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FORM 10-QSB

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the quarterly period ended MARCH 31, 1997

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

Commission File Number 333-11957

BIRMAN MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)

Delaware 62-1584092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

502 Gould Drive
Cookeville, Tennessee 38506
(Address of principal executive offices)

(615) 432-6532
(Registrant's telephone number, including area code)

Indicate by check mark whether Registrant (1) has filed all reports 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 [ ]

Number of shares outstanding as of April 30, 1997: 8,756,254

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BIRMAN MANAGED CARE, INC.

FORM 10-QSB

INDEX

Page No.
--------

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PART 1. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
March 31, June 30,
1997 1996
----------- ----------

ASSETS
Current assets:
Cash and cash equivalents $ 8,144,821 1,872,343
Accounts receivable, net 1,787,863 1,043,771
Prepaid expenses and other 49,582 9,903
Notes receivable 34,980 22,323
Deferred tax asset 119,549 95,549
----------- ----------
Total current assets 10,136,795 3,043,889
Property and equipment, net 618,446 293,684
Note receivable - related party (Note 5) - 631,173
Deferred offering costs - 25,000
Restricted Certificates of Deposit 500,000 -
Goodwill 1,242,250 16,145
Other assets 149,026 -
----------- ----------
Total assets $12,646,517 $4,009,891
=========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of note payable $ 210,219 $ 2,435
Current portion of capital lease obligations 1,201 1,540
Accounts payable 363,637 117,025
Accrued expenses 206,823 2,050
Income taxes payable 80,815 635,205
----------- ----------
Total current liabilities 862,695 758,255
Note payable, less current portion 612,598 5,028
Capital lease obligations, less current portion - 2,009
Deferred income taxes payable 55,620 55,620
Minority Interest 261,512 -
----------- ----------
Total liabilities 1,792,425 820,912
----------- ----------
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding - -
Common stock, $.001 par value, 25,000,000 shares
authorized, 8,756,254 and 6,931,082 issued and
outstanding, respectively 8,756 6,931
Additional paid-in capital 8,588,845 1,780,612
Retained earnings 2,256,491 1,401,436
----------- ----------
Total stockholders' equity 10,854,092 3,188,979
----------- ----------
Total liabilities and stockholders' equity $12,646,517 $4,009,891
=========== ==========

See notes to condensed consolidated financial statements.

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BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------

Revenues $ 3,707,850 $ 2,474,630 $ 8,804,132 $ 5,789,950
Cost of revenue 1,214,825 591,419 3,104,205 1,592,120
----------- ----------- ----------- -----------
Gross profit 2,493,025 1,883,211 5,699,927 4,197,830
Selling, general and administrative
expenses 1,742,924 1,103,835 4,388,309 3,235,402
----------- ----------- ----------- -----------
Income from operations 750,101 779,376 1,311,618 962,428

Other income (expense):
Interest expense (2,508) (9,262) (3,501) (39,242)
Interest income 53,327 16,253 114,937 28,655
Minority Interest in Subsidiary Earnings 1,890 - 1,890 -
----------- ----------- ----------- -----------
52,709 6,991 113,326 (10,587)
----------- ----------- ----------- -----------
Income before income taxes 802,810 786,367 1,424,944 951,841
Provision for income tax expense 320,335 267,365 569,889 323,881
----------- ----------- ----------- -----------
Net income $ 482,475 $ 519,002 $ 855,055 $ 627,960
=========== =========== =========== ===========

Per share data:

Primary net income per share (Note 3) .06 .08 .12 .09
=========== =========== =========== ===========
Primary weighted average common shares
outstanding (Note 3) 7,568,924 6,703,517 6,894,169 6,703,517
=========== =========== =========== ===========
Fully diluted net income per share (Note 3) .06 .07 .11 .08
=========== =========== =========== ===========
Fully diluted weighted average common
shares outstanding (Note 3) 8,608,574 7,703,517 7,961,152 7,703,517
=========== =========== =========== ===========

See notes to condensed consolidated financial statements.

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BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Nine Months Ended
March 31,
------------------------
1997 1996
---------- ---------

Cash flows from operating activities:
Net income 855,055 627,960
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 88,405 66,907
Interest income debited to note receivable - (909)
Changes in assets and liabilities:
Accounts receivable (744,092) (706,724)
Deferred tax asset (24,000) 92,301
Prepaid expenses and other (52,336) 5,000
Other assets (16,601) (3,722)
Accounts payable - trade 246,612 14,960
Bank Overdraft - (114,550)
Accrued expenses 204,773 41,221
Income taxes payable
- current (554,390) 338,907
- deferred - (7,000)
---------- ---------
Net cash provided by operating activities 3,426 354,351
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment (413,167) (72,053)
Collection of notes receivable - related parties 804,078 107,187
Advances for notes receivable - related parties (172,905) (419,859)
Acquisition of Canton Management Group, Inc. (1,572,617) -
---------- ---------
Net cash used by investing activities (1,354,611) (384,725)
---------- ---------
Cash flows from financing activities:
Proceeds from debt 819,000 161,100
Payments on debt (3,647) (371,935)
Payments on capital leases (2,348) -
Offering costs (2,385,264) (175,947)
Proceeds from sale of stock 10,000,000 992,500
Retirement of Common Stock (804,078) -
---------- ---------
Net cash provided by financing activities 7,623,663 605,718
---------- ---------
Net increase in cash and cash equivalents 6,272,478 575,344
Cash and cash equivalents at beginning of period 1,872,343 10,333
---------- ---------
Cash and cash equivalents at end of period 8,144,821 585,677
========== =========

See notes to condensed consolidated financial statements.

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BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying condensed consolidated financial statements of Birman
Managed Care, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Item 310 of Regulation S-B. Accordingly,
they do 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 adjustments)
considered necessary for a fair presentation of the Company's financial
condition and operating results for the interim periods presented have been
included. Operating results for the nine months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1997. These interim financial statements should be read in conjunction
with the prospectus dated February 12, 1997, including the financial statements
and notes contained therein, filed with the Securities and Exchange Commission.

The Company was organized in 1994 and reincorporated in Delaware in 1996 to
serve as the holding company of Birman & Associates, Inc., and BMC Health Plans,
Inc. On September 9, 1996, the Company was reincorporated in Delaware by means
of a merger in which shareholders of the Company received 72.939 shares of
Common Stock for each 100 shares of Common Stock then outstanding. This
represents a change in legal entity, but not in the operations of the Company.
The Company acquired a third subsidiary on June 14, 1996, through an asset
purchase of Hughes & Associates, Inc. ("Hughes"). The prior year operating
results of Hughes & Associates were not presented on a proforma basis as they
were considered immaterial.

On January 15, 1997, the Company acquired substantially all of the issued
and outstanding shares of capital stock of Canton Management Group, Inc., a
Mississippi corporation ("Canton"), for $1,500,000, of which $700,000 was paid
in cash and $800,000 was paid by the issuance of promissory notes payable in
four equal annual installments of $200,000 each plus interest at the rate of 2%
per annum on the unpaid principal balance. Canton is an inactive holder of a
certificate of authority to operate an HMO in Mississippi. Canton was renamed
Care3, Inc. As a result of the issuance of shares of Care3, Inc. to certain
founders of Canton. Care3, Inc. currently is a 69% subsidiary of the Company.
The Company may reduce its ownership percentage of Care3, Inc. to 60% by
allowing selected physicians to acquire shares of Care3, Inc. common stock. The
Company anticipates that it will own not less than 60% of Care3, Inc. The prior
year operating results of Canton Management Group were not presented on a
proforma basis as the Company was a development stage company and the results
were immaterial.

2. Nature of Operations

The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary "Quality Management Program" to
hospitals and their attending physicians. In addition, the Company is developing
and will operate various health plans in association with physician networks,
hospitals, and other health care providers.

3. Earnings Per Common Share

Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods. All weighted average shares
outstanding give retroactive effect to the 1,000 for 1 stock

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split in October 1995 and the 72.939 for 100 exchange of shares of Common Stock
in connection with the reincorporation of the Company in Delaware in September
1996. The Company completed an initial public offering of its Common Stock on
February 12, 1997. Pursuant to Securities and Exchange Commission rules, shares
of Common Stock issued for consideration below the anticipated offering price
per share during the 12-month period prior to filing of the registration
statement have been included in the calculation of common share equivalent
shares as if they had been outstanding for all periods presented. In addition,
shares of Common Stock that are subject to options and warrants having exercise
prices that are below the current trading price per share, whether or not
exercisable, have been included in the earnings per share calculation, using the
treasury stock method. One million shares of common stock placed in escrow after
completion of the public offering, which are common stock equivalents, have been
included in the calculation of fully diluted earnings per share, when they are
not anti-dilutive.

4. New Accounting Pronouncement

On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, Earnings per Share (SFAS 128). This
pronouncement provides a different method of calculating earnings per share than
is currently used in accordance with APB 15, Earnings per Share. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. This pronouncement is effective for fiscal
years and interim periods ending after December 15, 1997; early adoption is not
permitted. The Company has not determined the effect, if any, of adoption on
its EPS computation(s).

5. Related Party Transactions

Notes Receivable:

Included in notes receivable at June 30, 1997 are the following related
party notes and interest receivable:

June 30,
1996
--------

7% notes receivable from David N. Birman, M.D., due on demand $556,586
Interest receivable - David N. Birman, M.D. 74,587
--------
$631,173
========

On February 12, 1997, Dr. Birman tendered 174,800 shares of his Common
Stock, valued at $4.60 per share, as payment in full of his note to the Company
in the amount of $775,000 plus accrued interest, at the time of the closing of
the Company's initial public offering of shares.

6. Line of Credit

In August 1996, the Company arranged a $1,000,000 maximum principal amount
working capital revolving line of credit facility ("facility") with American
National Bank and Trust Company of Chicago. The facility has an initial maturity
date of October 31, 1997. The facility provides for the accrual of interest at a
floating annual rate equal to the lender's prime rate on the unpaid principal
balance. The facility is secured by a pledge of the Company's Quality Management
Program and quality assurance/utilization review accounts receivable. Under the
terms of the facility, the Company can borrow up to the lesser of: (i)
$1,000,000, or (ii) the maximum facility minus any letter of credit obligations,
or (iii) the "Borrowing Base", (i.e., up to 75% of the face amount of all then
existing eligible receivables), minus any letter of credit obligations. At March
31, 1997, there was a zero balance on the line of credit.

7. Significant Customer

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The Company has Provided Quality Management Program services to various
hospitals owned and/or managed by Quorum Health Care, Inc. ("Quorum") since
1991. Hospitals owned and/or managed by Quorum represented approximately 45% and
24% of the Company's Quality Management Program revenues for the nine months
ended March 31, 1996 and 1997, respectively.

8. Subsequent Events and Contingencies

On March 5, 1997 the Company terminated the employment of Robert D. Arkin
as general counsel, secretary and chief operating officer, for reasons the
Company believes constituted good cause. On May 8, 1997 Mr. Arkin filed a
complaint in United States District Court in Atlanta, Georgia, against the
Company, its chief executive officer, David N. Birman, M.D., and its executive
vice president, Sue D. Birman, seeking to enforce a written employment
agreement between the Company and Mr. Arkin, which was drafted by Mr. Arkin, and
other related causes of action.

In the complaint, Mr. Arkin seeks his unearned future compensation under
the employment agreement of $206,250 per year for five years; one additional
year's salary for non-renewal; bonus compensation of approximately $75,000
accrued through the date of termination; and immediate vesting of options to
acquire 291,758 shares of the Company's common stock at $1.37 per share as well
as other relief.

Counsel to the Company has advised that the complaint is without merit and
that the Company is likely to prevail. This is based upon their belief that the
termination was with cause and that the employment agreement is unenforceable
due to omissions by Mr. Arkin, the Company's former outside counsel, of certain
disclosures of conflicts of interest and notification to the Company of its
right to seek independent counsel which he was obligated to make prior to
entering into a business relationship with his client, the Company.

On May 14, 1997, the Company filed suit in Tennessee state court against
Mr. Arkin seeking a judicial determination that Mr. Arkin is entitled to no
additional compensation from the Company, to rescind his 97,252 vested stock
options, and for other related relief.

The accompanying financial statements contain no accrual for the additional
compensation sought by Mr. Arkin. In addition, the earnings per share
calculations as of March 31, 1997 contemplate only 97,252 options as
outstanding, representing a potential one-third vested portion of the total
options previously granted to Mr. Arkin.

The Company intends vigorously to defend its position that Mr. Arkin was
terminated with cause and that no part of his employment contract is still
enforceable, including the previous grant of options, whether vested or not at
the time of termination.

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

RESULTS OF OPERATIONS

The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations
for the periods indicated.

Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----

Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 32.8% 23.9% 35.3% 27.5%
Gross margin 67.2% 76.1% 64.7% 72.5%
Selling, general and administrative expenses 46.9% 44.6% 49.8% 55.9%
Income from operations 20.3% 31.5% 14.9% 16.6%
Other income (expense):
Interest expense (.1%) (.4%) -- (.7%)
Interest income 1.4% .7% 1.3% .5%
Income before provision for income taxes 21.6% 31.8% 16.2% 16.4%
Provision for income tax expense (8.6%) (10.8%) (6.5%) (5.6%)
Net income 13.0% 21.0% 9.7% 10.8%

THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1996

REVENUES. Revenue for the Company increased by 50%, to approximately
$3,708,000 in the three months ended March 31, 1997, from approximately
$2,475,000 in the comparable period of the prior year. The growth in revenue was
attributable to managements action to initiate engagements of new
hospital-clients and to specifically target larger hospital-clients for the
Quality Management Program. The aggregate Medicare discharges of the
hospital-clients increased by 76% to approximately 18,387 for the three months
ended March 31, 1997, from approximately 10,466 in the comparable period of the
prior year. The number of hospital-clients on contract at March 31, 1997 was 31
as compared to 29 at March 31, 1996. Additional revenue of approximately
$155,000 is attributable to the operations of Hughes and Associates, Inc. which
was

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acquired in June 1996 and not consolidated with the financial statements in the
comparable period of the prior year. The prior year operating results of Hughes
& Associates were not presented on a proforma basis as they were considered
immaterial.

COST OF REVENUE. The cost of revenue includes all costs directly associated
with the operations of the Quality Management Program and Hughes & Associates,
Inc., including compensation of physicians and allied medical specialists,
consulting staff travel and lodging, and other direct costs of the Quality
Management Program and the UR/QA division. The cost of revenue of the Company
increased by 106%, to approximately $1,215,000 for the three months ended March
31, 1997, from approximately $591,000 in the comparable period of the prior
year. The Company's cost of revenue as a percentage of revenue increased to
32.8% for the three months ended March 31, 1997 from 23.9%, an increase of 9%
for the three months ended March 31, 1996, due primarily to (i) a 5% increase in
recruitment and training costs for the Quality Management Program due to the
hiring of additional physicians and allied medical specialists for hospital
engagements scheduled or anticipated to start in the third and fourth quarters,
and (ii) a 2% increase in other costs related to the Quality Management Program
and (iii) a 2% increase in costs associated with the operations of Hughes &
Associates, Inc. which was acquired in June 1996 and not consolidated with the
financial statements in the comparable period of the prior year. Due to the
Company's expansion plans, the Company anticipates the cost of revenue as a
percentage of sales to remain at current levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 58%, to approximately $1,743,000 for the
three months ended March 31, 1997, from approximately $1,104,000 in the
comparable period of the prior year. The increase in selling, general and
administrative expenses for the three months ended March 31, 1997 was primarily
attributable to (i) the expansion of the Company's management team, and (ii)
selling, general and administrative expenses for Hughes & Associates, Inc.,
which was acquired in June 1996 and not consolidated with the financial
statements in the comparable period of the prior year, and (iii) general and
administrative costs associated with the Mississippi and Tennessee health plans
which began operations during the third quarter; and (iv) accrual of bonuses
pursuant to the Executive Bonus Plan. As a percentage of revenue, selling,
general and administrative expenses increased to 46.9% for the three months
ended March 31, 1997 from 44.6% in the comparable period in the prior year.

INTEREST INCOME AND EXPENSE. Interest income increased to approximately
$53,000 for the three months ended March 31, 1997, from approximately $16,000 in
the comparable period of the prior year. This increase was attributable to
interest earned on the increased balance of cash deposits held primarily in
money market accounts, certificates of deposit and commercial paper. Interest
expense decreased approximately $6,800, a reduction of 75% for the three months
ended March 31, 1997 from the comparable period of the prior year, as a result
of the Company repaying the entire outstanding principal of its term loan in
June 1996.

NET INCOME AND EARNINGS PER SHARE. For the three months ended March 31,
1997 net income for the Company decreased by 7% to $482,475 from $519,002 and
net income per dully diluted share decreased by 14% to $.06 per share from $.07
per fully diluted share from comparable periods of the prior year. Net income
results for the quarter were impacted by costs associated with the Company's
Initial Public Offering along with investments made in the development of the
Company's health plans in Mississippi and Tennessee. These investments are
expected to make the Company more profitable over the short and long term.

NINE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THE NINE MONTHS ENDED
MARCH 31, 1996.

REVENUES. Revenue for the Company increased by 52%, to approximately
$8,804,000 for the nine months ended March 31, 1997, from approximately
$5,790,000 in the comparable period of the prior year. The growth in revenue was
attributable to management's action to initiate engagements of new
hospital-clients and to specifically target larger hospital-clients for the
Quality Management Program. The aggregate Medicare discharges of the
hospital-clients increased by 76% to approximately 43,580 for the nine months
ended March 31, 1997, from approximately 24,739 in the comparable period of the
prior year. The number of hospital-clients on contract at March 31, 1997 was 31
as compared to 29 at March 31, 1996. Additional revenue of $433,000 is
attributable to the operations of Hughes and Associates, Inc. which was acquired
in June 1996 and not consolidated with the financial statements in the
comparable period of the prior year. The prior year operating results of Hughes
& Associates were not presented on a proforma basis as they were considered
immaterial.

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COST OF REVENUE. The cost of revenue includes all costs directly associated
with the operations of the Quality Management Program and Hughes & Associates,
Inc., including compensation of physicians and allied medical specialists,
consulting staff travel and lodging, and other direct costs of the Quality
Management Program and the UR/QA division. The cost of revenue of the Company
increased by 95%, to approximately $3,104,000 for the nine months ended March
31, 1997, from approximately $1,592,000 in the comparable period of the prior
year. The Company's cost of revenue as a percentage of revenue increased to
35.3% for the nine months ended March 31, 1997 from 27.5%, an increase of 8%,
for the nine months ended March 31, 1996, due primarily to (i) a 4% increase in
recruitment and training costs for the Quality Management Program due to the
hiring of additional physicians and allied medical specialists for hospital
engagements scheduled or anticipated to start in the third and fourth quarters,
and (ii) a 2% increase in other costs related to the Quality Management Program
and (iii) a 2% increase in costs associated with the operations of Hughes &
Associates, Inc. which was acquired in June 1996 and not consolidated with the
financial statements in the comparable period of the prior year. Due to the
Company's expansion plans, the Company anticipates the cost of revenue as a
percentage of sales to remain at current levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 36%, to approximately $4,388,000 for the
nine months ended March 31, 1997, from approximately $3,235,000 in the
comparable period of the prior year. The increase in selling, general and
administrative expenses for the nine months ended March 31, 1997 was primarily
attributable to (i) the expansion of the Company's management team and (ii)
selling, general and administrative expenses for Hughes & Associates, Inc.,
which was acquired in June 1996 and not consolidated with the financial
statements in the comparable period of the prior year, and (iii) general and
administrative costs associated with the Mississippi and Tennessee health plans
which began operations during the third quarter; and (iv) accrual of bonuses
pursuant to the Executive Bonus Plan. However, as a percentage of revenue,
selling, general and administrative expenses decreased to 49.8% for the nine
months ended March 31, 1997 from 55.9% in the comparable period in the prior
year.

INTEREST INCOME AND EXPENSE. Interest income increased to approximately
$115,000 for the nine months ended March 31, 1997, from approximately $29,000 in
the comparable period of the prior year. This increase was attributable to
interest earned on the increased balance of cash deposits held primarily in
money market accounts, certificates of deposit and commercial paper, and also on
the increased balance on loans made by the Company to Dr. Birman during the
first and second quarters in connection with the farm operations distributed to
him in fiscal 1995. Interest expense decreased approximately $36,000, a
reduction of 91% for the nine months ended March 31, 1997 from the comparable
period of the prior year, as a result of the Company repaying the entire
outstanding principal of its term loan in June 1996.

NET INCOME AND EARNINGS PER SHARE. For the nine months ended March 31, 1997
net income for the Company increased by 36% to $855,055 from $627,960 and net
income per fully diluted share increased by 38% to $.11 per share from $.08 per
fully diluted share from comparable periods of the prior year.

RECENT ACQUISITION

The recent acquisition of Canton, which was renamed to Care3, Inc.,
provides to the Company a Certificate of Compliance to operate an HMO in certain
counties in northern Mississippi. In addition to those counties, the Department
of Insurance of the State of Mississippi issued a Certificate of Compliance
dated February 10, 1997, for Care3 to operate an HMO in the six-county southern
Mississippi region on March 4, 1997, The Company's Mississippi HMO commenced
operations on or about March 18, 1997. Insufficient business activities have
taken place for the Company to assess the prospects for such operations. The
effect on the Company's operations of the Mississippi HMO will depend to a large
extent on the Company's ability to attract enrollees to its Mississippi health
plan which, in turn, will depend to a significant extent upon the Company's
ability to offer PPO and point-of-service options to its enrollees in addition
to the HMO option. Because the Company's health plan business will be in a
"start-up" phase for at least six months after the HM0 commences operations in
Mississippi, the Company anticipates that the Canton acquisition will result in
a net operating loss during at least the first three quarters of calendar 1997.
The prior year operating results of Canton

11
Management Group were not presented on a proforma basis as the Company was a
development stage company and the results were immaterial.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital to market its Quality Management Program and
to develop and launch its health plan business including, among other costs, the
organization of the requisite management infrastructure necessary to implement
the Company's health plan business.

During the nine months ended March 31, 1996, the Company financed its
operating and business development activities primarily through operating
revenue and $816,553 of proceeds from the private placement of shares of Common
Stock net of deferred offering costs. During the nine months ended March 31,
1996, the Company repaid approximately $372,000 of debt using proceeds from the
private placement of Company Stock. In addition, the Company advanced
approximately $420,000 against notes receivable from Dr. Birman and invested
approximately $72,000 in the purchase of property and equipment.

During the nine months ended March 31, 1997, the Company financed its
operating and business development activities primarily through operating
revenue and use of cash on hand at the beginning of the period. During the nine
months ended March 31, 1997, and the Company collected $804,078 on a note
receivable from Dr. Birman through the redemption of 174,800 shares of his
Common Stock, valued at $4.60 per share, at the time of the closing of the IPO
(February 12, 1997). In addition, the Company invested approximately $413,000 in
the purchase of property and equipment and repaid approximately $5,995 of debt
and capital leases using proceeds from operating activities. During the first
and second quarters, the Company advanced approximately $173,000 against notes
receivable from Dr. Birman which was subsequently repaid on February 12, 1997
through the redemption of 174,800 shares of Common Stock.

On January 15, 1997, the Company acquired all of the outstanding capital
stock of Canton for $1,500,000, of which $700,000 was paid in cash and $800,000
was paid by the issuance of promissory notes payable in four equal annual
installments of $200,000 each plus interest at the rate of 2% per annum on the
unpaid principal balance. Additional capital will be required to establish the
reserves required under Mississippi and Tennessee HMO regulations and to further
develop and market the Company's health plans.

The Company has a $1,000,000 maximum principal amount working capital line
of credit facility with American National Bank and Trust Company of Chicago. The
credit facility is secured by a pledge of the Company's Quality Management
Program and quality assurance/utilization review accounts receivable. These
receivables are obligations of the hospital-clients to the Company and of
insurance company and self-insured employer clients to Hughes, and are not
Medicare or Medicaid receivables.

Birman Managed Care, Inc. (the "Company"), successfully completed its
initial public offering of 2,000,000 shares of its common stock, par value $.001
per share, at a price of $5.00 per share sold under its registration statement
and prospectus dated February 12, 1997. The offering closed on February 19,
1997, and net proceeds of approximately $7,615,000 were received by the Company.

The Company believes that the net proceeds from the initial public
offering, together with its existing cash resources and available credit
facilities, will be sufficient to meet the Company's anticipated acquisition,
expansion, and working capital needs for the next 18 months. The Company,
however, may raise capital through the issuance of long-term or short-term debt
or the issuance of securities in private or public transactions to fund future
expansion of its business either before or after the end of the 18-month period.
There can be no assurance that acceptable financing for future transactions can
be obtained.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company's former general counsel and secretary, Robert D. Arkin, a
member of the Georgia State Bar, filed suit against the Company, its chairman,
president and chief executive officer, David N. Birman, M.D., and its executive
vice president and director, Sue D. Birman, in United States District Court for
the Northern District of Georgia, Atlanta Division, on May 8, 1997. The
complaint alleges breach by the Company of a written employment agreement
drafted by Arkin while he was an attorney for the Company which was executed by
the Company. On March 5, 1997, he was terminated by the Company for reasons the
Company believes constituted good cause. By his complaint, Arkin seeks all of
his future unearned compensation under the agreement, which calls for payments
to him of $206,250 per year for five years (plus annual CPI adjustments), plus
one additional year's salary if the contract is not renewed -- a total of over
$1,230,000. In addition, Arkin asserts he is entitled to his bonus compensation
under the Company's executive bonus plan, which would be approximately $75,000
through the date of termination, and immediate vesting of unvested options
granted him under the Company's 1995 Stock Option Plan to acquire 194,504 shares
of common stock of the Company for an exercise price of $1.37 per share. He
also alleges various causes of action related to the facts giving rise to his
termination, including an allegation that the Company, Dr. Birman and Sue D.
Birman violated the Securities Exchange Act of 1934 by not telling Arkin he was
going to be terminated before Arkin signed another agreement Arkin had drafted,
a "lock-up" agreement in which he agreed not to sell his shares of the Company's
common stock until December 20, 1998. Arkin's complaint also contains numerous
other disclosures and allegations which the Company believes are irrelevant to
the complaint and are protected by the Company's attorney/client privilege,
which disclosure is in violation of the Standards of Conduct of the Georgia
State Bar.

The complaint also alleges that the Company, Dr. Birman and Sue D. Birman
are residents of the Northern District of Georgia. That allegation is false as
all are residents of Cookeville, Tennessee and such fact is well-known to
Arkin.

The Company denies the material allegations of the complaint. The Company
has been advised that the complaint has no merit and that it is likely to
prevail on the complaint. Should Arkin prevail, it is unclear whether Arkin
would be entitled to some or all of the unearned and unpaid compensation. It
is further unclear whether such payment, if owed, would be for a lump-sum
payment of his claimed salary or whether the salary would be paid in annual or
monthly installments.

The Company believes that the employment agreement is not enforceable
against the Company and it further believes it has the right to rescind the
grant of stock options to Arkin, including options to acquire an additional
97,252 shares which have otherwise vested. In connection with the drafting,
negotiation and execution of the employment agreement, the executive bonus plan
and the stock option agreement, Arkin acted as sole counsel to the Company as
well as to himself. At no time did he disclose to the Company the conflicts of
interest inherent in the transactions. He further failed to advise the Company
of its right to obtain independent representation with respect to those
transactions. Such disclosure and advice are required by the Standards of
Conduct of the Georgia State Bar. The Company believes he further failed to
provide the Company with an accurate employment history prior to becoming
employed by the Company. Even if the agreements are deemed enforceable, the
Company believes that Arkin was terminated "for cause," which terminates any
right he would otherwise have to additional compensation or vesting of
unvested stock options.

Specifically, Arkin failed and refused to relocate to the Company's
headquarters in Cookeville, Tennessee from the Atlanta area as he had agreed to
do, he failed and refused to discharge the duties of a chief operating officer,
which duties he had promised in writing to perform, and he repeatedly refused to
comply with policies and directives of the Board of Directors and the chairman
and president of the Company, Dr. David N. Birman, after warning and notice.

On May 14, 1997, the Company sued Mr. Arkin in the Chancery Court for
Putnam County, Tennessee, seeking a declaration that the above-described
agreements are void and unenforceable, rescinding the grant of all stock options
to Mr. Arkin, and prohibiting Mr. Arkin from disclosing matters regarding the
Company which are subject to the attorney/client privilege.

ITEM 5. OTHER INFORMATION

As required by "lock up" agreements with five of its shareholders, the
Company intends to file on or about May 16, 1997 a registration statement under
Form SB-2 with the Securities and Exchange Commission to register 466,312 shares
of its common stock owned by five of its current shareholders. The shares so
registered may not be sold by the shareholders until December 20, 1998, as
provided by the "lock up" agreements. When sold, none of the proceeds will be
paid to the Company.

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

(a) Exhibits

3.1* Certificate of Incorporation of Birman Managed Care, Inc.
3.2* By-laws of Birman Managed Care, Inc.
3.3* Certificate of Merger dated September 9, 1996 by and between Birman
Managed Care, Inc. Delaware and Birman Managed Care, Inc.
4.1* Reference is made to Exhibits 3.1 through 3.3.
4.2* Specimen Common Stock Certificate.
4.6* Form of Representative's Warrant.
10.1* Employment Agreement by and between Birman Managed Care, Inc. and David
N. Birman, M.D. entered into on March 1, 1996.
10.2* Employment Agreement by and between Birman Managed Care, Inc. and Sue
D. Birman entered into on March 1, 1996.
10.3* Employment Agreement by and between Birman Managed Care, Inc. and
Robert D. Arkin entered into on March 1, 1996; Amendment No. 1 by and
between Birman Managed Care, Inc. and Robert D. Arkin entered into on
March 1, 1996.
10.4* Employment Agreement by and between Birman Managed Care, Inc., BMC
Health Plans, Inc. and Vincent W. Wong entered into on March 1, 1996.
10.5* Employment Agreement by and between Birman Managed Care, Inc. and
Douglas A. Lessard entered into on March 1, 1996; Amendment No. 1 by
and between Birman Managed Care, Inc. and Douglas A. Lessard entered
into on March 1, 1996; Amendment No. 2 by and between Birman Managed
Care. Inc. and Douglas A. Lessard entered into on September 1, 1996.
10.6* Employment Agreement by and between Birman Managed Care, Inc. and Mark
C. Wade entered into on July 1, 1995; Amendment No. 1 by and between
Birman Managed Care, Inc., BMC Health Plans, Inc. and Mark C. Wade
entered into on October 30, 1995; Amendment No. 2 by and between Birman
Managed Care, Inc. and Mark C. Wade entered into on September 1, 1996.
10.7* Employment Agreement by and between Birman Managed Care, Inc. and Brad
Seitzinger, M.D. entered into on August 26, 1991.
10.8* Employment Agreement by and between Birman Managed Care, Inc. and Bill
Barenkamp entered into on November 9, 1993.
10.9* Consulting Agreement by and between Richard M. Ross, RRCG, L.L.C., and
Birman Managed Care, Inc. entered into as of September 1, 1996.
10.10* 1995 Stock Option Plan for Birman Managed Care, Inc. dated October 31,
1995.
10.11* 1996 Non-Employee Directors' Non-Qualified Stock Option Plan of Birman
Managed Care, Inc.
10.12* Stock Purchase Agreement by and between Birman Managed Care, Inc.,
Canton Management Group, Inc. and Wesley Prater, M.D., Larry Cooper,
M.D., Kelvin Ramsey, M.D., L.C. Tennin, M.D., Louis Saddler, M.D.,
James Goodman, Ph.D, Vic Caracci, Michael T. Caracci, Roben T. Teague,
M.S.W., Vincent Caracci, Charlie Hills, Harold Wheeler, M.D., Stephanie
Tucker, Winifred Fulgham and Joyce Johnson entered into on September 6,
1996.

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10.13* Promissory Note by David N. Birman, M.D. and payable to the Company.
10.14* Loan and Security Agreement dated August 21, 1996 by and between
American National Bank and Trust Company of Chicago and Birman &
Associates, Inc.
10.15* Loan and Security Agreement dated August 21, 1996 by and between Hughes
& Associates, Inc.
10.16* Promissory Note (Secured) dated August 21, 1995 in the stated principal
amount of $1,000,000 payable to American National Bank & Trust Company
of Chicago by Birman & Associates and Hughes & Associates, Inc.
10.17* Form of Indemnification Agreement for Birman Managed Care, Inc.
10.18* Executive Bonus Plan.
10.19* Agreement by and between National Benefit Resources, Inc. and Birman
Managed Care, Inc. entered into on April 16, 1996.
10.20* Agreement dated September 17, 1996 by and between Birman Managed Care,
Inc. and Community Medical Center.
10.21* Form of Escrow Agreement.
10.22* Lease dated December 2, 1996 between Arc Builders, LLC and Birman
Managed Care, Inc.
10.23* Form of Consulting Agreement between Birman Managed Care. Inc. and
Royce Investment Group, Inc.
10.24* Form of Merger and Acquisition Agreement between Birman Managed Care,
Inc. and Royce Investment Group, Inc.
11.1 Statement of Computation of Earnings Per Share for the three and nine
months ended March 31, 1997.
27.1 Financial Data Schedule.
99.1** State of Mississippi, Department of Insurance Certificate of Authority
dated February 10, 1997.

(b) Reports

No reports on Form 8-K were required to be filed by the Company during the
three months ended December 31, 1996.

* Incorporated by reference from the Company's Registration Statement on Form
SB-2 (No. 333-11957)

** Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended December 31, 1996.

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.

BIRMAN MANAGED CARE, INC.

May 14, 1997 /s/ DAVID N. BIRMAN
----------------------------------------
David N. Birman
Chairman of the Board, President and
Chief Executive Officer

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May 14, 1997 /s/ DOUGLAS A. LESSARD
----------------------------------------
Douglas A. Lessard
Vice President, Treasurer and Chief
Financial Officer
(Principal Accounting Officer)