to
suppliers of approximately $649,000.

(NOTE I) - SUBSEQUENT EVENTS - CONVERSION OF CERTAIN PROMISSORY NOTES

         In February 1998, the Company agreed that promissory notes issued to
Donald Fargnoli and Louis Rocco in connection with the acquisition of MRS would
be accordingly converted in part, into 557,806 shares of Company common stock,
representing eighty (80%) percent of the notes. Of the remaining twenty (20%) 
percent, approximately $389,000, 


                                                                              10
<PAGE>   12
$130,000 will be paid in cash immediately and the balance of $259,000 will be
contributed to capital.


PART 1 - ITEM 2

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

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 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 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 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. The write-off of the carrying
value of goodwill required under SFAS #121 is based on management projections of
the impact of the oxygen reimbursement reductions on continuing operations of
the Company, resulting in a charge of approximately $4,813,000 recorded in the 
current quarter. Also, the evaluation led the Company to determine that the 
remaining amortization period for the goodwill should be reduced from 30 to 20 
years.


THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31,
1996.

         NET REVENUES - Net revenues increased by approximately $2,634,000 or
110.5% to $5,017,000 for the three months ended December 31, 1997 from
$2,383,000 for the three months ended December 31, 1996. This increase was
primarily due to the acquisition of MRS; offering new services to the existing
client base; and an increase in the rental of durable medical and respiratory
equipment.

         COST OF NET REVENUES - Cost of net revenues increased by approximately
$736,000 or 72.3% to $1,754,000 for the three months ended December 31, 1997
from $1,018,000 for the


                                                                              11
<PAGE>   13
three months ended December 31, 1996. Cost of net revenues decreased as a
percentage of net revenues to 35.0% for the three months ended December 31, 1997
from 42.7% for the three months ended December 31, 1996. This decrease in
percentage of cost of net revenues is primarily attributable to the acquisition
of MRS, which resulted in a change in the mix of sales; improved purchase
efficiencies resulting in higher gross margins; coupled with increased rental of
durable medical equipment.

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses increased by approximately $1,291,000 or 123.5 % to
$2,336,000 for the three months ended December 31, 1997 from $1,045,000 for the
three months ended December 31, 1996, and also increased as a percentage of net
revenues to 46.6% from 43.9%. The increase in selling, general and
administrative expenses as a percentage of net revenues was primarily
attributable to hiring of additional personnel to support the Company's growth
and the acquisition of MRS which had a higher selling, general and 
administrative costs structure.

         For the three months ended December 31, 1997, the Company incurred 
approximately $16,000 of legal expenses related to the investigation by the 
U. S. Department of Justice (See Note E of Notes to condensed consolidated 
financial statements).

         OPERATING (LOSS) - INCOME - The Company had operating loss of
approximately $5,153,000 for the three months ended December 31, 1997 as
compared to operating income of $233,000 for the three months ended December 31,
1996. The operating loss for the current period as compared to operating income
for the prior comparable period is directly related to the $4,813,000 charge for
the impairment to the carrying value of goodwill and $979,000 charge to write
down the accounts receivable to its estimated realizable value. The charge to
write down accounts receivable has been recorded in the provision for doubtful
accounts. Also the amortization of intangibles increased by $116,000 or 400.0%
to $145,000 for the three months ended December 31, 1997 from $29,000 for the
three months ended December 31, 1996. The amortization of intangibles increased
as a percentage of net revenues to 3.0% for the three months ended December 31,
1997 from 1.2% for the three months ended December 31, 1996. This increase is
attributable to amortization expense of relating to the excess of purchase price
over net assets acquired, customer list and non compete covenants.

         INTEREST EXPENSE, NET - Interest expense, net increased by
approximately $42,000 to $133,000 for the three months ended December 31, 1997
from $91,000 for the three months ended December 31, 1996. The increase in
interest expense is attributable to interest payments of approximately $48,000
related to additional borrowings from The Bank of New York and approximately
$46,000 related to the MRS promissory notes.

         NET INCOME - The Company had a net loss of approximately $4,670,000 for
the three months ended December 31, 1997 as compared to net income of $80,000
for the three months ended December 31, 1996. The decrease of $4,590,000 is
attributable to the reasons described above.


                                                                              12
<PAGE>   14
NINE MONTHS ENDED DECEMBER 31, 1997 VERSUS NINE MONTHS ENDED DECEMBER 31, 1996

         NET REVENUE - Net revenues increased by approximately $6,817,000 or
91.7% to $14,254,000 for the nine months ended December 31, 1997 from $7,437,000
for the nine months ended December 31, 1996. This increase was primarily due to
the acquisition of MRS; offering new services to the existing client base; an
increase in the rental of respiratory, and durable medical equipment.

         COST OF NET REVENUE - Cost of net revenues increased by approximately
$2,348,000 or 72.9% to $5,569,000 for the nine months ended December 31,1997
from $3,221,000 for the nine months ended December 31, 1996. Cost of net
revenues decreased as a percentage of net revenues to 39.1% for the six months
ended December 31, 1997 from 43.3% for the nine months ended December 31, 1996.
This decrease in percentage of cost of net revenues is primarily attributable to
the acquisition of MRS, which resulted in a change in the mix of sales and cost
of net revenues.

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses increased by approximately $4,278,000 or 138.9% to
$7,357,000 for the nine months ended December 31, 1997 from $3,079,000 for the
nine months ended December 31, 1996, and also increased as a percentage of net
revenues to 51.6% from 41.4%. The increase in selling, general and
administrative expenses as a percentage was primarily attributable to hiring
additional personnel to support the Company's growth and the acquisition of MRS.
which had a higher selling, general and administrative costs structure.

         For the nine months ended December 31, 1997 the Company incurred 
$289,000 of legal expenses related to the investigation by the U.S. Department 
of Justice (See Note E of Notes to condensed consolidated financial statements).

         OPERATING (LOSS) INCOME - The Company incurred an operating loss of
approximately $5,235,000 for the nine months ended December 31, 1997 as compared
to operating income of $784,000 for the nine months ended December 31, 1996. The
operating loss for the current period as compared to operating income for the
prior comparable period is attributable to additional legal costs of $289,000,
$4,813,000 charge for the impairment to the carrying value of goodwill and
$979,000 charge to write down the accounts receivable to its estimated
realizable value. The charge to write down accounts receivable has been recorded
in the provision for doubtful accounts. Also the amortization of intangibles
increased by $235,000 or 204.3% to $350,000 for the nine months ended December
31, 1997 from $115,000 for the nine months ended December 31, 1996. The
amortization of intangibles increased as a percentage of net revenues to 2.5%
for the nine months ended December 31, 1997 from 1.5% ended December 31, 1996.
This increase is attributable to amortization expense relating to the excess of
purchase price over net assets acquired, customer list and non complete
covenants.

         INTEREST EXPENSE, NET - Interest expenses, net increased by
approximately $97,000 or 45.3% to $311,000 for the nine months ended December
31, 1997 from $214,000 for the nine months ended December 31, 1997. The overall
increase in interest expense is attributable to interest payments of
approximately $128,000 related to additional borrowings from the Bank of New
York and approximately $107,000 related to the MRS promissory notes.


                                                                              13
<PAGE>   15
         NET (LOSS) INCOME - The Company had a net loss approximately $4,816,000
for the nine months ended December 31, 1997 as compared with net income of
$320,000 for the nine months ended December 31, 1996. The decrease of $5,136,000
is attributable to the reasons described above.

         Management continues its efforts to reduce operating expenses,
primarily through the consolidation and centralization of MRS personnel and
operations to the Company's facilities in August 1997. This consolidation
program is designed to enhance profitability and efficiency, reduce certain
redundancies in operations and billing in order to obtain a better overall
utilization of its operating personnel, reduce overhead and enhance
administrative and operation efficiency.

         As a result of the charge for the reduction of goodwill the
amortization expense of the carrying value of goodwill will be reduced
prospectively. The write off of accounts receivable will increase the
productivity of the billing department by increasing their efficiency in working
the current receivables. Additionally the Company has created a verification
department to insure the accuracy of the billing information before claims are
actually billed. The Company anticipates these procedures will reduce the number
of claim denials thus shortening the collection process. Management will
continue to pursue additional managed care provider contracts and service
agreements, and is continually negotiating and bidding for new agreements.


LIQUIDITY AND CAPITAL RESOURCES

         Prior to the initial public offering, the Company financed its
operations through stockholders loans, private placements, and vendor loans and
to a lesser extent, bank credit lines.

         In October 1996, the Company completed an initial public offering of
1,495,000 units at a price of $5.20 per unit, each consisting of one share of
common stock and one Class A Warrant pursuant to a registration statement which
was declared effective by the Securities and Exchange Commission on October 18,
1996, resulting in net proceeds of $6,115,000. The Company used the proceeds of
the offering for the repayment of approximately $255,000 of loans payable to a
director and former stockholders; repayment of 8% promissory notes in the
aggregate principal amount of approximately $937,000 plus accrued interest of
approximately $39,000; repayment of a bank note of $200,000 and accrued interest
of approximately $1,000 and repayments of notes payable to suppliers of
approximately $649,000.

         The Company currently has a $4,000,000 line of credit with the Bank of
New York with interest payable at the prime rate. As of June 30, 1997,
approximately $2,223,000 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,
leaving approximately $277,000 available for future borrowings under the line,
until the uncertainty surrounding the investigation by the U.S. Department of
Justice of the Company is completed.

         Working capital decreased to approximately $359,000 at December 31,
1997 from working capital of $5,121,000 at March 31, 1997. The decrease of
$4,762,000 is primarily due to the acquisition of MRS for approximately
$4,437,000.

         Net cash provided by operating activities was $173,000 for the nine
months ended December 31, 1997 and $111,000 of net cash was provided for the
nine months ended December 31, 1996.

         Net cash used in investing activities was $5,604,000 and $512,000 for
the nine months ended December 31, 1997 and 1996, respectively. For the nine
months ended December 31, 1997 approximately $ 171,000 was expended for the
build out of new office space and warehouse facilities to accommodate the move
of MRS personnel and operations to the


                                                                              14
<PAGE>   16
Company's facilities in August 1997 and payment of $4,437,000 for the payment of
the acquisition of MRS.

         Net cash provided by financing activities was $1,433,000 for the nine
months ended December 31, 1997 and $4,545,000 was used in financing activities
for the nine months ended December 31, 1996. Approximately $1,980,000 was drawn
down under the Company's line of credit. Repayments of $1,443,000 were made to
payoff a MRS credit line and term loan; various notes and capital lease
obligations. In the current quarter approximately $ 1,100,000 of vendor payables
were converted into a promissory note.

         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. Accounts receivable generally are outstanding for more
than 90 days.

         The Company believes that internally generated funds together with the
remaining amount available for borrowing under the line of credit will provide
sufficient liquidity and enable it to meets its currently foreseeable working
capital requirements for at least the next 12 months. However, the Company may
need to obtain additional financing to continue its operations. There can be no
assurance that additional financing 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.


RECENT ACCOUNTING PRONOUNCEMENTS

         The Company believes that the adoption by the Financial Accounting
Standards Board of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", will not have a material impact on the Company's financial
condition and results of operations. SFAS No. 128, "Earnings per Share" ("SFAS
128") has been issued effective for fiscal periods ending after December 15,
1997. It will require the Company to compute net income per share on a
simplified basis. The Company is required to adopt the provisions of SFAS No.
128 and does not expect adoption of SFAS No. 128 to have a material effect on
the Company's financial position or results of operations. Basic per share
calculations will exclude dilution effective with the March 31, 1998 financial
statements. In addition, SFAS Nos. 130 and 131 were issued, which established
reporting and disclosure of comprehensive income and segment information,
respectively. The adoption of these pronouncements will not have a significant
effect on the financial statements.

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
                                                                               

                                                                              15
<PAGE>   17
Company bears the risk that reimbursement rates set by such programs will not
keep pace with inflation.

FORWARD LOOKING STATEMENTS

         From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward looking statements. In
order to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in any of the Company's performance, development and results of the Company's
business include, but are not limited to, the following: Current cash flow and
operating deficits, the Company's need to service short and long term debt;
adverse changes in federal and state laws; rules and regulations relating to the
home health care industry; to government reimbursement policies, to private
industry reimbursement policies and to other matter affecting the Company's
industry and business; and continued consolidation by the Company's local,
regional and national competitors resulting in increased competition. There may
be other risks that are outside the control of the Company that are mentioned
elsewhere in this report and in other published reports of the Company.



PART II-OTHER INFORMATION


         ITEM 1   - LEGAL PROCEEDINGS

         Information concerning legal matters in incorporated by reference from
Part I, Note E 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


                                                                              16
<PAGE>   18
                                   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 February 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
                                    



                                                                              17