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

(Mark One)

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

        For the quarterly period ended March 31, 1996

                              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, 1996,  28,298,800  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.




                MERIT BEHAVIORAL CARE CORPORATION

                        Table of Contents
                Form 10-Q for the Quarterly Period
                       Ended March 31, 1996


PART I         FINANCIAL INFORMATION                         Page

Item 1.        Financial Statements (Unaudited)

               Condensed Consolidated Balance Sheets at
               March 31, 1996 and September 30, 1995           3

               Condensed Consolidated Statements of
               Operations for the three months ended
               March 31, 1996 and March 31, 1995, and
               the six months ended March 31, 1996
               and March 31, 1995                              4

               Condensed Consolidated Statements of
               Cash Flows for the six months ended
               March 31, 1996 and March 31, 1995               5

               Notes to Condensed Consolidated
               Financial Statements                            6

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

PART II        OTHER INFORMATION

Item 1.        Legal Proceedings                              13

Item 5.        Other Information                              14

Item 6.        Exhibits and Reports on Form 8-K               14
















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

                                                     March 31,   September 30,
                                                      1996            1995
                                                    ----------   ------------
    ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . .   $ 46,000     $ 20,611
Accounts receivable, net of allowance for
doubtful accounts of $1,172 and $525 . . . . . . .      27,497       27,648
Short-term marketable securities . . . . . . . . .         ---        1,143
Other current assets . . . . . . . . . . . . . . .       4,552        4,569
    Total current assets . . . . . . . . . . . . .      78,049       53,971
Property, plant and equipment, net . . . . . . . .      61,771       54,974

Other Assets:
Goodwill and other intangibles, net of accumulated
  amortization of  $48,343 and $37,017 . . . . . .     170,312      171,139
Restricted cash. . . . . . . . . . . . . . . . . .       4,495       12,405
Deferred financing costs, net of accumulated amortization
  of $546. . . . . . . . . . . . . . . . . . . . .      11,453          ---
Other assets . . . . . . . . . . . . . . . . . . .      13,348       12,931
                                                       199,608      196,475
Total assets . . . . . . . . . . . . . . . . . . .    $339,428     $305,420

    LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . .   $   4,953   $    3,389
Claims payable . . . . . . . . . . . . . . . . . .      50,215       43,371
Deferred revenue . . . . . . . . . . . . . . . . .       8,961        9,582
Accrued interest . . . . . . . . . . . . . . . . .       4,854          ---
Current portion of long-term debt. . . . . . . . .         500          ---
Other current liabilities. . . . . . . . . . . . .      12,483        8,788
      Total current liabilities. . . . . . . . . .      81,966       65,130

Due to parent (noninterest bearing). . . . . . . .         ---       70,813
Long-term debt . . . . . . . . . . . . . . . . . .     246,000          ---
Deferred income taxes. . . . . . . . . . . . . . .      33,097       44,744
Other long-term liabilities. . . . . . . . . . . .       1,808        2,400

Stockholders' Equity:
Common stock (40,000,000 shares authorized,
  $0.01 par value, 28,398,800 shares
   outstanding at March  31, 1996) . . . . . . . .        284            10
Additional paid in capital . . . . . . . . . . . .    (12,162)      118,877
Retained (deficit) earnings. . . . . . . . . . . .     (6,115)        3,446
Notes receivable from officers . . . . . . . . . .     (5,450)          ---
   Total stockholders' equity. . . . . . . . . . .    (23,443)      122,333
Total liabilities and stockholders' equity . . . .   $339,428      $305,420

   See accompanying notes to condensed consolidated financial statements.








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


                                    Three months ended    Six months ended
                                         March 31,            March 31,
                                     1996       1995       1996      1995
                                    ------     ------     ------    ------
Revenue. . . . . . . . . . . . .  $111,721    $86,942   $222,641  $164,141
Expenses:
  Direct service costs . . . . .    87,941     70,644    176,291   129,105
  Selling, general
   and administrative. . . . . .    15,707     11,398     30,015    23,379
  Amortization of intangibles. .     6,522      5,263     12,837    10,289
                                    ------     ------     ------   -------
                                   110,170     87,305    219,143   162,773
Operating income (loss). . . . .     1,551       (363)     3,498     1,368
Other income (expense):
  Interest income and other. . .       797        374      1,338       665
  Interest expense . . . . . . .    (6,104)       ---    (11,549)      ---
  Merger costs . . . . . . . . .       ---        ---     (3,972)      ---
                                    ------     ------     ------    ------
                                    (5,307)       374    (14,183)      665
                                    ------     ------     ------    ------
(Loss) income before income taxes
  and cumulative effect
  of accounting change . . . . .    (3,756)        11    (10,685)     2,033
(Benefit) provision
    for income taxes . . . . . .    (1,151)       535     (2,136)     1,899
(Loss) income before cumulative
  effect of accounting change. .    (2,605)      (524)    (8,549)       134
Cumulative effect of
  accounting change for deferred
  contract start-up costs, net of tax
  benefit of $757. . . . . . . .       ---        ---     (1,012)       ---
                                    ------     ------     ------     ------
Net (loss) income. . . . . . . .  $ (2,605)    $ (524)  $ (9,561)   $   134
                                    ------     ------     ------     ------
Pro forma net income assuming the new
  method of accounting for deferred
  contract start-up costs is applied
  retroactively. . . . . . . . .  $ (2,605)    $ (968)  $ (8,549)   $  (310)


    See accompanying notes to condensed consolidated financial statements.









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

                                                       Six months ended
                                                           March 31,
                                                      1996         1995
                                                     ------       ------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . .      $  (9,561)   $     134
Adjustments to reconcile net (loss) income
  to net cash provided by operating activities:
  Cumulative effect of accounting change . .          1,012          ---
  Depreciation and amortization. . . . . . .         18,098       13,206
  Deferred taxes.. . . . . . . . . . . . . .         (3,296)         189
Changes in operating assets and liabilities, net of the effect of acquisitions:
  Accounts receivable. . . . . . . . . . . .          2,152         (485)
  Other current assets . . . . . . . . . . .            392          146
  Deferred contract start-up costs . . . . .         (2,390)      (3,677)
  Accounts payable and accrued liabilities .          9,834        4,448
Net cash provided by operating activities. .         16,241       13,961
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment .      (11,448)     (14,951)
  Sales of marketable securities . . . . . .          1,143          860
  Long-term restrictions removed
    (placed) on cash. . . . . . . . . . . . .         7,910         (660)
  Investments in and advances
         to joint ventures. . . . . . . . . .        (1,221)         ---
  Repayments of advances from joint ventures .          120          ---
  Cash used for acquisitions, contingent
    consideration, and related expenses,
    net of cash acquired . . . . . . . . . . .      (11,058)        (380)
  Other. . . . . . . . . . . . . . . . . . . .       (1,072)         108
  Net cash used for investing activities . . .      (15,626)     (15,023)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from capital contribution . . . . .      114,980          ---
  Borrowings from parent . . . . . . . . . . .          ---          641
  Proceeds from bridge loan. . . . . . . . . .       75,000          ---
  Proceeds from revolving credit facility. . .       84,000          ---
  Proceeds from senior term loans. . . . . . .      120,000          ---
  Proceeds from sale of notes. . . . . . . . .      100,000          ---
  Repayment of notes receivable from officers.          250          ---
  Redemption of common stock . . . . . . . . .     (259,039)         ---
  Preliminary adjustment to
    common stock redemption. . . . . . . . . .        4,895          ---
  Repayment of due to parent . . . . . . . . .      (70,813)         ---
  Repayment of bridge loan . . . . . . . . . .      (75,000)         ---
  Repayment of revolving credit facility . . .      (57,500)         ---
  Payment of financing costs . . . . . . . . .      (11,999)         ---
  Net cash provided by financing activities. .       24,774          641
INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS. . . . . . . . . . . . . . . . .       25,389         (421)
  Cash and cash equivalents at beginning
     of period . . . . . . . . . . . . . . . .       20,611        24,730
CASH AND CASH EQUIVALENTS AT END OF
  PERIOD . . . . . . . . . . . . . . . . . . .     $ 46,000       $24,309
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid for income taxes . . . . . . . . .     $    801       $ 1,570
  Cash paid for interest . . . . . . . . . . .     $  6,100       $   ---

   See accompanying notes to condensed consolidated financial statements.




                             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, 1996 and the 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
the fiscal 1996 and 1995  interim  periods  are not  necessarily  indicative  of
results to be expected for the entire year.  The  consolidated  balance sheet at
September  30, 1995 was derived from the  Company's  September  30, 1995 audited
financial  statements.  Certain  prior year  amounts have been  reclassified  to
conform with the current year's presentation.  For further information, refer to
the Company's  consolidated  financial statements and notes thereto for the year
ended  September  30, 1995  included in the  Company's  filing on Form S-4 dated
March 20, 1996.


2.   MERGER

On October 6, 1995,  the  Company  completed a merger  (the  "Merger")  with MDC
Acquisition  Corp.  ("MDC"),  a company formed by Kohlberg Kravis Roberts & Co.,
L.P.  ("KKR"),  whereby MDC was merged with and into the  Company.  Prior to the
Merger,  the  Company  was a  wholly-owned  subsidiary  of  Merck  &  Co.,  Inc.
("Merck").  In connection with the Merger,  Merck received  $333,186 in cash and
retained approximately 15.0% of the common stock of the post-Merger Company. The
Merger was accounted  for as a  recapitalization  which  resulted in a charge to
equity of $259,039 to reflect the  redemption  of common stock.  In  conjunction
with the Merger,  the Company paid a stock dividend of approximately 49.6 shares
for each share of the Company's common stock then outstanding.

The Merger was financed with $114,980 of new cash equity, consisting of $105,000
from  affiliates  of KKR and  $9,980  from  Company  management  and  affiliated
entities  ("Management").  Management  acquired an  additional  $5,800 of equity
which was funded by loans from the Company.  The balance of the  transaction was
funded with a $75,000 bridge loan (the "Bridge  Loan")  provided by an affiliate
of KKR and  $155,000  of  initial  borrowings  under a  $205,000  senior  credit
facility among the Company,  The Chase  Manhattan  Bank,  N.A. and Bankers Trust
Company  (the  "Senior  Credit  Facility").  The  aforementioned  proceeds  were
utilized  to  redeem  common  stock for  $259,039,  repay  amounts  due Merck of
$70,813,  and pay certain fees and expenses related to the Merger.  Of the total
fees and expenses, $5,500 was paid to KKR.

3.  LONG-TERM DEBT

At March 31, 1996, long-term debt consisted of the following:

     Revolving Loans                       $26,500
     Senior Term Loan A                     70,000
     Senior Term Loan B                     50,000
     Notes                                 100,000
                                           -------
                                           246,500
                                           -------
     Less current portion                     (500)
                                         $ 246,000


Senior  Credit  Agreement - In October 1995,  the Company  entered into a credit
agreement (the "Credit Agreement"), which provides for secured borrowings from a
syndicate  of  lenders.  The Senior  Credit  Facility  consists of (i) a six and
one-half year revolving credit facility providing for up to $85,000 in revolving
loans,  which includes  borrowing capacity available for letters of credit of up
to $20,000,  and (ii) a term loan facility  providing for up to $120,000 in term
loans,  consisting  of a $70,000  senior  term loan with a  maturity  of six and
one-half  years  ("Senior  Term Loan A"), and a $50,000  senior term loan with a
maturity of eight years  ("Senior  Term Loan B"). At March 31, 1996,  $26,500 of
revolving loans and three letters of credit totaling $425 were outstanding under
the  Revolving  Credit  Facility,  and  approximately  $58,075 was available for
future borrowings.

The annual  amortization  schedule  of the  Senior  Term Loans is $500 in fiscal
1997,  $3,000 in 1998,  $10,500 in 1999,  $13,000  in 2000,  $20,500 in 2001 and
$72,500  thereafter.  The Senior Term Loans are subject to mandatory  prepayment
(i) with the  proceeds of certain  asset sales and (ii) on an annual  basis with
50% of the Company's  Excess Cash Flow (as defined in the Credit  Agreement) for
so long as the ratio of the  Company's  Total  Debt (as  defined  in the  Credit
Agreement)  to  annual  Earnings  Before  Interest,   Taxes,   Depreciation  and
Amortization  ("EBITDA" as defined in the Credit  Agreement) is greater than 3.5
to 1.0.

The Company is charged a commitment fee calculated at an  EBITDA-dependent  rate
ranging from 0.250% to 0.500% per annum of the  commitment  under the  Revolving
Credit Facility in effect on each day. The Company is charged a letter of credit
fee  calculated  at an  EBITDA-dependent  rate ranging from 0.375% to 1.750% per
annum of the face amount of each letter of credit and a fronting fee  calculated
at a rate equal to 0.250% per annum of the face amount of each letter of credit.
Loans under the Credit  Agreement  bear  interest at  EBITDA-dependent  floating
rates,  which are,  at the  Company's  option,  based upon (i) the higher of the
Federal funds rate plus 0.5%,  or bank prime rates,  or (ii)  Eurodollar  rates.
Rates on borrowings  outstanding  under the Senior Credit Facility averaged 8.4%
for the six months ended March 31, 1996.

Notes - On November 22, 1995, the Company issued  $100,000  aggregate  principal
amount of 11 1/2%  senior  subordinated  notes due 2005 (the  "Notes"),  the net
proceeds  of which  were  applied to repay the Bridge  Loan  (including  accrued
interest) and a portion of the revolving loans under the Senior Credit Facility.
The Notes are senior subordinated, unsecured obligations of the Company.

The Company may be obligated to purchase at the holders' option all or a portion
of the Notes upon a change of control or asset sale, as defined in the indenture
for the Notes  (the  "Notes  Indenture").  The Notes are not  redeemable  at the
Company's option prior to November 15, 2000, except that at any time on or prior
to November 15, 1998, under certain  conditions the Company may redeem up to 35%
of the  initial  principal  amount of the Notes  originally  issued with the net
proceeds of a public offering of the common stock of the Company. The redemption
price is equal to 111.50% of the  principal  amount if the  redemption  is on or
prior to November  15,  1997,  and 110.50% if the  redemption  is on or prior to
November 15, 1998.  From and after  November 15, 2000, the Notes will be subject
to  redemption  at the option of the  Company,  in whole or in part,  at various
redemption prices,  declining from 105.75% of the principal amount to par on and
after November 15, 2004. The Notes mature on November 15, 2005.


4.  NOTES RECEIVABLE FROM OFFICERS

In October 1995, the Company loaned several  officers an aggregate of $5,800 for
the  purchase of common  stock of the  Company.  Each loan is  represented  by a
promissory  note which bears  interest at a rate of 6.5% per annum.  These notes
are full recourse  obligation of the officers,  are collateralized by the pledge
of shares of common  stock of the  Company and may be prepaid in part or in full
without notice or penalty.  One note for $250 was repaid as of December 31, 1995
and  another  note  for  $100  was  canceled  in  January  1996.  The  remaining
outstanding notes are due as follows: $250 in 1997 and $5,200 in 2001. The notes
are shown as a reduction of stockholders'  equity in the accompanying  condensed
consolidated balance sheet.

5.   ACQUISITIONS

On October 5, 1995,  the Company paid an initial $8,730 to acquire Choate Health
Management,  Inc. and certain related entities ("Choate"), a Massachusetts-based
integrated behavioral healthcare organization. On December 19, 1995, the Company
paid an initial  $50 with a  subsequent  payment  of $2,950 in  January  1996 to
acquire ProPsych, Inc. ("ProPsych"),  a Florida-based  behavioral health managed
care company.  These acquisitions were accounted for as purchase transactions in
accordance  with  Accounting  Principles  Board  ("APB")  Opinion  No.  16.  The
condensed  consolidated  financial  statements  include the operating results of
Choate  and  ProPsych  from their  respective  dates of  acquisition.  Pro forma
results  of  operations  have not  been  presented  because  the  effect  of the
acquisitions was not significant.

The Company is obligated to make contingent  payments to the former shareholders
of  Choate  and  ProPsych  based on  future  financial  performance.  Contingent
consideration  related to Choate is  calculated  as six times the calendar  year
1997 pre-tax income of Choate, less $8,000; the maximum additional consideration
is $22,000.  Contingent consideration related to ProPsych is calculated as three
times the sum of calendar  year 1996 and 1997 pre-tax  income of ProPsych,  less
$3,000; the maximum additional consideration is $15,000. Any additional payments
related to Choate or ProPsych will be recorded as goodwill.

The purchase price for each of the aforementioned  transactions was allocated to
the net assets  acquired  based upon their  estimated  fair market  values.  The
excess  of the  purchase  price  over the  estimated  fair  value of net  assets
acquired  amounted to  approximately  $7,400 for Choate and $3,100 for ProPsych.
Such amounts have been accounted for as goodwill and are being amortized over 40
years  using  the  straight  line  method.   These  allocations  were  based  on
preliminary estimates and may be revised at a later date.


6.  STOCK OPTIONS AND AWARDS

In October 1995, the Company adopted the 1995 Stock Purchase and Option Plan for
Employees of Merit  Behavioral  Care  Corporation  and  Subsidiaries  (the "1995
Option Plan"). The 1995 Option Plan provides for the issuance of up to 8,561,000
shares of common stock to key  employees  of the  Company.  The 1995 Option Plan
permits  the  issuance  of common  stock and the  grant of  non-qualified  stock
options (the "1995  Options") to purchase  shares of common stock.  The exercise
price of the 1995 Options will not be less than 50% of the fair market value per
share of common  stock on the date of such grant.  Such options vest at the rate
of 20% per year over a period of five  years.  As of March 31,  1996,  5,288,000
options  with an exercise  price of $5.00 per share were issued and  outstanding
under the 1995 Option Plan.

In January  1996,  the Company  adopted a second stock  option  plan,  the Merit
Behavioral  Care  Corporation  Employee Stock Option Plan ("1996 Employee Option
Plan").  The 1996 Employee Option Plan,  which covers all employees not included
in the 1995 Option Plan,  provides for the issuance of up to 1,000,000 shares of
common stock of the Company.  The 1996 Employee Option Plan permits the issuance
of common stock and the grant of non-qualified stock options (the "1996 Employee
Options" ) to purchase shares of common stock. The 1996 Employee Options vest on
the fourth anniversary of the date of grant,  provided that the employee remains
employed  with  the  Company  on  such  date.  The  1996  Employee  Options  are
exercisable only after an initial public offering of common stock of the Company
meeting  certain  requirements.  As of March 31, 1996,  818,925  options with an
exercise  price of $7.50 per share were  issued and  outstanding  under the 1996
Employee Option Plan.


7.  CONTINGENCIES

The  Company is engaged in various  legal  proceedings  that have  arisen in the
ordinary course of its business.  The Company believes that the ultimate outcome
of such proceedings  will not have a material effect on the Company's  financial
position, liquidity or results of operations.


8.  RECENTLY ISSUED ACCOUNTING STANDARDS

In  March  1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of". SFAS 121 establishes  accounting standards for the impairment of long-lived
assets and certain identified  intangibles to be disposed of or held and used by
an entity.  SFAS 121 is effective for fiscal years  beginning after December 15,
1995.  The  Company  will adopt SFAS 121 in fiscal  1997 and does not expect its
implementation  to have a material  effect on its results of  operations  or its
financial condition.

In  October  1995,  the  FASB  issued  SFAS  123,  "Accounting  for  Stock-Based
Compensation". SFAS 123 establishes financial accounting and reporting standards
for stock-based  employee  compensation  plans. SFAS 123 is effective for fiscal
years  beginning  after  December 15,  1995.  The Company will adopt SFAS 123 in
fiscal 1997 and does not expect its  implementation to have a material effect on
its results of operations or its financial condition.


9.  ACCOUNTING CHANGE

Effective  October 1, 1995,  the Company  changed its method of  accounting  for
deferred  start-up  costs  related to new  contracts  or  expansion  of existing
contracts (i) to expense costs  relating to start-up  activities  incurred after
commencement of services under the contract,  and (ii) to limit the amortization
period for deferred  start-up  costs to the initial  contract  period.  Prior to
October 1, 1995, the Company  capitalized  certain start-up costs related to the
completion of the provider networks and reporting systems beyond commencement of
contracts and, in limited instances,  amortized the start-up costs over a period
that included the initial renewal term  associated with the contract.  Under the
new policy,  the Company does not defer  contract  start-up costs after contract
commencement.  The change was made to increase  the focus on  controlling  costs
associated with contract start-ups.

The Company  recorded a pre-tax  charge of $1,769  ($1,012  after  taxes) in its
fiscal 1996 first  quarter  results of  operations  as a cumulative  effect of a
change in  accounting.  The pro forma  impact of this  change on the prior  year
periods  presented  would be to increase  costs and expenses by $776 ($444 after
taxes) for both the three  months  ended March 31, 1995 and the six months ended
March 31, 1995.  The effect of the change on the current year periods  presented
cannot be reasonably estimated.


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.  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. 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 manages  behavioral
healthcare  programs for approximately  1,000 payors accross all segments of the
healthcare industry,  including health maintenance  organizations ("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, 1996 Compared to
  Three Months Ended March 31, 1995

Revenue. Revenue increased by $24.8 million, or 28.5%, to $111.7 million for the
three months ended March 31, 1996 from $86.9  million for the three months ended
March 31, 1995. Of this increase,  $25.0 million was  attributable to 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, as well as the
inclusion of revenue for the current  three month  period from certain  programs
that commenced  during the prior fiscal year; and $2.1 million was  attributable
to new  customers  commencing  service in the current  quarter,  the majority of
which was derived from the Company's  contract with AT&T,  services  under which
commenced on January 1, 1996.  This revenue  increase was partially  offset by a
$7.3  million  decrease  in  revenue as a result of the  termination  of certain
contracts,  two of  which  accounted  for $3.4  million  of such  decrease.  The
majority  of these  contracts  had  terminated  in various  periods of the prior
fiscal year. Contract price increases were not a material factor in the increase
in revenue.

The Company  completed  two  acquisitions  during the current  fiscal  year.  On
October 5, 1995, the Company acquired Choate Health Management, Inc. and certain
related  entities  ("Choate"),  and on December 19, 1995,  the Company  acquired
ProPsych, Inc. ("ProPsych").  These acquisitions, which were accounted for under
the purchase  method of accounting,  contributed  an additional  $5.0 million in
revenue for the three months ended March 31, 1996.

Direct Service Costs. Direct service costs increased by $17.3 million, or 24.5%,
to $87.9  million for the three months  ended March 31, 1996 from $70.6  million
for the three months ended March 31, 1995.  As a percentage  of revenue,  direct
service  costs  decreased  from 81.3% in the prior  year  period to 78.7% in the
current year period. This decrease was primarily due to unusually high inpatient
utilization in the prior year quarter  experienced under a significant  contract
with an HMO focused on the Medicaid beneficiary population.  Changes made by the
Company in the management of such program and in the clinical protocols utilized
to deliver  treatment  services had the effect of reducing  such high  inpatient
utilization and redirecting beneficiaries to more appropriate and cost-effective
levels of care.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased by $4.3 million,  or 37.7%, to $15.7 million
for the three  months  ended  March 31,  1996 from $11.4  million  for the three
months  ended  March 31,  1995.  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 the Company's  national  service  center  located in St. Louis,
Missouri (the "National  Service Center") which will allow for growth beyond its
current  needs,  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  increased  to 14.1% for the current  quarter from
13.1% in the prior year quarter.  The increase in the expense,  coupled with the
delay in the planned  start date of certain new  contracts,  contributed  to the
increase in selling,  general and  administrative  expenses as a  percentage  of
revenue.

Amortization  of  Intangibles.  Amortization  of  intangibles  increased by $1.3
million,  or 24.5%,  to $6.5  million for the three  months ended March 31, 1996
from $5.3 million for the three  months  ended March 31, 1995.  The increase was
primarily  due  to  an  increase  in  amortization  of  goodwill  recognized  in
connection with the  acquisitions of Choate and ProPsych and the Company's joint
venture with Empire Blue Cross and Blue  Shield,  as well as to increases in the
amortization of deferred contract start-up costs related to new contracts.

Other Income (Expense).  For the three months ended March 31, 1996, other income
and expense  consisted  of (i) interest  expense of $6.1  million  incurred as a
result of the increase in long-term  debt  resulting  from 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.

Income Taxes.  The Company  recorded a benefit for income taxes during the three
months  ended  March 31,  1996 based  upon the  Company's  pre-tax  loss in such
period.


Six Months Ended March 31, 1996 Compared to Six Months Ended March
31, 1995

Revenue.  The Company's revenue increased by $58.5 million,  or 35.6%, to $222.6
million for the six months ended March 31, 1996 from $164.1  million for the six
months ended March 31, 1995. Of this increase, $60.4 million was attributable to
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, as
well as the  inclusion  of revenue for the current six month period from certain
programs  that  commenced  during the prior  fiscal  year;  and $2.4 million was
attributable  to new  customers  commencing  service  in the  current  six month
period,  the majority of which was derived from the AT&T contract.  This revenue
increase was partially offset by a $13.0 million decrease in revenue as a result
of the termination of certain contracts, two of which accounted for $6.9 million
of such  decrease.  The majority of these  contracts  had  terminated in various
periods of the prior fiscal year.  Contract price  increases were not a material
factor in the increase in revenue.

The Company's acquisitions of Choate and ProPsych contributed an additional $8.7
million in revenue for the six months ended March 31, 1996.

Direct Service Costs. Direct service costs increased by $47.2 million, or 36.6%,
to $176.3  million for the six months  ended March 31, 1996 from $129.1  million
for the six months ended March 31,  1995.  As a  percentage  of revenue,  direct
service  costs  increased  from 78.7% in the prior  year  period to 79.2% in the
current year period.  The increase was principally due to the loss in the fourth
quarter of fiscal 1995 of two contracts  with higher than average  direct profit
margins  and a  renewal  of a  significant  contract  on  lower  pricing  terms.
Furthermore,  the Company  earned a lower than average direct profit margin on a
significant  state  Medicaid  program which was not in effect for the entire six
month period in the prior year.  These increases were partially  offset by lower
inpatient  utilization  in the  current  six  month  period as  compared  to the
corresponding period in the prior year related to a significant contract with an
HMO focused on the Medicaid beneficiary population.  Such decrease resulted from
the  implementation  of changes in program  management and  modification  of the
clinical  treatment  protocols  applicable  to such  contract.  The  Company  is
continuing  its effort to reduce direct service costs to mitigate the effects of
pricing  pressure  associated with the competitive bid process for new contracts
and  negotiations to extend existing  contracts.  In the second quarter of 1996,
related to this effort, the Company commenced a nationwide recontracting program
with its  participating  facilities  and  providers  in an effort to obtain more
favorable rates.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased by $6.6 million,  or 28.2%, to $30.0 million
for the six months  ended March 31,  1996 from $23.4  million for the six months
ended  March  31,  1995.  As a  percentage  of  revenue,  selling,  general  and
administrative  expenses  decreased  to 13.5% for the  current  year period from
14.2% in the prior year  period.  The  increase  in total  selling,  general and
administrative  expenses was  primarily  attributable  to growth in  information
systems staff,  marketing and sales administrative staff, corporate and regional
management and support systems associated with the higher sales volume.  Because
a large  portion  of these  expenses  are  fixed in nature  and do not  increase
directly with additional revenue,  selling,  general and administrative expenses
decreased as a percentage of revenue.

Amortization  of  Intangibles.  Amortization  of  intangibles  increased by $2.5
million, or 24.3%, to $12.8 million for the six months ended March 31, 1996 from
$10.3  million  for the six  months  ended  March 31,  1995.  The  increase  was
primarily  due  to  an  increase  in  amortization  of  goodwill  recognized  in
connection with the  acquisitions of Choate and ProPsych and the Company's joint
venture with Empire Blue Cross and Blue  Shield,  as well as to increases in the
amortization of deferred contract start-up costs related to new contracts.

Other Income  (Expense).  For the six months ended March 31, 1996,  other income
and expense  consisted of (i) interest  expense of $11.5  million  incurred as a
result of the  increase in  long-term  debt  resulting  from the merger with MDC
Acquisition  Corp.  (the  "Merger");   (ii)  merger  expenses  of  $4.0  million
consisting  primarily of professional  and advisory fees; and (iii) interest and
other income of $1.3 million  relating  primarily to investment  earnings on the
Company's short-term investments and restricted cash balances.

Income  Taxes.  The Company  recorded a benefit for income  taxes during the six
months  ended  March 31,  1996 based  upon the  Company's  pre-tax  loss in such
period.  The  resulting  income tax  benefit  has been  partially  offset by the
nondeductible nature of certain merger costs.

Cumulative Effect of Accounting  Change.  Effective October 1, 1995, the Company
changed its method of  accounting  for deferred  start-up  costs  related to new
contracts or expansion of existing  contracts (i) to expense  costs  relating to
start-up  activities incurred after commencement of services under the contract,
and (ii) to limit the  amortization  period for deferred  start-up  costs to the
initial  contract  period.  Prior to October 1, 1995,  the  Company  capitalized
start-up costs related to the completion of the provider  networks and reporting
systems beyond  commencement of contracts and, in limited  instances,  amortized
the  start-up  costs  over a period  that  included  the  initial  renewal  term
associated with the contract.  Under the new policy,  the Company does not defer
contract  start-up  costs  after  contract  commencement  or include the initial
renewal  term in the  amortization  period.  The change was made to increase the
focus on controlling costs associated with contract start-ups.

The Company  recorded a pre-tax  charge of $1,769  ($1,012  after  taxes) in its
fiscal 1996 first  quarter  results of  operations  as a cumulative  effect of a
change in  accounting.  The pro forma  impact of this  change on the prior years
presented would be to increase costs and expenses by $776 ($444 after taxes) for
both the three  months and six months  ended March 31,  1995.  The effect of the
change on the current year periods presented cannot be reasonably estimated.

Liquidity and Capital Resources

For the six months ended March 31, 1996,  operating  activities provided cash of
approximately  $16.2 million,  investing  activities used cash of  approximately
$15.6 million and financing activities provided cash of $24.8 million, resulting
in a net  increase  in cash and cash  equivalents  of $25.4  million.  Investing
activities in the current six month period consisted  principally of (i) capital
expenditures  of $11.4  million  related  to the  continued  development  of the
Company's  new  information  systems and  expansion  of the  Company's  National
Service Center;  (ii) payments totaling $1.2 million for funding under the joint
ventures with Neighborhood Health Providers, LLC and Community Health Network of
Connecticut, Inc.; (iii) payments totaling $11.1 million for the acquisitions of
Choate and  ProPsych;  and (iv) a net  decrease  of $7.9  million  in  long-term
restricted cash primarily due to the  reclassification  of the Company's surplus
cash balance with the State of Iowa to cash and cash equivalents.

In October 1995, the Company  completed a merger with MDC  Acquisition  Corp., a
company  formed by Kohlberg  Kravis Roberts & Co., L.P.  ("KKR").  In connection
with the Merger, Merck & Co., Inc. ("Merck") received $333.2 million in cash and
retained  approximately 15% of the common stock of the post-Merger  Company. The
Merger was financed  with $115.0  million of new cash equity from  affiliates of
KKR and Company  management.  The balance of the  transaction  was funded with a
$75.0 million  bridge loan (the "Bridge  Loan")  provided by an affiliate of KKR
and $155.0  million of initial  borrowings  under a $205.0 million senior credit
facility.  The aforementioned  proceeds were utilized to redeem common stock for
$259.0 million,  repay amounts due Merck of $70.8 million,  and pay certain fees
and expenses  relate to the Merger.  In November 1995, the Company issued $100.0
million  aggregate  principal  amount of 11 1/2% senior  subordinated  notes due
2005,  the net  proceeds  of which were  applied to repay the Bridge  Loan and a
portion of the revolving loans under the senior credit facility. As of March 31,
1996,  $26.5  million of  revolving  loans and $0.4 million of letters of credit
were  outstanding   under  the  Company's   revolving   credit   facility,   and
approximately $58.1 million was available for future borrowing.  Adjusted EBITDA
(as defined in the covenants contained in the indenture for the Notes) increased
by $4.6 million, or 67.6%, to $11.4 million for the three months ended March 31,
1996 from $6.8 million for the three  months  ended March 31, 1995.  For the six
months ended March 31, 1996,  Adjusted  EBITDA  increased  by $7.2  million,  or
47.4%,  to $22.4  million from $15.2  million for the  comparable  period in the
prior year.

On October 5, 1995, the Company acquired Choate for $8.7 million; the Company is
obligated  to make  contingent  payments  relating  to  Choate  based on  future
financial  performance.  On December 19, 1995, the Company acquired ProPsych for
an initial payment of $0.1 million and a payment of $2.9 million made in January
1996; the Company is obligated to make contingent  payments relating to ProPsych
based on future  financial  performance.  From  time to time,  the  Company  has
engaged in and continues to engage in  preliminary  discussions  with respect to
potential acquisitions.

As of March 31,  1996,  the  Company  had total cash  balances  (including  cash
equivalents)  of $50.5  million,  of which $32.0  million was  restricted  under
certain contractual,  fiduciary and regulatory  requirements;  moreover, of such
amount,  $4.5  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, 1996, the Company also
held a  surplus  cash  balance,  classified  as cash  and cash  equivalents,  as
required by the contract with the State of Iowa to provide managed mental health
services to that state's Medicaid population (the "Iowa Mental Health Contract")
held by the Company.

Historically,  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.  The Company
expects to finance its capital  requirements in the future through existing cash
balances,  cash  generated from  operations  and borrowings  under its revolving
credit  facility.  Based upon the current  level of operations  and  anticipated
growth,  the Company  believes that  available  cash,  together  with  available
borrowings  under its 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 through the foreseeable future.


                 PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

The Company  currently  is involved  in legal  proceedings  relating to the Iowa
Mental Health Contract. The proceedings arose out of the initial decision of the
Iowa Department of Human Services (the "Iowa DHS") in May 1994 to award the Iowa
Mental Health Contract to Value Behavioral Health, Inc. (the "Competitor").  The
Company  contested the decision to award the Iowa Mental Health  Contract to the
Competitor on the basis that,  among other things,  the  Competitor  should have
been  disqualified from competing for the Iowa Mental Health Contract because of
certain  conflicts of interest in the bidding process for the Iowa Mental Health
Contract.  After the Iowa DHS  denied the  Company  administrative  relief,  the
Company  filed suit in the  District  Court of Iowa for Polk  County  (the "Iowa
District Court"), requesting that the entry into the Iowa Mental Health Contract
by the Iowa DHS and the  Competitor be stayed  pending the court's  ruling.  The
Iowa District Court granted the Company's stay motion. Subsequently, in a ruling
entered in October 1994,  the Iowa District  Court  disqualified  the Competitor
from  performing  services  under the Iowa  Mental  Health  Contract  because of
various conflicts of interest.  After the Iowa District Court decision, the Iowa
DHS  withdrew  the  initial  award of the Iowa  Mental  Health  Contract  to the
Competitor and, in November 1994, awarded the Iowa Mental Health Contract to the
Company.  The  Competitor  appealed the Iowa District Court decision to the Iowa
Supreme  Court and  requested  that the Iowa Supreme  Court stay the Iowa Mental
Health  Contract  between  the Iowa DHS and the  Company.  The  Competitor  also
commenced an administrative proceeding with the Iowa DHS to contest the award of
the Iowa  Mental  Health  Contract  to the  Company.  The Iowa  DHS  denied  the
Competitor's  protest  and the Iowa  Supreme  Court  denied  the stay  motion in
December  1994.  In  January  1995,  the  Company  and the Iowa DHS  signed  the
definitive  Iowa  Mental  Health  Contract  and,  on March 1, 1995,  the Company
commenced services thereunder.

The Competitor's appeal of the October 1994 Iowa District Court decision and its
challenge  of the  administrative  decision  by the Iowa  DHS to award  the Iowa
Mental  Health  Contract to the Company have been  consolidated  and are pending
before the Iowa Supreme  Court.  The Iowa Supreme Court is expected to rule upon
the  Competitor's  appeal  sometime in 1996.  There can be no assurance that the
Iowa  Supreme  Court  will  not  overturn  the  Iowa  District   Court's  ruling
disqualifying the Competitor or that, should the Iowa District Court decision be
overturned, the Iowa DHS will not terminate the Iowa Mental Health Contract with
the Company. The Iowa Mental Health Contract, which is terminable for any reason
by the Iowa DHS upon 60 days notice,  generated revenue of $20.8 million for the
six months ended March 31,  1996.  In  connection  with  entering  into the Iowa
Mental Health Contract,  the Company agreed to indemnify the Iowa DHS for 50% of
certain damages and related  expenses (up to a maximum payment by the Company of
$2.5 million) that the Iowa DHS incurs, if any, as a result of awarding the Iowa
Mental  Health  Contract to the Company.  Termination  of the Iowa Mental Health
Contract  or a material  damage  award  relating  thereto  could have a material
adverse effect on the Company.

ITEM 5.  OTHER INFORMATION

In March 1996, Richard S. Chung, M.D., the Company's Executive Vice
President and Chief Clinical Officer, informed the Company that he will be
leaving the Company on May 31, 1996.  Further, in connection with the
departure of Shannon R. Kennedy, Ph.D. from the Company on April 1, 1996,
the Company purchased all shares of Common Stock acquired by Dr. Kennedy
on October 5, 1995 in connection with the Merger.  Dr. Kennedy formerly held
the positions of Director, President and Chief Operating Officer of the
Company.

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

(a) Exhibits

     Exhibits  required  in  accordance  with  Item  601 of  Regulation  S-K are
incorporated  by reference  herein as filed with the  Registrant's  Registration
Statement in Form S-4 (no. 33-80987) dated March 20, 1996.

     In addition, the Company has filed herewith the following exhibits:

     10.31  Amisys  Implementation  and Systems  Integration  Services Agreement
            between  Perot  Systems   Corporation  and  Merit   Behavioral  Care
            Corporation,  dated  effective as of January 12, 1996  (confidential
            treatment requested).

     18     Letter regarding change in accounting principles of Deloitte
            & Touche LLP.

     27     Financial Data Schedule (electronic filing only).

(b) Reports on Form 8-K

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


                           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: December 4, 1996         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)