<PAGE>



                     U.S. 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, 1996
                                       ------------------

____ 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 of Jurisdiction              of (I.R.S. Employer)
         Incorporation or Organization)              Identification No.)

                                18 Sargent Place
                              Mt. Vernon, NY 10550
                    ----------------------------------------
                    (Address of Principal Executives Offices)

                                 (914) 665-9050
                     --------------------------------------
                           (Issuer's Telephone Number)


                    ----------------------------------------
              (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 reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes ____  No __X__

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

     Check whether the registrant filed all documents 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: 6,225,000
                                                  ---------

         Transitional Small Business Disclosure Format (check one):
Yes __X__  No ____


<PAGE>




                          COMMUNITY CARE SERVICES, INC.
                       Third Quarter Report on Form 10-QSB
                     For The Quarter Ended December 31, 1996





                                TABLE OF CONTENTS



                                                                      Page
                                                                      ----
Part I.       Financial Information


Item I.       Financial Statements

              Condensed Balance Sheets as at December 31, 1996
                (unaudited) and March 31, 1996                           2

              Condensed Statements of Income for the Nine and Three
                Months Ended December 30, 1996 and 1995 (unaudited)      3

              Condensed Statements of Cash Flows for the Nine
                Months Ended December 31, 1996 and 1995 (unaudited)      4

              Notes to Condensed Financial Statements                    5-6

Item 2.       Management's Discussion and Analysis of
                Financial Condition and Results of Operations            7-10



Part II.      Other Information


Item 1.       Legal Proceedings                                          11


Item 6.       Exhibits and Reports on Form 8-K                           11


Signature                                                                12

<PAGE>


                          COMMUNITY CARE SERVICES, INC.
                                 BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                                     As at                 As at
                                                                                  December 31,           March 31,
                                                                                      1996                  1996
                                                                               -------------------     ----------------
                                   ASSETS                                         (Unaudited)
<S>                                                                                  <C>                  <C>         
Current Assets:
  Cash and cash equivalents ...................................................   $ 4,334,000               $   191,000
  Accounts receivable, trade-net of allowance for
    doubtful accounts of $276,000 .............................................     3,138,000                 2,808,000
  Inventories .................................................................       618,000                   441,000
  Prepaid expenses and other current assets ...................................        73,000                     4,000
                                                                                  -----------               -----------
        Total Current Assets ..................................................     8,163,000                 3,444,000

Rental equipment-net of accumulated
    depreciation of $454,000 ..................................................     1,382,000                 1,284,000
Property and equipment-net of accumulated
    depreciation and amortization of $59,000 ..................................       274,000                   218,000
Covenants not to compete-net of accumulated
    amortization of $581,000 ..................................................        19,000                    75,000
Accounts and customer lists-net of accumulated
    amortization of $75,000 ...................................................       125,000                   140,000
Security deposits .............................................................        36,000                    36,000
Deferred offering costs .......................................................             0                   193,000
Deferred debt costs ...........................................................             0                    77,000
                                                                                  -----------               -----------

                TOTAL .........................................................   $ 9,999,000               $ 5,467,000
                                                                                  ===========               ===========

                    LIABILITIES
Current Liabilities:
  Accounts payable and accrued expenses .......................................   $ 1,895,000               $ 2,179,000
  Current portion of long term debt ...........................................        90,000                   691,000
  Note payable-bank ...........................................................             0                   200,000
  Due to Adam Health Care Equipment Corp. .....................................     1,171,000                 1,171,000
  Income taxes payable ........................................................       316,000                   181,000
                                                                                  -----------               -----------
         Total Current Liabilities ............................................     3,472,000                 4,422,000

Long-term debt ................................................................             0                   932,000
Deferred income taxes payable .................................................         9,000                     9,000
                                                                                  -----------               -----------

        Total Liabilities .....................................................     3,481,000                 5,363,000
                                                                                  -----------               -----------

Commitments and Contingencies

               STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
  20,000,000 shares, issued and outstanding
  6,225,000 shares at December 31, 1996 and
  4,730,000 shares at March 31, 1996 ..........................................        62,000                    47,000
Preferred stock, $.01 par value authorized
  1,000,000 shares none issued
Additional paid in capital ....................................................     6,407,000                   328,000
Retained earnings (accumulated deficit) .......................................        49,000                  (271,000)
                                                                                  -----------               -----------

         Total Stockholders Equity ............................................     6,518,000                   104,000
                                                                                  -----------               -----------

                TOTAL .........................................................   $ 9,999,000               $ 5,467,000
                                                                                  ===========               ===========
</TABLE>


       See accompanying notes to unaudited condensed financial statements
    
                                                                             2
<PAGE>

                          COMMUNITY CARE SERVICES, INC.
                            STATEMENTS OF OPERATIONS
                                  - Unaudited -
<TABLE>
<CAPTION>

                                                            For The                                   For The
                                                       Nine Months Ended                        Three Months Ended
                                                          December 31,                          December, 31......
                                             ---------------------------------------    ------------------------------------
                                                   1996                 1995                 1996                 1995
                                             -----------------    ------------------    ----------------    -----------------

<S>                                              <C>                 <C>                <C>                 <C>        
Net Revenues ..............................      $ 7,437,000         $ 3,641,000        $ 2,383,000         $ 1,437,000
                                                 -----------         -----------        -----------         -----------

Costs and Expenses:
  Cost of net revenues
    Product and supply costs ..............        2,968,000           1,252,000            930,000             460,000
    Rental equipment depreciation .........          253,000             169,000             88,000              65,000
                                                 -----------         -----------        -----------         -----------
                                                   3,221,000           1,421,000          1,018,000             525,000

  Selling, general and administrative
    expenses ..............................        3,079,000           1,688,000          1,045,000             689,000

  Provision for doubtful accounts .........          238,000             172,000             58,000              67,000

  Amortization of intangible assets .......          115,000              71,000             29,000              24,000
                                                 -----------         -----------        -----------         -----------

Total Cost and Expenses ...................        6,653,000           3,352,000          2,150,000           1,305,000
                                                 -----------         -----------        -----------         -----------

     Operating Income .....................          784,000             289,000            233,000             132,000

Interest Expense ..........................          151,000              94,000             28,000              40,000
                                                 -----------         -----------        -----------         -----------

Income before provision for
  income taxes and extraordinary item .....          633,000             195,000            205,000              92,000
Provision for income taxes ................          278,000              15,000             90,000              15,000
                                                 -----------         -----------        -----------         -----------

Income before extraordinary item ..........          355,000             180,000            115,000              77,000
                                                                                                            ===========

Extraordinary Item
Write off of unamortization deferred
    financing costs, net of taxes .........           35,000                   0             35,000                   0
                                                 -----------         -----------        -----------         -----------

NET INCOME - HISTORICAL ...................      $   320,000             180,000        $    80,000              77,000
                                                 ===========                            ===========                    

Pro Forma
Pro Forma Income Taxes ....................                               71,000                                 25,000
                                                                     -----------                            -----------

NET INCOME - PRO FORMA ....................                          $   109,000                            $    52,000
                                                                     ===========                            ===========

Per share data
  Income before extraordinary item ........      $       .07         $       .03        $       .02         $        01
  Extraordinary item ......................             (.01)                .00               (.01)                .00
                                                 ===========         ===========        ===========         ===========
  Net income per common share .............      $       .06         $       .03        $       .01         $       .01
                                                 ===========         ===========        ===========         ===========

Weighted average number of
  common shares outstanding ...............        5,137,727           3,591,666          5,948,750           3,591,666
                                                 ===========         ===========        ===========         ===========

</TABLE>


       See accompanying notes to unaudited condensed financial statements
                                                                               3
<PAGE>

                          COMMUNITY CARE SERVICES, INC.
                            Statements of Cash Flows
                                  - Unaudited -
<TABLE>
<CAPTION>

                                                                                         Nine Months Ended
                                                                                           December 31,
                                                                                   1996                     1995
                                                                                 ------------            -------------   

<S>                                                                               <C>                      <C>        
Cash flow from operating activities:
   Income before extraordinary item .......................................       $   355,000              $   180,000
   Extraordinary item, net of tax benefit .................................            35,000                        0
                                                                                  -----------              -----------
   Net income - Historical ................................................           320,000                  180,000
   Adjustments to reconcile net income
    to cash provided by operating activities:
      Depreciation & amortization expense .................................           358,000                  251,000
      Write off of unamoritized
         deferred financing costs .........................................            79,000                        0
       Loss on disposal of rental equipment ...............................            71,000                        0
       Provision for doubtful accounts ....................................           (62,000)                 172,000
       Deferred income taxes payables .....................................                 0                    9,000
       Changes in operating assets and liabilities:
         (Increase) in accounts receivable-trade ..........................          (268,000)              (1,235,000)
         (Increase) decrease in inventories ...............................          (177,000)                (418,000)
         (Increase) decrease in prepaid expenses ..........................           (69,000)                  18,000
         (Decrease) increase in accounts payable and
           accrued expenses ...............................................          (275,000)               1,408,000
         Increase in income taxes payable .................................           134,000                    6,000
                                                                                  -----------              -----------

         Net cash provided by operating activities ........................           111,000                  391,000
                                                                                  -----------              -----------

Cash flows from investing activities:
  Acquisition of rental equipment .........................................          (423,000)                (466,000)
  Acquisition of property and equipment ...................................           (89,000)                 (34,000)
                                                                                  -----------              -----------

         Net cash (used in) investing activities ..........................          (512,000)                (500,000)
                                                                                  -----------              -----------

Cash flow from financing activities:
  Proceeds of initial public offering .....................................         6,079,000                        0
  Issuance of common stock ................................................            15,000                  100,000
  Proceeds of bank borrowings .............................................                 0                  200,000
  Principal repayment of bank borrowings ..................................          (200,000)                 (56,000)
  Principal repayment of notes payable to suppliers .......................          (649,000)                 (93,000)
  Proceeds from promissory notes ..........................................           300,000                        0
  Principal repayment of promissory notes .................................          (300,000)                       0
  Principal repayment of debt offering ....................................          (637,000)                       0
  Repayment of director and former stockholders loans .....................          (255,000)                       0
  Deferred offerings costs ................................................           192,000                  (64,000)
                                                                                  -----------              -----------

         Net cash provided by financing activities ........................         4,545,000                   87,000
                                                                                  -----------              -----------


NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS ..............................................         4,144,000                  (22,000)

Cash at beginning of period ...............................................           190,000                   76,000
                                                                                  -----------              -----------

CASH AND CASH EQUIVALENT AT END OF PERIOD .................................       $ 4,334,000              $    54,000
                                                                                  ===========              ===========

Supplementary disclosures of cash flow information: 
Cash paid during the period:
  Interest........................................................                $    65,000              $    24,000
                                                                                  -----------              -----------
  Taxes...........................................................                $   115,000              $         0
                                                                                  -----------              -----------
</TABLE>
                                                                               4
       See accompanying notes to unaudited condensed financial statements


<PAGE>


                         PMCOMMUNITY CARE SERVICES, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(Note A) - Basis of Presentation

         (1) Community Care Services Inc. (the `Company') operates a home health
care business which sells and rents durable medical equipment and respiratory
products, and sells rehabilitation products and disposable medical supplies
primarily in the five boroughs of New York City, Westchester, Rockland, and
Nassau counties of New York State, as well as the northern regions of New Jersey
and the southern region of Connecticut.

         The accompanying unaudited interim condensed financial statements
included herein are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial information.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position, as at
December 31, 1996, and the results of operations, and cash flows for the nine
and three months ended December 31, 1996, and for all periods presented have
been made. The results of operations for the nine and three months ended
December 31, 1996 are not necessarily indicative of the results to be expected
for the fiscal year ending March 31, 1997. The unaudited interim condensed
financial statements should be read in connection with the audited financial
statements and notes thereto included in Amendment No.4 to the Company's Form
SB-2 (file no. 333-1700) filed with the Securities and Exchange Commission on
October 3, 1996, pursuant to which the Company completed the initial public
offering of its common stock (the `Offering').

         (2) Net income per common share is computed based on the weighted
average number of shares outstanding during the periods and giving retroactive
effect to the conversion of common shares for warrants and the 2.2 for 1 stock
split, both effected in August 1996.

(Note B) - Initial Public Offering

         On October 18, 1996, the Company completed the Offering of 1,495,000
shares of its common stock. The Offering resulted in proceeds of approximately
$6,094,000. 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 of $39,000;
repayment of bank credit line principal of $200,000 and accrued interest of
approximately $1,000 and repayment of notes payable to suppliers of
approximately $649,000.

         The company recorded an extraordinary charge of $63,000, net of income
tax benefit of $28,000, during the three months December 31, 1996, related to
the write-off of deferred financing cost in connection with the related
repayment of the $937,000 of 8% promissory notes.

(Note C) - Commitments and Contingencies

         In April 1993, the Company purchased certain assets and the business of
Adam Health Care Equipment Corporation ("Adam"), a company in the same industry,
for $1,500,000 (the "Purchase Price"). The Company paid Adam an additional
$86,000 representing an adjustment to the Purchase Price mainly for used
equipment and parts. The Company paid $150,000 at the execution of this
agreement and $300,000 at the closing. Of the $1,050,000 balance, $1,000,000 was
to be paid in equal quarterly installments evidenced by promissory notes with
interest at 6% per annum and a final payment due March 15, 1995. The remaining
$50,000 would be paid following the completion of a full Medicare billing cycle.

                                                                               5
<PAGE>

         In 1993, the Company commenced an action against Adam and its
principals arising out of the acquisition. The complaint alleges that the
defendants made numerous misrepresentations relating to the business previously
conducted by Adam. The complaint seeks recovery of damages of $1,500,000,
additional punitive damages, the reduction of the original purchase price or
rescission of the original purchase agreement. The defendants have asserted
counterclaims against the Company. The counterclaims seek the payment of the
unpaid purchase price of $1,050,000 and collection expense of over $175,000.
Defendants also allege various additional causes of action, claiming plaintiffs
converted or interfered with the collection of property owned or due to
defendants and seek damages of over $7,000,000, including $5,000,000 in punitive
damages. The Company believes it has meritorious defenses to the counterclaims.
However, there can be no assurance that the Company will be successful in
recovering damages for its claims or in defending itself against the
counterclaims. A judgment against the Company as a result of the counterclaims
could have a material adverse effect on its business.















                                                                               6

<PAGE>

PART 1 - ITEM 2

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

Three Months Ended December 31, 1996 Versus Three Months Ended December 31, 1995

         Net Revenues - Net revenues increased by approximately $946,000 or
65.8% to $2,383,000 for the three months ended December 31, 1996 from $1,437,000
for the three months ended December 31, 1995. This increase was primarily due to
the expansion of the Company's medical supply business after the Company became
a provider of disposable medical supplies for the largest certified home health
care agency in New York City. Additionally, the increase in net revenues was due
to offering new services to the existing client base; obtaining additional
managed care organizations as new clients; an increase in the rental of
respiratory equipment; and the sale of specialty rehabilitation products.

         Cost of Net Revenues - Cost of net revenues increased by approximately
$493,000 or 93.9% to $1,018,000 for the three months ended December 31, 1996
from $525,000 for the three months ended December 31, 1995. Cost of net revenues
increased as a percentage of net revenues to 42.7% for the three months ended
December 31, 1996 from 36.5% for the three months ended December 31, 1995. This
increase in percentage of cost of net revenues is primarily attributable to the
increased sales of supplies mentioned above, which has a higher product cost
than durable medical equipment; coupled with the increased sales, rather than
rentals, of durable medical equipment.

         Selling, General and Administrative - Selling, general and
administrative expenses increased by approximately $356,000 or 51.7%, to
$1,045,000 for the three months ended December 31, 1996 from $689,000 for three
months ended December 31, 1995, but decreased as a percentage of net revenues to
43.9%, from 47.9%. The decrease in expenses as a percentage of net revenues was
primarily attributable to the sales, rather than rentals of durable medical
equipment which results in lower overhead costs such as reduced maintenance and
administrative personnel costs.

         Operating Income - The operating income increased by approximately
$101,000 to $233,000 for the three months ended December 31, 1996 from $132,000
for the three months ended December 31, 1995. The operating income as a
percentage of net revenues was 9.8% for the three months ended December 31, 1996
as compared to 9.2% for the three months ended December 31, 1995. The increase
was primarily due to the increase in net revenues and a decrease in the selling
general and administrative expenses as a percentage of net revenues as stated
above.

         Interest Expense - Interest expense decreased by approximately $12,000
to $28,000 for the three months ended December 31, 1996 from $40,000 for the
three months ended December 31, 1995. The decrease in interest expense resulted
from the Company's payment of certain indebtedness with the proceeds of the
Company's offering.

          Income Before Extraordinary Item - The Company had income before
extraordinary item of approximately $115,000 for the three months ended December
31, 1996 and income before extraordinary item of $77,000 for the three months
ended December 31, 1995. The increase of $38,000 is attributable to the reasons
described above.

         Extraordinary Item - An extraordinary charge of approximately $63,000
was recorded, net of an income tax benefit of $28,000, related to the write off
of unamoritized deferred financing costs in connection with $937,000 of 8%
promissory notes which were repaid with the proceeds of the offering.

         Net Income - The Company had net income - historical of approximately
$80,000 at December 31, 1996 compared with net income - pro forma of $52,000 at
December 31, 1995. The increase of $28,000 in attributable to the reasons
described above.

                                                                               7
<PAGE>


Nine Months Ended December 31, 1996 Versus Nine Months Ended December 31, 1995

Results of Operations

         Net revenues - Net revenues increased by approximately $3,796,000 or
104.3% to $7,437,000 for the nine months ended December 31, 1996 from $3,641,000
for the nine months ended December 31, 1995. This increase was primarily due to
the expansion of the Company's medical supply business after the Company became
a provider of disposable medical supplies for the largest certified home health
care agency in New York City and the further development of the Company's
rehabilitation products division. Additionally, the increase in net revenues was
due to offering new services to the existing client base; by obtaining
additional managed care organizations as new clients; an increase in the rental
of respiratory equipment; and the sale of specialty rehabilitation products.

         Cost of Net Revenues - Cost of net revenues increased by approximately
$1,800,000 or 126.7%, to $3,221,000 for the nine month ended December 31, 1996
from $1,421,000 for the nine months ended December 31, 1995. Cost of net
revenues increased as percentage of net revenues to 43.3% for the nine months
ended December 31, 1996 from 39.0% for the nine months ended December 31, 1995.
This increase in cost of net revenues as a percentage of net revenues for the
nine months ended December 31, 1996 is primarily attributable to the increased
sales volume of medical supplies, which have a higher product cost than durable
medical equipment; coupled with the increased sales, rather than rentals, of
durable medical equipment.

         Selling, General and Administrative Expenses - Selling, general and
administrative increased by approximately $1,391,000, or 82.4% to $3,079,000 for
the nine months ended December 31, 1996 from $1,688,000 for the nine months
ended December 31, 1995, but decreased 5.0% as a percentage of net revenues to
41.4% from 46.4%. The decrease as a percentage of net revenues was primarily
attributable to the sales, rather than rentals of durable medical equipment
which results in lower overhead costs, such as reduced maintenance and
administrative personnel costs.

         Operating Income - The company had operating income of approximately
$784,000 for the nine months ended December 31, 1996, as compared to operating
income of $289,000 for the nine months ended December 31, 1995. This was mainly
attributed to the Company's significant increase in net revenues while certain
operating costs and expenses, such as corporate overhead, did not increase
proportionally with the increase in net revenues.

         Interest Expense - Interest expense increased by approximately $57,000
or 60.6% to $151,000 for the nine month ended December 31, 1996 from $94,000 at
December 31, 1995. The increase is attributable to an increase in outstanding
indebtedness, primarily, approximately $937,000 of 8% promissory notes. These
promissory notes and related accrued interest were paid off with the proceeds of
the Offering.

         Extraordinary Item - An extraordinary charge of approximately $63,000
was recorded, net of an income tax benefit of $28,000, related to the write off
of unamoritized deferred financing costs in connection with $937,000 of 8%
promissory notes which were repaid with the proceeds of the offering.

         Net Income - The Company had net income-historical of approximately
$320,000 at December 31, 1996, compared with net income-pro forma of $109,000 at
December 31, 1995. The increase of $211,000 is attributable to the reasons
described above.

Income Taxes Pro Forma

         The Company had net income-historical of $320,000 and $80,000 for the
nine and three months ended December 31, 1996, respectively, compared with net
income-pro forma of $109,000 and $52,000 for the nine and three months ended
December 31, 1995, respectively. The December 31, 1995 financial statements give
pro forma effect as if the Company's Subchapter S election was

                                                                               8
<PAGE>

terminated for the entire nine months ended December 30, 1995. A Subchapter S
election was in effect until November 22, 1995. Federal and New York State
corporate income taxes are accrued for both these entire periods on a pro forma
basis. The Company's pro forma income taxes were $71,000 and $25,000 for the
nine and three months ended December 31, 1995 respectively.

Liquidity and Capital Resources

         The Company completed the Offering in October 1996, and received
proceeds of approximately $6,094,000. Prior to the Offering, the Company
financed its operations through stockholders loans, private placements, vendor
loans and to a lesser extent, bank credit lines.

         From inception through the end of fiscal 1994, the Company financed its
operations in part through loans from its officers and directors in the
aggregate principal amount of approximately $255,000 which were repaid with the
proceeds of the Offering. In the fall of 1995 the Company entered into lease
agreement relating to the purchase of inventory and rental equipment at interest
rates ranging from 9% to 13% per year. Payments under the lease agreements are
paid out of operating revenues. The Company currently has financing agreements
outstanding with some vendors which it expects to satisfy out of cash provided
by operating activities. Between April 1995 and January 1996, the Company
received net proceeds of approximately $312,000 from equity placements. In
February 1996 and the fall of 1995, the Company completed debt private
placements of 8% promissory notes as well as warrants and received net proceeds
of approximately $937,000. The promissory notes and interest were repaid with
the proceeds of the Offering.

         In January 1996, one of the Company's vendors advanced funds to enable
the Company to satisfy in full an outstanding line of credit with a bank in the
aggregate principal amount of approximately $106,000. As a result, the Company
has an outstanding note, secured by inventory, with such vendor in the aggregate
principal amount of approximately $106,000 with monthly payments of
approximately $9,000 and interest at a rate of 1% over the prime rate, the note
was paid off in January 1997.

         Prior to the Offering, the Company had a credit facility with a bank in
the aggregate principal amount of $200,000, which was fully drawn down, with
interest payable monthly at a rate of 1% above the prime rate. The credit
facility was paid off with the proceeds of the Offering.

         Working capital increased by approximately $5,669,000 from a working
capital deficit of $978,000 at March 31, 1996 to $4,691,000 of working capital
at December 31, 1996. The increase is primarily due to the Offering which
generated the Company proceeds of $6,094,000 coupled with a decrease in accounts
payable of $275,000; an increase in accounts receivable - trade of $268,000; an
increase in inventories of $177,000; repayments of notes payable to suppliers of
$649,000; repayments of loans from director and former stockholder of $255,000;
and repayments of 8% promissory notes of $937,000.

         Net cash provided by operating activities was $111,000 and $391,000 for
the nine months ended December 31, 1996 and 1995, respectively.

         Net cash used in investing activities for the acquisition of rental
equipment, property and equipment was $512,000 and $500,000 for the nine months
ended December 31, 1996 and 1995, respectively.

         Net cash provided by financing activities was $4,545,000 and $87,000
for the nine months ended December 31, 1996 and 1995, respectively. The increase
in financing activities is due to proceeds of the offering coupled with the
payment of certain liabilities.

         Virtually all of the Company's revenues are attributable to payments
received from third party payers who generally do not make payments for 75 to 90
days after billing. The Company continues to carefully monitor the aging of the
accounts receivable, but such delay in the past required the Company to borrow
and seek equity financing.

                                                                               9

<PAGE>

         The Company however, believes that internally generated funds and the
proceeds of the Offering will provide sufficient liquidity and enable it to meet
its currently foreseeable working capital requirements for at least the next 12
months. However, the Company may need to obtain additional financing to meet
growth opportunities or unanticipated working capital needs. There can be no
assurance that additional financing will be available if and when needed by or
on terms acceptable to the Company.

         The Company believes that a final judgment in the Adam litigation in
its favor would not affect its liquidity, operations, or capital resources,
because management believes that a judgment in the Company's favor would result
in a reduction of the purchase price to be paid by the Company for the assets
and the Company's current portion of long term debt would be reduced
accordingly. If the defendants were to prevail, the Company would, in all
likelihood, attempt to obtain the necessary financing to satisfy any additional
amounts required to be paid pursuant to a judgement requiring payment of the
original purchase price. Although the Company does not believe that a judgement
be awarded, it could have a material adverse effect on the Company's liquidity,
operations and capital resources. Settlement of the litigation might or might
not have a material adverse effect on the Company's liquidity depending on
factors such as the settlement amount, whether the payment is made in cash,
stock or a note or combination thereof and, if a note is involved, the terms
thereof.

         The Company believes that the adoption by the Financial Accounting
Standards Board of Financial Accounting Standards ("FAS") No. 121 "Accounting
for the Impairment of long-lived Assets to Be Disposed Of" and FASB No. 123,
"Accounting for Stock Based-Compensation" will not have a material impact on the
Company's financial condition and results of operations.

Seasonality

         The Company generally has not experienced seasonal fluctuation.

Inflation

         The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net revenues or its
profitability.

Proposed Acquisition

         In December 1996, the Company signed a letter of intent to acquire all
of the shares of Metropolitan Home Care, Inc., d/b/a Metropolitan Respiratory
Services, Inc. ("MRS"). MRS is a provider of respiratory therapy, services and
equipment in the New York Metropolitan area with 1996 annual revenues of
approximately $10 million. The acquisition, which is subject to the completion
of due diligence, is expected to be made for approximately $8.5 million to be
paid in a combination of cash, notes and Company common stock.

                                                                              10
<PAGE>


PART II-OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

         In April 1993, the Company purchased certain assets and business of
Adam Health Care Equipment Corporation ("Adam"), a company in the same industry,
for $1,500,000 (the "Purchase Price"). In addition, the Company paid Adam an
additional $86,000 representing an adjustment to the Purchase Price mainly for
used equipment and parts. The Company paid $150,000 at the execution of this
agreement and $300,000 at the closing. $1,000,000 of the balance was to be paid
in equal quarterly installments evidenced by promissory notes with interest at
6% per annum and a final payment due March 15, 1995. The remaining $50,000 would
be paid following the completion of a full Medicare billing cycle.

         In 1993, the Company commenced an action against Adam and its
principals arising out of the acquisition. The complaint alleges that the
defendants made numerous misrepresentations relating to the business previously
conducted by Adam. The complaint seeks recovery of damages of $1,050,000
additional punitive damages, the reduction of the original purchase price or
rescission of the original purchase agreement. The defendants have asserted
counterclaims against the Company. The counterclaims seek the payment of the
unpaid purchase price of $1,050,000 and collection expense of over $175,000.
Defendants also allege various additional causes of action, claiming plaintiffs
converted or interfered with the collection of property owned or due to
defendants and seek damages of over $7,000,000 including $5,000,000 in punitive
damages. The Company believes it has meritorious defenses to the counterclaims.
However, there can be no assurance that the Company will be successful in
recovering damages for its claims or in defending itself against the
counterclaims. A judgment against the Company as a result of the counterclaims
could have a material adverse effect on its business.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits
         Exhibit 27 - Financial Data Schedule

     (b) Reports on Form 8-K - Not Applicable








                                                                              11


<PAGE>


                                   SIGNATURES

         In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th day of February, 1997.



                                           COMMUNITY CARE SERVICES, INC.
                                                    (registrant)

                                             /s/ Alan T. Sheinwald
                                 ----------------------------------------------
                                               Alan T. Sheinwald

                                        President & Chief Executive Officer




                                                /s/ Joel Quall
                                 ----------------------------------------------
                                                    Joel Quall

                                        Chief Financial Officer
                                        Principal Financial & Accounting Officer