<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 July 31, 1999
                                                 -------------

                                       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>
<CAPTION>
                DELAWARE                                    23-2491707
    -------------------------------                      ------------------
<S>                                                      <C>
    (State or Other Jurisdiction of                        (IRS Employer
     Incorporation 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 August 31, 1999, PMR Corporation had 6,988,878 shares of common stock
outstanding.

<PAGE>   2

                                 PMR CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
PART I                    FINANCIAL INFORMATION                              Page
<S>                  <C>                                                     <C>

        Item 1.      Financial Statements

                     Condensed Consolidated Balance Sheets as
                     of  July 31, 1999 (Unaudited) and April 30,
                     1999                                                      1

                     Condensed Consolidated Statements of
                     Operations for the quarter ended July 31,
                     1999 and 1998 (Unaudited)                                 2

                     Condensed  Consolidated  Statements  of
                     Cash Flows for the three  months  ended
                     July 31, 1999 and 1998 (Unaudited)                        3

                     Notes to Condensed Consolidated Financial
                     Statements (Unaudited)                                    4

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

        Item 3.      Quantitative and Qualitative Disclosures
                     about Market Risks                                       14

PART II OTHER INFORMATION

        Item 1.      Legal Proceedings                                        15
        Item 2.      Changes in Securities and Use of Proceeds                15
        Item 3.      Defaults Upon Senior Securities                          15
        Item 4.      Submission of Matters to a Vote of Security
                     Holders                                                  15
        Item 5.      Other Information                                        15
        Item 6.      Exhibits and Reports on Form 8-K                         15
</TABLE>

<PAGE>   3

                         PART I -- FINANCIAL INFORMATION
ITEM 1.                        FINANCIAL STATEMENTS

                                 PMR CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            JULY 31,                 APRIL 30,
                                                                                              1999                     1999
                                                                                         ------------             ------------
ASSETS                                                                                    (UNAUDITED)               (AUDITED)
<S>                                                                                      <C>                      <C>
Current assets:
    Cash and cash equivalents                                                            $  3,183,493             $  5,441,012
    Short-term investments, available for sale                                             26,334,969               27,509,554
    Accounts receivable, net of allowance for uncollectible amounts
       of $13,330,000 in 2000 and $10,664,000 in 1999                                      22,027,232               20,002,894
    Prepaid expenses and other current assets                                               2,028,391                1,787,859
    Income taxes receivable                                                                 2,750,858                2,212,815
    Deferred income tax benefit                                                             4,653,000                4,653,000
                                                                                         ------------             ------------
Total current assets                                                                       60,977,943               61,607,134

Furniture and office equipment, net of accumulated depreciation
       of $1,599,000 in 2000 and $1,532,000 in 1999                                         3,116,940                2,863,934
Long-term receivables, net of allowance for uncollectible amounts
      of  $3,528,000  in 2000 and $4,087,000 in 1999                                        5,057,636                4,742,329
Deferred income tax benefit                                                                 1,206,000                1,206,000
Other assets                                                                                  522,883                  546,621
                                                                                         ------------             ------------
Total assets                                                                             $ 70,881,402             $ 70,966,018
                                                                                         ============             ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

    Accounts payable                                                                     $  1,142,242             $  1,539,327
    Accrued expenses                                                                        2,671,025                1,852,335
    Accrued compensation and employee benefits                                              2,082,172                2,083,082
    Advances from case management agencies                                                    829,684                  846,353
    Payable to related party                                                                4,782,264                3,052,610
                                                                                         ------------             ------------
Total current liabilities                                                                  11,507,387                9,373,707

Note payable                                                                                  270,360                  294,073
Deferred rent expense                                                                          52,194                   53,438
Contract settlement reserve                                                                 6,689,922                6,672,727
Minority interest                                                                           1,451,313                1,921,057

Commitments

Stockholders' equity:

    Convertible preferred stock, $.01 par value, authorized shares --
      1,000,000; issued & outstanding shares -- none in 2000 and 1999                              --                       --
    Common Stock, $.01 par value, authorized shares -- 19,000,000; issued and
      outstanding shares -- 6,988,878 in 2000 and in 1999                                      69,889                   69,889
    Additional paid-in capital                                                             48,123,385               48,123,385
    Retained earnings                                                                       4,409,452                5,400,242
    Treasury stock, 340,000 shares of common stock at cost                                 (1,692,500)                (942,500)
                                                                                         ------------             ------------
Total stockholders' equity                                                                 50,910,226               52,651,016
                                                                                         ------------             ------------
Total liabilities and stockholders' equity                                               $ 70,881,402             $ 70,966,018
                                                                                         ============             ============
</TABLE>

          See notes to condensed consolidated financial statements


                                       1
<PAGE>   4

                                 PMR CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          Three months ended July 31,
                                                                       ---------------------------------
                                                                           1999                 1998
                                                                       ------------         ------------
<S>                                                                    <C>                  <C>
Revenue -- psychiatric care                                            $ 12,823,964         $ 14,821,057
Revenue -- pharmaceutical care                                            9,599,625            3,029,965
                                                                       ------------         ------------
        Total revenue                                                    22,423,589           17,851,022

Costs and expenses:

       Direct operating expenses -- psychiatric care                      9,978,457           10,093,180
       Cost of sales -- pharmaceuticals                                   7,231,410            2,275,119
       Direct operating expenses -- pharmaceuticals                       1,179,556              409,503
       Marketing, general and administrative                              3,586,286            2,567,341
       Provision for bad debts                                            1,877,444              716,439
       Depreciation and amortization                                        279,528              239,194
       Special charge                                                       816,574                   --
       Net interest (income)                                               (377,132)            (508,811)
                                                                       ------------         ------------
                                                                         24,572,123           15,791,965
     Income (loss) before minority interest, income taxes
         and cumulative change                                           (2,148,534)           2,059,057
     Minority interest                                                     (469,744)             239,294
                                                                       ------------         ------------
     Income (loss) before income taxes and cumulative change             (1,678,790)           1,819,763
     Income tax (benefit) expense                                          (688,000)             749,000
                                                                       ------------         ------------
     Net income (loss) before cumulative change                            (990,790)           1,070,763
     Cumulative change, net of income tax benefit                                --              592,689
                                                                       ------------         ------------
     Net Income (loss)                                                 $   (990,790)        $    478,074
                                                                       ============         ============
     Earnings (loss) per common share before cumulative change:
          Basic                                                        $      (0.15)        $       0.15
                                                                       ============         ============
          Diluted                                                      $      (0.15)        $       0.15
                                                                       ============         ============
     Earnings (loss) per common share :
          Basic                                                        $      (0.15)        $       0.07
                                                                       ============         ============
          Diluted                                                      $      (0.15)        $       0.07
                                                                       ============         ============
     Shares used in computing earnings (loss) per share:
          Basic                                                           6,667,356            6,953,225
                                                                       ============         ============
          Diluted                                                         6,667,356            7,320,778
                                                                       ============         ============
</TABLE>


     See notes to condensed consolidated financial statements

                                       2
<PAGE>   5

                                 PMR CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       JULY 31,             JULY 31,
                                                                         1999                 1998
                                                                     ------------         ------------
<S>                                                                  <C>                  <C>
OPERATING ACTIVITIES
Net income (loss)                                                    $   (990,790)        $    478,074
Adjustments to reconcile net income to net cash
      used in operating activities:
      Provision for bad debts                                           1,877,444              716,439
      Depreciation and amortization                                       279,528              239,194
      Special charge                                                      816,574                   --
      Cumulative effect of change in accounting principle                      --              592,689
      Income (loss) applicable to minority interest                      (469,744)             239,294
      Deferred income taxes                                              (538,043)             (13,099)
      Changes in operating assets and liabilities:
           Accounts and notes receivables                              (4,217,090)          (5,011,035)
           Prepaid expenses and other assets                             (245,399)            (403,285)
           Accounts payable and accrued expenses                         (394,969)            (673,986)
           Accrued compensation and employee benefits                        (910)            (121,340)
           Advances from case management agencies                         (16,669)              94,247
           Payable to related party                                     1,729,654            2,677,539
           Contract settlement reserve                                     17,195              170,933
           Income taxes receivable/payable                                     --              712,338
           Deferred rent expense                                           (1,245)               3,757
                                                                     ------------         ------------
Net cash used in operating activities                                  (2,154,464)            (298,241)

INVESTING ACTIVITIES
Proceeds from the sale and maturity of short term investments           2,566,148                   --
Purchases of short term investments                                    (1,391,563)          (2,146,237)
Purchases of furniture and office equipment                              (503,927)            (494,726)
                                                                     ------------         ------------
Net cash provided by (used in) investing activities                       670,658           (2,640,963)

FINANCING ACTIVITIES
Proceeds from sale of common stock                                             --               42,530
Payments on note payable to bank                                          (23,713)             (23,774)
Acquisition of treasury stock                                            (750,000)                  --
                                                                     ------------         ------------
Net cash provided (used in) by financing activities                      (773,713)              18,756
                                                                     ------------         ------------
Net increase (decrease) in cash                                        (2,257,519)          (2,920,448)
Cash at beginning of period                                             5,441,012           18,522,859
                                                                     ------------         ------------
Cash at end of period                                                $  3,183,493         $ 15,602,411
                                                                     ============         ============
</TABLE>

           See notes to condensed consolidated financial statements


                                       3
<PAGE>   6

                                 PMR CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                  July 31, 1999

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 condensed consolidated balance sheet at April 30, 1999 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 three months ended July
31, 1999, are not necessarily indicative of the results that may be expected for
the year ending April 30, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended April 30, 1999.

                                       4
<PAGE>   7

NOTE B -- EARNINGS PER SHARE

Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic EPS includes no dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the entity. The Company has
calculated its earnings per share in accordance with SFAS No. 128 for all
periods presented.

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                      July 31,
                                                          -------------------------------
                                                               1999               1998
                                                          -------------------------------
<S>                                                       <C>                 <C>
Numerator
Net income (loss) available to common shareholders        $  (990,790)        $   478,074
                                                          ===========         ===========

Denominator:
Weighted average shares outstanding for basic
  earnings per share                                        6,667,356           6,953,225
                                                          -----------         -----------
Effects of dilutive securities
  Employee stock options and warrants                               0             367,553
                                                          -----------         -----------
Dilutive potential common shares                                    0             367,553
Shares used in computing diluted earnings per
  common share                                              6,667,356           7,320,778
                                                          ===========         ===========
Earnings (loss) per common share, basic                   $     (0.15)        $      0.07
                                                          ===========         ===========
Earnings (loss) per common share, diluted                 $     (0.15)        $      0.07
                                                          ===========         ===========
</TABLE>

Common stock equivalents of 20,638 shares for the quarter ended July 31, 1999
were excluded from the calculation of diluted earnings per share because of the
anti-dilutive effect related to the net loss for the quarter.

                                       5
<PAGE>   8

NOTE C -- DISCLOSURES ABOUT REPORTABLE SEGMENTS

In accordance with the criteria of SFAS No. 131,  Disclosures  About Segments of
an Enterprise and Related  Information,  the Company determined that it operates
in three reportable segments:  Outpatient Programs, Case Management Programs and
Pharmaceuticals.  The Company's reportable segments are strategic business units
that  offer  different  services  to  a  variety  of  inpatient  and  outpatient
recipients.  Activities  classified as Other in the following schedule relate to
primarily unallocated home office items and activity from the Company's chemical
dependency and other programs.

A summary of segment activity is as follows:

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                             July 31,
                                    -----------------------------------------------------------------------------------------
                                                           Case
                                      Outpatient         Management      Pharmaceutical
                                       Programs           Programs            Care                Other              Total
                                    -----------------------------------------------------------------------------------------
<S>                                 <C>                 <C>               <C>                 <C>                <C>
1999
Revenues                              $  9,249,795      $  3,087,983      $  9,599,625        $    486,186       $ 22,423,589

Income (loss) before income taxes
 and cumulative change                   1,788,373           111,373          (471,626)         (3,106,910)        (1,678,790)

1998
Revenues                              $ 12,252,493      $  2,096,647      $  3,029,965        $    471,917       $ 17,851,022

Income (loss) before income taxes
 and cumulative change                   3,403,116            20,049                 0          (1,603,402)         1,819,763
</TABLE>

                                       6
<PAGE>   9

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 for the fiscal year ended April 30,
1999 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 and
administers the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of a total of 41 Outpatient
Programs, two Case Management Programs and four Chemical Dependency Programs.
Stadt Solutions, LLC ("Stadt Solutions"), the Company's majority owned
subsidiary with Stadt Holdings (formerly Stadtlander Drug Distribution Co.,
Inc.) ("Stadtlander"), offers a specialty pharmacy program for individuals with
SMI, which presently serves approximately 7,500 individuals through fifteen
pharmacies in fourteen states. Stadt Solutions received the Company's clinical
research and information business upon formation. PMR, including Stadt
Solutions, operates in approximately twenty-five states and employs or contracts
with more than 400 mental health and pharmaceutical professionals and provides
services to approximately 11,000 individuals diagnosed with SMI.

SOURCES OF REVENUE

Outpatient Programs. Outpatient Programs managed or administered by PMR are the
Company's primary source of revenue. Revenue under these programs is derived
primarily from services 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 large 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 36 of the 41 Outpatient Programs operated during the first
quarter and constituted 67.8% of the Company's psychiatric care revenue for the
three months ended July 31, 1999. These contractual agreements are with
hospitals or

                                       7
<PAGE>   10

Community Mental Health Centers ("CMHCs"), and 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 fees that may not be deemed reimbursable to the provider by Medicare's
fiscal intermediaries. At July 31, 1999, the Company had recorded $6.7 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
2000.

     Case Management Programs. For its Case Management Programs in Tennessee,
the Company receives a monthly case rate fee from the managed care consortiums
responsible for managing the Tennessee TennCare Partners State Medical Managed
Care Program ("TennCare") and is responsible for the administration, provision
or arranging for the provision of psychiatric case management services and
related outpatient clinical care for consumers who are eligible to participate
in the TennCare program. Revenue under the TennCare program is 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 urgent care
program receives interim payments, which 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.

     Pharmaceuticals. Through Stadt Solutions, the Company offers specialty
pharmaceutical services to individuals with SMI. Stadt Solutions also offers
site management and clinical information services to pharmaceutical companies,
health care providers and public sector purchasers. Stadt Solutions serves
clients through a variety of pharmacies offering anti-psychotic or other
medications for individuals with schizophrenia or other serious mental illnesses
as well as offering blood monitoring services. Stadt Solutions will seek to
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. Stadt Solutions records pharmaceutical revenue when the product
is sold to customers at pharmacies, net of any estimated contractual allowances.

     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.

                                       8
<PAGE>   11

RESULTS OF OPERATIONS -- QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED
JULY 31, 1998

     Revenue -- Psychiatric Care. Revenues from psychiatric care decreased from
$14.8 million for the quarter ended July 31, 1998 to $ 12.8 million for the
quarter ended July 31, 1999, a decrease of $ 2.0 million, or 13.5%. The
Outpatient Programs recorded revenues of $9.2 million, a decrease of $3.1
million or 25% as compared to quarter ended July 31, 1998. Same site revenues
decreased by 13.2% or $1.0 million as compared to the quarter ended July 31,
1998. In addition, seven sites were closed during the quarter ended July 31,
1999, which recorded revenues of $1.0 million less in the quarter ended July 31,
1999 as compared to the quarter ended July 31, 1998. A decrease of revenues of
$575,000 for the quarter ended July 31, 1999, related to a revision of estimated
contractual settlement with a certain provider. The Outpatient Programs operated
under an all-inclusive fee arrangement had operating margins of 25.7% in the
quarter ended July 31, 1999 as compared to 37.3% in the quarter ended July 31,
1998. The Company's Case Management Programs recorded revenues of $3.1 million,
an increase of $1.0 million, or 47.6%, from the quarter ended July 31, 1998. The
increase in revenues was due to a corresponding increase in consumers of 48.2%
as compared to the quarter ended July 31, 1998. Revenue from the Company's
Chemical Dependency and other programs not included as outpatient or case
management was $486,000, an increase of 3.0% from the quarter ended July 31,
1998.

     Revenue -- Pharmaceuticals. Revenues from Pharmaceuticals increased from
$3.0 million for the quarter ended July 31, 1998 to $9.6 million for the quarter
ended July 31, 1999, a increase of $6.6 million, or 220.0%. The revenues for the
quarter ended July 31, 1998 included only one month versus three months for the
quarter ended July 31, 1999.

     Direct Operating Expenses -- Psychiatric Care. Direct operating expenses
consist of costs incurred at the program sites and costs associated with the
field management responsible for administering the programs. Direct operating
expenses decreased from $10.1 million for the quarter ended July 31, 1998 to
$10.0 million for the quarter ended July 31, 1999, a decrease of $100,000, or
1.0%. As a percentage of psychiatric care revenues, psychiatric care operating
expenses were 78.1%, an increase from 68.2% for the quarter ended July 31, 1998.
The increase in operating expenses as a percentage of psychiatric care revenues
primarily related to the $575,000 reduction in Outpatient Programs revenue from
an adjustment to the contractual settlement during the quarter ended July 31,
1999, and the inclusion of operating expenses for managed care and research
without a corresponding increase in revenue contribution.

     Cost of Sales -- Pharmaceuticals. Cost of sales of pharmaceutical products
increased from $2.3 million for quarter ended July 31, 1998 to $7.2 million for
the quarter ended July 31, 1999, a increase of 213.0%. The costs represent 75.1%
and 75.3% of pharmaceutical revenue for the quarters ended July 31, 1998 and
1999 respectively. The cost of sales for the quarter ended July 31, 1998
included only one month versus three months for the quarter ended July 31, 1999.

     Direct Operating Expenses -- Pharmaceuticals. Direct operating expenses of
pharmaceuticals increased from $410,000 for quarter ended July 31, 1998 to $1.2
million for the quarter ended July 31, 1999, an increase of $790,000 or 192.7%.
The expenses represent 13.5%

                                       9
<PAGE>   12

and 12.3% of pharmaceutical revenue for quarter ended July 31, 1998 and 1999,
respectively. Direct operating expenses for the quarter ended July 31, 1998
included only one month versus three months for the quarter ended July 31, 1999.

     Marketing, General and Administrative. Marketing, general and
administrative expenses increased from $2.6 million for the quarter ended July
31, 1998 to $3.6 million for the quarter ended July 31, 1999, an increase of
$1.0 million or 38.5%. The increase was related to investment in the corporate
headquarters to support existing and anticipated programs, including the Stadt
Solutions venture and a coordinated care initiative in Southern California. As a
percentage of total revenues, marketing, general and administrative expenses
were 14.5% for the quarter ended July 31, 1998, as compared to 16.1% for quarter
ended July 31, 1999. The increase in marketing, general and administrative
expenses as a percent of revenue was due to an increase in support costs related
to the coordinated care initiative without a proportionate increase in
coordinated care revenue, partially offset by a significant increase in
pharmaceutical revenues without proportionate increases in administrative
expenses.

     Provision for Bad Debts. Expenses related to the provision for bad debts
increased from $716,000 for the quarter ended July 31, 1998 to $1.9 million for
the quarter ended July 31, 1999, an increase of $1.2 million, or 165.4%. The
increase was due to reserves against revenue from sales of the new product
segment pharmaceutical products and to a higher provision rate for bad debt
associated with a less than expected collection experience in pharmaceutical
products and 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 was 4.0% of revenues for the quarter ended July 31, 1998 as
compared to 8.4% for the quarter ended July 31, 1999. 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 manages.

     Depreciation and Amortization. Depreciation and amortization expenses
increased from $239,000 for the quarter ended July 31, 1998 to $280,000 for the
quarter ended July 31, 1999, an increase of $41,000, or 17.2%. The increase was
due to additional capital expenditures associated with new Outpatient Programs
and increased capital expenditures for information systems.

     Special Charge. In the first quarter ended July 31, 1999, the Company
closed seven outpatient psychiatric program locations, incurring a charge of
approximately $521,000. The charge consists of lease termination costs,
operating losses and write-offs of various fixed assets. In addition, the
Company has restructured certain departments company wide involving the
reduction in force of approximately 19 employees. Severance costs of
approximately $296,000 were incurred in connection with the restructuring. At
July 31, 1999, an accrual for special charges of $557,000 was included in
accrued liabilities in the consolidated balance sheet.

     Net Interest Income. Interest income, net of interest expense, decreased
from $509,000 for the quarter ended July 31, 1998 to $377,000 for the quarter
ended July 31, 1999, a decrease of $132,000, or 25.9%. This decrease resulted
from lower cash, cash equivalents and short-term investment balances resulting
from the purchase of Treasury Stock and the use of cash in operations.

                                       10
<PAGE>   13

     Income (Loss) Before Minority Interest, Income Taxes and Cumulative Change.
Income (loss) before minority interest, income taxes and cumulative change
decreased from $2.1 million for the quarter ended July 31 1998 to a loss of $2.1
million for the quarter ended July 31, 1999, a decrease of $4.2 million.

     Minority Interest. Minority interest decreased from an operating gain of
$239,000 for the quarter ended July 31, 1998 to an operating loss of $470,000
for the quarter ended July 31, 1999, a decrease of $709,000. Minority interest
represents the allocation of the operating gains or losses of Stadt Solutions
during the quarter to the minority shareholder as required by the Stadt
Solutions Operating Agreement.

     Cumulative Change. The cumulative change of $593,000 for the quarter ended
July 31, 1998, represents the effect, net of income tax benefit of $411,000, of
writing off previously capitalized start-up costs. The Company adopted this
change in accounting principle in the first quarter 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.

LIQUIDITY AND CAPITAL RESOURCES

     For the quarter ended July 31, 1999, net cash used in operating activities
was $2.2 million. Working capital at July 31, 1999 was $49.5 million, a decrease
of $2.7 million, as compared to working capital at April 30, 1999. Cash, cash
equivalents and short-term investments at July 31, 1999 were $29.5 million, a
decrease of $3.5 million or 10.6% as compared to April 30, 1999.

     The use of cash for operating activities during the quarter ended July 31,
1999 was due to delayed collection of accounts receivable. The Company
experienced growth in accounts receivable due to an increase in days revenue
outstanding from 76 at April 30, 1999 to 90 at July 31, 1999. The increase in
days revenue outstanding was primarily due to focused review of claims by fiscal
intermediaries at several outpatient programs. 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 2000 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 July 31, 1999,
no balance was outstanding under the line of credit. Working capital is
anticipated to be utilized during fiscal 2000 to continue expansion of the
Company's Outpatient and Case Management Programs, for expansion of Stadt
Solutions' pharmacy services, and for the development of a risk based
coordinated care project. 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 common stock. Purchased shares will be used for corporate
purposes including issuance under PMR's

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<PAGE>   14

stock compensation plans. The purchases will be made from time to time in open
market transactions. As of April 30, 1999, the Company repurchased 90,000 shares
of its common stock at an average price of $5.81 per share, or $523,750, in open
market transactions. In May 1999, the Company repurchased an additional 200,000
shares of its common stock at a price of $3.75 per share, or $750,000, in open
market transactions. These shares are held in treasury. In May 1999, the Board
of Directors authorized an additional 5% of the Company's outstanding common
stock for repurchase.

     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 growth strategy
of Stadt Solutions.

     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 quarter of fiscal
1999 and 2000, a majority of the Company's psychiatric care 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
CMHCs on whose behalf these programs are managed. Certain of the Company's
contracts with its providers contain warranty obligations that require the
Company to indemnify such providers for the portion of the Company's management
fee disallowed for reimbursement. 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.

     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 indemnity 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

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<PAGE>   15

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. The Company's
computer applications (and computer applications used by 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 second quarter of fiscal 2000. The Company
expects that the total cost associated with these revisions will not be
material. These costs were primarily incurred during fiscal 1999 and 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 during fiscal 2000. The cost to be incurred
by the Company related to externally maintained systems is expected to be
minimal. The Company believes that by completing its planned corrections to its
computer applications, the year 2000 issue with respect to the Company's 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 associated with year 2000 compliance issues, and because the
Company's assessment is necessarily based on information from third party
vendors and suppliers, there can be no assurance that the Company's assessment
is correct or as to the materiality, worst case scenario or effect of any
failure of such assessment to be correct.

     The Company has initiated a program to determine whether the computer
applications of its significant payors and contract providers will be upgraded
in a timely manner. The Company has not completed this review and it is unknown
whether computer applications of contract providers and Medicare and other
payors will be year 2000 compliant. The Company has not determined the extent to
which any disruption in the billing practices of providers or the payment
practices of Medicare or other payors caused by the year 2000 issues will affect
the Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption could have a material adverse effect upon the Company's

                                       13

<PAGE>   16

business, financial condition and results of operations. The Company has not
established a contingency plan in the event of any such disruption or worst case
scenario.

     Stadt Solutions has completed a review and assessment of its applications
and systems and is expected to complete all required remediation. The cost to be
incurred by Stadt Solutions related to such remediation, and the extent of such
remediation, is expected to be minimal. Stadt Solutions believes that by
completing the planned corrections to its applications and systems, the year
2000 issue with respect to its applications and 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 Stadt Solutions' business,
financial condition and results of operations. Because of the many uncertainties
associated with year 2000 compliance issues, including uncertainties or
disruption in the payment practices of Medicaid or other payors, and because
Stadt Solutions' assessment is necessarily based on information from third party
vendors and suppliers and Stadtlander, there can be no assurance that the
Company's assessment is correct or as to the materiality, worst case scenario or
effect of any failure of such assessment to be correct. Stadt Solutions has not
established a contingency plan in the event of any such disruption or worst case
scenario.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The Company does not and did not invest in market risk sensitive
instruments in the first quarter of fiscal 2000. The Company had and has no
exposure to market risk with regard to changes in interest rates. The Company
does not and has not used derivative financial instruments for any purposes,
including hedging or mitigating interest rate risk.

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<PAGE>   17

PART II -- OTHER INFORMATION

Item 1 -- Legal Proceedings

     Not Applicable

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

     None

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<PAGE>   18

                                   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: September 13, 1999

                                        PMR CORPORATION


                                        BY: /s/ Mark Clein
                                            ------------------------------------
                                            MARK CLEIN
                                            Chief Executive Officer
                                            (Principal Executive Officer)


                                        BY: /s/ Michael Feori
                                            ------------------------------------
                                            MICHAEL FEORI
                                            Controller
                                            (Principal Accounting Officer)


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