<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q

            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: JUNE 30, 1998    Commission File Number: 1-12238



                               MHM SERVICES, INC.
             (Exact name of Registrant as specified in its charter)




      DELAWARE                                               52-1223048
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)


8000 TOWERS CRESCENT DRIVE, SUITE 810, VIENNA, VIRGINIA              22182
(Address of principal executive offices)                           (Zip Code)


Registrant's telephone number, including area code: (703) 749-4600

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 period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No

As of August 10, 1998, there were 3,525,848 shares of Common Stock, par value
$.01 per share, outstanding.
<PAGE>   2
                      MHM SERVICES, INC., AND SUBSIDIARIES
                           QUARTER ENDED JUNE 30, 1998


                                      INDEX



<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              NUMBER
<S>                                                                                            <C> 
PART I.          FINANCIAL INFORMATION

         ITEM 1. FINANCIAL STATEMENTS
                
                 Condensed Consolidated Statements of Operations-
                 Nine Months Ended June 30, 1998 and 1997 (Unaudited)                            4

                 Condensed Consolidated Balance Sheets
                 June 30, 1998 (Unaudited) and September 30, 1997                                5

                 Condensed Consolidated Statements of Cash Flows
                 Nine Months Ended June 30, 1998 and 1997 (Unaudited)                            6

                 Notes to Condensed Consolidated Financial
                 Statements (Unaudited)                                                        7-8

         ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                9-12


         ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     12


PART II.           OTHER INFORMATION                                                         12-14

         ITEM 1.   LEGAL PROCEEDING                                                             12

         ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS                                    13

         ITEM 3.   DEFAULTS UPON SENIOR SECURITIES                                              13

         ITEM 5.   OTHER INFORMATION                                                            13

         ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                             14
</TABLE>



                                        2
<PAGE>   3
                      MHM SERVICES, INC., AND SUBSIDIARIES
                           QUARTER ENDED JUNE 30, 1998



PART 1.                      FINANCIAL INFORMATION

                  ITEM 1.               FINANCIAL STATEMENTS



                                       3
<PAGE>   4
                               MHM SERVICES, INC.
                                AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                   (000's)                       (000's)
                                        Three Months Ended June 30,   Nine Months Ended June 30,
                                        -------------------------     -------------------------
                                            1998           1997            1998          1997
                                        ------------   -----------     ------------   ----------
<S>                                     <C>            <C>             <C>            <C>
 Net Revenues                           $     7,153    $    5,543      $    23,176    $   13,408

 Costs and Expenses
    Operating                           $     5,354         4,245           17,856        10,364
    General and Administrative                1,031         1,398            3,641         3,756
    Provision for Bad Debts                     801           562            2,018         1,242
    Depreciation and Amortization               112           102              353           260
 Other (credits) charges
    Interest Expense - MEDIQ                    233           263              757           776
    Interest Expense - Other                     39            35              154            51
    Gain on Sale of Hospital                 (2,444)           --           (2,444)           --
    Other                                      (125)         (517)            (131)         (662)
                                        ------------   -----------     ------------   -----------

 Net Income (Loss)                      $     2,152    $     (545)     $       972    $   (2,379)
                                        ============   ===========     ============   ===========
 Income (Loss) per Share
    Basic and Diluted                   $      0.61    $    (0.16)     $      0.28    $    (0.70)
                                        ============   ===========     ============   ===========

 Weighted Average Shares Outstanding          3,526         3,510            3,526         3,377
                                        ============   ===========     ============   ===========
</TABLE>


            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       4
<PAGE>   5
                               MHM SERVICES, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                (000's)
                                                            Mediq Settlement
                                                                Proforma         (000's)            (000's)
                                                             June 30, 1998    June 30, 1998     September 30, 1997
                                                               Unaudited        Unaudited          (See Note)
                                                              (See Note 3)
<S>                                                         <C>               <C>                <C>
    Assets
Current Assets:
    Cash and Cash Equivalents                               $           -     $         87       $         195
    Accounts Receivable, Net                                        4,384            4,384               4,491
    Prepaid Expenses                                                  179              179                 103
    Estimated Third Party Settlements                               1,526            1,526               1,910
    Other Current Assets                                              748              748                 352
                                                            -------------------------------      --------------
       Total Current Assets                                         6,837            6,924               7,051

Property, Plant and Equipment, Net                                    371              371                 531
Notes Receivable, Net                                               1,172            1,172               1,039
Restricted Cash                                                       425              425                 450
Deferred Rent                                                                                              416
Other Assets                                                          224              224                 288
Goodwill, Net                                                         722              722                 766
Other Intangibles, Net                                                667              667                 873
                                                            -------------------------------      --------------
Total Assets                                                $      10,418     $     10,505       $      11,414
                                                            ===============================      ==============

    Liabilities and Stockholders' Deficit
Current Liabilities
    Accounts Payable                                        $         907     $        907       $         975
    Accrued Expenses                                                2,715            2,685               3,308
    Accrued Expenses - MEDIQ Interest                                                1,776               1,019
    Estimated Third Party Payor Settlements                         1,661            1,661               2,187
    Current Maturities of Long Term Debt                            2,888           10,539              10,720
                                                            -------------------------------      --------------
       Total Current Liabilities                                    8,171           17,568              18,209


Long Term Debt, Less Current Maturities                               229              229               1,456

Other Liabilities                                                      --               --                  19
Stockholders' Equity (Deficit)                                      2,018           (7,292)             (8,270)
                                                            -------------------------------      --------------
Total Liabilities and Stockholders' Equity (Deficit)        $      10,418     $     10,505        $     11,414
                                                            ===============================       =============
</TABLE>


Note: The balance sheet at September 30, 1997 has been condensed from the
      audited financial statements at that date.

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       5
<PAGE>   6
                               MHM SERVICES, INC.
                                AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>

                                                                          (000's)
                                                                 Nine Months Ended June 30,
                                                             ----------------------------------
                                                                   1998               1997
                                                             ----------------   ---------------
<S>                                                           <C>               <C>
Cash Flows from Operating Activities
Net Income (Loss)                                              $       972        $   (2,379)

Adjustments to Reconcile Net Income (Loss) to Net Cash
    Used in Operating Activities                                    (2,841)              185
                                                               ------------       -----------
Net Cash Used in Operating Activities                               (1,869)           (2,194)

Cash Flows from Investing Activities
Capital Expenditures                                                    (7)             (117)
Proceeds from Sale of Hospital                                       3,182              (250)
Other                                                                                   (283)
                                                               ------------       -----------
Net Cash Provided by (Used in) Investing Activities                  3,175              (650)

Cash Flows from Financing Activities
Borrowings, Net                                                        460               473
Proceeds from Exercise of Stock Options                                  5                --
Debt Repayments                                                     (1,879)             (374)
                                                               ------------       -----------
Net Cash Provided by (Used in) Financing Activities                 (1,414)               99

Decrease in Cash and Cash Equivalents                                 (108)           (2,745)

Cash and Cash Equivalents
    Beginning Balance                                                  195             3,611
                                                               ------------       -----------

    Ending Balance                                             $        87        $      866
                                                               ============       ===========

Supplemental Disclosure of Cash Flow Information
    Interest Paid                                              $       213        $      395
                                                               ============       ===========
    Income Taxes Paid (Refunded)                               $        --        $     (569)
                                                               ============       ===========

Supplemental Disclosure of Non-cash Investing and Financing
    Activities
    Acquisitions - Portion Financed with Long Term Debt        $        --        $      275
                                                               ============       ===========
    Acquisitions - Portion Financed by Issuance of common
        stock                                                  $        --        $      100
                                                               ============       ===========
    Purchase and Sale of Hospital
        Purchase of Hospital                                   $    (2,700)
        Sale of Hospital, Net of Related Costs                 $     6,382
        Receivable from Sale of Hospital                       $      (500)
                                                               ------------
        Net Proceeds                                           $     3,182
                                                               ============
</TABLE>



            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       6
<PAGE>   7
                      MHM SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      The condensed consolidated balance sheet as of June 30, 1998, the
condensed consolidated statements of operations for the three and nine month
periods ended June 30, 1998 and 1997 and the condensed consolidated statements
of cash flows for the nine month periods ended June 30, 1998 and 1997 have been
prepared by the Company, without audit. In the opinion of management, all
material adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the condensed consolidated financial position,
results of operations and cash flows as of June 30, 1998, and for all periods
presented, have been made.

      Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1997. The results of operations
for the period ended June 30, 1998, are not necessarily indicative of the
operating results for the full year.

NOTE 2 - LIQUIDITY

      The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. The Company had incurred aggregated net losses of $22.2 million for
the three years and nine months ended June 30, 1998, and had a stockholders'
deficit of ($7.3) million as of June 30, 1998. Absent the sale of certain of its
assets, the Company has experienced difficulty in generating sufficient cash
flows to meet its obligations and sustain its operations. At June 30, 1998,
current liabilities exceeded current assets by $10.6 million primarily due to a
judgement MEDIQ Inc., (MEDIQ) obtained against the Company. However, as further
discussed in note 3, on July 15, 1998, the Company has settled the MEDIQ
judgement. If this settlement had occurred on or before June 30, 1998, the
Company's Balance Sheet would have reported stockholders' equity of $2 million.
Current liabilities would have exceeded current assets by $1.3 million. Net
Income for the nine-month period ending June 30, 1998 would have been $10.2
million and $11.3 million in the third quarter of fiscal year 1998.

      Consistent with its strategy to withdraw from the business of providing
inpatient services, on April 17, 1998, the Company sold its last inpatient
psychiatric hospital operation, Mountain Crest Hospital in Fort Collins,
Colorado. The hospital operations, together with certain assets previously
leased by the Hospital, were sold to Poudre Valley Hospital, a general hospital
in Fort Collins, for a cash purchase price of $6.5 million. In connection with
the sale to Poudre Valley Hospital, the Company acquired the previously leased
assets for a purchase price of $2.7 million. As a result of the transaction, the
Company reported a one-time gain of approximately $2.4 million for the three
months ended June 30, 1998.

      In a continuing effort to improve the Company's financial condition for
both the immediate future and the long term, the Company is continuing its
efforts to reduce operating expenses, seek more profitable business
opportunities, raise additional capital and improve its cash flows.
Nevertheless, there can be no assurance that the Company's efforts will be
successful. The consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue as a going concern.



                                       7
<PAGE>   8
                      MHM SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 3 - MEDIQ DEBT

      On July 15, 1998, the Company and MEDIQ settled the $11.8 million
judgement against the Company. In return for a cash payment of $3 million by the
Company, MEDIQ has vacated its claim, and released the Company and its
affiliates from any and all other liabilities; provided, however, no bankruptcy
proceedings involving the Company occur which result in MEDIQ repaying all or
part of the settlement amount it received.

      The settlement was funded by a $2 million loan from Health Care Financial
Partners, the Company's principal lender, as well as from the Company's existing
lines of credit. The $2 million loan is collateralized by substantially all the
assets of the Company. The loan from Health Care Financial Partners, which has a
six month term, carries interest of prime plus two percent, a two percent
commitment fee, and a completion fee of an additional two percent. In addition,
in return for making the loan, Health Care Financial Partners has been granted
warrants for 300,000 shares of common stock of the Company, priced at $.01 per
share and exercisable at any time before July 15, 2003.

      Michael S. Pinkert, the Company's CEO, has extended his personal guarantee
to Health Care Financial Partners covering $800,000 of the $2 million loan. In
return for his guarantee, Mr. Pinkert has been granted warrants for 145,000
shares of the Company's stock, at a price of $.50 per share and exercisable at
any time before July 15, 2008.

      As a result of the settlement, the Company will recognize a one-time gain
of $9.2 million in the fourth quarter. This gain, in turn, will increase
shareholder's book equity by $2.64 per share. The per share increase in book
value is based on 3.5 million shares outstanding. The Company has presented a
pro forma Balance Sheet as of June 30, 1998 to present the effect of this
transaction as if it had occurred on or before June 30, 1998.

NOTE 4 - CONTINGENCY

The Company has become aware that a claim for a refund of certain Medicare
payments is being made against a mental health practice group to which a
subsidiary of the Company previously provided management services. The claim is
being asserted by the Medicare fiscal intermediary which was responsible for
processing and paying the practice group's bills for Medicare payments, and
apparently arises from post payment review by the Intermediary of Medicare
reimbursement previously paid to the group. The claim, which seeks approximately
$1.7 million in refunds, relates to Medicare reimbursement paid to the group
prior to any involvement of the Company's subsidiary as well as during the
period in which management services were provided to the group. No claim has
been asserted against the Company or its subsidiary, and the Company does not
believe that it has any liability with respect to the claims made against the
practice group.

NOTE 5 - NEW FINANCIAL ACCOUNTING STANDARDS

      The Company adopted Statement 128, Earnings Per Share, in 1998. The 1997
loss per share amounts are also presented in accordance with Statement 128.
Income/(Loss) per share is computed by dividing net income/(loss) by the
weighted average number of common shares outstanding.



                                       8
<PAGE>   9
                      MHM SERVICES, INC. AND SUBSIDIARIES


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

      The following discussion addresses the financial condition of the Company
as of June 30, 1998 and the Company's results of operations for the three and
nine month periods then ended, compared with the same periods last year. This
discussion should be read in conjunction with Management's Discussion and
Analysis section (pages 21-33) for the fiscal year ended September 30, 1997
included in the Company's Annual Report on Form 10-K.


GENERAL

      The Company made significant changes in its operations from 1994 to the
present, including the sale of all of the Company's seven freestanding
behavioral healthcare facilities (and the divestiture of the Company's contract
management business), so that the Company could focus on its Extended Care
Services Division and Correctional Services Division. The Extended Care Services
Division, which commenced operations in the fall of 1993, has experienced growth
through internal development, principally from one contract with the State of
Georgia, and acquisitions. However, the Company has experienced continuing
losses in the Extended Care Services Division and despite recent changes
designed to improve its profitability and cash flow, it is uncertain as to the
future of this division. The Company formed a Correctional Services Division in
1997 and in the fourth quarter of 1997 secured contracts with the Tennessee and
Georgia Departments of Correction to provide mental health services on a
capitated basis to the inmates of those states' correctional systems. The
Company is currently seeking additional contracts through acquisitions and
contract awards.

     The report of the Company's independent auditors on the Company's audited
consolidated financial statements for the fiscal year ended September 30, 1997,
includes an explanatory paragraph which raises substantial doubt as to the
Company's ability to continue as a going concern. As a result of the Company's
continuing negative operating results, excluding the gain on the sale of
Mountain Crest, the Company has continued to experience difficulty generating
sufficient cash flows from operations to meet its obligations and sustain its
operations. At June 30, 1998, the Company's current liabilities exceeded its
current assets by $10.6 million. The Company's working capital deficit was
primarily due to the classification of the MEDIQ Note as a current liability. As
previously reported, the Company settled its dispute with MEDIQ Inc., on July
15, 1998. The proforma effect of this settlement would have reduced the working
capital deficit to ($1.3) million as of June 30, 1998. The Company's pro forma
working capital deficit is primarily due to the $2 million loan from Health Care
Financial Partners, which has a six-month term.

FINANCIAL POSITION - JUNE 30, 1998 COMPARED TO SEPTEMBER 30, 1997

     The Company's stockholders' deficit decreased to ($7.3) million at June 30,
1998 from ($8.3) million at September 30, 1997. The change was primarily due to
the recognizing of net income of $972,000 for the nine months ended June 30,
1998. As previously mentioned, if the MEDIQ settlement had occurred prior to
June 30, 1998, the Company would have reported a stockholders' equity of $2
million and net income for the nine month period of $10.2 million.

      Current Assets declined by $127,000 at June 30, 1998 as compared to
September 30, 1997 primarily due to settlements with Medicare on receivables due
from prior year cost reports offset by the receivable due from the sale of the
hospital. Non current assets declined by $782,000 due primarily to the reduction
in Deferred Rent related to the sale of the freestanding hospital and the
amortization of other intangible assets.

      Current Liabilities declined by $641,000 and non-current liabilities
declined by $1.2 million. The reduction in liabilities was funded by the
proceeds the Company received from the sale of the freestanding hospital.




                                       9
<PAGE>   10
                      MHM SERVICES, INC. AND SUBSIDIARIES

NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997

      Net revenues for the nine months ended June 30, 1998 were $23.2 million an
increase of 73% over the same period of 1997. This increased revenue is the
result of growth in the Company's Correctional Services and Extended Care
Services Divisions. The Correctional Services Division generated revenues of
$8.2 million for the nine months ended June 30, 1998 due to the contracts with
the States of Tennessee and Georgia which began in July 1997 and October 1997,
respectively. The Extended Care Services Division generated revenues for the
nine months ended June 30, 1998 of $11.9 million as compared to $9.1 million for
the nine months ended June 30, 1997. This increase is attributable primarily to
acquisitions in fiscal year 1997, offset in part by reduced revenues as a result
of the shutdown of Extended Care Services operations in certain states in the
fourth quarter of 1997. The Company's one remaining freestanding facility,
Mountain Crest, sold in April 1998, generated revenues of $2.8 million for the
nine months ended June 30, 1998 as compared to $4.2 million for the nine months
ended June 30, 1997. This decrease was attributable to lower census in the
facility and the sale of the facility at the beginning of the third quarter of
1998.

      Operating expenses for the nine months ended June 30, 1998 were $17.9
million, as compared to $10.4 million for the nine months ended June 30, 1997.
This significant increase was attributable to the acquisitions in the Company's
Extended Care Services Division and the formation of the Correctional Services
Division. General and administrative expenses during the nine months ended June
30, 1998 were $3.6 million or 16% of net revenues, as compared to $3.8 million
or 28% of net revenues during the nine months ended June 30, 1997. The
percentage decrease is attributable to general and administrative costs
remaining relatively fixed while the Company's net revenues increased.

      The provision for bad debts increased to $2 million for the first nine
months of 1998, as compared to $1.2 million for the nine months ended June 30,
1997. The increase in the provision is directly related to the increase in net
revenues of the Extended Care Services Division in fiscal year 1998 and
increases in allowances for uncollectible receivables for certain extended care
services operations, which were shut down during fiscal year 1997. As of June
30, 1998 and 1997, bad debt expense as a percentage of net revenues were
approximately 9%.

      Depreciation and amortization expenses were $353,000 for the nine months
ended June 30, 1998, compared to $260,000 for the nine months ended June 30,
1997. The increase is attributable to higher amortization costs for goodwill and
other intangible costs relating to the acquired operations in the Extended Care
Services Division.

      Interest expense for the nine months ended June 30, 1998 totaled $911,000
compared to $827,000 for the nine months ended June 30, 1997. Of such expense,
$757,000 related to the MEDIQ Note for the nine months ended June 30, 1998,
compared to $776,000 for the nine months ended June 30, 1997. The remaining
$154,000 in interest expense incurred in the nine months ended June 30, 1998
relates primarily to interest on the Company's accounts receivable line of
credit and indebtedness relating to Extended Care Services Division
acquisitions. The line of credit did not exist in the 1997 period and the level
of acquisition debt was significantly lower.

      Primarily due to the sale of Mountain Crest Hospital, the Company
recognized other income of $2.6 million in the nine months ended June 30, 1998,
compared to other income of $662,000 in the nine months ended June 30, 1997.

      For the nine month period ended June 30, 1998, the Company recognized an
operating loss of $1.6 million which was offset by the gain on sale of the
hospital and other non operating income to result in net income of $972,000 as
compared to a net loss of $2.4 million for the comparable prior year period.

THIRD QUARTER, 1998 COMPARED TO THIRD QUARTER 1997

      Net revenues for the third quarter of fiscal 1998 were $7.2 million, a 29%
increase over the same period of 1997. This increased revenue is the result of
growth in the Correctional Services Division. The 



                                       10
<PAGE>   11
                      MHM SERVICES, INC. AND SUBSIDIARIES

      Correctional Services Division generated revenues of $2.8 million for the
third quarter of fiscal 1998 due to the contracts with the States of Tennessee
and Georgia which began in July 1997 and October 1997, respectively. The
Extended Care Services Division generated revenues for the third quarter of
fiscal 1998 of $3.9 million as compared to $4.1 million for the third quarter of
fiscal 1997. This decrease is primarily attributable to the shutdown of Extended
Care Services operations in certain states in the fourth quarter of 1997.
Mountain Crest Hospital was sold on April 17, 1997 and generated net revenues of
$208,000 in the third quarter of 1998 as compared to $1.4 million in the third
quarter of 1997.

      Operating expenses for the third quarter of fiscal 1998 were $5.4 million
or 75% of net revenues, as compared to $4.2 million or 77% of net revenues, for
the third quarter of fiscal 1997. This increase reflects the operating expense
growth in the Correctional Services Division offset by the shutdown of Extended
Care Services operations in certain states in the prior year. General and
administrative expenses during the third quarter of fiscal 1998 were $1 million
or 14% of net revenues, as compared to $1.4 million or 25% of net revenues in
the prior year quarter. Again, the percentage decrease is attributable to
general and administrative costs remaining relatively fixed while Company net
revenues increased.

      The provision for bad debts was $801,000 for the third quarter of 1998, as
compared to $562,000 in the third quarter of fiscal 1997. During the third
quarter, the Company decided to increase its allowance for uncollectable
receivables for certain Extended Care Service operations which was shut down
during fiscal year 1997 and collections on those outstanding receivables had not
been received by the end of this quarter. As a percentage of net revenues, bad
debt expense was 11% in the third quarter of 1998, as compared to 10% in the
third quarter of 1997.

      Depreciation and amortization expenses were $112,000 for the third
quarter of fiscal 1998, compared to $102,000 for the third quarter of
fiscal 1997. The increase is attributable to higher amortization costs for
goodwill and other intangible costs relating to the acquired operations in the
Extended Care Services Division.

       Interest expense for the third quarter of fiscal 1998 totaled $272,000,
compared to $298,000 for the third quarter of fiscal 1997. Of such expense,
$233,000 related to the MEDIQ Note for the third quarter of fiscal 1998,
compared to $263,000 for the third quarter of fiscal 1997. The remaining $39,000
in interest expense incurred in the third quarter of fiscal 1998 relates
primarily to interest on the Company's accounts receivable line of credit and
acquisition indebtedness relating to Extended Care Services Division
acquisitions. The line of credit did not exist in the 1997 period and the level
of acquisition debt was lower.

      As mention earlier, the gain on sale of Mountain Crest Hospital of $2.4
million recognized during the third quarter was the primary component of the
Company's other income.

      For the three month period ended June 30, 1998, the Company recognized an
operating loss of $417,000 which was offset by the gain on sale of hospital and
other income resulting in net income of $2.2 million for the quarter as compared
to a net loss of $545,000 for the comparable prior year period.






LIQUIDITY AND CAPITAL RESOURCES

      Effective March 11, 1997, MHM Extended Care Services, Inc., a wholly owned
subsidiary of MHM Services, Inc., obtained a $4 million revolving credit
facility to finance its receivables. Borrowings on the credit facility are
limited to qualified accounts receivable. As of June 30, 1998, the amount
available to borrow under the terms and conditions of the line was approximately
$800,000. Also, the Company has a $500,000 line of credit with NationsBank N.A.,
guaranteed by certain officers and 


                                       11
<PAGE>   12
                      MHM SERVICES, INC. AND SUBSIDIARIES

directors of the Company that was totally available to the Company as of
June 30, 1998. To fund the MEDIQ settlement on July 15, 1998, the Company used
the entire NationsBank's line of credit, and $275,000 of the revolving credit
facility. The outstanding debt to MEDIQ, Inc. of $11.8 million as of June 30,
1998, has been primarily replaced with a $2 million bridge loan with
HeathCare Financial Partners due on January 15, 1999.

      Cash used in operating activities was $1.9 million for the nine months
ended June 30, 1998. Cash was primarily used to fund operating losses, excluding
the gain on sale of Mountain Crest Hospital, and to pay off accounts payable and
accrued expenses. The primary source of cash from investing activities for the
nine months ended June 30, 1998, was from the sale of Mountain Crest Hospital.
Net cash used in financing activities totaling $1.4 million for the nine months
ended June 30, 1998 primarily represents the Company efforts in reducing
short-term debt which had accumulated as of September 30, 1997. The Company
anticipates limited capital expenditures for the remainder of fiscal 1998,
consisting of minor purchases of office equipment as required to replace old or
obsolete equipment.

      As a result of the Company's continued negative operating results,
excluding the gain on sale of Mountain Crest Hospital, the Company has been
experiencing difficulty generating sufficient cash flows from operations to meet
its obligations and sustain its operations. The Company's liquidity could be
improved by accelerated collection of receivables, reducing the operating losses
of the Company's remaining businesses, reductions in overhead and obtaining
additional capital and/or financing sources. However, to date the Company's
efforts to improve liquidity through these means have been moderately
successful. There can be no assurance that any of such events will occur or, if
they do occur, that the impact on cash flows will be sufficient to enable the
Company to continue its operations. As a result of the recent MEDIQ settlement,
the Company believes that it is in a better position to raise additional capital
and make the necessary changes to its business operation to reverse prior
historical trends.

       This report includes forward-looking statements based on management's
current plans and expectations, relating to, among other matters, the proposed
business activities of the Company, estimates of amounts that are not yet
determinable and the proposed activities of the Company relating to improving
its liquidity. Such statements involve risks and uncertainties which may cause
actual future activities and results of operations to be materially different
from that suggested in this report, including, among others, the use of
available cash resources to fund continuing operating losses, and the amount and
timing of government reimbursement of third party payer claims. For additional
information, please refer to the Company's Annual Report on Form 10-K and other
reports filed by the Company with the Securities and Exchange Commission.



ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      At June 30, 1998, the Registrant did not have any market risk exposure
categories as defined in Item 305 of Regulation S-K, and therefore, no related
market risk.


PART II     OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS.



ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS
                  (Not applicable)

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.


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<PAGE>   13
                      MHM SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                  (Not applicable)

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  (Not applicable)

ITEM 5.     OTHER INFORMATION

      On June 9, 1998, the Company was notified that the American Stock Exchange
Executive Committee of the Exchange Board of Governors had denied its appeal of
the February 3, 1998 determination by the Exchange to delist the Company stock.
The last day for trading the Company's stock on the American Stock Exchange was
June 16, 1998. Effective June 17, 1998, the Company's stock is traded on the
electronic bulletin board under the symbol "MHMM".

      On July 15, 1998, the Company settled for a $3 million payment the $11.8
million judgement which MEDIQ, Inc. ("MEDIQ") obtained in April 1998, against
the Company and two affiliated partnerships. As a result of the settlement, the
Company will realize, in the fourth quarter, an extraordinary gain of $9.2 
million. The Company's stockholder' equity will improve on a pro forma basis as
of June 30, 1998, to approximately $2 million from a ($7.8) million deficit.

       The Company secured the $3 million used to satisfy the MEDIQ claim from a
$2 million loan the Company obtained from HealthCare Financial Partners along
with $1 million from its cash and existing lines of credit. The loan from
HealthCare Financial Partners has a six-month term and interest rate of prime
plus 2%. In consideration of the loan, the Company granted Healthcare Financial
Partners five year warrants for 300,000 shares exercisable at $.01 per share.
Mr. Pinkert has also guaranteed $800,000 of the $2 million HealthCare Financial
Partners loan. For his guaranty, the Company granted Mr. Pinkert 145,000
ten-year warrants exercisable at $.50 per share.


                                       13
<PAGE>   14
                      MHM SERVICES, INC. AND SUBSIDIARIES

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8K

<TABLE>
<CAPTION>
            Exhibit
a)          Numbers                      Exhibits

<S>               <C>    
            4.1   Common Stock Purchase Warrant Agreement between MHM Services,
                  Inc., and HealthCare Financial Partners, Inc. dated July 15,
                  1998.

            4.2   Common Stock Purchase Warrant Agreement between MHM Services,
                  Inc., and Michael S. Pinkert dated July 15, 1998.

            4.3   Registration Rights Agreement between MHM Services, Inc., and
                  HealthCare Financial Partners dated July 15, 1998.

            4.4   Registration Rights Agreement between MHM Services, Inc., and
                  Michael S. Pinkert dated July 15, 1998.

            10.1  Settlement Agreement between MHM Services, Inc., Oakview
                  Limited Partnership, Columbia Health Associated Limited
                  Partnership, Michael S. Pinkert and MEDIQ, Incorporated, dated
                  July 15, 1998

            10.2  Promissory Note between MHM Services, Inc., MHM Correctional
                  Services, Inc., MHM Extended Care Services, Inc., MHM of
                  Colorado, Inc., Oakview Limited Partnership, Columbia Health
                  Associated Limited Partnership, Michael S. Pinkert and
                  HealthCare Financial Partners Funding II, Inc., dated July 15,
                  1998.

            10.3  Credit and Security Agreement between MHM Services, Inc., MHM
                  Correctional Services, Inc., MHM Extended Care Services, Inc.,
                  MHM of Colorado, Inc., Oakview Limited Partnership, Columbia
                  Health Associated Limited Partnership, Michael S. Pinkert and
                  HealthCare Financial Partners Funding II, Inc., dated July 15,
                  1998.

            27.1  Financial Data Schedule.
</TABLE>


b)    Reports on Form 8-K

      The Company filed a Current Report 8-K dated April 17, 1998 announcing
      the purchase and then sale of Mountain Crest Hospital.


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<PAGE>   15
                      MHM SERVICES, INC. AND SUBSIDIARIES

SIGNATURES

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


Dated August 14, 1998                           MHM Services, Inc.




                                                /s/ CLEVELAND E. SLADE
                                                Vice President and Chief
                                                Financial Officer



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