<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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 October 31, 1998
                               
                                       OR

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

For the transition period from ____________________ to _________________________

                         Commission file number 0-20488
                                                -------

                                 PMR CORPORATION
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                                        <C>
                Delaware                                       23-2491707
---------------------------------------------             -------------------
(State or Other Jurisdiction of Incorporation              (I.R.S. Employer 
or Organization)                                          Identification No.)
</TABLE>

501 Washington Street, 5th Floor San Diego, California 92103
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)          (Zip Code)

Registrant's Telephone Number, Including Area Code 619-610-4001
                                                   ------------

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

        Indicate by check [X] 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 [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

        At November 30, 1998, PMR Corporation had 6,987,751 shares of common
stock outstanding.



<PAGE>   2

                                 PMR CORPORATION

                                      INDEX


<TABLE>
<CAPTION>
PART I                              FINANCIAL INFORMATION                   Page
<S>            <C>             <C>                                          <C>
               Item 1.                                              
               Financial       Condensed Consolidated Balance
               Statements      Sheets as of  October 31, 1998                1
                               (Unaudited) and April 30, 1998

                               Condensed Consolidated Statements
                               of Income for the three and six
                               month periods ended October 31,
                               1998 and 1997 (Unaudited)                     2

                               Condensed Consolidated Statements
                               of Cash Flows for the six months
                               ended October 31, 1998 and 1997
                               (Unaudited)                                   3

                               Notes to Condensed Consolidated
                               Financial Statements (Unaudited)              4

               Item 2.         Management's Discussion and
                               Analysis of Financial Condition and
                               Results of Operations                         6

               Item 3.         Quantitative and Qualitative                  16
                               Disclosures about Market Risks

PART II        OTHER INFORMATION

               Item 1.         Legal Proceedings                             17
               Item 2.         Changes in Securities and Use of              17
                               Proceeds
               Item 3.         Defaults Upon Senior Securities               17
               Item 4.         Submission of Matters to a Vote of            17
                               Security Holders
               Item 5.         Other Information                             17
               Item 6.         Exhibits and Reports on Form 8-K            17-18
</TABLE>



<PAGE>   3
                         PART I - FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

                                 PMR CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      OCTOBER 31,             APRIL 30,
                                                                                         1998                   1998
                                                                                     ------------           ------------
                                                                                                              (Restated)
<S>                                                                                  <C>                    <C>         
ASSETS
Current assets:
   Cash and cash equivalents                                                         $ 29,228,186           $ 18,522,859
   Short-term investments, available-for-sale                                           9,343,280             20,257,045
   Accounts receivable, net of allowance for uncollectible amounts
      of $10,869,082 in 1999 and $9,081,610 in 1998                                    23,618,298             16,655,759
   Prepaid expenses and other current assets                                              958,488              1,192,144
   Deferred income tax benefit                                                          4,136,000              4,136,000
                                                                                     ------------           ------------
Total current assets                                                                   67,284,252             60,763,807

Furniture and office equipment, net of accumulated depreciation
   of $1,295,563 in 1999 and $1,727,040 in 1998                                         2,811,096              3,492,449
Long-term receivables                                                                   5,141,077              2,976,918
Deferred income tax benefit                                                             2,080,000              2,080,000
Other assets                                                                            1,044,383              1,135,880
                                                                                     ------------           ------------
Total assets                                                                         $ 78,360,808           $ 70,449,054
                                                                                     ============           ============

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable and other current liabilities                                    $    670,656           $    469,462
   Accrued expenses                                                                     2,929,135              2,974,400
   Accrued compensation and employee benefits                                           1,924,909              2,178,693
   Advances from case management agencies                                               1,517,072              1,686,477
   Income taxes payable                                                                 1,496,692              1,304,353
   Payable to related party                                                             6,836,088                     --
                                                                                     ------------           ------------
Total current liabilities                                                              15,374,552              8,613,385

Note payable                                                                              344,687                392,024
Deferred rent expense                                                                      86,173                 87,566
Contract settlement reserve                                                             7,763,810              7,479,993
Minority interest                                                                         511,948                     --

Commitments

Stockholders' equity:
   Common Stock, $.01 par value, authorized shares - 10,000,000; issued and
        outstanding shares - 6,985,769 in 1999 and 6,949,650 in 1998                       69,857                 69,496
   Additional paid-in capital                                                          48,214,747             47,959,557
   Retained earnings                                                                    6,413,784              5,847,033
   Treasury stock, 50,000 shares of common stock at cost                                 (418,750)                    --
                                                                                     ------------           ------------
Total stockholders' equity                                                             54,279,638             53,876,086
                                                                                     ------------           ------------
Total liabilities and stockholders' equity                                           $ 78,360,808           $ 70,449,054
                                                                                     ============           ============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       1
<PAGE>   4

                                 PMR CORPORATION
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED OCTOBER 31,       SIX MONTHS ENDED OCTOBER 31,
                                                            ------------------------------      ------------------------------
                                                                1998              1997              1998              1997
                                                            ------------      ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>               <C>         
Revenue - psychiatric care                                  $ 13,797,558      $ 17,560,514      $ 28,618,615      $ 33,737,294
Revenue - pharmaceutical care                                  8,619,593                --        11,649,558                --
                                                            ------------      ------------      ------------      ------------
     Total revenue                                            22,417,151        17,560,514        40,268,173        33,737,294

Expenses:
     Cost of sales of pharmaceutical products                  6,747,636                --         9,022,755                --
     Direct operating expenses - psychiatric care              9,473,247        12,350,295        19,566,427        23,976,727
     Direct operating expenses - pharmaceutical care           1,210,144                --         1,619,647                --
     Marketing, general and administrative                     2,461,820         2,315,470         5,029,161         4,430,122
     Provision for bad debts                                   1,192,475           758,231         1,908,914         1,421,761
     Depreciation and amortization                               299,333           255,654           538,527           471,268
     Acquisition expense                                       1,774,772                --         1,774,772                --
     Special charge                                             (678,292)               --          (678,292)               --
     Net interest (income) expense                              (482,315)          (87,796)         (991,126)         (176,544)
                                                            ------------      ------------      ------------      ------------
                                                              21,998,820        15,591,854        37,790,785        30,123,334

     Income before minority interest, income taxes
        and cumulative change                                    418,331         1,968,660         2,477,388         3,613,960
     Minority interest                                           272,654                --           511,948                --
                                                            ------------      ------------      ------------      ------------
     Income before income taxes and cumulative change            145,677         1,968,660         1,965,440         3,613,960
     Income tax expense                                           57,000           807,147           806,000         1,481,721
                                                            ------------      ------------      ------------      ------------
     Net income before cumulative change                          88,677         1,161,513         1,159,440         2,132,239

     Cumulative change, net of income tax benefit                     --                --           592,689                --
                                                            ------------      ------------      ------------      ------------
     Net income                                             $     88,677      $  1,161,513      $    566,751      $  2,132,239
                                                            ============      ============      ============      ============


     Earnings per common share before cumulative change
        Basic                                               $       0.01      $       0.22      $       0.17      $       0.41
                                                            ============      ============      ============      ============
        Diluted                                             $       0.01      $       0.19      $       0.16      $       0.36
                                                            ============      ============      ============      ============

     Earnings per common share
        Basic                                               $       0.01      $       0.22      $       0.08      $       0.41
                                                            ============      ============      ============      ============
        Diluted                                             $       0.01      $       0.19      $       0.08      $       0.36
                                                            ============      ============      ============      ============


     Shares used in computing earnings per share
        Basic                                                  6,936,548         5,251,935         6,944,886         5,189,008
                                                            ============      ============      ============      ============
        Diluted                                                7,243,812         5,968,656         7,316,077         5,907,960
                                                            ============      ============      ============      ============
</TABLE>

See notes to condensed consolidated financial statements.



                                       2
<PAGE>   5

                                 PMR CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED OCTOBER 31,
                                                                           1998                   1997
                                                                       ------------           ------------
<S>                                                                    <C>                    <C>         
OPERATING ACTIVITIES
Net income                                                             $    566,751           $  2,132,239
Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
     Acquisition expense                                                  1,774,772                     --
     Special charge                                                        (678,292)                    --
     Depreciation and amortization                                          538,527                471,268
     Provision for bad debts                                              1,908,914              1,421,761
     Cumulative effect of change in accounting principle                    592,689                     --
     Income applicable to minority interest                                 511,948                     --
     Changes in operating assets and liabilities:
           Accounts and notes receivables                               (11,035,612)            (8,134,741)
           Prepaid expenses and other assets                                152,763                204,598
           Accounts payable and accrued expenses                         (1,359,301)                 7,240
           Accrued compensation and employee benefits                      (253,784)              (190,607)
           Advances from case management agencies                          (169,405)              (224,677)
           Payable to related party                                       6,836,088                     --
           Contract settlement reserve                                      283,817              1,283,550
           Income taxes payable                                             604,207                852,462
           Deferred rent expense                                             (1,393)                46,627
                                                                       ------------           ------------
Net cash provided by (used in) operating activities                         272,689             (2,130,280)

INVESTING ACTIVITIES
Proceeds from the sale and maturity of short term investments            46,475,547                     --
Purchases of short term investments                                     (35,561,782)                    --
Purchases of furniture and office equipment                                (689,341)            (1,352,661)
                                                                       ------------           ------------
Net cash provided by (used in) investing activities                      10,224,424             (1,352,661)

FINANCING ACTIVITIES
Proceeds from secondary offering,  net of offering costs                         --             33,307,750
Proceeds from sale of common stock                                          255,551                824,122
Payments on note payable to bank                                            (47,337)                    --
                                                                       ------------           ------------
Net cash provided by (used in) financing activities                         208,214             34,131,872
                                                                       ------------           ------------

Net increase in cash & cash equivalents                                 10,705,327             30,648,931
Cash at beginning of period                                              18,522,859             10,048,203
                                                                       ------------           ------------
Cash at end of period                                                  $ 29,228,186           $ 40,697,134
                                                                       ============           ============
</TABLE>

See notes to condensed consolidated financial statements.



                                       3
<PAGE>   6
                                 PMR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                October 31, 1998

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for audited financial statements.
The balance sheet at April 30, 1998 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position of PMR Corporation ("PMR" or "the Company") have been
included. Operating results for the six months ended October 31, 1998, are not
necessarily indicative of the results that may be expected for the year ending
April 30, 1999. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K/A for the
year ended April 30, 1998.

NOTE B - RECLASSIFICATION

Certain 1998 amounts have been reclassified to conform to the 1999 presentation.

NOTE C - EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which supersedes APB Opinion No. 15. SFAS 128 replaces the
presentation of primary earnings per share (EPS) with "Basic EPS" which includes
no dilution and is based on weighted-average common shares outstanding for the
period. Companies with complex capital structures, including PMR, will also be
required to present "Diluted EPS" that reflects the potential dilution of
securities such as employee stock options and warrants to purchase common stock.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997.

NOTE D - RESTATEMENT

As of April 30, 1998, the Company recorded an accrual for special charges
related to contract losses under certain contracts with Scripps Health. The
Company determined that its estimate of special charges related to contract
losses was overaccrued as of April 30, 1998 because all information available to
the Company was not used in determining the original estimate. The Company has
restated its previously issued financial statements as of April 30, 1998 to
eliminate this overaccrual.


                                        4
<PAGE>   7

The restatement had the effect of reducing previously reported accrued expenses
as of April 30, 1998 by $560,000 to $2,974,000, increased income taxes payable
by approximately $230,000 to $1,304,353, and increasing retained earnings by
approximately $330,000 to $5,847,033. For the year ended April 30, 1998, special
charge expense was reduced by $560,000 which increased the Company's net income
by $330,007 after taxes from $1,458,378 to $1,788,385. The increase in net 
income increased basic EPS for the year ended April 30, 1998 from $.24 as 
previously reported to $.30 and increased diluted EPS from $.22 as previously 
reported to $.27.




                                        5
<PAGE>   8

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

When used in this Quarterly Report on Form 10-Q and in other public statements
by the Company and Company officers, the words "may", "will", "expect",
"anticipate", "continue", "forecast", "estimate", "project", "intend", and
similar expressions are intended to identify forward-looking statements
regarding events and financial trends which may affect the Company's future
operating results and financial position. Such statements are subject to risks
and uncertainties that could cause the Company's actual results and financial
position to differ materially. Among those factors are those discussed below and
in the Company's Annual Report on form 10-K/A for the fiscal year ended April
30, 1998 and the Company's periodic reports and other filings with the
Securities and Exchange Commission. The release of forward-looking statements
will not impose an obligation upon the Company to maintain or update these
statements in the future. The Company shall assume no responsibility to publicly
release the results of any revision of forward-looking statements to reflect
trends or circumstances after the date they are made or to reflect the
occurrence of unanticipated events.

OVERVIEW

        PMR Corporation ("PMR" or "the Company") is a leading manager of
specialized mental health care programs and disease management services designed
to treat individuals diagnosed with a serious mental illness ("SMI"). PMR
manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 35 Outpatient Programs, one
Case Management Program and four Chemical Dependency Programs. In July 1998, the
Company formed a new company called Stadt Solutions, LLC ("Stadt Solutions")
which is jointly owned by PMR and Stadtlander Drug Distribution Co., Inc.
("Stadtlander"). Stadt Solutions offers a specialty pharmacy program for
individuals with SMI, initially serving approximately 6,000 individuals through
13 pharmacies in 13 states. PMR, with Stadt Solutions, operates in approximately
23 states and employs or contracts with more than 400 mental health and
pharmaceutical industry professionals and provides services to approximately
11,000 individuals diagnosed with SMI. PMR believes it is the only private
sector company focused on providing an integrated mental health disease
management model to the SMI population.

        PMR's Outpatient Programs serve as a comprehensive alternative to
inpatient hospitalization and include partial hospitalization and lower
intensity outpatient services. The Case Management Program provides an
intensive, individualized primary care service which consists of a proprietary
case management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.

SOURCES OF REVENUE

        Outpatient Programs. Outpatient Programs operated by PMR are the
Company's primary source of revenue. Revenue under these programs is derived
primarily from services



                                        6
<PAGE>   9

provided under three types of agreements: (i) all-inclusive fee arrangements
based on fee-for-service rates (based on units of service provided) under which
the Company is responsible for substantially all direct program costs; (ii)
fee-for-service arrangements under which the provider maintains responsibility
for a larger extent of direct program costs; and (iii) fixed fee arrangements
where the Company's fee is a fixed monthly sum and the provider assumes
substantially all program costs. The all-inclusive arrangements are in effect at
29 of the 35 Outpatient Programs operated during the second quarter of fiscal
1999 and constituted 69.0% of the Company's psychiatric care revenue for the
three months ended October 31, 1998. Typical contractual agreements with these
providers, primarily acute care hospitals or Community Mental Health Centers
("CMHCs"), require the Company to provide, at its own expense, specific
management personnel for each program site. Patients served by the Outpatient
Programs typically are covered by Medicare.

        Revenue under the Outpatient Program is recognized at estimated net
realizable amounts when services are rendered based upon contractual
arrangements with providers. Under certain of the Company's contracts, the
Company is obligated to indemnify the provider for all or some portion of the
Company's management fees that may not be deemed reimbursable to the provider by
Medicare's fiscal intermediaries. As of October 31, 1998, the Company had
recorded $7.8 million in contract settlement reserves to provide for possible
amounts ultimately owed to its provider customers resulting from disallowance of
costs by Medicare and Medicare cost report settlement adjustments. Such reserves
are classified as non-current liabilities because ultimate determination of
substantially all of the potential contract disallowances is not anticipated to
occur during fiscal 1999.

        Case Management Program. For its Case Management Program in Tennessee,
the Company receives a monthly case rate payment from the managed care
consortiums responsible for managing the Tennessee TennCare Partners State
Medical Managed Care Program ("TennCare") and is responsible for planning,
coordinating and managing psychiatric case management services for its consumers
who are eligible to participate in the TennCare program. The Company also is
responsible for providing a portion of the related outpatient clinical care
under certain of the agreements. Revenues under the TennCare program are
recognized in the period in which the related service is to be provided. These
revenues represent substantially all of the Company's case management revenues.
The Company also operates an urgent care program that receives interim payments
that are adjusted based on inpatient utilization statistics which are compared
to a baseline. Revenues are recognized based on the quarterly calculation of the
statistical trends.

        Chemical Dependency Programs. In Southern California, the Company
contracts primarily with managed care companies and commercial insurers to
provide its outpatient chemical dependency services. The contracts are
structured as fee-for-service or case rate reimbursement and revenue is
recognized in the period in which the related service is delivered.

        Pharmaceutical. In July 1998, the Company and Stadtlander formed Stadt
Solutions, a Delaware limited liability company. Stadt Solutions offers
specialty pharmaceutical services to individuals with SMI and also offers site
management and clinical information services to 



                                        7
<PAGE>   10

pharmaceutical companies, health care providers and public sector purchasers.
Ownership of Stadt Solutions is held 50.1% by PMR and 49.9% by Stadtlander.
Stadtlander is entitled to receive a priority distribution of income
approximately equivalent to the operating income Stadtlander expected to be
generated by Stadtlander's base of approximately 6,000 clients existing at the
time of the formulation of Stadt Solutions. The incremental operating income in
excess of this base, if any, will be distributed equally between the Company and
Stadtlander.

        Stadt Solutions commenced business with operations serving clients
through 13 pharmacies in 13 states offering services to approximately 6,000
clients. These individuals are presently receiving the drug clozaril, an
anti-psychotic for schizophrenia, as well as blood monitoring services. Stadt
Solutions will offer patients expanded services, including dispensing of all of
the pharmaceuticals needed by these individuals and providing disease management
services to improve compliance and education for the patient, the physician and
family members.

RESULTS OF  OPERATIONS - QUARTER  ENDED OCTOBER 31, 1998 COMPARED TO QUARTER 
ENDED OCTOBER 31, 1997

        Revenue - Psychiatric Care. Revenues from psychiatric care for the
quarter ended October 31, 1998 were $13.8 million, a decrease of $3.8 million,
or 21.4%, as compared to the quarter ended October 31, 1997. The Outpatient
Programs recorded revenues of $10.6 million, a decrease of $1.8 million, or
14.4%, from the quarter ended October 31, 1997. The decline in revenues was due
to a net reduction of six outpatient programs versus the year ago quarter. This
reduction was partially offset by an increase in same site revenues of 2.4% in
the Outpatient Programs. The Outpatient Programs operated under an all-inclusive
fee arrangement had operating margins of 38.9% in the quarter ended October 31,
1998 as compared to 40.1% in the quarter ended October 31, 1997. The Case
Management Program recorded revenues of $2.8 million, a decrease of $1.6
million, or 35.7% as compared to the quarter ended October 31, 1997. The
decrease in Case Management revenues was due to the restructuring of the
Company's relationship with Case Management, Inc., a Memphis, Tennessee case
management agency, which substantially reduced the recognized revenue from this
program as well as the termination of two Case Management Programs in Arkansas.
Revenues from the Company's Chemical Dependency Programs were $292,000, a
decrease of 28.2% from the quarter ended October 31, 1997. The decrease in
revenues was associated primarily with the Company's termination of two Chemical
Dependency Programs in Arkansas which generated no revenue in the second quarter
of fiscal 1999.

        Revenue - Pharmaceutical Care. Revenues of $8.6 million from
pharmaceutical care represents sales of pharmaceutical products to approximately
6,000 individuals with SMI through 13 Stadt Solutions pharmacies for the quarter
ended October 31, 1998. Stadt Solutions was formed in July 1998 and, therefore
generated no revenue or expenses for the quarter ended October 31, 1997.

        Cost of Sales of Pharmaceutical Products. Cost of sales of
pharmaceutical products of $6.7 million represent the cost of providing such
products by Stadt Solutions in the quarter ended October 31, 1998.



                                        8
<PAGE>   11

        Direct Operating Expenses - Psychiatric Care. Direct operating expenses
of psychiatric care consist of costs incurred at the program sites and costs
associated with the field management responsible for administering the programs.
Direct operating expenses for the quarter ended October 31, 1998 were $9.5
million, a decrease of $2.9 million, or 23.3%, as compared to the quarter ended
October 31, 1997. As a percentage of psychiatric care revenues, operating
expenses were 68.7%, down from 70.3% for the quarter ended October 31, 1997. The
overall decrease in direct operating expenses and the improvement in the
operating expense ratio was primarily due to the net closing of six Outpatient
Programs, three Case Management Programs and two Chemical Dependency Programs,
which in the aggregate, had lower patient volume and higher expense ratios than
the remaining programs. The Company also restructured its agreement with Case
Management, Inc., a case management agency in Memphis, Tennessee, which reduced
recognized revenue but improved operating margins.

        Direct Operating Expenses - Pharmaceutical Care. Direct operating
expenses of pharmaceutical care of $1.2 million consist of the operating costs
incurred at the 13 Stadt Solutions pharmacies and related billing costs for the
quarter ended October 31, 1998.

        Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses consist of corporate overhead expenses and regional
administrative, development and clinical expenses which are not direct program
expenses. Marketing, general and administrative expenses for the quarter ended
October 31, 1998, were $2.5 million, an increase of $146,000 or 6.3%, as
compared to the quarter ended October 31, 1997. The increase was related to
investment in the home offices to support existing and anticipated programs,
including the Stadt Solutions venture and a managed care initiative in Southern
California. As a percentage of total revenues, marketing, general and
administrative expenses were 11.0% in the quarter ended October 31, 1998, as
compared to 13.2% for the quarter ended October 31, 1997. The decrease in
marketing, general and administrative expenses as a percent of revenue was due
to the significant increase in pharmaceutical revenue without proportionate
increases in administrative expenses.

        Provision for Bad Debts. Expenses related to the provision for bad debts
for the quarter ended October 31, 1998, were $1.2 million, an increase of
$434,000, or 57.3%, as compared to the quarter ended October 31, 1997. The
increase was due to additional reserves against revenue from sales of
pharmaceutical products and to a higher accrual rate for bad debt associated
with certain Outpatient Programs that were subject to a high level of review
from fiscal intermediaries. As a percentage of revenues, the provision for bad
debts increased to 5.3% of revenues in the quarter ended October 31, 1998 from
4.3% in the quarter ended October 31, 1997. The Company expects this accrual to
fluctuate based on the amount of claims under review in its Outpatient Programs
and the number of programs that the Company operates which serve a significant
indigent population.

        Depreciation and Amortization. Depreciation and amortization expenses
for the quarter ended October 31, 1998, were $299,000 an increase of $44,000, or
17.1%, as compared to the quarter ended October 31, 1997. The increase was due
to additional capital expenditures 



                                        9
<PAGE>   12

associated with new Outpatient Programs and increased capital expenditures for
information systems.

        Acquisition Expense. Acquisition expenses consist of legal, advisory,
accounting, consulting and other costs related to the terminated definitive
merger agreement with Behavioral Health Corporation. Previously capitalized
Acquisition expenses written-off for the quarter ended October 31, 1998 were
$1.8 million. No Acquisition expenses were recorded in the quarter ended October
31, 1997.

        Special Charge. Special Charge expenses consist of expenses related to
the closing of several programs identified in the quarter ended April 30, 1998.
Special Charge income of $678,000 was recorded in the quarter ended October 31,
1998, due primarily to a favorable settlement of disputes and the restructuring
of the relationship with Case Management, Inc. The outcome of the dispute, which
was better than anticipated, involved the release of claims against the Company
for certain liabilities, the return of common stock that was issued to the
agency as part of the consideration for a restrictive covenant, and the
establishment of a new contractual relationship that entitles the Company to a
percentage of the agencies future cash flow in exchange for certain services.
The Company has reflected the return of common stock as treasury stock in
stockholders' equity at a value of $418,750. No Special Charge expenses were
recorded in the quarter ended October 31, 1997.

        Net Interest Income. Interest income increased from $88,000 for the
quarter ended October 31, 1997 to $482,000 for the quarter ended October 31,
1998, an increase of $395,000, or 449.4%. This increase resulted from higher
cash and cash equivalent and short-term investment balances resulting from the
completion of the Company's follow-on common stock offering in October 1997.

        Income Before Minority Interest, Income Taxes and Cumulative Change.
Income before minority interest, income taxes and cumulative change decreased
from $2.0 million for the quarter ended October 31, 1997 to $418,000 for the
quarter ended October 31, 1998, a decrease of $1.5 million or 78.8%. Income
before minority interest, income taxes and cumulative change as a percentage of
revenue decreased from 11.2% to 1.9% over this period of time.

        Minority Interest. Minority interest of $272,000 represents a
distribution of the operating profits of Stadt Solutions in its entirety to
Stadtlander.


RESULTS OF OPERATIONS - SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO SIX MONTHS
ENDED OCTOBER 31, 1997

        Revenue - Psychiatric Care. Revenues from psychiatric care for the six
months ended October 31, 1998 were $28.6 million, a decrease of $5.1 million, or
15.2%, as compared to the six months ended October 31, 1997. The Outpatient
Programs recorded revenues of $22.9 million, a decrease of $1.0 million, or
4.2%, from the six months ended October 31, 1997. The decrease in revenues was
due to a net reduction of six outpatient programs versus the year ago



                                       10
<PAGE>   13

quarter. This reduction was partially offset by same site revenue growth of 7.3%
in the Outpatient Programs. The Outpatient Programs operated under an
all-inclusive fee arrangement had operating margins of 38.0% in the six months
ended October 31, 1998 as compared to 40.4% in the six months ended October 31,
1997. The Company's Case Management Programs recorded revenues of $4.9 million,
a decrease of $3.4 million, or 40.7%, from the six months ended October 31,
1997. The decrease in revenues was due to the restructuring of the Company's
relationship with Case Management, Inc. and the termination of two Case
Management Programs in Arkansas. Revenues from the Company's Chemical Dependency
Programs were $595,000, a decrease of 29.0% from the six months ended October
31, 1997. The decrease in revenues was associated primarily with the Company's
termination of two Chemical Dependency Programs in Arkansas.

        Revenue - Pharmaceutical Care. Revenues of $11.6 million from
pharmaceutical care represents sales of pharmaceutical products to approximately
6,000 individuals with SMI through 13 Stadt Solutions pharmacies since its
formation in July 1998.

        Cost of Sales of Pharmaceutical Products. Cost of sales of
pharmaceutical products of $9.0 million represent the cost of providing such
products since the formation of Stadt Solutions in July 1998.

        Direct Operating Expenses - Psychiatric Care. Direct operating expenses
for the six months ended October 31, 1998 were $19.6 million, a decrease of $4.4
million, or 18.4%, as compared to the six months ended October 31, 1997. As a
percentage of psychiatric care revenues, operating expenses were 68.4%, down
from 71.1% for the six months ended October 31, 1997. The overall decrease in
direct operating expenses and the improvement in the operating expense ratio was
primarily due to the net closing of six Outpatient Programs, three Case
Management Programs and two Chemical Dependency Programs, which in the
aggregate, had lower patient volume and higher expense ratios than the remaining
programs. The Company also restructured its agreement with Case Management,
Inc., which reduced recognized revenue but improved operating margins.

        Direct Operating Expenses - Pharmaceutical Care. Direct operating
expenses of pharmaceutical care of $1.6 million consist of the operating costs
incurred at the 13 Stadt Solutions pharmacies and related billing costs since
the formation of Stadt Solutions in July 1998.

        Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for the six months ended October 31, 1998, were $5.0
million, an increase of $599,000 or 13.5%, as compared to the six months ended
October 31, 1997. The increase was related to investment in the home offices to
support existing and anticipated programs, including the Stadt Solutions venture
and a managed care initiative in Southern California. As a percentage of total
revenues, marketing, general and administrative expenses were 12.5% in the six
months ended October 31, 1998, as compared to 13.1% for the six months ended
October 31, 1997. The decrease in marketing, general and administrative expenses
as a percent of revenue was due to



                                       11
<PAGE>   14

the significant increase in pharmaceutical revenue without proportionate
increases in administrative expenses.

        Provision for Bad Debts. Expenses related to the provision for bad debts
for the six months ended October 31, 1998, were $1.9 million, an increase of
$487,000, or 34.3%, as compared to the six months ended October 31, 1997. The
increase was due to additional reserve against revenue from sales of
pharmaceutical products. As a percentage of revenues, the provision for bad
debts increased slightly to 4.7% of revenues in the six months ended October 31,
1998 from 4.2% in the six months ended October 31, 1997. The Company expects
this accrual to fluctuate based on the amount of claims under review in its
Outpatient Programs and the number of programs which the Company operates which
serve a significant indigent population.

        Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended October 31, 1998, were $539,000, an increase of
$67,000, or 14.3%, as compared to the six months ended October 31, 1997. The
increase was due to additional capital expenditures associated with new
Outpatient Programs and increased capital expenditures for information systems.

        Acquisition Expense. Acquisition expenses written-off for the six months
ended October 31, 1998 were $1.8 million.

        Special Charge. Special Charge income of $678,000 was recorded in the
six months ended October 31, 1998, due primarily to a favorable settlement of
disputes with Case Management, Inc. The outcome of the dispute, which was better
than anticipated, involved the release of claims against the Company for certain
liabilities, the return of common stock that was issued to the agency as part of
the consideration for a restrictive covenant, and the establishment of a new
contractual relationship that entitles the Company to a percentage of the
agencies future cash flow in exchange for certain services.

        Net Interest Income. Interest income increased from $176,000 for the six
months ended October 31, 1997 to $991,000 for the six months ended October 31,
1998, an increase of $815,000, or 461.4%. This increase resulted from higher
cash and cash equivalent and short-term investment balances resulting from the
completion of the Company's follow-on common stock offering in October 1997.

        Income Before Minority Interest, Income Taxes and Cumulative Change.
Income before minority interest, income taxes and cumulative change decreased
from $3.6 million for the six months ended October 31, 1997 to $2.5 million for
the six months ended October 31, 1998, a decrease of $1.1 million or 31.5%.
Income before minority interest, income taxes and cumulative change as a
percentage of revenue decreased from 10.7% to 6.2% over this period of time.

        Minority Interest. Minority interest of $512,000 represents a
distribution of the operating profits of Stadt Solutions in its entirety to
Stadtlander.



                                       12
<PAGE>   15

        Cumulative Change. The cumulative change of $593,000 represents the
effect, net of income tax benefit of $412,000, of writing off previously
capitalized start-up costs. The Company adopted this change in accounting
principle in the first six months of fiscal 1999 consistent with the
requirements of Accounting Standards Executive Committee's Statement of Position
98-5 Reporting on Costs of Start-up Activities.

        Restatement. As of April 30, 1998, the Company recorded an accrual for
special charges related to contract losses under certain contracts with Scripps
Health. The Company determined that its estimate of special charges related to
contract losses was overaccrued as of April 30, 1998 because all information
available to the Company was not used in determining the original estimate. The
Company has restated its previously issued financial statements as of April 30,
1998 to eliminate this overaccrual.

LIQUIDITY AND CAPITAL RESOURCES

        For the six months ended October 31, 1998, net cash provided by
operating activities was $273,000. Working capital at October 31, 1998 was $51.9
million, a decrease of $241,000, or .5%, as compared to working capital at April
30, 1998. Cash and cash equivalents and short-term investments at October 31,
1998 were $38.6 million, a decrease of $209,000 or .5% as compared to April 30,
1998.

        The Company experienced growth in accounts receivable due to significant
revenue increases combined with an increase in days revenue outstanding to 97 at
October 31, 1998 (versus 88 at April 30, 1998). The increase in days revenue
outstanding was due to focused reviews of claims by fiscal intermediaries at
several Outpatient Programs, and the restructuring and termination of Case
Management Programs which have historically experienced shorter payment cycles
than the Outpatient Programs. The largest source of accounts receivable growth
has been from Stadt Solutions, which has accumulated $7.5 million in accounts
receivable since the initiation of operations on July 1, 1998. This receivable
growth represents the anticipated working capital investment which will be
funded by the Company and Stadtlanders during the third fiscal quarter. The
other significant use of cash was leasehold improvements associated with
recently opened sites and investment in information technology.

        Working capital available to finance fiscal 1999 obligations is expected
to be provided principally from operations, as well as from a $10 million line
of credit from Sanwa Bank. Interest is payable under this line of credit at
either the bank's reference rate or the Eurodollar rate plus 2%. As of October
31, 1998 no balance was outstanding under the line of credit. Working capital is
anticipated to be utilized during fiscal 1999 to continue expansion of the
Company's Outpatient and Case Management Programs, for expansion of Stadt
Solutions and its site management and clinical information business, and for the
development of a risk based managed care project. Pursuant to the terms of the
Stadt Solutions Subscription Agreement and Operating Agreement, the Company
anticipates investing between $2.5 and $3.0 million into Stadt Solutions to fund
the second closing and provide sufficient working capital for operations.



                                       13
<PAGE>   16

The Company also anticipates using working capital and, if necessary, incurring
indebtedness in connection with, selective acquisitions.

        In December 1998, the Board of Directors authorized the Company to
repurchase up to 350,000 shares of its common stock, approximately 5% of the
Company's outstanding primary shares. Purchased shares will be used for
corporate purposes including issuance under PMR's stock compensation plans. The
purchases will be made from time to time in open market transactions.

        The opening of a new Outpatient Program site typically requires $45,000
to $150,000 for office equipment, supplies, lease deposits, leasehold
improvements and the hiring and training of personnel prior to opening. These
programs generally experience operating losses through an average of the first
four months of operation. The Company expects to provide cash for the start up
of the site management and clinical information business as part of the
formation of Stadt Solutions. The Company also is in the process of developing a
new care management information system that will be a data collection and
repository system for the Company's clinical information. The Company
anticipates investing up to $1,000,000 in this system during fiscal 1999 and
fiscal 2000.

        From time to time, the Company recognizes charges to operations as a
result of particular uncertainties associated with the health care reimbursement
rules as they apply to the Outpatient Programs. During the first six months of
fiscal 1998 and 1999, a majority of the Company's revenue was derived from the
management of its Outpatient Programs. Since substantially all of the patients
of the Outpatient Programs are eligible for Medicare, collection of a
significant component of the Company's management fees is dependent upon
reimbursement of claims submitted to fiscal intermediaries by the hospitals or
CMHCSs on whose behalf these programs are managed. Under the Company's contracts
with its providers, the Company may be responsible to indemnify providers for
the portion of the Company's management fee disallowed for reimbursement
pursuant to warranty obligations that exist with certain providers. Although the
Company believes that its potential liability to satisfy such requirements has
been adequately reserved in its financial statements, the obligation to pay such
amounts, if and when they become due, could have a material adverse effect on
the Company's short term liquidity. Certain factors are, in management's view,
likely to lessen the impact of any such effect, including the expectation that,
if claims arise, they will arise on a periodic basis over several years and that
any disallowance will merely be offset against obligations already owed by the
provider to the Company.

        The Company maintains significant reserves to cover the potential impact
of two primary uncertainties: (i) the Company may have an obligation to
indemnify certain providers for some portions of its management fee which may be
subject to disallowance upon audit of a provider's cost report by fiscal
intermediaries; and (ii) the Company may not receive full payment of the
management fees owed to it by a provider during the periodic review of the
provider's claims by the fiscal intermediaries.



                                       14
<PAGE>   17

        The Company has been advised by Health Care Financing Administration
that certain program-related costs are not allowable for reimbursement. The
Company may be responsible for reimbursement of the amounts previously paid to
the Company that are disallowed pursuant to obligations that exist with certain
providers. Although the Company believes that its potential liability to satisfy
such requirements has been adequately reserved in its financial statements,
there can be no assurance that such reserves will be adequate. The obligation to
pay the amounts estimated within the Company's financial statements (or such
greater amounts as are due), if and when they become due, could have a material
adverse effect upon the Company's business, financial condition and results of
operations

IMPACT OF INFLATION

        A substantial portion of the Company's revenue is subject to
reimbursement rates that are regulated by the federal and state governments and
that do not automatically adjust for inflation. As a result, increased operating
costs due to inflation, such as labor and supply costs, without a corresponding
increase in reimbursement rates, may adversely affect the Company's earnings in
the future.

IMPACT OF YEAR 2000 COMPUTER ISSUES

        The year 2000 issue is the result of computer applications being written
using two digits rather than four to define the applicable year. Certain
computer applications (including computer applications that may be used by the
Company and any of the Company's customers, vendors, payors or other business
partners) may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing disruption
of operations.

        The Company has completed a thorough review of its material computer
applications and has identified and scheduled necessary corrections for its
computer applications. Corrections are currently being made and are expected to
be substantially implemented by the third quarter of fiscal 1999. The Company
expects that the total cost associated with these revisions will not be
material. These costs will be primarily incurred during fiscal 1999 and be
charged to expense as incurred. For externally maintained systems, the Company
has begun working with vendors to ensure that each system is currently year 2000
compliant or will be made year 2000 compliant in early 1999. The cost to be
incurred by the Company related to externally maintained systems is expected to
be minimal. Externally maintained systems which the Company currently relies
include environmental and building systems related to its headquarters and field
offices, payroll, banking and billing systems.

        The Company believes that by completing its planned corrections to its
computer applications and identifying and confirming the correction of year 2000
compliance problems of its vendors, the year 2000 issue with respect to the
Company's systems and externally maintained systems can be mitigated. However,
if such corrections cannot be completed on a timely basis, the year 2000 issue
could have a material adverse impact on the Company's business, financial
condition and results of operations. Because of the many uncertainties



                                       15
<PAGE>   18

associated with year 2000 compliance issues, and because the Company's
assessment is necessarily based on information from third party lessors,
manufactures, vendors and suppliers, there can be no assurance that the
Company's assessment is correct and it is not possible to predict the
materiality or effect of any failure of such assessment to be correct.

        Significant failures or erroneous applications experienced by HCFA or
other third party payors or providers could cause a delay in the Company's
receipt of payments from its customers. For example, such failures could cause
difficulties in processing Medicare or other claims in a timely manner,
collecting accurate claims or data or enrolling new patients. The Company has
initiated a program to determine whether the computer applications of its
significant payors and contract providers are year 2000 compliant or will be
upgraded to be compliant in a timely manner. The Company has not completed this
review and it is unknown whether computer applications of contract providers and
HCFA and other payors will be year 2000 compliant. Although the Company has not
determined the extent to which any disruptions as described above could affect
the Company's operations, any such disruption could have a substantial adverse
impact on Medicare or Medicaid payments to providers and, in turn, payments to
the Company, resulting in a material adverse effect upon the Company's business,
financial condition and results of operations.

        The Company's priority with respect to year 2000 compliance has been to
identify potential processing concerns and to evaluate the risk of processing
failure. The Company has begun to develop contingency plans relating to the
areas of year 2000 risk exposure and expects to substantially complete such
plans by the second quarter of fiscal 2000. However, there can be no assurance
that the Company will complete it contingency planning within such time period
or that its contingency plans will contemplate all possible risks of any
failures related to the year 2000 problem.

Item 3. Quantitative and Qualitative Disclosures about Market Risk 
        Not Applicable.



                                       16
<PAGE>   19

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

        The Company's arbitration and disputes with Case Management, Inc., a
case management agency in Memphis, Tennessee previously disclosed by the Company
under Item 3. "Legal Proceedings" of its Annual Report on Form 10-K/A for the
year ended April 30, 1998 (the "1998 Form 10-K/A"), have been settled, and the
Company has entered into a new service agreement with the case management
agency.

        The Company received a letter from the U.S. Attorney for the Northern
District of Texas dated October 7, 1998, notifying the Company that the U.S.
Attorney declined to pursue any claims under the False Claims Act related to the
Company's former Dallas program (previously disclosed under Item 3. "Legal
Proceedings" of the 1998 Form 10-K/A).

        On September 9, 1998, the U.S. Attorney for the Southern District of
California filed a Notice of Election of the United States to Decline
Intervention relating to its decision not to intervene in the qui tam suit filed
by the former employee of the Company. (The qui tam suit was also previously
disclosed under Item 3. "Legal Proceedings" of the 1998 form 10-K/A). The
Company has not been served with a summons and complaint by the qui tam relator.

Item 2 - Changes in Securities and Use of Proceeds
         None

Item 3 - Defaults upon Senior Securities
         None

Item 4 - Submission of Matters to a Vote of Security Holders
         None

Item 5 - Other Information
         None

Item 6 - Exhibits and Reports on Form 8-K

(a)      Exhibits

         Exhibit  Number:  27.1      Financial Data Schedule

(b)      Reports on Form 8-K

         During the second quarter of fiscal 1999, the Company filed the
following reports on Form 8-K:



                                       17
<PAGE>   20

1.       Report on Form 8-K dated August 4, 1998 and filed on August 5, 1998
         announcing the definitive merger agreement between the Company and
         Behavioral Healthcare Corporation.



                                       18
<PAGE>   21

                                   SIGNATURES

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

Dated: December 17, 1998
                                        PMR CORPORATION


                                        BY: /s/ Allen Tepper
                                            ------------------------------------
                                            ALLEN TEPPER
                                            Chief Executive Officer
                                            (Principal Executive Officer)


                                        BY: /s/ Mark P. Clein
                                            ------------------------------------
                                            MARK P. CLEIN
                                            Chief Financial Officer
                                            (Principal Financial Officer)



                                       19