UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549
                                FORM 10-Q

(Mark One)

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

     For the quarterly period ended March 31, 1997

                        OR

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

           Commission File No. 33-80987

        Merit Behavioral Care Corporation
(Exact name of registrant as specified in its charter)

Delaware                                                   22-3236927
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                      Identification Number)

                          One Maynard Drive
                     Park Ridge, New Jersey 07656
              (Address of principal executive offices)

                            (201) 391-8700
                   (Registrant's telephone number,
                            including area code)

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
requirements for the past 90 days.

                            Yes..X...    No.......

As of April 30, 1997,  28,477,800  shares of the registrant's  common stock, par
value $.01 per share, which is the only class of common stock of the registrant,
were outstanding.


<PAGE>



                  MERIT BEHAVIORAL CARE CORPORATION
<TABLE>

                           Table of Contents
                 Form 10-Q for the Quarterly Period
                        Ended March 31, 1997



<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
PART I                     FINANCIAL INFORMATION                                                 PAGE

Item 1.                    Financial Statements (Unaudited)

                             Condensed Consolidated Balance Sheets at                                3
                             March 31, 1997 and September 30, 1996

                             Condensed Consolidated Statements of Operations for
                             the three months ended March 31, 1997 and March 31,
                             1996 and the six months ended March 31, 1997
                             and March 31, 1996                                                      4

                             Condensed Consolidated Statements of
                             Cash Flows for the six months ended
                             March 31, 1997 and March 31, 1996                                       5

                             Notes to Condensed Consolidated
                             Financial Statements                                                    6

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

PART II                    OTHER INFORMATION

Item 1.                    Legal Proceedings                                                       10

Item 5.                    Other Information                                                       10

Item 6.                    Exhibits and Reports on Form 8-K                                           11
</TABLE>


                                                         2

<PAGE>


<TABLE>

<CAPTION>
                           MERIT BEHAVIORAL CARE CORPORATION
                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                        (UNAUDITED)
                                (dollars in thousands)


                                                                                       <C>             <C>
                                                                                     March 31,   September 30,
         ASSETS                                                                       1997            1996
                                                                                   ----------      ---------
Current Assets:
Cash and cash equivalents.......................................................   $  51,746       $  47,375
Accounts receivable, net........................................................      30,495          28,383
Other current assets............................................................       6,186           4,777
                                                                                   ----------      -----------
  Total current assets..........................................................      88,427          80,535
                                                                                   ----------       ----------
Property, plant and equipment, net..............................................      72,399          67,880
                                                                                   ----------       ----------
Other Assets:
Goodwill and other intangibles, net.............................................     151,031         162,849
Restricted cash.................................................................       5,728           5,668
Deferred financing costs, net...................................................      10,703          11,362
Other assets....................................................................      19,380          16,507
                                                                                   ----------      ----------
                                                                                     186,842         196,386
                                                                                   ----------      ----------
Total assets....................................................................  $  347,668       $ 344,801
                                                                                   ==========      ==========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................  $    7,559      $    5,888
Claims payable..................................................................      64,667          57,611
Deferred revenue................................................................       7,073           6,577
Accrued interest................................................................       5,066           5,008
Current portion of long-term debt...............................................         500             500
Other current liabilities.......................................................       9,286          13,079
                                                                                 -----------      ----------
  Total current liabilities.....................................................      94,151          88,663

Long-term debt..................................................................     257,500         253,500
Deferred income taxes...........................................................      23,666          30,669
Other long-term liabilities.....................................................       1,416           1,451

Stockholders' Equity:
Common stock (40,000,000 shares authorized, $0.01 par
  value, 28,477,800 and 28,398,800 shares issued)...............................         285            284
Additional paid in capital......................................................      (3,825)        (9,756)
Retained deficit................................................................     (19,805)       (14,435)
Notes receivable from officers..................................................      (5,720)        (5,470)
                                                                                  -----------    ------------
                                                                                     (29,065)       (29,377)
Less common stock in treasury (21,000 shares)...................................         ---           (105)
                                                                                --------------  -------------
  Total stockholders' equity....................................................     (29,065)       (29,482)
                                                                                -------------   -------------
Total liabilities and stockholders' equity......................................  $   347,668      $ 344,801
                                                                                    =========       =========
</TABLE>

  See accompanying notes to condensed consolidated financial statements.

                                                         3

<PAGE>


<TABLE>
<CAPTION>
                                         MERIT BEHAVIORAL CARE CORPORATION
                                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (UNAUDITED)
                                              (dollars in thousands)



                                                                      Three months ended         Six months ended
                                                                          March  31,                 March 31,
<S>                                                               <C>           <C>              <C>          <C> 
                                                                  1997          1996             1997         1996
                                                              ------------  ------------     -----------  --------

Revenue.......................................................$ 132,743       $111,721         $261,368    $222,641
Expenses:
  Direct service costs........................................  108,243         87,941          211,175     176,291
  Selling, general and administrative.........................   15,794         15,707           32,373      30,015
  Amortization of intangibles.................................    6,671          6,522           13,470      12,837
                                                              ------------  -----------      ----------  ----------
                                                                130,708        110,170          257,018     219,143

Operating income..............................................    2,035          1,551            4,350       3,498
Other income (expense):
  Interest income and other...................................      765            797            1,545       1,338
  Interest expense............................................   (6,246)        (6,104)         (12,432)    (11,549)
  Merger costs................................................      ---            ---              ---      (3,972)
                                                              ------------  -------------    ------------  ---------
                                                                 (5,481)        (5,307)         (10,887)    (14,183)
                                                              -----------   -----------      -----------  ----------

Loss  before income taxes  and cumulative effect of
  accounting change...........................................     (3,446)      (3,756)           (6,537)   (10,685)
Benefit for income taxes......................................       (948)      (1,151)           (1,167)    (2,136)
                                                              ------------- -----------      ----------- -----------
Loss before cumulative effect of accounting change...              (2,498)      (2,605)           (5,370)    (8,549)
Cumulative effect of accounting change for deferred
 contract start-up costs, net of tax benefit of $757.......           ---          ---               ---     (1,012)
                                                              ------------ -------------    ------------  ---------

Net loss.............................................          $   (2,498)   $  (2,605)         $ (5,370)  $ (9,561)
                                                                ==========    =========        ========== ==========



</TABLE>


    See accompanying notes to condensed consolidated financial statements.


                                                         4

<PAGE>


<TABLE>
<CAPTION>

                                         MERIT BEHAVIORAL CARE CORPORATION
                                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (UNAUDITED)
                                              (dollars in thousands)

                                                                                 Six months ended
                                                                                    March 31,
<S>                                                                         <C>                   <C> 
                                                                            1997                  1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..............................................................$  (5,370)           $   (9,561)
Adjustments to reconcile net loss to net cash
  provided by operating activities:
  Cumulative effect of accounting change...............................      ---                  1,012
  Depreciation and amortization........................................   19,504                 17,552
  Amortization of deferred financing costs.............................      671                    546
  Deferred taxes.......................................................   (1,466)                (3,296)
Changes in operating assets and liabilities, net of the effect of acquisitions:
  Accounts receivable..................................................   (2,112)                 2,152
  Other current assets.................................................   (1,409)                   392
  Deferred contract start-up costs.....................................   (2,282)                (2,390)
  Accounts payable and accrued liabilities.............................    5,488                  9,834
                                                                       ---------             ----------
Net cash provided by operating activities..............................   13,024                 16,241
                                                                       ---------             ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment...........................  (10,914)               (11,448)
  Sales of marketable securities.......................................      ---                  1,143
  Long-term restrictions placed on cash................................      (60)                (1,010)
  Investments in and advances to joint ventures........................   (1,750)                (1,221)
  Repayments of advances from joint ventures...........................      465                    120
  Cash used for acquisitions, contingent consideration, and
    related expenses, net of cash acquired.............................      ---                (11,058)
  Other................................................................     (644)                (1,072)
                                                                       ---------              ----------
  Net cash used for investing activities...............................  (12,903)               (24,546)
                                                                       ---------               ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from capital contribution...................................      ---                114,980
  Proceeds from bridge loan............................................      ---                 75,000
  Proceeds from revolving credit facility..............................   88,500                 80,500
  Proceeds from senior term loans......................................      ---                120,000
  Proceeds from sale of notes..........................................      ---                100,000
  Repayment of notes receivable from officers..........................      250                    250
  Redemption of common stock...........................................      ---               (254,144)
  Repayment of due to parent...........................................      ---                (70,813)
  Repayment of bridge loan.............................................      ---                (75,000)
  Repayment of revolving credit facility...............................  (84,000)               (54,000)
  Repayment of senior term loans.......................................     (500)                    ---
  Payment of financing costs...........................................      ---                (11,999)
                                                                       ---------              ----------
  Net cash provided by financing activities............................    4,250                  24,774
                                                                       ----------             ----------
INCREASE  IN CASH AND CASH EQUIVALENTS.................................    4,371                  16,469
  Cash and cash equivalents at beginning of period.....................   47,375                  29,531
                                                                       ---------              ----------
CASH AND CASH EQUIVALENTS AT END OF
  PERIOD...............................................................$  51,746                $ 46,000
                                                                        ========               =========
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash (received) paid for income taxes................................$    (175)              $    801
  Cash paid for interest...............................................$  11,703               $  6,100
</TABLE>

   See accompanying notes to condensed consolidated financial statements.

                                                         5

<PAGE>


                          MERIT BEHAVIORAL CARE CORPORATION
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (UNAUDITED)
                              (dollars in thousands)




1.  BASIS OF PRESENTATION

The accompanying  unaudited interim condensed  consolidated financial statements
include the accounts of Merit  Behavioral Care  Corporation and its wholly-owned
subsidiaries  (the  "Company"),  and  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.

The  condensed  consolidated  balance  sheet at March 31, 1997 and the condensed
consolidated  statements of operations and cash flows for all periods  presented
are unaudited and reflect all adjustments, consisting of normal recurring items,
which management considers necessary for a fair presentation.  Operating results
for fiscal 1997 interim periods are not necessarily  indicative of results to be
expected  for the entire  year.  The  condensed  consolidated  balance  sheet at
September  30, 1996 was derived from the  Company's  September  30, 1996 audited
financial  statements.  Certain  prior year  amounts have been  reclassified  to
conform with the current year's presentation.

Although the Company believes the accompanying disclosures are adequate, certain
information  and  disclosures  normally  included in the notes to the  financial
statements  have  been  condensed  or  omitted  as  permitted  by the  rules and
regulations  of  the  Securities  and  Exchange  Commission.   The  accompanying
unaudited financial  statements should be read in conjunction with the financial
statements  contained  in the  Annual  Report  on Form  10-K for the year  ended
September 30, 1996.

2.  CONTINGENCIES

In  October  1996,  a group of  eight  plaintiffs  purporting  to  represent  an
uncertified class of psychiatrists,  psychologists and social workers brought an
action under the federal  antitrust laws in the United States District Court for
the Southern  District of New York against nine  behavioral  health managed care
organizations, including the Company (collectively, "Defendants"). The complaint
alleges that Defendants  violated  section 1 of the Sherman Act by engaging in a
conspiracy to fix the prices at which Defendants  purchase  services from mental
healthcare  providers such as  plaintiffs.  The complaint  further  alleges that
Defendants  engaged in a group boycott to exclude  mental  healthcare  providers
from  Defendants'  networks  in  order  to  further  the  goals  of the  alleged
conspiracy.   The  complaint  also   challenges  the  propriety  of  Defendants'
capitation arrangements with their respective customers,  although it is unclear
from  the  complaint  whether  plaintiffs  allege  that  Defendants   unlawfully
conspired to enter into capitation arrangements with their respective customers.
The complaint seeks treble damages against  Defendants in an unspecified  amount
and a permanent injunction  prohibiting  Defendants from engaging in the alleged
conduct which forms the basis of the complaint,  plus costs and attorneys' fees.
In January  1997,  defendants  filed a motion to dismiss  the  complaint,  which
motion has not yet been heard or  decided.  The  Company  intends to  vigorously
defend  itself in this  litigation.  No amounts are recorded on the books of the
Company in anticipation of a loss as a result of this contingency.




                                                         6

<PAGE>



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

Results of Operations

Overview

The Company is one of the leading  behavioral  health  managed care companies in
the United  States,  arranging  for a full  spectrum  of  behavioral  healthcare
services on a nationwide basis.  Behavioral healthcare involves the treatment of
a variety of behavioral  health  conditions  such as emotional and mental health
problems,  substance abuse and other personal concerns that require  counseling,
outpatient therapy or more intensive  treatment  services.  The Company provides
managed behavioral  healthcare  services through a systematic  clinical approach
with the objective of diagnosing problems promptly and designing treatment plans
to ensure that patients  receive the  appropriate  level of care in an effective
and cost-efficient  manner. The Company manages behavioral  healthcare  programs
for approximately  1,000 payors across all segments of the healthcare  industry,
including  health  maintenance  organization  ("HMOs"),  Blue Cross Blue  Shield
organizations  and other  insurance  companies,  corporations  and labor unions,
Federal,  state and local  governmental  agencies,  and various  state  Medicaid
programs.

Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996

Revenue. Revenue increased by $21.0 million, or 18.8%, to $132.7 million for the
three months ended March 31, 1997 from $111.7 million for the three months ended
March  31,  1996.  Of this  increase,  $22.6  million  was  attributable  to the
inclusion of revenue  from certain  contracts  that  commenced  during the prior
fiscal year as well as additional revenue from existing  customers  generated by
an increase  in both the number of programs  managed by the Company on behalf of
such customers and an increase in the number of  beneficiaries  enrolled in such
customers'  programs;  and  $11.6  million  was  attributable  to new  customers
commencing  service in the current quarter.  This revenue increase was partially
offset by a $13.2 million  decrease in revenue as a result of the termination of
certain contracts,  $10.6 million of which was due to terminations that occurred
in various periods of the prior fiscal year. Contract price increases were not a
material factor in the increase in revenue.

Direct Service Costs. Direct service costs increased by $20.3 million, or 23.1%,
to $108.2  million for the three months ended March 31, 1997 from $87.9  million
for the three months ended March 31, 1996.  As a percentage  of revenue,  direct
service  costs  increased  from 78.7% in the prior  year  period to 81.5% in the
current year period.  The increase was due to the anticipated lower than average
direct  profit  margin  earned on the TennCare  Partners  Program and a Medicaid
program  in the  Commonwealth  of  Pennsylvania.  Under  the  TennCare  Partners
Program,  services  under which  commenced in the fourth quarter of fiscal 1996,
the Company (together with a local Tennessee partner) provides mental health and
substance abuse managed care services to approximately 500,000 Medicaid-eligible
and uninsured  individuals  residing in the State of Tennessee.  In light of the
significance  of the  contract to the  Company's  overall  revenue  base and the
unusual  structure  of  the  TennCare  Partners  Program,  the  Company  expects
unfavorable year over year direct cost percentage  comparisons for the remainder
of fiscal 1997. Furthermore, on February 1, 1997 the Company commenced providing
mental   health  and   substance   abuse   services  to   approximately   40,000
Medicaid-eligible  beneficiaries  residing  in the  County  of  Delaware  of the
Commonwealth  of  Pennsylvania.  The direct  profit margin under such program is
contractually limited to an amount which is significantly lower than the average
direct profit margin of the Company's overall business.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative expenses increased by $0.1 million, or 0.6%, to $15.8 million for
the three  months  ended March 31, 1997 from $15.7  million for the three months
ended March 31, 1996. The increase in total selling,  general and administrative
expenses  was  primarily  attributable  to (i)  growth  in  marketing  and sales
administrative  staff,  corporate and regional  management  and support  systems
associated  with the higher sales  volume,  (ii)  expenses  associated  with the
expansion of both the Company's  national  service  center located in St. Louis,
Missouri (the "National Service Center"), and the Company's headquarters located
in Park Ridge, New Jersey,  and (iii) expenses related to the planned deployment
of the Company's new information  systems. As a percentage of revenue,  selling,
general and  administrative  expenses  decreased from 14.1% in the prior year to
11.9%

                                                         7

<PAGE>



in the current year period as a result of these expenses being  allocated over a
larger  revenue  base.  In  particular,  the TennCare  Partners and the Delaware
County programs are large, self-contained programs requiring minimal incremental
selling,  general and  administrative  expenses or operational  support from the
Company,  thereby  mitigating  the  effects of their lower than  average  direct
service cost margins described above.

Amortization  of  Intangibles.  Amortization  of  intangibles  increased by $0.2
million, or 3.1%, to $6.7 million for the three months ended March 31, 1997 from
$6.5  million  for the three  months  ended March 31,  1996.  The  increase  was
primarily  due  to  an  increase  in  amortization  of  goodwill  recognized  in
connection with the acquisition of ProPsych, Inc.

Other Income (Expense).  For the three months ended March 31, 1997, other income
and expense  consisted of (i) interest  expense of $6.2 million  related to debt
incurred as a result of the merger of the Company with MDC Acquisition  Corp. on
October  6, 1995 (the  "Merger");  and (ii)  interest  and other  income of $0.8
million relating  primarily to investment  earnings on the Company's  short-term
investments  and restricted  cash balances.  Both interest  expense and interest
income are relatively unchanged from the prior year period.

Income Taxes.  The Company  recorded a benefit for income taxes during the three
months  ended  March 31,  1997 based  upon the  Company's  pre-tax  loss in such
period.

Six Months Ended March 31, 1997 Compared to Six Months Ended March 31, 1996

Revenue.  The Company's revenue increased by $38.8 million,  or 17.4%, to $261.4
million for the six months ended March 31, 1997 from $222.6  million for the six
months ended March 31, 1997. Of this increase, $52.0 million was attributable to
the inclusion of revenue from certain  contracts that commenced during the prior
fiscal year as well as additional revenue from existing  customers  generated by
an increase  in both the number of programs  managed by the Company on behalf of
such customers and an increase in the number of  beneficiaries  enrolled in such
customers'  programs;  and  $15.0  million  was  attributable  to new  customers
commencing  service in the current six month period.  This revenue  increase was
partially  offset by a $28.2  million  decrease  in  revenue  as a result of the
termination of certain contracts, $24.7 million of which was due to terminations
that  occurred  in various  periods of the prior  fiscal  year.  Contract  price
increases were not a material factor in the increase in revenue.

Direct Service Costs. Direct service costs increased by $34.9 million, or 19.8%,
to $211.2  million for the six months  ended March 31, 1997 from $176.3  million
for the six months ended March 31,  1996.  As a  percentage  of revenue,  direct
service  costs  increased  from 79.2% in the prior  year  period to 80.8% in the
current year period.  The increase was due to the anticipated lower than average
direct profit margin earned on the TennCare Partners Program, partly offset by a
year over year  decline  in  healthcare  utilization  in the  Company's  overall
business.  Excluding the effect of the TennCare Partners contract,  however, the
Company  experienced a decline in the direct service cost percentage as a result
of overall  lower  healthcare  utilization  in the current  six month  period as
compared to the previous period, due to continued  development and deployment of
alternative treatment programs designed to achieve more cost-effective treatment
and the  Company's  increased  focus on  clinical  care  techniques  directed at
patients requiring more intensive treatment services.  Also positively impacting
the direct cost percentage was the effect of a nationwide  recontracting program
with providers which began in the second quarter of fiscal 1996.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative expenses increased by $2.4 million, or 8.0%, to $32.4 million for
the six months ended March 31, 1997 from $30.0  million for the six months ended
March 31,  1996.  The  increase in total  selling,  general  and  administrative
expenses  was  primarily  attributable  to (i)  growth  in  marketing  and sales
administrative  staff,  corporate and regional  management  and support  systems
associated  with the higher sales  volume,  (ii)  expenses  associated  with the
expansion of both the  Company's  National  Service  Center,  and the  Company's
headquarters,  and (iii)  expenses  related  to the  planned  deployment  of the
Company's new information systems. As a percentage of revenue,  selling, general
and  administrative  expenses  decreased  from 13.5% in the prior year period to
12.4% in the current year period as a result of these expenses  being  allocated
over a larger revenue base. In particular, as noted above, the TennCare Partners
and the Delaware County programs require minimal  incremental  selling,  general
and administrative  expenses or Company operational support,  thereby mitigating
the effects of their lower than average  direct  service cost margins  described
above.


                                                         8

<PAGE>



Amortization  of  Intangibles.  Amortization  of  intangibles  increased by $0.7
million,  or 5.5%, to $13.5 million for the six months ended March 31, 1997 from
$12.8  million  for the six  months  ended  March 31,  1996.  The  increase  was
primarily  due  to  an  increase  in  amortization  of  goodwill  recognized  in
connection with the acquisition of ProPsych, Inc.

Other Income  (Expense).  For the six months ended March 31, 1997,  other income
and expense  consisted of (i) interest  expense of $12.4 million related to debt
incurred as a result of the Merger,  and (ii)  interest and other income of $1.5
million relating  primarily to investment  earnings on the Company's  short-term
investments  and  restricted  cash  balances.  The year  over year  increase  in
interest  expense of $0.9 million was primarily  attributable to the full period
impact of (i) the  indebtedness  incurred  on October 6, 1995 by the  Company in
connection  with the Merger;  and (ii) the Notes which bore interest at a higher
rate than the bridge financing  facility that the Notes replaced.  The year over
year increase in interest  income of $0.2 million was primarily  attributable to
both an increase in average invested cash balances as compared to the prior year
period and interest earned on advances to certain joint ventures.

Income  Taxes.  The Company  recorded a benefit for income  taxes during the six
months  ended  March 31,  1997 based  upon the  Company's  pre-tax  loss in such
period.

Liquidity and Capital Resources

General.  For the six months ended March 31, 1997, operating activities provided
cash of $13.0  million,  investing  activities  used cash of $12.9  million  and
financing activities provided cash of $4.3 million,  resulting in a net increase
in cash  and cash  equivalents  of $4.4  million.  Investing  activities  in the
current six month period  consisted  principally of (i) capital  expenditures of
$10.9 million  related  primarily to the continued  development of the Company's
new information  systems and expansion of the Company's National Service Center;
and (ii) payments  totaling $1.8 million for funding under various joint venture
arrangements,  the most  significant of which was with Community Sector Systems,
Inc.

Senior Indebtedness.  As of March 31, 1997, $38.5 million of revolving loans and
$8.1 million of letters of credit were  outstanding  under the revolving  credit
facility of the Company's  Credit  Agreement with The Chase Manhattan Bank, N.A.
(the "Senior Credit Facility") and approximately $38.4 million was available for
future borrowing.

Adjusted EBITDA.  Adjusted EBITDA, a financial measure used in the Senior Credit
Facility and the  indenture for the Notes (the  "Indenture"),  increased by $1.0
million,  or 8.8%,  to $12.4  million for the three  months ended March 31, 1997
from $11.4 million for the three months ended March 31, 1996. For the six months
ended March 31, 1997,  Adjusted  EBITDA  increased by $3.0,  or 13.4%,  to $25.4
million from $22.4 million for the comparable period in the prior year.

Cash in Claims Funds and Restricted  Cash. As of March 31, 1997, the Company had
total cash balances  (including  cash  equivalents)  of $57.5 million,  of which
$38.6 million was restricted under certain contractual, fiduciary and regulatory
requirements;  moreover,  of such  amount,  $5.7  million  was  classified  as a
long-term asset on the Company's  balance sheet.  Under certain  contracts,  the
Company is required to establish segregated claims funds into which a portion of
its capitation  fee is held until a  reconciliation  date (which  reconciliation
typically   occurs   annually).   Until  that  time,  cash  funded  under  these
arrangements  is  unavailable to the Company for purposes other than the payment
of claims.  In addition,  California and Illinois state regulatory  requirements
restrict access to cash held by the Company's subsidiaries in such states. As of
March 31, 1997, the Company also held surplus cash balances,  classified as cash
and cash equivalents,  as required by the contracts held by the Company relating
to Medicaid  programs  for the States of Iowa and  Tennessee  and for a Medicaid
contract in the Commonwealth of Pennsylvania.

Availability of Cash. Prior to the Merger, the Company has funded its operations
primarily with cash generated from operations and through the funding of certain
acquisitions,  investments and other transactions by its former parent,  Merck &
Co., Inc. The Company currently and in the future expects to finance its capital
requirements through existing cash balances,  cash generated from operations and
borrowings  under the revolving  credit facility of the Senior Credit  Facility.
Based  upon the  current  level of cash flow  from  operations  and  anticipated
growth,  the Company  believes that  available  cash,  together  with  available
borrowings  under the revolving  credit facility and other sources of liquidity,
will be adequate  to meet the  Company's  anticipated  future  requirements  for
working capital,  capital expenditures,  and scheduled payments of principal and
interest on its indebtedness for the foreseeable future.

                                                         9

<PAGE>





                            PART II.  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists,  psychologists and social workers brought an
action under the federal  antitrust laws in the United States District Court for
the Southern  District of New York against nine  behavioral  health managed care
organizations,  including  the  Company  (collectively,  "Defendants")  entitled
Edward  M.  Stephens,  Jose  A.  Yaryura-Tobias,   Judith  Green,  Ph.D.,  Fugen
Neziroglu,  Ph.D.,  Ona Robinson,  Ph.D.,  Laurie A. Baum,  C.S.W.,  Agnes Wohl,
C.S.W., and The On-Step Institute For Mental Health Research, Inc., individually
and on behalf of all others  similarly  situated,  v. CMG Health,  FHC  Options,
Inc., Foundation Health PsychCare Services,  Inc., Green Spring Health Services,
Inc.,  Human Affairs  International,  Inc.,  Merit  Behavioral  Care Corp.,  MCC
Behavioral Care Inc.,  United  Behavioral  Systems,  Inc., and Value  Behavioral
Health, Inc., 96 Civ. 7798 (KMW). The complaint alleges that Defendants violated
section 1 of the Sherman Act by  engaging in a  conspiracy  to fix the prices at
which  Defendants  purchase  services from mental  healthcare  providers such as
plaintiffs.  The complaint  further alleges that  Defendants  engaged in a group
boycott to exclude  mental  healthcare  providers from  Defendants'  networks in
order to  further  the  goals of the  alleged  conspiracy.  The  complaint  also
challenges  the  propriety of  Defendants'  capitation  arrangements  with their
respective  customers,  although  it  is  unclear  from  the  complaint  whether
plaintiffs allege that Defendants  unlawfully conspired to enter into capitation
arrangements with their respective customers. The complaint seeks treble damages
against  Defendants  in  an  unspecified  amount  and  a  permanent   injunction
prohibiting  Defendants  from  engaging in the alleged  conduct  which forms the
basis of the  complaint,  plus  costs and  attorneys'  fees.  In  January  1997,
Defendants  filed a motion to dismiss the  complaint,  which  motion has not yet
been heard or decided.  The Company intends to vigorously  defend itself in this
litigation.  However,  there  can be no  assurance  that  the  outcome  of  this
litigation will be favorable to the Company. An unfavorable outcome could have a
material adverse effect on the Company.

ITEM 5.  OTHER INFORMATION

         Since July 1996,  the Company  has been  providing  services  under the
State of Tennessee's  "TennCare Partners Program," a mental health and substance
abuse benefits program covering  principally  Medicaid  recipients and uninsured
individuals  residing  in that State  ("TennCare  Beneficiaries").  The  Company
participates in the TennCare  Partners Program through a joint venture (known as
a "behavioral health  organization" or "BHO") with Tennessee  Behavioral Health,
Inc. ("TBH")  pursuant to a contract between the Tennessee  Department of Mental
Health and Mental  Retardation  ("TDMHMR") and TBH. The contract with TDMHMR has
an initial 12 month term ending  June 30, 1997 and, by its terms,  automatically
renews for  successive 12 month periods unless either TDMHMR or TBH gives notice
of its  intention  not to  renew.  The  Department  of  Health  of the  State of
Tennessee ("TDOH"),  which has oversight of TDMHMR,  recently announced that the
mental health and substance  abuse services  currently  provided by the two BHOs
participating  in the TennCare  Partners  Program are to be  transitioned to the
"Managed  Care  Organizations"  (typically,  health  maintenance  organizations)
("MCOs") currently providing medical,  surgical and other healthcare benefits to
TennCare Beneficiaries.  The earliest date (the "Transition Date") at which such
transition of services to the MCOs may occur is January 1, 1998.

         The Company believes that, if the  responsibility  for providing mental
health and substance abuse services to TennCare  Beneficiaries is transferred to
the MCOs, MCOs will most likely  subcontract with behavioral health managed care
companies,  such as the Company, to provide such services. The Company currently
is in  discussions  with certain MCOs relating to the possible  provision by the
Company of mental health and substance abuse services to TennCare  Beneficiaries
covered by such MCOs. However,  because the TDOH announcement has been made only
recently,  and in light of the  uncertainty  over the  identity of the MCOs that
would service the TennCare Beneficiaries after the Transition Date and the terms
on which such MCOs would provide mental health and substance abuse services, the
Company has not entered into any definitive subcontracts with MCOs. There can be
no assurance that the TennCare Partners Program will be transitioned to the MCOs
or, if such transition occurs,  that the Company will subcontract with any MCOs,
that the terms of any such subcontracts will be favorable to the Company or that
the Company will be able

                                                        10

<PAGE>



to  replace  through  such  subcontracts  the  revenue it  otherwise  would have
generated in connection with the TennCare Partners Program after the Transition
Date.

ITEM 6.  EXHIBITS AND REPORTS ON FORM  8-K.

(a) Exhibits

         *27      Financial Data Schedule (electronic filing only).

                  *filed herewith

(b) Reports on Form 8-K

         No  reports on Form 8-K were filed  during the  quarter  for which this
report is being filed.

                                                        11

<PAGE>





                                                    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.

The signatory  hereby  acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.







Date: May 15, 1997               Merit Behavioral Care Corporation



                                 By:      /s/ Arthur H. Halper
                                    -----------------------------
                                    Arthur H. Halper, Executive Vice President
                                    and Chief Financial Officer
                                   (Principal Financial Officer,
                                    Accounting Officer and
                                    Duly Authorized Officer)


                                                        12

<PAGE>