<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 September 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
                      SECOND QUARTER REPORT ON FORM 10-QSB
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998


                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
PART I.  FINANCIAL
INFORMATION

   Item I. Financial Statements

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

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

         Condensed Consolidated Statements of Cash
         Flows for the Six Months Ended September 30,
         1998(unaudited)  and 1997(unaudited)                                4-5

         Notes to Condensed Consolidated Financial                           6-9
         Statements

   Item 2. Management's Discussion and Analysis of
           Financial Condition and Results of Operations                   10-15


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
<PAGE>   3
         COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
             CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                        AT                 AT
                                                                   SEPTEMBER 30,        MARCH 31,
                                                                       1998               1998
                                                                   -------------      ------------
                                                                    (UNAUDITED)
<S>                                                                <C>                <C>         
                              ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                       $    517,000       $    276,000
   Accounts receivable,net of allowance for doubtful
      accounts of $1,831,000 and $1,401,000                           5,024,000          5,606,000
   Income tax receivable                                                   --              268,000
   Inventory, net                                                       617,000            669,000
   Prepaid expenses and other current assets                            211,000            127,000
   Deferred tax asset, net                                              513,000            560,000
                                                                   ------------       ------------
               TOTAL CURRENT ASSETS                                   6,882,000          7,506,000

Rental equipment, net                                                 2,110,000          2,057,000
Property and equipment, net                                           1,267,000          1,065,000
Excess of purchase price over fair value of
   net assets acquired, net                                           2,221,000          2,272,000
Covenants not to compete, net                                           416,000            487,000
Accounts and customer list, net                                         284,000            305,000
Other assets                                                             65,000             57,000
Deferred taxes assets, net                                               69,000             69,000
                                                                   ------------       ------------

          TOTAL  ASSETS                                            $ 13,314,000       $ 13,818,000
                                                                   ============       ============

             LIABILITIES AND STOCKHOLDERS' EQUITY

                          LIABILITIES
CURRENT LIABILITIES:
   Note payable - Bank                                             $  2,500,000       $  2,403,000
   Accounts payable                                                   2,837,000          2,820,000
   Accrued expenses                                                   1,069,000          1,138,000
   Current portion of long term debt                                  1,326,000          1,865,000
   Current portion of capital lease obligations                         106,000            146,000
                                                                   ------------       ------------
               TOTAL CURRENT LIABILITIES                              7,838,000          8,372,000

Long term portion of debt                                               724,000            775,000
Long term portion of capital lease obligations                          160,000            161,000
                                                                   ------------       ------------
               TOTAL LIABILITIES                                      8,722,000          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                                            9,944,000          9,931,000
Accumulated deficit                                                  (5,423,000)        (5,492,000)
                                                                   ------------       ------------
               TOTAL STOCKHOLDERS' EQUITY                             4,592,000          4,510,000
                                                                   ------------       ------------

               TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY         $ 13,314,000       $ 13,818,000
                                                                   ============       ============
</TABLE>

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


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

<TABLE>
<CAPTION>
                                                                  FOR THE                          FOR THE
                                                             THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                SEPTEMBER 30,                    SEPTEMBER 30,
                                                        ----------------------------      ----------------------------
                                                            1998             1997             1998             1997
                                                        -----------      -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>              <C>        
NET REVENUES                                            $ 4,433,000      $ 5,005,000      $ 8,865,000      $ 9,238,000
                                                        -----------      -----------      -----------      -----------

COST AND EXPENSES:
   Cost of net revenues
      Product and supply costs                            1,629,000        1,433,000        3,218,000        3,350,000
      Rental equipment depreciation                         154,000          373,000          401,000          465,000
                                                        -----------      -----------      -----------      -----------

      Cost of net revenues                                1,783,000        1,806,000        3,619,000        3,815,000

   Selling, general and administrative                    2,185,000        2,787,000        4,296,000        5,021,000
   Provision for doubtful accounts                          217,000          101,000          430,000          278,000
   Amortization of intangible assets                        100,000          114,000          199,000          205,000
                                                        -----------      -----------      -----------      -----------
   Total cost and expenses                                4,285,000        4,808,000        8,544,000        9,319,000

   OPERATING  INCOME (LOSS)                                 148,000          197,000          321,000          (81,000)

   Interest expense,net                                     106,000          147,000          214,000          179,000
                                                        -----------      -----------      -----------      -----------

   Income (loss) before provision for income taxes           42,000           50,000          107,000         (260,000)

   Provision (benefit) for income taxes                      18,000           22,000           38,000         (115,000)
                                                        -----------      -----------      -----------      -----------

NET  INCOME (LOSS)                                           24,000           28,000           69,000         (145,000)
                                                        ===========      ===========      ===========      ===========

Per share data :

   Net income (loss) per common share:
       Basic and diluted                                $      0.00      $      0.00      $      0.01      $     (0.02)
                                                        ===========      ===========      ===========      ===========

   Weighted average number of shares outstanding          7,145,049        7,421,900        7,145,049        7,166,823
                                                        ===========      ===========      ===========      ===========
       Basic and diluted
</TABLE>


  The accompanying notes are an intergral 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
                                                                          SIX MONTHS ENDED
                                                                            SEPTEMBER 30,
                                                                    -----------------------------
                                                                        1998              1997
                                                                    -----------       ----------- 
<S>                                                                 <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                 $    69,000       $  (145,000)
  Adjustments to reconcile net income (loss)
    to net cash provided by operating activities:
   Depreciation and amortization expense                                670,000           670,000
   Write off of rental equipment                                         37,000            22,000
   Provision for doubtful accounts                                      430,000           278,000
   Deferred tax asset                                                    38,000              --
   Non cash compensation                                                  9,000              --
    Changes in operating assets and liabilities net of effects
     from Metropolitan Respirator Service, Inc. acquisition:
      Accounts receivable                                               152,000        (1,009,000)
      Inventory                                                          52,000            (8,000)
      Prepaid expenses and other current assets                         184,000          (396,000)
      Other assets                                                       (8,000)           51,000
      Accounts payable and accrued expenses                             (52,000)          833,000
    Income tax payable                                                     --             203,000
                                                                    -----------       -----------
          Net cash provided by operating activities                   1,581,000           499,000
                                                                    -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of rental equipment                                      (466,000)         (495,000)
  Acquisition of property and equipment                                (289,000)         (354,000)
  Acquisition, of Metropolitan Respirator Service, Inc.                    --          (4,411,000)
                                                                    -----------       -----------
          Net cash (used in) investing activities                      (755,000)       (5,260,000)
                                                                    -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from promissory note                                         223,000              --
  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                   (515,000)          (67,000)
  Repayments of former MRS stockholders notes                          (156,000)             --
  Principal repayments of notes payable to Adam
    Health Care Equipment Corp.                                        (142,000)         (118,000)
  Principal repayments of capital lease obligations                     (98,000)         (186,000)
                                                                    -----------       -----------
          Net cash (used in) provided by financing activities          (585,000)          537,000
                                                                    -----------       -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    241,000        (4,224,000)

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $   517,000       $   424,000
                                                                    ===========       ===========
</TABLE>


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


<TABLE>
<CAPTION>
                                                                                                 FOR THE
                                                                                            SIX MONTHS ENDED
                                                                                              SEPTEMBER 30,
                                                                                      -----------------------------
                                                                                          1998              1997
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>        
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period
       Interest                                                                       $   203,000       $   130,000
                                                                                      -----------       -----------
       Taxes                                                                          $      --         $    45,000
                                                                                      -----------       -----------

SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
      Rental equipment acquired under capital lease                                        40,000            24,000
      Property and equipment acquired under capital lease                                  20,000           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 and liabilities assumed based on their fair value as
        follows:

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


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


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

(NOTE A) - ORGANIZATION AND BACKGROUND

  [1] Organization

      Community Care Services, Inc., ("CCS") was incorporated in July 1992 in
the State of New York. CCS and its wholly owned subsidiary, Metropolitan
Respirator Service, Inc. ("MRS"), collectively, "The Company", provide home
health care services and products consisting primarily of respiratory equipment,
rental and sale of durable medical equipment and 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 information regarding both CCS and its
wholly owned subsidiary, MRS. Intercompany balances and transactions have been
eliminated in consolidation.

      The condensed consolidated financial statements of the Company for the
three and six months ended September 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 consolidated financial position at September 30, 1998, the results of
operations for the three and six months ended September 30, 1998 and 1997, and
the cash flows for the six months ended September 30, 1998 and 1997.

      The results of operations for the three and six months ended September 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 $37,000 for the
three months ended September 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 regarding the Company
("The Draft Notice"). Pursuant to the Draft Notice, DSS sought recovery of
$227,000 from the Company as well as exclusion of the Company as a provider
under the New York State Medicaid program. Pursuant to DOH's process, the
Company, through its healthcare regulatory counsel, submitted a detailed
response to the Draft Notice. DOH thereafter reviewed its draft findings and
recommendations and issued a final Notice. Pursuant to which DOH reduced the
amount of the proposed audit recovery to $83,978. DOH has also withdrawn it's
intention to exclude the Company as a provider under the New York State Medicaid
program. DOH has issued an advisory to the Company that continued performance
issues of the type or nature addressed in the audit could result in a severe
sanction in the future.

  [3] Net Income Per Share

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

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

  [4] Reclassifications

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


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


(NOTE B) - ACQUISITIONS

  [1] Metropolitan Respirator Service, Inc.

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

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

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


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


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


<TABLE>
<S>                                                                <C>         
Net revenues                                                       $ 10,236,000
Net (loss) income                                                  $   (893,000)
Net (loss) income per common share - basic and diluted             $      (0.12)
</TABLE>


  [2] Adam Health Care Equipment Corp.

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


(NOTE C) - CONSULTING AGREEMENT

        On August 24, 1998, the Company entered into a six-month consulting
agreement with Harris G. LeRoy II ("the consultant") to provide a strategic 
operating overview of the Company. Mr. LeRoy will receive $1,000 a day along 
with 1,000 stock options per day. The exercise price of the options is $1.31 
which is the average closing price of the Company's common stock during the 
month of August, 1998. The options shall accumulate and be issued to the 
consultant upon the expiration or the earlier termination of the agreement. 
Fifty percent (50%) of the total number of options that the consultant is 
eligible to receive are  guaranteed by the Company. The issuance of the 
remaining fifty percent (50%) of the options are subject to the discretion of 
the Board of Directors of the  Company, which may elect to grant the 
consultant all, none, or a portion of  such options. The Company recorded a 
charge to earnings of approximately $9,000 in the period ended September 30,
1998 representing the value of 10,500 options earned during such period, and
will incur additional future charges to earnings.


                                        9
<PAGE>   11
                  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 State Department of Health that the Company engaged in
criminal wrongdoing, the Company would be subject to criminal penalties. In 
addition, if it is determined that the Company engaged in criminal wrongdoing, 
the Company would be terminated as a Medicaid and Medicare services provider, 
and will be at risk of having its contracts with private insurers and other 
non-governmental agencies terminated. Additionally, even if the Company is not 
charged with criminal wrongdoing itself, but one of its past or present 
officers or employees are convicted of crimes relating to their employment, the
Company could be terminated as a Medicaid and Medicare provider. In these 
circumstances, although the Company would not be subject to automatic exclusion
from such programs, it could be at risk of having its contracts with private 
insurers and other non-governmental agencies terminated. If such occurred, it 
would have a material adverse effect on the Company's business, results of 
operations, and financial condition and the Company may not be able to continue
as a going concern.


MEDICAL REIMBURSEMENT FOR OXYGEN THERAPY SERVICES

      The Balanced Budget Act (the "Budget Act") was signed by President Clinton
on August 5, 1997. The Budget Act provides for reductions in Medicare
reimbursement rates for oxygen and certain oxygen equipment. Oxygen
reimbursement rates were reduced to seventy five percent (75%) of their 1997
levels, beginning January 1, 1998 and will be further reduced to seventy 
percent (70%) of their 1997 levels beginning


                                       10
<PAGE>   12
                  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 results for the six months ended September 30, 1998 reflect the
reduction for the aforementioned Medicare reimbursement rates as compared to the
six months ended September 30, 1997 which does not reflect the reductions since
they did not go into effect until January 1, 1998.

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

      NET REVENUES - Net revenues decreased by approximately $572,000 or 11.4 %
to $4,433,000 for the three months ended September 30, 1998 from $5,005,000 for
the three months ended September 30, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.

      COST OF NET REVENUES - Cost of net revenues decreased by approximately
$23,000 or 1.3% to $1,783,000 for the three months ended September 30, 1998 from
$1,806,000 for the three months ended September 30, 1997. Cost of net revenues
increased as a percentage of net revenues to 40.2% for the three months ended
September 30, 1998 from 36.1% for the three months ended September 30, 1997.
This increase in cost of net revenues, as a percentage of net revenues, for the
three months ended September 30, 1998 is primarily attributable to the change in
the mix of net revenues and the decrease in the oxygen reimbursement rates
resulting from the Budget Act.

      SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by approximately $602,000 or 21.6% to $2,185,000 for the
three months ended September 30, 1998 from $2,787,000 for the three months ended
September 30, 1997, and also decreased as a percentage of net revenues to 49.3%
from 55.7%. The reduction in selling, general and administrative expenses as a
percentage of net revenues is primarily attributable to decreases in operating
expenses relating to the consolidation of operations, and the reduction of
personnel.

      For the three months ended September 30, 1998 and 1997, the Company
incurred approximately $14,000 and $95,000 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 $148,000 for the three months ended September 30, 1998 as compared
to an operating income of $197,000 for the three months ended September 30,
1997.

      INTEREST EXPENSE, NET - Interest expense, net decreased by approximately
$41,000 to $106,000 for the three months ended September 30, 1998 from $147,000
for the three months ended September 30, 1997. This decrease was due to a lower
overall outstanding debt balance as a result of the conversion of MRS
stockholders notes. (See Note B).


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

      NET (LOSS) INCOME - The Company had a net income of approximately $24,000
for the three months ended September 30, 1998 as compared with net income of
$28,000 for the three months ended September 30, 1997.

SIX MONTHS ENDED SEPTEMBER 30, 1998 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1997

      NET REVENUES - Net revenues decreased by approximately $373,000 or 4.0 %
to $8,865,000 for the six months ended September 30, 1998 from $9,238,000 for
the six months ended September 30, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.

      COST OF NET REVENUES - Cost of net revenues decreased by approximately
$196,000 or 5.1% to $3,619,000 for the six months ended September 30, 1998 from
$3,815,000 for the six months ended September 30, 1997. Cost of net revenues
decreased as a percentage of net revenues to 40.8% for the six months ended
September 30, 1998 from 41.3% for the six months ended September 30, 1997. This
decrease in cost of net revenues as a percentage of net revenues for the six
months ended September 30, 1998 is primarily attributable to the change in the
mix of net revenues and the decrease in the rental equipment depreciation.

      SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by approximately $725,000 or 14.4% to $4,296,000 for the six
months ended September 30, 1998 from $5,021,000 for the six months ended
September 30, 1997, and also decreased as a percentage of net revenues to 48.5%
from 54.4%. The reduction in selling, general and administrative expenses is
primarily attributable to decreases in operating expenses relating to the
consolidation of operations and the reduction of personnel.

      For the six months ended September 30, 1998 and 1997, the Company incurred
approximately $37,000 and $273,000, 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 $321,000 for the six months ended September 30, 1998 as compared
to an operating loss of $81,000 for the six months ended September 30, 1997.

      INTEREST EXPENSE, NET - Interest expense, net increased by approximately
$35,000 to $214,000 for the six months ended September 30, 1998 from $179,000
for the three months ended September 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).


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


      NET (LOSS) INCOME - The Company had a net income of approximately $69,000
for the six months ended September 30, 1998 as compared with net loss of
$145,000 for the six months ended September 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

      Working capital decreased to a deficiency of approximately $957,000 at
September 30, 1998 from a working capital deficiency of $866,000 at March 31,
1998. The current ratio decreased slightly t0 .88 at September 30, 1998 from .90
at March 31, 1998.

      Net cash provided by operating activities was approximately $1,581,000 for
the six months ended September 30, 1998 compared with net cash provided by
operating activities of approximately $499,000 for the six months ended
September 30, 1997. The increase of approximately $1,082,000 was primarily
attributable to the decreases in accounts payable and accrued expenses, prepaid
expenses and other current assets, and accounts receivable.

      Net cash used in investing activities was approximately $755,000 for the
six months ended September 30, 1998, compared with approximately $5,260,000 for
the six months ended September 30, 1997. The decrease of approximately
$4,505,000 is primarily attributable to the acquisition of MRS in the six months
ended September 30, 1997 offset by decreases in additions of rental equipment
and property and equipment in the six months ended September 30, 1998.

      Net cash used in financing activities was approximately $585,000 for the
six months ended September 30, 1998, compared with net cash provided by
financing activities of approximately $537,000 for the six months ended
September 30, 1997. The decrease of approximately $1,122,000 was primarily
attributable to an increase in repayments to former MRS stockholders, Adam, and
supplier notes, in conjunction with decreases in credit line borrowings and
repayments.

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

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


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


      The Company currently has a $2,500,000 line of credit with the Bank of New
York with interest payable at the prime rate. As of September 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 was
resolved. Subsequently, on October 22, 1998, the bank reconfirmed the cap on the
credit line with the Company at $2,500,000.

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


SEASONALITY

      The Company generally has not experienced seasonal fluctuation.

INFLATION

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

IMPACT OF THE YEAR 2000 ISSUE

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

      Based on a recent assessment, the Company determined that it would be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such


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

modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.

      The Company is in the process of assessing the impact of the Year 2000
issue on its information technology systems and devices that contain embedded 
microprocessors to operate. The Company plans to complete this assessment by 
January 31, 1999.

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

      The Company will utilize both internal and external resources to 
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project by March 31, 1999. The total
cost of the Year 2000 modifications is estimated at $1,115,000 and is being
funded by a credit line. To date, the Company has incurred costs of $679,000
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.


                                       15
<PAGE>   17
                  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.

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

      ITEM 2 - CHANGES IN SECURITIES

      None

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

      None

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

      None

      ITEM 5 - OTHER INFORMATION

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

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

      ITEM 6 -  EXHIBITS AND REPORTS ON FORM 8K

      None


                                       16
<PAGE>   18
                  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 14th day of November 1998.



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

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

                                         /s/ Elia C. Guarneri
                                    -------------------------------
                                    Interim Chief Financial Officer
                                       and Principal Financial &
                                          Accounting Officer


                                       17