<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

(MARK ONE)                         FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

         FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

         For the transition period from _____________ to _____________
 

                         Commission File Number 0-16162


                    CHILDREN'S COMPREHENSIVE SERVICES, INC.
                    ---------------------------------------
             (Exact name of registrant as specified in its charter)

           Tennessee                                           62-1240866
-------------------------------                          ----------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)

3401 West End Ave., Suite 500, Nashville, Tennessee              37203
---------------------------------------------------     -----------------------
(Address of principal executive offices)                       (Zip Code)


Registrant's telephone number, including area code:  (615) 383-0376
                                                     --------------


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                              Yes    X      No   
                                                  -------    --------

The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:

Common Stock, $.01 Par Value, outstanding at February 10, 1999 - 7,399,483 
---------------------------------------------------------------------------
shares.
-------



                                       1
<PAGE>   2

                                     INDEX

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.


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

Item 1.  Financial Statements (unaudited)

                  Consolidated Balance Sheets --December 31, 1998
                  and June 30, 1998...............................................................................3

                  Consolidated Statements of Income --
                  Three and six month periods ended December 31, 1998 and 1997....................................5

                  Consolidated Statements of Cash Flows --
                  Six months ended December 31, 1998 and 1997.....................................................6

                  Notes to Consolidated Financial Statements --
                  December 31, 1998...............................................................................8

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..............................................19

PART II. OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders.....................................................19

Item 6.  Exhibits and Reports on Form 8-K........................................................................19


SIGNATURES.......................................................................................................21
</TABLE>



                                       2
<PAGE>   3


                         PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                December 31,       June 30, 
                                                                   1998              1997   
                                                              ----------------    -----------
(dollars in thousands)                                          (unaudited)

<S>                                                           <C>                 <C>
ASSETS

CURRENT ASSETS
      Cash and cash equivalents                                      $   1,069      $  20,067
      Accounts receivable, net of allowance for doubtful
         accounts of $1,675 at December 31 and $1,865 at
         June 30                                                        22,653         17,809
      Prepaid expenses                                                   1,150            634
      Deferred income taxes                                                525            525
      Other current assets                                               4,415          1,577
                                                                     ---------      ---------

TOTAL CURRENT ASSETS                                                    29,812         40,612

PROPERTY AND EQUIPMENT,net of
        accumulated depreciation of $9,024 at December 31
            and $7,831 at June 30                                       49,342         37,162

DEFERRED TAX ASSETS, net of valuation allowance                            910            785

COST IN EXCESS OF NET ASSETS ACQUIRED, net                              14,495          1,180

OTHER ASSETS AND DEFERRED CHARGES, net                                   1,332            462
                                                                     ---------      ---------

         TOTAL ASSETS                                                $  95,891      $  80,201
                                                                     =========      =========
</TABLE>



                                       3
<PAGE>   4

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

                    CONSOLIDATED BALANCE SHEETS (Continued)



<TABLE>
<CAPTION>
                                                                 December 31,        June 30, 
                                                                    1998               1998
                                                                --------------      ----------
                                                                 (unaudited)

<S>                                                             <C>                 <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                                 $   3,408      $   1,901
    Current portion - long-term debt                                       791             44
    Accrued employee compensation                                        2,763          5,192
    Income taxes payable                                                   534            136
    Accrued other expenses                                               3,001          3,300
    Other liabilities and deferred revenue                               1,625            172
                                                                     ---------      ---------

         TOTAL CURRENT LIABILITIES                                      12,122         10,745

LONG TERM DEBT AND CAPITAL LEASE
     OBLIGATIONS                                                        27,568         11,611
DEFERRED TAXES PAYABLE                                                   2,635             --
OTHER LIABILITIES                                                           --             13
                                                                     ---------      ---------

          TOTAL LIABILITIES                                             42,325         22,369
                                                                     ---------      ---------

SHAREHOLDERS' EQUITY
      Preferred stock, par value $1.00 per share--
           10,000,000 shares authorized                                     --             --
      Common stock, par value $.01 per share--
            50,000,000 shares authorized; issued and
            outstanding 7,340,608 shares at December 31
            and 8,038,783 shares at June 30                                 73             80
       Additional paid-in capital                                       51,536         57,820
       Retained earnings (deficit)                                       1,957            (68)
                                                                     ---------      ---------

       TOTAL SHAREHOLDERS' EQUITY                                       53,566         57,832
                                                                     ---------      ---------

       TOTAL LIABILITIES AND SHAREHOLDERS'
              EQUITY                                                 $  95,891      $  80,201
                                                                     =========      =========
</TABLE>


See notes to consolidated financial statements.



                                       4
<PAGE>   5


                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



<TABLE>
<CAPTION>

                                                            Three Months Ended             Six Months Ended
                                                               December 31,                  December 31,
                                                       ---------------------------    --------------------------
(In thousands, except per share amounts)                    1998           1997           1998           1997
                                                       ------------     ----------    -----------     ----------
<S>                                                    <C>              <C>           <C>             <C>
Revenues:
       Operating revenues                                  $ 27,092       $ 22,245       $ 49,421        $41,951
       Management fee income                                    873            884          1,744          1,819
                                                           --------       --------       --------       --------
                        TOTAL REVENUES                       27,965         23,129         51,165         43,770
                                                           --------       --------       --------       --------
Operating expenses:
       Employee compensation and benefits                    16,837         13,707         31,339         26,331
       Purchased services and other expenses                  7,768          6,636         14,724         12,955
       Depreciation and amortization                            806            507          1,441            983
       Related party rent                                        29             26             58             51
                                                           --------       --------       --------       --------
                       TOTAL OPERATING EXPENSES              25,440         20,876         47,562         40,320
                                                           --------       --------       --------       --------

Income from operations                                        2,525          2,253          3,603          3,450
Other (income) expense:
       Interest expense                                         370            234            618            514
       Interest income                                          (91)          (157)          (305)          (333)
       Other income                                              --           (217)           (57)          (217)
                                                           --------       --------       --------       --------
                       TOTAL OTHER (INCOME) EXPENSE, NET        279           (140)           256            (36)
                                                           --------       --------       --------       --------

Income before income taxes                                    2,246          2,393          3,347          3,486
Provision for income taxes                                      887            898          1,322          1,306
                                                           --------       --------       --------       --------
                       NET INCOME                          $  1,359       $  1,495       $  2,025       $  2,180
                                                           ========       ========       ========       ========

Basic earnings per common share                            $   0.19       $   0.19       $   0.27       $   0.27

Diluted earnings per common share                          $   0.18       $   0.18       $   0.27       $   0.27
</TABLE>



                See notes to consolidated financial statements.



                                       5
<PAGE>   6

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



<TABLE>
<CAPTION>
                                                                           Six Months Ended
                                                                             December 31,
                                                                     -----------------------------
(dollars in thousands)                                                  1998                1997
                                                                     ---------           ---------

<S>                                                                  <C>                 <C>
OPERATING ACTIVITIES
       Net income                                                    $   2,025           $   2,180
       Adjustments to reconcile net income to net cash
               provided (used) by operating activities:
             Depreciation                                                1,221                 940
             Amortization                                                  220                  43
             Amortization of deferred loan costs                            25                  17
             Provision for bad debts                                       372                  87
Changes in operating assets and liabilities, net of the effects 
       from acquisitions:
       Accounts receivable                                              (3,122)             (1,332)
       Prepaid expenses                                                   (454)               (417)
       Other current assets                                               (139)                 65
       Accounts payable                                                    631                 (42)
       Accrued employee compensation                                    (3,002)                909
       Accrued other expenses                                             (593)               (344)
       Income taxes payable                                               (314)               (945)
       Other liabilities                                                 1,440                (262)
                                                                     ---------           ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                        (1,690)                899
INVESTING ACTIVITIES                                                    
       Purchase of assets of Vendell Healthcare                             --                (710)
       Purchase of Ameris                                              (12,499)                 --
       Purchase of Somerset                                             (8,175)                 --
       Purchase of note receivable                                      (2,500)                 --
       Purchase of property and equipment                               (1,234)               (932)
       (Increase) in other assets                                         (938)                (69)
                                                                     ---------           ---------
NET CASH USED BY INVESTING ACTIVITIES                                $ (25,346)          $  (1,711)
                                                                     ---------           ---------
</TABLE>



                                       6
<PAGE>   7

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

         CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)



<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                               December 31,
                                                                   -------------------------------------
(dollars in thousands)                                                 1998                      1997
                                                                   -----------                ----------
<S>                                                                <C>                        <C> 
FINANCING ACTIVITIES
       Principal payments on revolving lines of credit, long-
           term borrowings and capital lease obligations             $ (18,242)                $     (20)
       Proceeds from revolving lines of credit and long-term
           borrowings                                                   32,571                        -- 
       Common Stock repurchased                                         (6,263)                       --
       Proceeds from issuance of Common Stock, net                           3                        59
       Stock registration costs                                            (31)                       --
                                                                     ---------                 ---------
NET CASH PROVIDED BY FINANCING
           ACTIVITIES                                                    8,038                        39
                                                                     ---------                 ---------
DECREASE  IN CASH AND CASH
       EQUIVALENTS                                                     (18,998)                     (773)
       Cash and cash equivalents at beginning of period                 20,067                    13,649
                                                                     ---------                 ---------
CASH AND CASH EQUIVALENTS AT END OF
           PERIOD                                                    $   1,069                 $  12,876
                                                                     =========                 =========
</TABLE>



See notes to consolidated financial statements.



                                       7
<PAGE>   8

                    CHILDREN'S COMPREHENSIVE SERVICES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                               December 31, 1998

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1999. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998,
the Company's prior fiscal year end.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

NOTE B -- CONTINGENCIES

The Company is involved in various legal proceedings, none of which are
expected to have a material effect on the Company's financial position or
results of operations.

NOTE C - COMPREHENSIVE INCOME

As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes the standards for the reporting and display of
comprehensive income and its components. This Statement requires that all items
that are components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. During the first six months of fiscal 1999 and 1998, the Company
had no items of other comprehensive income.

NOTE D -- EARNINGS PER COMMON SHARE

The computation of basic net income per common share is based on the weighted
average number of shares outstanding. Diluted net income per common share
includes the effect of common stock equivalents, consisting of dilutive stock
options and warrants.



                                       8
<PAGE>   9

The following table sets forth the computation of basic and diluted earnings
per share:


<TABLE>
<CAPTION>
                                          Three Months Ended              Six Months Ended
                                             December 31,                   December 31,
                                       ------------------------      -------------------------
                                          1998           1997            1998          1997
                                       ----------     ---------      ----------     ----------
<S>                                    <C>            <C>            <C>            <C>
BASIC:

Average shares outstanding              7,340,608      7,820,635      7,519,783      7,000,000
                                       ==========     ==========     ==========     ==========

Net income                             $1,359,000     $1,495,000     $2,025,000     $2,180,000
                                       ==========     ==========     ==========     ==========

Per share amount                       $     0.19     $     0.19     $     0.27     $     0.31
                                       ==========     ==========     ==========     ==========

DILUTED:

Average shares outstanding              7,340,608      7,820,635      7,519,783      7,000,000

     Net effect of dilutive stock
     options and warrants                 148,565        311,671         92,804        200,000
                                       ----------     ----------     ----------     ----------

            TOTAL                       7,489,173      8,132,306      7,612,587      7,200,000
                                       ==========     ==========     ==========     ==========

Net income                             $1,359,000     $1,495,000     $2,025,000     $2,180,000
                                       ==========     ==========     ==========     ==========

Per share amount                       $     0.18     $     0.18     $     0.27     $     0.30
                                       ==========     ==========     ==========     ==========
</TABLE>

NOTE E -- MERGER & ACQUISITIONS

The Company's financial statements have been restated to reflect the Company's
merger with Ventures Healthcare of Gainesville, Inc. ("Ventures") effective
January 1, 1998. The merger was accounted for as a pooling of interests. The
Company issued 146,580 shares of common stock pursuant to the transaction.
Revenue increased by $316,000 and $590,000 and net income by $90,000 and
$137,000 for the three and six month periods ended December 31, 1997,
respectively, as a result of the restatement for the Ventures transaction.

In September 1998, the Company acquired Ameris Health Systems ("Ameris") for
net consideration of approximately $12.5 million in cash. This transaction has
been accounted for as a purchase. Pursuant to this transaction, the Company
also purchased a note receivable for $2.5 million in cash. The payment of this
note is guaranteed by $2.5 million cash escrowed in conjunction with this
transaction. Ameris, through its wholly owned subsidiary, American Clinical
Schools, Inc., operates residential juvenile sex offender programs in Tennessee
and Alabama with an aggregate capacity of 168 licensed beds. In addition,
Ameris had a 60 bed site under development in Pennsylvania, a state



                                       9
<PAGE>   10

NOTE E -- MERGER & ACQUISITIONS (continued)

in which CCS had not previously operated, which began operations during the
December 1998 quarter.

In December 1998, the Company acquired Somerset, Inc., the operator of a
200-seat educational day treatment program located in southern California.
Consideration for this transaction consisted of approximately $8.2 million in
cash and $2.3 million in notes payable. This transaction has been accounted for
as a purchase. Pro forma financial information as if the acquisitions had
occurred at the beginning of the periods presented would not differ
significantly from reported results.



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

The Company's merger with Ventures Healthcare of Gainesville, Inc.
("Ventures"), effective January 1, 1998, was accounted for as a pooling of
interests. Accordingly, the Company's prior period financial statements have
been restated to reflect this transaction.

The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth under "Business Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.

General

As of December 31, 1998, the Company was providing education, treatment and
juvenile justice services to approximately 3,800 at risk and troubled youth and
100 adults either directly or through management contracts. It currently offers
these services through the operation and management of nonresidential
specialized education programs and day treatment programs and both open and
secured residential treatment centers in 13 states. These services are provided
directly or through the Company's revenue based management contracts. Revenues
are recognized as services are rendered. The Company's non-residential
programs, which historically have generated higher operating margins than the
Company's residential facilities, generally receive revenues based on per diem
rates. The Company's residential facilities generally receive revenues under
either fixed fee contracts, at per diem rates or on a cost reimbursed basis.



                                      10
<PAGE>   11

The Company receives management fee income from services provided to third
parties, including medical/surgical facilities, community mental health centers
and other behavioral health providers, for management of day treatment
programs, residential treatment centers, behavioral units in medical/surgical
facilities and free-standing behavioral facilities. The Company also receives
management fee income from Helicon, Incorporated ("Helicon"), a Section
501(c)(3) not-for-profit corporation, for consulting, management and marketing
services rendered pursuant to a Consulting and Marketing Agreement, effective
as of August 1992, by and between Helicon and the Company (the "Helicon
Agreement"). As of December 31, 1998, the Company was providing consulting,
management and marketing services to Helicon at 12 programs. In addition,
Helicon also leases three facilities owned by the Company to operate its
programs. Pursuant to the Helicon Agreement, which expires September 1, 1999,
the Company is entitled to receive for these services management fee income in
an amount equal to 6% of the monthly gross revenues of Helicon's programs. The
payment of these management fees, however, is subordinated in right of payment
to amounts payable by Helicon to fund its programs. The Company expects that
this Agreement will be renewed. During the periods reported herein, the Company
recognized all of the management fee income to which it was entitled. However,
for certain periods prior to fiscal 1997, the Company did not recognize all of
the management fee income to which it was entitled due to the inability of
Helicon to pay these amounts. As of December 31, 1998, unpaid management fees,
lease payments and advances, plus interest, due the Company from Helicon
totaled approximately $7,696,000. The Company has fully reserved this amount,
and future payments received from Helicon on this amount, if any, will be
recognized by the Company on the cash basis. The Company has also guaranteed
Helicon's obligations under a bank line of credit in the amount of $1,500,000.
As of December 31, 1998, there was $603,000 outstanding under this line of
credit. See "-Liquidity and Capital Resources."

Employee compensation and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and worker's
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs.

Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's statements of income. Significant
components of these expenses at the operating level include items such as
professional fees and contracted services, food, utilities, supplies, rent and
insurance. Significant components of these expenses at the administrative level
include legal, accounting, investor relations, marketing, consulting and travel
expense.

At June 30, 1998, the Company had regular tax net operating loss carryforwards
of $2,449,000 which expire from 2002 through 2010. Utilization of a portion of
the net operating loss carryforwards is subject to an annual limitation
pursuant to Internal Revenue Code Section 382.



                                      11
<PAGE>   12

The Company's quarterly results may fluctuate significantly as a result of a
variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in advance
of achieving such levels. The Company's quarterly results may also be impacted
by seasonality, as revenues generated by youth education and treatment services
are generally seasonal in nature, fluctuating with the academic school year.

During the three month period ended December 31, 1998, the Company:

      -  Acquired the operator of a 200-chair education day treatment program
         in California;
      -  Signed a contract for a 150-chair education day treatment program in
         a secure residential facility in Arkansas;
      -  Secured a new $40 million credit facility;
      -  Opened a 60-bed residential treatment facility in Pennsylvania; and -
         Signed a contract with the Ohio Department of Youth Services for a
         30-bed secure residential program for adolescent female offenders.

Results of Operations


The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:

<TABLE>
<CAPTION>
                                                Three Months Ended                  Six Months Ended
                                                   December 31,                        December 31,
                                           ------------------------------    -------------------------------
                                               1998              1997             1998             1997
                                           --------------   -------------    --------------   --------------
<S>                                        <C>              <C>              <C>              <C>
Operating revenues                                   96.9%           96.2%             96.6%            95.8%
Management fee income                                 3.1             3.8               3.4              4.2
                                           --------------   -------------    --------------   --------------
                  TOTAL REVENUES                    100.0           100.0             100.0            100.0
                                           --------------   -------------    --------------   --------------
Employee compensation and benefits                   60.2            59.3              61.3             60.2
Purchased services and other expenses                27.8            28.7              28.8             29.6
Depreciation and amortization                         2.9             2.2               2.8              2.2
Related party rent                                    0.1             0.1               0.1              0.1
                                           --------------   -------------    --------------   --------------
             TOTAL OPERATING EXPENSES                91.0            90.3              93.0             92.1
                                           --------------   -------------    --------------   --------------
Income from operations                                9.0             9.7               7.0              7.9
Other (income) expense:
       Interest expense                               1.3             1.0               1.2              1.2
       Interest income                               (0.3)           (0.7)             (0.7)            (0.8)
       Other income                                    --            (0.9)             (0.1)            (0.5)
Provision for income taxes                            3.2             3.9               2.6              3.0
                                           --------------   -------------    --------------   --------------

                  NET INCOME                          4.8%            6.4%              4.0%             5.0%
                                           ==============   =============    ==============   ==============
</TABLE>


                                      12
<PAGE>   13

Three Months Ended December 31, 1998 versus December 31, 1997

Operating revenues for the three months ended December 31, 1998 increased
$4,847,000 or 21.8%, to $27,092,000 as compared to $22,245,000 for the three
months ended December 31, 1997. Approximately $2,800,000 of the increase in
operating revenues is attributable to the Ameris acquisition. The increase is
also due to increased utilization in certain programs, other acquisitions and
the opening of new programs during the current and preceding comparative
quarters, offset in part by a decline in census at the Company's Montana
facility.

Management fee income decreased $11,000 for the three months ended December 31,
1998 to $873,000 from $884,000 for the three month period ended December 31,
1997. Management fee income recognized under the Helicon Agreement for the
three months ended December 31, 1998 increased $14,000 to $335,000 from
$321,000 for the three months ended December 31, 1997.

Total revenues for the three months ended December 31, 1998 increased
$4,836,000, or 20.9%, to $27,965,000 as compared to $23,129,000 for the three
months ended December 31, 1997 as a result of the factors described above.

Employee compensation and benefits for the three months ended December 31, 1998
increased $3,130,000, or 22.8%, to $16,837,000, as compared to $13,707,000 for
the three months ended December 31, 1997. As a percentage of total revenues,
employee compensation and benefits increased from 59.3% for the three months
ended December 31, 1997 to 60.2% for the three months ended December 31, 1998.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth. The increase in
employee compensation and benefits as a percent of revenue over the same period
in the prior year results in part from intentional overstaffing at the
Company's Montana facility during the quarter.

Purchased services and other expenses for the three months ended December 31,
1998 increased $1,132,000, or 17.1%, to $7,768,000, as compared to $6,636,000
for the three months ended December 31, 1997. As a percentage of total
revenues, purchased services and other expenses decreased to 27.8% for the
three months ended December 31, 1998 from 28.7% for the three months ended
December 31, 1997. The increase in purchased services and other expenses over
the same period in the prior year is attributed primarily to the Company's
growth. The decrease in purchased services and other expenses as a percent of
revenue over the same period in the prior year resulted primarily from the
effect of increased utilization at certain facilities.

Depreciation and amortization for the three months ended December 31, 1998
increased $299,000, or 59.0%, to $806,000 as compared to $507,000 for the three
months ended December 31, 1997. The increase in depreciation and amortization
compared to the same period in the prior year is primarily attributable to the
Company's growth, including an increase in the amortization of goodwill arising
from the Company's acquisitions.

Income from operations for the three months ended December 31, 1998 increased
$272,000, or 12.1%, to $2,525,000 as compared to $2,253,000 for the three
months ended December 31, 1997,



                                      13
<PAGE>   14

and decreased as a percentage of total revenues to 9.0% for the three months
ended December 31, 1998 from 9.7% for the three months ended December 31, 1997
as a result of the factors described above.

Interest expense for the three months ended December 31, 1998 increased
$136,000 to $370,000 as compared to $234,000 for the three months ended
December 31, 1997. The increase in interest expense over the same period in the
prior year is attributed principally to debt incurred pursuant to the recent
acquisitions.

Interest income decreased $66,000 to $91,000 for the three months ended
December 31, 1998 as compared to $157,000 for the three months ended December
31, 1997. The decrease in interest income over the same period in the prior
year is attributable primarily to the decrease in cash available for investment
as a result of the Company's repurchase of 700,000 shares of its outstanding
Common Stock and its acquisition of Ameris.

Other income for the three months ended December 31, 1998 was $-0- versus
$217,000 for the three months ended December 31, 1997. Other income for the
comparable prior period reflects a one time payment by Helicon of management
fees for which a reserve had previously been established.

Provision for income tax expense for the three months ended December 31, 1998
decreased $11,000 to $887,000 from $898,000 for the three months ended December
31, 1997. The decrease in provision for income tax expense compared to the same
period in the prior year results primarily from the decrease in the Company's
taxable income.

Six Months Ended December 31, 1998 versus December 31, 1997

Operating revenues for the six months ended December 31, 1998 increased
$7,470,000 or 17.8%, to $49,421,000 as compared to $41,951,000 for the six
months ended December 31, 1997. Approximately $3,740,000 of the increase in
operating revenues is attributable to acquisitions made during fiscal 1999. The
increase is also due to increased utilization in certain programs along with
the opening of new programs and other acquisitions made since the comparable
prior quarter.

Management fee income decreased $75,000 for the six months ended December 31,
1998 to $1,744,000 from $1,819,000 for the six month period ended December 31,
1997. Management fee income recognized under the Helicon Agreement for the six
months ended December 31, 1998 increased $26,000 to $670,000 from $644,000 for
the six months ended December 31, 1997. Other management fee income declined
primarily as the result of one contract acquired from Vendell which was not
renewed.

Total revenues for the six months ended December 31, 1998 increased $7,395,000,
or 16.9%, to $51,165,000 as compared to $43,770,000 for the six months ended
December 31, 1997 as a result of the factors described above.



                                      14
<PAGE>   15

Employee compensation and benefits for the six months ended December 31, 1998
increased $5,008,000, or 19.0%, to $31,339,000, as compared to $26,331,000 for
the six months ended December 31, 1997. As a percentage of total revenues,
employee compensation and benefits increased from 60.2% for the six months
ended December 31, 1997 to 61.3% for the six months ended December 31, 1998.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth, including acquisitions.
The increase in employee compensation and benefits as a percent of revenue over
the same period in the prior year results in part from intentional overstaffing
at the Company's Montana facility during the period.

Purchased services and other expenses for the six months ended December 31,
1998 increased $1,769,000, or 13.7%, to $14,724,000, as compared to $12,955,000
for the six months ended December 31, 1997. As a percentage of total revenues,
purchased services and other expenses decreased to 28.8% for the six months
ended December 31, 1998 from 29.6% for the six months ended December 31, 1997.
The increase in purchased services and other expenses over the same period in
the prior year is attributed primarily to the Company's growth, including
acquisitions. The decrease in purchased services and other expenses as a
percent of revenue over the same period in the prior year results primarily
from the effect of increased utilization at certain facilities.

Depreciation and amortization for the six months ended December 31, 1998
increased $458,000, or 46.6%, to $1,441,000 as compared to $983,000 for the six
months ended December 31, 1997. The increase in depreciation and amortization
compared to the same period in the prior year is attributable to the Company's
growth, including an increase in the amortization of goodwill arising from the
Company's acquisitions.

Income from operations for the six months ended December 31, 1998 increased
$153,000, or 4.4%, to $3,603,000 as compared to $3,450,000 for the six months
ended December 31, 1997, and decreased as a percentage of total revenues to
7.0% for the six months ended December 31, 1998 from 7.9% for the six months
ended December 31, 1997, as a result of the factors described above.

Interest expense for the six months ended December 31, 1998 increased $104,000,
or 20.2%, to $618,000 as compared to $514,000 for the six months ended December
31, 1997. The increase in interest expense over the same period in the prior
year is attributed principally to debt incurred pursuant to the recent
acquisitions.

Interest income decreased $28,000 to $305,000 for the six months ended December
31, 1998 as compared to $333,000 for the six months ended December 31, 1997.
The decrease in interest income over the same period in the prior year is
attributable primarily to the decrease in cash available for investment as a
result of the Company's repurchase of 700,000 shares of its outstanding Common
Stock and its acquisition of Ameris.

Other income for the six months ended December 31, 1998 was $57,000, consisting
of the recognition of previously deferred gain on the sale of property
concurrent with the collection of the note receivable related to the sale.
Other income for the comparable prior period reflects a one time payment by
Helicon of management fees for which a reserve had previously been established.



                                      15
<PAGE>   16

Provision for income tax expense for the six months ended December 31, 1998
increased $16,000 to $1,322,000 from $1,306,000 for the six months ended
December 31, 1997.

Liquidity and Capital Resources

Cash used by operating activities for the six months ended December 31, 1998
was $1,690,000 on net income of $2,025,000 as compared to cash provided of
$899,000 on net income of $2,180,000 for the six months ended December 31,
1997. An increase in accounts receivable combined with a decrease in accrued
employee compensation were the primary factors contributing to the use of cash
by operating activities during the fiscal 1999 period. The increase in accounts
receivable is the result of a number of factors, including an increase in the
Company's revenues and the timing of ratification of contracts by certain of
the Company's California school district customers. The decrease in accrued
employee compensation is the result of the Company's growth, differences in
normal pay cycles and the payment of annual bonuses. Working capital at
December 31, 1998 was $17,690,000, as compared to $29,867,000 at June 30, 1998.
The change results primarily from acquisitions during the period and the
repurchase of the Company's Common Stock.

Cash used by investing activities was $25,346,000 for the six months ended
December 31, 1998 as compared to $1,711,000 for the six months ended December
31, 1997, due primarily to (i) an increase in other assets and, (ii) the Ameris
and Somerset acquisitions during fiscal 1999 versus the additional cash payment
related to the Vendell acquisition during fiscal 1998.

Cash of $8,038,000 was provided by financing activities for the six months
ended December 31, 1998, due primarily to borrowings under the Company's new
credit facility for the Somerset acquisition offset by funds used for the
repurchase of 700,000 shares of the Company's Common Stock. Cash of $39,000 was
provided by financing activities for the six months ended December 31, 1997.

The Company has a credit agreement with SunTrust Bank and First American
National Bank (jointly "the Lenders"), the term of which extends through
December 1, 2001. Under the terms of this agreement, the Lenders have made
available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $25,000,000. The credit
facility bears interest at either (i) the one, two, three or six month LIBOR
rate plus an applicable margin, which ranges between .75% and 1.75% and is
dependent on the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization, or (ii) SunTrust Bank's index rate plus an
applicable margin, which ranges between .00% and .50%, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable
and equipment. At December 31, 1998, the outstanding balance under the line of
credit was $10,800,000.

Additionally, effective December 1, 1998, the Company has entered into a term
loan with the Lenders in the amount of $15,000,000 at a fixed interest rate.
The term loan is for a period of seven years. The Company's effective rate of
interest on the loan is 8.10%. No payment of principal is required until
December 2001, at which time increasing payments that amortize the loan fully
are due over the remaining four years of the agreement.



                                      16
<PAGE>   17

The Company's line of credit requires the Company to comply with certain
restrictive covenants with respect to its business and operations and to
maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of the Lenders, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$500,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.

Pursuant to the Somerset transaction, the Company issued a note payable to the
sellers totaling $2,375,000. This note bears interest at 6%, will amortize
fully over the three year period ending December 1, 2001, and is secured by the
Company's real estate and improvements purchased pursuant to the Somerset
transaction. At December 31, 1998, $745,000 of the note is included in current
liabilities and $1,630,000 the note is included in long-term debt.

Helicon has entered into a $1.5 million line of credit with First American
National Bank. As a condition to this line of credit, the Company agreed to
guarantee Helicon's performance under this line of credit. At December 31,
1998, there was $603,000 outstanding under Helicon's line of credit.

Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company may also
consider other strategic acquisitions, including acquisitions of existing
programs and other companies engaged in youth services or related businesses.

Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations and amounts
available under its line of credit will provide sufficient cash flow for the
foreseeable future.

Year 2000

The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that will occur at
midnight, December 31, 1999. The Y2K issue, which also includes a number of
related problems, affects nearly every business in the world. The Company's
assessment of potential Y2K problems has focused on three areas: (i) the
Company's information technology ("IT") systems, (ii) its non-IT systems, and
(iii) its relationships with third parties. The Company has substantially
completed an initial assessment of its IT systems' exposure to the Y2K-related
problems, and currently believes that its main IT systems, which include
billing, accounting, and payroll systems, are Y2K compliant. Although the
Company has not tested the Y2K compliance of such systems, such systems have
been represented as Y2K compliant by the vendors thereof. Certain less-critical
IT systems as well as certain individual computers and associated software are
not currently Y2K compliant, however, the Company expects to replace these
systems or make them Y2K compliant as needed.



                                      17
<PAGE>   18

The Company has also assessed the exposure of its non-IT systems (such as time
clocks) to Y2K problems, and does not believe that Y2K issues related to non-IT
systems will have a material adverse effect on the Company's results of
operations, financial position or cash flows.

The Company has begun an assessment of the Y2K readiness of its payors and
other third parties with whom it does business, and expects to more fully focus
on this aspect of its Y2K compliance during calendar 1999. The Company has
contacted all material payors and other third party payors in an attempt to
assess the effect of any Y2K issues that may arise. The Company will continue
discussion with any non-compliant material payors in an attempt to assess and
encourage their Y2K readiness. Despite efforts that the Company may make in
this regard, there can be no assurance that the systems of other companies with
whom it does business will be compliant.

To date, the Company has incurred no material expenses related to the Y2K
compliance of its IT and non-IT systems. The Company believes that the costs
associated with finalizing the Y2K compliance of such systems will not
materially increase the Company's future operating expenses or capital
expenditures.

The Company believes that its most likely worst case Y2K scenario is that some
of its material third party payors will not be Y2K compliant and will have
difficulty processing and paying the Company's bills, which could affect the
Company's cash flows. The Company has implemented an initial contingency plan
to address this scenario by increasing its available line of credit facility.
The Company expects to continue to assess this contingency plan during 1999.

Inflation

Inflation has not had a significant impact on the Company's results of
operation since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.


Impact of Accounting Change

In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report segment information in annual financial statements. This Statement is
effective for financial statements for the Company's fiscal year which began
July 1, 1998; however, the Statement is not required to be applied to interim
financial statements in the initial year of its application. The adoption of
the statement will affect only disclosures provided and will have no impact on
the Company's consolidated balance sheets or results of operations.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on Costs of Start-up Activities" which changes
the way in which public companies account for start-up costs. The SOP requires
most entities, upon adoption, to write off as a cumulative effect of a change
in accounting principle any previously capitalized start-up or organization
costs. This SOP is effective for financial statements for fiscal years
beginning after




                                      18
<PAGE>   19

December 15, 1998, and will, therefore, be adopted by the Company effective
July 1, 1999. Adoption of the SOP is not expected to have a material impact on
the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At December 31, 1998, the Company had only cash equivalents, invested in high
grade, very short term securities, which are not typically subject to material
market risk.


PART II.  OTHER INFORMATION

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

The Company held its Annual Meeting of Shareholders on November 11, 1998 (the
"Annual Meeting"). At the Annual Meeting, the shareholders of the Company voted
to elect six directors, William J Ballard, Amy S. Harrison, Martha A. Petrey,
Thomas B. Clark, Joseph A. Fernandez, and David L. Warnock for one-year terms
and until their successors are duly elected and qualified. The following table
sets forth the number of votes cast for and against/withheld with respect to
each of the nominees for director:

<TABLE>
<CAPTION>
         Nominee                      For                Against/Withheld
         --------------------      ----------       ----------------------
         <S>                       <C>              <C>
         William J Ballard          5,560,337                    13,030
         Amy S. Harrison            5,560,337                    13,030
         Martha A. Petrey           5,560,337                    13,030
         Thomas B. Clark            5,560,337                    13,030
         Joseph A. Fernandez        5,560,337                    13,030
         David L. Warnock           5,560,337                    13,030
</TABLE>

The shareholders of the Company also voted to approve the Company's Employee
Stock Purchase Plan and to ratify the selection of Ernst & Young LLP as the
Company's independent auditors for the 1999 fiscal year. The plan was approved
by the shareholders with 5,489,555 votes cast for the plan and 83,812 votes
cast against the plan or withheld. The selection of the Company's auditors was
ratified with 5,565,987 votes cast for ratification and 7,380 votes cast
against ratification or withheld.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)The following exhibits are included herein:
          (10) Credit  Agreement by and among the Company and SunTrust Bank,
                Nashville,  N.A. as agent and lender
                dated December 1, 1998
          (27) Financial Data Schedule  (SEC use only)


                                      19
<PAGE>   20

      (b)Reports on Form 8-K:

Form 8-K - Reporting date - November 25, 1998 Items reported - Item 5. Other
events The Company reported the adoption of a shareholder rights plan by the
Board of Directors.

Form 8-K - Reporting date - December 16, 1998 Items reported - Item 2.
Acquisition or disposition of assets The Company reported the acquisition of
Somerset, Inc. for cash and assumption of certain liabilities.



                                      20
<PAGE>   21

                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                             CHILDREN'S COMPREHENSIVE SERVICES, INC.
                             ---------------------------------------
                                        (Registrant)



Date:  February 15, 1999     /s/  WILLIAM J BALLARD                
                             ---------------------------------------------------
                             William J Ballard
                             Chairman and Chief Executive Officer



Date:  February 15, 1999     /s/  DONALD B. WHITFIELD                    
                             ---------------------------------------------------
                             Donald B. Whitfield
                             Vice President of Finance, Chief Financial Officer
                             (Principal Financial and Accounting Officer)



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