PHC INC /MA/, 424A, 1998-08-04

PHC INC /MA/
424A, 1998-08-04
HOME HEALTH CARE SERVICES

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PROSPECTUS

2,211,491 Shares of Class A Common
Stock of
PHC, INC.

PIONEER BEHAVIORAL HEALTH

This Prospectus relates to the public offering that may be made from time
to time of up to 2,211,491 shares of the Class A Common Stock, par value $.01
per share (the "Class A Common Stock") of PHC, Inc., a Massachusetts corporation
(the "Company"), by those persons who acquired such shares in connection with
acquisitions or upon the exercise of warrants or conversion of Preferred Stock
issued in connection with financings. See "Selling Security Holders."

The shares offered pursuant to this Prospectus may be sold from time to
time by the Selling Security Holders. No underwriting arrangements have been
entered into by the Selling Security Holders as of the date hereof. The
distribution of the shares offered pursuant to this Prospectus by the Selling
Security Holders may be effected in one or more transactions that may take place
in the over-the-counter market, including ordinary broker's transactions,
privately negotiated transactions, or through sales to one or more dealers for
resale of such shares as principals, at prevailing market prices at the time of
sale, prices related to such prevailing market prices, or negotiated prices.
Underwriting discounts and usual and customary or specifically negotiated
brokerage fees or commissions will be paid by the Selling Security Holders in
connection with sales of such shares. See "Plan of Distribution."

The Company will not receive any proceeds from the sale of the shares
offered pursuant to this Prospectus other than on exercise of warrants to
purchase shares of Common Stock. Any proceeds received by the Company will be
added to working capital. By agreement with the Selling Security Holders, the
Company will pay all of the expenses incident to the registration of such shares
under the Act (other than agent's or underwriter's commissions and discounts),
estimated to be approximately $62,500.

The Selling Security Holders, and any broker-dealers, agents, or
underwriters through whom the shares offered pursuant to this Prospectus are
sold, may be deemed "underwriters" within the meaning of the Act with respect to
securities offered by them, and any profits realized or commissions received by
them may be deemed underwriting compensation.

The Class A Common Stock and the Company's Class B Common Stock, par value
$.01 per share (the "Class B Common Stock"), are similar in all respects except
that holders of Class B Common Stock have five votes per share and holders of
Class A Common Stock have one vote per share on all matters on which
stockholders may vote and that holders of the Class A Common Stock are entitled
to elect two members of the Company's Board of Directors and holders of the
Class B Common Stock are entitled to elect all (currently 3) of the remaining
members of the Board of Directors. Subject to certain limitations, each share of
the Class B Common Stock is convertible into one share of Class A Common Stock
automatically upon any sale or transfer thereof or at any time at the option of
the holder. See "Description of Securities." The Class A Common Stock and the
Class B Common Stock are sometimes collectively referred to herein as the
"Common Stock.") As of the date of this Prospectus, and without giving effect to
the exercise of any options or warrants, the holders of Class A Common Stock own
approximately 87.1% of the outstanding Common Stock and hold approximately 55.5%
of the total voting power, and the holders of Class B Common Stock own
approximately 12.9% of the outstanding Common Stock and hold approximately 44.5%
of the total voting power. Bruce A. Shear, the President and Chief Executive
Officer and a Director of the Company owns approximately 11.9% of the
outstanding Common Stock and holds approximately 37.8% of the total voting
power.

The Class A Common Stock is traded on the NASDAQ SmallCap Market under the
symbol PIHC. On July 10, 1998, the closing bid price of the Class A Common Stock
was $ 1.75.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is August 3, 1998.

<PAGE>
AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act" with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the securities offered
hereby, reference is hereby made to the Registration Statement, and the exhibits
and schedules thereto which may be inspected without charge at the public
reference facilities maintained at the principal office of the Commission at 450
Fifth Street, N.W., Room 1024, Washington D.C. 20549 and at the Commission's
regional offices at 7 World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained upon written request
from the public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reference is made to the copies of
any contracts or other documents filed as exhibits to the Registration
Statement.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be
obtained at prescribed rates from the Commission at such address. Such reports,
proxy statements and other information can also be inspected at the Commission's
regional offices at 7 World Trade Center, New York, New York, 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.

A copy of the Company's Annual report on Form 10-KSB, as filed with the
Commission, is available upon request, without charge, by writing to PHC, Inc.,
200 Lake Street, Suite 102, Peabody, Massachusetts 01960, Attention: Bruce A.
Shear.

The Company intends to furnish its stockholders and holders of rights
exercisable for publicly traded securities of the Company with annual reports
containing audited financial statements and such other periodic reports as the
Company may from time to time deem appropriate or as may be required by law.

FORWARD LOOKING STATEMENTS

This registration statement contains certain forward-looking statements
regarding the Company, its business prospects and results of operations that are
subject to certain risks and uncertainties posed by many factors and events that
could cause the Company's actual business, prospects and results of operations
to differ materially from those that may be anticipated by such forward-looking
statements.

Factors that may affect such forward-looking statements include, without
limitations; the Company's ability to successfully and timely develop and
finance new projects, the impact of competition on the Company's revenues, and
changes in reimbursement rates, patient mix, and demand for the Company's
services, negative cash flow, need for additional financing as a result of
significant and increasing amounts of accounts receivable due in part to
acquisitions and expansion and delays in reimbursement by third-party payors,
variable patient census, seasonality and fluctuation in quarterly results
regulations, control of the Company by Bruce A. Shear, dependence upon
attraction and retention of key personnel, potential staffing shortages,
competition and reliance on kay clients.

When used, words such as believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise.

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements (including the
Notes thereto) appearing elsewhere in this Prospectus.

The Company

PHC, Inc. (the "Company") is a national health care company specializing in
the treatment of substance abuse, which includes alcohol and drug dependency and
related disorders, and in the provision of psychiatric services. The Company
currently operates two substance abuse treatment facilities: Highland Ridge
Hospital, located in Salt Lake City, Utah, ("Highland Ridge"); and Mount Regis
Center, located in Salem, Virginia, near Roanoke ("Mount Regis") and eleven
psychiatric facilities: Harbor Oaks Hospital ("Harbor Oaks"), a 64-bed
psychiatric hospital located in New Baltimore, Michigan; Harmony Healthcare
("Harmony Healthcare"), a provider of outpatient behavioral health services in
Las Vegas, Nevada; Total Concept EAP ("Total Concept"), a provider of outpatient
behavioral health services in Shawnee Mission, Kansas;" North Point-Pioneer,
Inc. ("NPP") which operates five outpatient behavioral health centers under the
name Pioneer Counseling Center in the greater Detroit metropolitan area, and
Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary providing
outpatient services through a physicians' practice in Roanoke, Virginia. The
Company also operates BSC-NY, Inc. ("BSC") which provides management and
administrative services to psychotherapy and psychological practices in the
greater New York City metropolitan area.

The Company's substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care and
subacute facilities (i.e., facilities designed to provide care to individuals
who no longer require hospital care but who require some medical care), which
permits the Company to provide its clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. The Company tailors these programs
and services to "safety-sensitive" industries and concentrates its marketing
efforts on the transportation, oil and gas exploration, heavy equipment,
manufacturing, law enforcement, gaming, and health services industries.

Harbor Oaks provides psychiatric care to children, adolescents and adults.
The Company draws patients from the local population and uses the facility as a
mental health resource to complement its substance abuse facilities. Harmony
Healthcare and Total Concept provide psychiatric treatment for adults,
adolescents and children. BSC is a manager of psychological service providers
with contracts at over 35 long-term care facilities. NPP provides outpatient
psychiatric treatment for adults, adolescents and children in the Metropolitan
Detroit area. PCV is a physicians' practice specializing in the treatment of
addictive behavior in adults, adolescents and children in the Roanoke Valley,
Virginia area.

In May, 1998 the Company closed Good Hope Center, a substance abuse
treatment facility located in West Greenwich, Rhode Island ("Good Hope") and
entered into an agreement terminating the lease for the facility. Under the
agreement the Company is obligated to pay approximately $125,000. The Company
estimates that it will incur aggregate costs of closing this facility, in
addition to the lease agreement cost, of approximately $120,000. In June, 1998
the Company's sub acute long-term care facility, Franvale Nursing and
Rehabilitation Center ("Franvale"), in Braintree, Massachusetts was closed in a
State Receivership action which was precipitated when the Company caused the
owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to
institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. All
patients have been transferred from Franvale and the assets of the facility are
being liquidated. The Company does not anticipate a negative impact as a result
of the closing of this facility.

The Company intends to limit its business operations to behavioral health
and substance abuse facilities providing services to particular markets through
customized, outcome-oriented programs, which the Company believes produce
overall cost savings to the patient or client organization. The substance abuse
facilities provide treatment services designed to prevent relapse. Such
services, while potentially more costly on a per patient stay basis, often
result in long-term health care cost savings to insurers, patients and patients'
families. The goal of the Company's psychiatric treatment programs is to provide
care at the lowest level of intensity appropriate for the patient in an
integrated delivery system that includes inpatient and outpatient treatment
opportunities. The integrated nature of the Company's psychiatric programs,
which generally involves the same caregivers supervising different treatment
modalities, provides for efficient care delivery and the avoidance of repeat
procedures and diagnostic and therapeutic errors.

The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged into an
inactive publicly held Massachusetts corporation and was the surviving
corporation in the merger. The Company changed its name to "PHC, Inc." as of
November 24, 1992. The Company is based in Massachusetts and is unaffiliated
with an inactive Minnesota corporation of the same name. The Company does
business under the trade name "Pioneer Healthcare" and "Pioneer Behavioral
Health." With the exception of the services provided directly by the Company
under the name Pioneer Development Support Services, the Company operates as a
holding company, providing administrative, legal and programmatic support to its
subsidiaries.

Unless the context otherwise requires, references in this Prospectus to
"Pioneer" and the "Company" mean PHC, Inc. and its subsidiaries. The Company's
executive offices are located at 200 Lake Street, Suite 102, Peabody,
Massachusetts 01960 and its telephone number is (978) 536-2777.

<PAGE>
The Offering

Securities Offered:... 2,211,491 shares of Class A Common Stock. See
"Description of Securities."). The number of shares of Common Stock covered by
this Registration Statement includes, pursuant to rule 429, 627,207 shares of
Common Stock previously registered in registration statement nos. 333-71418,
333-44045 and 333-2246.

Securities Outstanding as of June 30, 1998 (1):

Class A Common Stock 4,935,267 Class B Common Stock 727,328 Class C Common
Stock 0 Preferred Stock 950

NASDAQ Symbol Common Stock: PIHC

Use of Proceeds. The Company will only receive proceeds from the exercise
of warrants and will use such proceeds, if any, as working capital.

Risk Factors. An investment in these securities involves a high degree of
risk. Prospective purchasers should carefully review the factors set forth under
"Risk Factors."

(1) Unless otherwise indicated, the information in this Prospectus does not
give effect to (i) 3,334,710 shares of Class A Common Stock issuable upon the
exercise of outstanding warrants, (ii) 312,550 shares of Class A Common Stock
issuable upon the exercise of the Unit Purchase Option and attached warrants,
(iii) 600,000 shares issuable upon the exercise of options granted or reserved
for issuance under the Company's 1993 Stock Purchase and Option Plan (the "Stock
Plan"), 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan"), and 1995
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), and
(iv) an indeterminable number of shares issuable to the former owners of
Behavioral Stress Centers, Inc. and Pioneer Counseling of Virginia, Inc. in the
event that certain earning targets are achieved. See "Note K" and "Note L" of
the accompanying Financial Statements and "Selling Security Holders" for
additional information.

<PAGE>
Summary Consolidated
Financial Data

Nine Months Ended
March 31, Year Ended June
30,
1998 1997 1997 1996
----------------------------------------------
Statements of Operations
Data:
Revenue.................. $16,148,430 $15,694,971 $21,927,655 $16,758,836
Operating expenses....... 16,748,046 14,765,648 21,887,070 16,187,596
Income (loss) from (599,616) 929,323 40,585 571,240
operations...............
Other expense............ 466,113 475,056 724,182 158,884

Income (loss) from (1,171,238) 424,267 (880,908) 631,517
continuing operations

Income (loss) from (1,829,508) (341,486) (1,958,756) (1,216,832)
discontinued operations

Net income (loss) (3,000,746) 82,781 (2,839,664) (585,315)

Basic Earnings (Loss)per
common share:

Continuing Operations (.23) .13 (.27) .23
Discontinued Operations (.36) (.11) (.60) (.45)

Total (.59) .02 (.87) (.22)

Basic Weighted average
number of

shares outstanding 5,090,919 3,170,222 3,270,175 2,709,504

Diluted Earnings (loss)
per common share:
Continuing Operations (.23) .09 (.27) .18
Discontinued Operations (.36) (.07) (.60) (.34)
Total (.59) .02 (.87) (.16)

Diluted Weighted average
number of shares outstanding 5,090,919 4,855,753 3,270,175 3,615,514

As of March
31,1998
Balance Sheet Data:
Total assets...................... $20,716,982
Working capital................... $3,605,006
Long-term obligations............. $5,867,966
Stockholders' equity.............. $7,507,687

<PAGE>

RISK FACTORS

An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information in this
Prospectus, the following risk factors should be considered carefully in
evaluating whether to invest in the securities offered hereby.

Negative Cash Flow; Need for Additional Financing; Significant and
Increasing Amounts of Accounts Receivable. The Company generated a loss of
$3,000,746 during the first three fiscal quarter of 1998, a loss of $2,839,664
during fiscal year 1997 and a loss of $585,315 during fiscal year 1996. There
can be no assurance that the Company will not incur additional losses in the
future. As a result of significant losses in prior years, as of March 31, 1998
the Company had an accumulated deficit of $7,727,411. The Company experienced a
significant increase in accounts receivable from $6,734,997, as of June 30, 1996
to $10,023,264 as of March 31, 1998 excluding accounts receivable due to Quality
Care Centers of Mass, Inc. of $908,960 which is included in liabilities of
discontinued operations. Primarily as a result of the losses noted above, in
part due to a decline in census, and the increase in accounts receivable, the
Company has had negative cash flow from operations in recent periods. Although
the Company has entered into various accounts receivable funding facilities,
there can be no assurance that the Company will be able to obtain any additional
required financing on terms acceptable to the Company. The inability to obtain
needed financing could have a material adverse effect on the Company's financial
condition, operations and business prospects and there can be no assurance that
the Company will be able to attain or maintain profitability in the future. See
Consolidated Financial Statements and notes related thereto included herein or
incorporated herein by reference.

Lack of Access to Capital to Achieve Acquisition Strategy. The Company
intends to expand its operations through the acquisition or establishment of
additional facilities, and may seek to obtain additional financing from various
sources including banks. The Company's plan to acquire additional facilities in
the future is highly dependent upon its access to capital, of which there can be
no assurance. See "Negative Cash Flow; Need for Additional Financing;
Significant and Increasing Amounts of Accounts Receivable." If the Company is
unable to secure the necessary access to capital it will be unable to acquire
additional facilities which, in turn, will limit the Company's growth.

Reimbursement by Third-Party Payors; Significant and Increasing Accounts
Receivable; Concentration of a Receivable; Change in Service Mix. Payment for
substance abuse treatment is provided by private insurance carriers and managed
care organizations; payment for long-term and subacute care is provided by
private insurance carriers, managed care organizations and the Medicare and the
Medicaid programs; payment for psychiatric services is provided by private
insurance carriers, managed care organizations and the Medicare and the Medicaid
programs. Changes in the sources of the Company's revenues could significantly
alter the profitability of the Company's operations. In general, revenues
derived from the Medicare and Medicaid programs in connection with the long-term
and subacute care services provided by the Company have been less profitable to
the Company than revenues derived from private insurers and managed care
organizations. In addition, the Company experiences greater delays in the
collection of amounts reimbursable by the Medicare and the Medicaid programs
than in the collection of amounts reimbursable by private insurers and managed
care organizations. Accordingly, a change in the Company's service mix from
substance abuse and psychiatric to long-term care could have a material adverse
effect on the Company as would an increase in the percentage of the Company's
patients who are insured by Medicare or Medicaid. In addition, cost containment
pressures from private insurers and the Medicare and the Medicaid programs have
begun to restrict the amount that the Company can charge for its services. If a
substantial number of private insurers and managed care organizations were to
adopt more restrictive reimbursement schedules and if such schedules did not
permit the Company to profitably provide substance abuse treatment and long-term
and subacute health care, the Company's business would be materially adversely
affected. Ten percent of revenues from continuing operations for the quarter
ended March 31, 1998 was related to Government Payors. This amount excludes
revenue from Franvale Nursing and Rehabilitation Center, the long term care
facility, which is reported as discontinued operations. In addition, there can
be no assurance that the Company's existing facilities will continue to meet, or
that proposed facilities will meet, the requirements for reimbursement by
third-party or governmental payors.

The Company had substantial receivables from Medicaid and Medicare of
approximately $946,000, excluding discontinued operations, at March 31, 1998,
which would constitute a concentration of credit risk should these agencies
defer or be unable to make reimbursement payments as due.

A number of substance abuse facilities in the New England area have closed
in recent years, purportedly in part because certain managed care organizations
are no longer willing to pay for inpatient treatment beyond five or ten days,
making it difficult for such facilities to remain in operation. On May 31, 1998
the Company closed its Rhode Island facility which has lost approximately
$85,000 per month over the last nine months due to the cost involved in
operating in the heavy managed care environment of Rhode Island. The Company has
marketed, and intends to continue marketing, its services to managed care
organizations and insurance companies that are willing to reimburse the Company
for longer lengths of stay, particularly with respect to those patients with
severe substance abuse addictions. However, if a growing number of managed care
organizations and insurance companies adopt policies which limit the length of
stay for substance abuse treatment, the Company's business would be materially
adversely affected.

Reimbursement for substance abuse and psychiatric treatment from private
insurers is largely dependent on the Company's ability to substantiate the
medical necessity of treatment in accordance with varying requirements of
different insurance companies. The process of substantiating a claim often takes
up to four months and, as a result, the Company experiences significant delays
in the collection of amounts reimbursable by third-party payors which adversely
affects the Company's working capital condition. The Company's accounts
receivable (net of allowance for bad debts) were $10,023,264 at March 31, 1998,
compared with $9,671,763 at June 30, 1997 and $6,734,997 at June 30, 1996
excluding discontinued operations. Those changes are due primarily to an
increase in patient census in connection with acquisitions. If the Company
expands, the Company will be required to seek payment from a larger number of
payors and the amount of the Company's accounts receivable will likely increase.
In the June 30, 1997 year end detailed review of the Company's allowance for
doubtful accounts, the reserve was deemed to be inadequate to cover future
potential bad debt and was adjusted accordingly. This adjustment resulted in an
increase in allowance for doubtful accounts to $1,942,602 at June 30, 1997 from
$1,059,774 at June 30, 1996 excluding discontinued operations. The Company
further increased this allowance to $2,062,093 at March 31, 1998 in line with
its more aggressive reserve policy. If the amount of receivables which
eventually become uncollectible exceeds such allowance, the Company could be
materially adversely affected. In addition, any decrease in the Company's
ability to collect its accounts receivable or any further delay in the
collection of accounts receivable would have a material adverse effect on the
Company. See the Consolidated Financial Statements and notes related thereto
included herein.

As a general rule, the Company attempts not to accept patients who do not
have either insurance coverage or adequate financial resources to pay for
treatment. Each of the Company's substance abuse facilities does, however,
provide treatment free of charge to a small number of patients each year who are
unable to pay for treatment but who meet certain clinical criteria and who are
believed by the Company to have the requisite degree of motivation for treatment
to be successful. In addition, the Company provides follow-up treatment free of
charge to relapse patients who satisfy certain criteria. Most of the Company's
psychiatric patients are either covered by insurance or pay at least a portion
of treatment costs. The number of patient days attributable to all patients who
receive treatment free of charge in any given fiscal year is in the Company's
discretion and has been less than 5%.

Private insurers, managed care organizations and, to a lesser extent,
Medicaid and Medicare, are beginning to carve-out specific services, including
mental health and substance abuse services, and establish small, specialized
networks of providers for such services at fixed reimbursement rates. Continued
growth in the use of carve-out systems could materially adversely affect the
Company to the extent the Company is not selected to participate in such smaller
specialized networks or if the reimbursement rate is not adequate to cover the
cost of providing the service.

Acquisition and Expansion Risks. The Company intends to expand its business
through acquisition. The acquisitions will be in areas that will further support
the integrated delivery system in markets that the Company currently services.
There can be no assurance that the Company will be successful in identifying
appropriate acquisition opportunities or, if it does, that the Company will be
successful in acquiring such facilities or that the acquired facilities will be
profitable. The ability of the Company to acquire and develop additional
facilities will depend on a number of factors beyond the control of the Company,
including the availability of financing, the ability of the Company to obtain
necessary permits, licenses and approvals as well as the employment of
appropriate personnel to manage and staff the acquired facilities. Moreover, the
attendant risks of expansion could have a material adverse effect on the
Company's business. Start-up facilities could operate at a loss for a
substantial period of time following acquisition. The operating losses and
negative cash flow associated with start-up acquisitions could have a material
adverse effect on the profitability of the Company unless and until such
facilities are fully integrated with the Company's other operations and become
profitable.

Variable Patient Census. The patient census at the Company's substance
abuse and psychiatric facilities decreased from 63.4% to 58.8% occupancy from
fiscal year 1996 to fiscal year 1997 and to 49.5% for the nine months ended
March 31, 1998. There can be no assurance that the Company will be able to
maintain sufficient capacity utilization or pricing in the future to ensure
profitability.

Blind Pool/Acquisition Program. The Company's acquisition program is
directed by Bruce A. Shear, a Director and the President and Chief Executive
Officer of the Company, in conjunction with other members of the Company's Board
of Directors. As consideration for any acquisition, in addition to the payment
of cash (if any), the Company may issue notes, common stock, preferred stock or
other securities. Key employees of acquired companies may become employees of
the Company and may hold management positions in the Company. The Company does
not intend to seek stockholder approval for any such acquisitions unless
required by applicable law or regulations. Accordingly, investors will be
substantially dependent upon the business judgment of management in making such
acquisitions. The Company intends to engage in a program to seek acquisitions in
business areas related or complementary to the present business of the Company
and currently plans to acquire one or more substance abuse facilities and/or
psychiatric facilities. There can be no assurance that the Company will be able
to attract management to operate any additional facilities or, if the Company
cannot attract such management, that the Company's current management will be
able to devote a sufficient amount of time to managing any additional
facilities.

Seasonality and Fluctuation in Quarterly Results. The Company experiences
and expects to continue to experience a decline in revenue in its fiscal
quarters ending December 31 primarily due to a seasonality decline in revenue
from the Company's substance abuse facilities during this period.

Regulation. The Company and the health care industry are subject to
extensive federal, state and local regulation with respect to licensure and
conduct of operations at existing facilities, construction of new facilities,
acquisition of existing facilities, the addition of new services, compliance
with physical plant safety and land use requirements, implementation of certain
capital expenditures and reimbursement for services rendered. Health care
facilities, including those operated by the Company, are subject to periodic
inspections by governmental authorities to ensure compliance with licensure
standards and to permit continued participation in third-party payor
reimbursement programs, including the Medicare and the Medicaid programs, where
applicable. Although, to the best of the Company's knowledge, all of the
Company's existing facilities are currently in compliance with all material
governmental requirements, there can be no assurance that the Company will be
able to obtain new licenses to effect its acquisition strategy or maintain its
existing licenses and reimbursement program participation approvals. It is not
possible to accurately predict the content or impact of future legislation and
regulations affecting the health care industry. The Company's ability to develop
or acquire new facilities is dependent upon its ability to secure requisite
certificates or determinations of need, licenses, permits and reimbursement
program participation approvals. If the Company is unable to obtain required
licenses and approvals for new projects, or if its existing licenses or
approvals are restricted, rescinded or revoked, its growth would be limited and
its business would be materially adversely affected.

In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs.
Currently, Congress and the President contemplate plans to reduce Medicare
spending over the next ten years. Preliminary indications suggest that, in
addition to increased costs to beneficiaries, the plan would attempt to impose a
disproportionate share of the burdens of reform upon health care providers.
Additionally, proposed congressional spending reductions for the Medicaid
program, possibly involving the issuance of block grants to states, is likely to
hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. The Commonwealth of Massachusetts has already implemented a
mental health/substance abuse managed care program for its Medicaid population,
which, in general, has increased administrative oversight and reduced revenues
for mental health/substance abuse providers. As a result of this reform activity
the Company can give no assurance that payments under such programs will in the
future remain at a level comparable to the present level or be sufficient to
cover the costs allocable to such patients. In addition, many states, including
the Commonwealth of Massachusetts and the State of Michigan, are considering
reductions in state Medicaid budgets.

Control of the Company by Bruce A. Shear. The holders of the Company's
Class B Common Stock are entitled to five votes per share on any matter
requiring stockholder action, and the holders of the Class A Common Stock are
entitled to one vote per share, except with respect to the election of
directors. The holders of the Class A Common Stock are entitled to elect two
members to the Company's five-member Board of Directors and the holders of the
Class B Common Stock are entitled to elect the remaining directors. Assuming no
exercise of any options or warrants and no conversion of any debentures or
preferred stock, at May 31, 1998 the holders of the Class B Common Stock
beneficially own 12.9% of the Company's Common Stock, but have 44.5% of the
total voting power. Bruce A. Shear and his affiliates own and control 11.9% of
the Common Stock, but hold 37.8% of the total voting power

Dependence Upon Attraction and Retention of Key Personnel; Potential
Staffing Shortages. The Company is highly dependent on the principal members of
its management and professional staff, particularly Bruce A. Shear, the
Company's President and Chief Executive Officer, Robert H. Boswell, the
Company's Executive Vice President and the other members of the Company's
management. Although the Company has obtained key man insurance in the amount of
$1,000,000 on the life of Mr. Shear, the loss of any key person would have a
material adverse effect on the Company's business. In addition, the Company's
success will depend, in large part, on its ability to attract and retain highly
qualified personnel, particularly skilled health care personnel. The Company
faces competition for such personnel from governmental agencies, health care
providers and other companies. The Company has not to date experienced
substantial difficulty in hiring appropriate personnel to staff its facilities.
However, if there were a shortage of trained health care personnel in the
geographic markets in which the Company conducts or proposes to conduct its
business, such shortages could increase the Company's operating costs and limit
its expansion opportunities. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires for continued
growth. Similarly, if the Company acquires additional facilities, there can be
no assurance that it will be able to attract management to operate such
facilities or, if it cannot attract such management, that the Company's current
management will be able to devote a sufficient amount of time to managing such
additional facilities.

Competition. The health care business is highly competitive and subject to
excess capacity. The Company's competitors include both not-for-profit and
for-profit hospitals, health care companies specializing in substance abuse,
psychiatric services and subacute services and nursing home chains, many of
which have substantially greater resources than the Company.

Reliance on Key Clients. The Company has entered into relationships with
large employers, health care institutions and labor unions to provide treatment
for psychiatric disorders, chemical dependency and substance abuse in
conjunction with employer-sponsored employee assistance programs. The employees
of such institutions may be referred to the Company for treatment, the cost of
which is reimbursed on a per diem or per capita basis. Although none of these
large employers, health care institutions or labor unions accounts for 10% or
more of the Company's consolidated revenues, the loss of any of these key
clients would require the Company to expend considerable effort to replace
patient referrals and would result in revenue losses to the Company and
attendant loss in income.

Possible Nasdaq Delisting. The Company has been informally advised by the
staff of Nasdaq that an issuance of stock by the Company at a significant
discount to market would likely result in a review by Nasdaq of the Company's
continued listing. From time to time the company does issue stock at a discount
to market. Although the Company believes that the pricing of the securities
issued by the Company at a discount to market from time to time is not
significant enough to result in a Nasdaq review of the Company's listing, there
can be no assurance that Nasdaq will not conduct such a review, or otherwise
take action to delist the Class A Common Stock. The Company would oppose such
action through all reasonable administrative and judicial means.

Although the Company's Class A Common Stock is listed on Nasdaq, there can
be no assurance that the Company will meet the criteria for continued listing of
securities on Nasdaq. These continued listing criteria include that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in capital
and surplus, (ii) the minimum bid price of the Class A Common Stock be $1.00 per
share or the market value of the freely tradable Class A Common Stock ("public
float") be at least $1,000,000 and the value of its capital and surplus be at
least $2,000,000, (iii) there be at least 100,000 shares in the Company's public
float with a market value of at least $200,000, (iv) there be at least two
active market makers in the Class A Common Stock and (v) the Company's Stock be
held by at least 300 holders.

Furthermore, Nasdaq's Board of Directors has recently voted to revise the
listing standards for the SmallCap Market. Such proposed changes would require
that (i) for two of the last three years, the Company must maintain at least
$2,000,000 in net tangible assets, or at least $35,000,000 in market
capitalization, or at least 500,000 shares in the Company's public float with a
market value of at least $1,000,000. The criteria relating to bid price, market
makers and shareholders would not be changed by this proposal. Currently, the
Company meets these new criteria, but there can be no assurances that it will
continue to meet such criteria.

If the Company becomes unable to meet such criteria and is delisted from
Nasdaq, trading, if any, in the Class A Common Stock would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
then available, on the National Association of Securities Dealers Inc.'s
"Electronic Bulletin Board." As a result, an investor would likely find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
the Company's securities.

Risk of Low-Priced Stocks; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities. If the Company's securities were
delisted from Nasdaq, they may become subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). For transactions covered by
this Rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, such Rule may affect the ability of broker-dealers
to sell the Company's securities and may affect the ability of purchasers in
this offering to sell any of the securities acquired hereby in the secondary
market.

The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. As of July 10, 1998 the closing price of the Company's
stock as reported on Nasdaq was $1.75. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.

The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on the Nasdaq National Market
System, are otherwise listed on Nasdaq and have certain price and volume
information provided on a current and continuing basis, or if the Company meets
certain minimum net tangible assets or average revenue criteria. While the
Company currently meets these criteria, there can be no assurance that the
Company's securities will continue to qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of
penny stock from associating with a broker-dealer or participating in a
distribution of penny stock, if the Commission finds that such a restriction
would be in the public interest.

If the Company's securities were subject to the rules on penny stocks, the
market liquidity for the Company's securities would be materially adversely
affected.

Dividends. The Company has not paid any cash dividends on common stock
since its inception and does not anticipate paying cash dividends on common
stock in the foreseeable future. The Company has a series of Preferred Stock
outstanding which would preclude the Company from paying dividends on Common
Stock until all Preferred Stock dividends have been paid.

Possible Adverse Effects of Authorization of Preferred Stock. The Company's
Restated Articles of Organization authorize the issuance of 1,000,000 shares of
Preferred Stock on terms which may be fixed by the Company's Board of Directors
without further stockholder action. The terms of any series of Preferred Stock,
which may include priority claims to assets and dividends and special voting
rights, could adversely affect the rights of holders of the Common Stock. The
issuance of the Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions, financing transactions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, capital
stock of the Company. In May 1997 the Company issued 1,000 shares of Convertible
Preferred Stock for $1,000,000. As of June 30, 1997 half of the Convertible
Preferred Stock had been converted into 229,964 shares of Class A Common Stock.
On August 20, 1997, 246,305 shares of Class A Common Stock were issued upon
conversion of the remaining shares of Convertible Preferred Stock. In accordance
with the Preferred Stock agreement, these shares were issued at a discount of
$200,000 from fair market value which was reflected as additional dividend in
the June 30, 1997 Financial Statements. On March 18, 1998 the Company issued 950
shares of Convertible Preferred Stock for $950,000, convertible for Class A
Common Stock at 80% of the average closing bid price five days prior to the
conversion date but not less than $1.88 or more than $3.50 per share, and
Warrants to purchase 49,990 shares of the Company Class A Common Stock for $2
5/16 per share.

Thin Float. The average weekly trading volume of the Company's Class A
Common Stock for the period from July 1, 1997 to March 31, 1998 was 339,441
shares. There can be no assurance that the weekly trading volume will not remain
at the same level or decline. As a result of the thin float in the Company's
stock, a small number of transactions can result in significant swings in the
market price of the Company's stock, and it may be difficult for stockholders to
dispose of the Company's stock in a timely way at a desirable market price.

<PAGE>
DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock. While
there are currently no restrictions on the Company's ability to pay dividends
the Company anticipates that future earnings, if any, will be retained for use
in the business or for other corporate purposes, and it is not anticipated that
cash dividends in respect of Common Stock will be paid in the foreseeable
future. Any decision as to the future payment of dividends will depend on the
results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.

MARKET FOR COMMON STOCK

The following table sets forth, for the periods indicated, the high and low
sale prices of the Company's Class A Common Stock, as reported on the Nasdaq
SmallCap Market.

1995 High Low
First Quarter....................... $ 6 3/4 $ 6
Second Quarter...................... $ 6 1/2 $ 6
Third Quarter....................... $ 6 1/4 $ 5 1/8
Fourth Quarter...................... $ 7 3/8 $ 5 1/8

1996
First Quarter....................... $ 7 3/4 $ 6 1/2
Second Quarter...................... $ 7 3/8 $ 5 1/2
Third Quarter....................... $ 9 5/8 $ 5 1/4
Fourth Quarter...................... $ 9 3/4 $ 7

1997
First Quarter....................... $ 9 5/8 $ 6 1/2
Second Quarter...................... $ 7 1/8 $ 4 5/8
Third Quarter....................... $ 5 5/8 $ 1 3/4
Fourth Quarter $ 4 3/8 $ 2 1/8

1998
First Quarter....................... $ 3 9/16 $ 2 1/4
Second Quarter...................... $ 3 $ 1 7/8
Third Quarter....................... $ 2 13/16 $ 1 7/8
Fourth Quarter...................... $ 2 7/16 $ 1 5/8

On June 30, 1998, the last reported sale price of the Class A Common Stock
on the Nasdaq SmallCap Market was $2.00. As of June 30, 1998, there were 449
holders of record of the Company's Class A Common Stock and 315 holders of
record of the Company's Class B Common Stock.

USE OF PROCEEDS

<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1998. This table should be read in conjunction with the Consolidated
Financial Statements and related notes appearing elsewhere in this Prospectus.

As of
March
31, 1998

Long-term debt, Including Current Maturities........... $4,049,569
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; 950 shares issued and outstanding .......... 10
Class A Common Stock; $.01 par value; 20,000,000
shares authorized; 4,932,303 shares issued(1)........... 49,323
Class B Common Stock, $.01 par value; 2,000,000
shares authorized; 730,292 shares issued................ 7,303

Additional paid-in capital..................... 15,216,280
Treasury Stock 8,656 common shares at cost.... (37,818)
Accumulated deficit........................... (7,727,411)
Total stockholders' equity.................... 7,507,687

Total capitalization................................... $11,557,256

(1) Does not include: (i) 3,334,710 shares of Class A Common Stock
issuable upon the exercise of outstanding warrants, (ii) 312,550 shares of
Class A Common Stock issuable upon the exercise of the Unit Purchase Option
and attached warrants, (iii) 600,000 shares issuable upon the exercise of
options granted or reserved for issuance under the Company's 1993 Stock
Purchase and Option Plan (the "Stock Plan"), 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"), and 1995 Non-Employee Director Stock Option
Plan (the "Non-Employee Director Plan"), and (iv) an indeterminable number of
shares issuable to the former owners of Behavioral Stress Centers, Inc. and
Pioneer Counseling of Virginia, Inc. in the event that certain earning
targets are achieved. See "Note K" and "Note L" of the accompanying
Financial Statements and "Selling Security Holders" for additional
information.

<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for each of the
two years ended June 30, 1997 and 1996 have been derived from the Company's
consolidated financial statements, which have been audited by Richard A. Eisner
& Company, LLP, independent auditors, as of June 30, 1997 and June 30, 1996. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and other financial
information appearing elsewhere in this Prospectus.

Nine Months Ended
March 31, Year Ended June
30,
1998 1997 1997 1996
-------------------------------------------
Statements of Operations
Data:
Revenue.................. $16,148,430 $15,694,971 $21,927,655 $16,758,836
Operating expenses...... 16,748,046 14,765,648 21,887,070 16,187,596
Income (loss) from (599,616) 929,323 40,585 571,240
operations...............
Other expense............ 466,113 475,056 724,182 158,884

Income (loss) from (1,171,238) 424,267 (880,908) 631,517
continuing operations

Income (loss) from (1,829,508) (341,486) (1,958,756) (1,216,832)
discontinued operations

Net income (loss) (3,000,746) 82,781 (2,839,664) (585,315)

Basic Earnings (Loss)per
share:

Continuing Operations (.23) .13 (.27) .23
Discontinued Operations (.36) (.11) (.60) (.45)

Total (.59) .02 (.87) (.22)

Basic Weighted average
number of

shares outstanding 5,090,919 3,170,222 3,270,175 2,709,504

Diluted Earnings (loss)
per share:
Continuing Operations (.23) .09 (.27) .18
Discontinued Operations (.36) (.07) (.60) (.34)
Total (.59) .02 (.87) (.16)

Diluted Weighted average
number of

shares outstanding 5,090,919 4,855,753 3,270,175 3,615,514

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of
operations of the Company for the nine months ended March 31, 1998 and March 31,
1997 and the two years ended June 30, 1997. It should be read in conjunction
with the Consolidated Financial Statements of the Company and related Notes
appearing elsewhere in this Prospectus.

Overview

The Company presently provides health care services through two substance abuse
treatment centers, a psychiatric hospital and several outpatient psychiatric
centers (collectively called "treatment facilities"). The profitability of the
Company is largely dependent on the level of patient occupancy at these
treatment facilities. The Company's administrative expenses do not vary greatly
as a percentage of total revenue but the percentage tends to decrease slightly
as revenue increases because of the fixed components of these expenses.

The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement In addition, there are ongoing debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown.

Results of Operations

Nine months ended March 31, 1998 Compared to the nine months ended March 31,
1997

Net patient care revenue increased 2.8% to $16,148,430 for the nine months ended
March 31, 1998 from $15,694,971 for the nine months ended March 31, 1997. This
increase in revenue is due to the acquisition of Pioneer Counseling of Virginia
in January 1997. The Company recorded a loss from continuing operations of
$1,171,238 for the nine months ended March 31, 1998 as compared to income from
continuing operations of $424,267 for the nine months ended March 31, 1997. This
loss is due in part to a decline in census in the chemical dependency facilities
and an overall increase in provision for bad debts. Good Hope, the Company's
chemical dependency facility in Rhode Island, continued to operate at a loss
because of a decline in length of stay and lower reimbursements from third party
payors. As a result of these continued losses the Company closed the facility on
May 31, 1998. On May 27, 1998, PHC of Rhode Island, Inc. ("PHRI"), the operating
Company of Good Hope Center, entered into an agreement with NMI Realty, ("NMI")
the owners of the Good Hope Center real estate. This agreement releases PHRI
from the remaining 16 years on the Good Hope Center property lease in exchange
for approximately $35,000 of the PHRI net fixed assets and a total payment of
approximately $125,000 over the next seven months.

PHRI will continue to incur some operating expenses over the next several months
as a result of the costs related to the ongoing collection of Accounts
Receivable. The closure of PHRI will eliminate approximately $65,000 in losses
each month and further enhance the profitability of PHC.

In addition to the loss from continuing operations, the Company's long term care
facility which is reported as discontinued operations recorded a loss of
$1,829,508 for the nine months ended March 31, 1998 as compared to a net loss of
$341,486 for the nine months ended March 31, 1997. The facility is currently in
State Receivership while remaining patients are being transferred to other
facilities. (See "State Receivership" Risk Factor).

Year ended June 30, 1997 Compared to Year ended June 30, 1996

The Company experienced a loss from continuing operations for fiscal year ended
June 30, 1997. This is due to the losses incurred by Good Hope Center and a
significant increase in reserve for bad debts. The environment the Company
operates in today makes collection of receivables, particularly older
receivables, more difficult than in previous years. Accordingly, the Company has
recorded an increase in its accounts receivable reserve and has adopted a more
stringent reserve policy going forward as well as instituting a more aggressive
collection policy. A substantial portion of the increase in the reserve was
recorded in the fourth fiscal quarter. The Company reviewed these adjustments to
determine if some of the adjustments should have been made in prior fiscal
quarters. The Company concluded that it is not possible to determine what
adjustments, if any, should have been made in prior fiscal quarters of 1997
because the information on which the year-end analysis was based is not
available on a quarterly basis. The Company has changed its internal systems to
make such information available on a quarterly basis in the future and will
analyze such data to determine the adequacy of its reserves for future quarterly
financial statements which commenced with the quarter ended September 30, 1997.

Total patient care revenue from all facilities increased 30.8% to
$21,927,655 for the year ended June 30, 1997 from $16,758,836 for the year ended
June 30, 1996. These revenue amounts include $1,757,763 and $1,081,864
respectively of Good Hope Center which was closed by the Company in May 1998.
This revenue excludes revenues from the long term care facility which is
reported as discontinued operations. This increase in revenue is due primarily
to acquisitions.

Total patient care expenses for all facilities increased 29.7% to
$10,346,111 for the year ended June 30, 1997 from $7,974,811 for the year ended
June 30, 1996. This increase in expenses is due primarily to acquisitions.
Patient care expenses at the Company's long-term care facility increased to
$4,090,673 for fiscal 1997 from $4,029,572 in fiscal 1996 (approximately 1.5%).

Liquidity and Capital Resources

For the two fiscal years ended June 30, 1998, the Company met its cash flow
needs through Accounts Receivable financing and by issuing a significant number
of debt and equity securities as follows:

DATE TRANSACTION NUMBER PROCEEDS MATURITY TERMS STATUS
TYPE OF DATE
SHARES
11/96 Warrant 25,000 10/7/2001 $2.00 outstanding
issued as exercise
a payment price as
of commission adjusted
on Convertible 7/97
Debentures issued
for
services
11/96 Convertible $3,125,000 12/31/98 7% Interest Converted
Debentures per Yr. 8/97

2/97 Warrant 3,000 2/18/2002 $2.80 per outstanding
issued in 1.25
exchange shares
for Investor adjusted
Relations for
services dilution
issued
for
services
3/97 Warrant 160,000 3/31/2002 exercise outstanding
issued in price
exchange $2.62
for Investor issued
Relations for
services services
3/97 Warrant 150,000 3/31/2002 $2.00 outstanding
issued in exercise
lieu of price
cash for a issued
penalty on in lieu
the late of
registration payment
of Convertible of
Preferred Stock penalty
5/97 Convertible 1,000 $1,000,000 05/31/99 6% Interest Converted
Preferred per Yr. 6/97 thru
Stock convertible 8/97
at 80%
of 5 day
average
bid
price.
6/97 Warrant 50,000 06/04/2002 exercise outstanding
issued in price
conjunction $2.75
the Private
Placement of
Convertible
Preferred
Stock 5/97
9/97 Common 172,414 $ 445,000 N/A Issued Common
Stock with Stock Sold
warrants
at a
3.3%
discount
9/97 Warrant 86,207 09/30/2002 exercise outstanding
issued in price
conjunction $2.90
the Private
Placement of
Convertible
Preferred
Stock
9/97 Warrant 150,000 05/31/2002 exercise outstanding
issued in price
exchange $2.50
for cash and
financial
advisory
services
12/97 Mortgage $ 500,000 10/31/2001 Prime outstanding
advance Plus 5%
3/98 Warrant 3,000 03/10/2003 exercise outstanding
issued as price
a penalty $2.90
for late
registration
statement
filing on
the Private
Placement
of Common
Stock
3/98 HCFP Note $ 350,000 11/10/98 Prime outstanding
as Plus 3.5%
extended
3/98 Warrants 52,500 03/10/2003 exercise outstanding
issued as price
additional $2.38
interest on
3/98 debt
7/98 Warrants 52,500 07/10/2003 exercise outstanding
issued as price
additional $1.81
interest on
extension of
3/98 debt
3/98 Convertible 950 $ 950,000 03/18/2000 6% outstanding
Preferred Interest
Stock per Yr.
convertible
at 80%
of 5 day
average
bid
price.
3/98 Warrants 49,990 03/18/2003 exercise outstanding
issued in price
connection $2.31
with the
Private
Placement of
Convertible
Preferred
Stock 3/98

A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Accounts receivable from patient
care increased 3.6% to $10,023,264 during the nine months ended March 31, 1998
from $9,671,763 at June 30, 1997 and 43.6% from $6,734,997 at June 30, 1996. The
increase in accounts receivable is net of the sale of certain receivables to
LINC Finance Corporation VIII (LINC). This increase in receivables is primarily
due to increase in revenues from new acquisitions. The Company continues to
closely monitor its accounts receivable balances and implement procedures and
policies, including more aggressive collection techniques, to manage this
receivables growth and keep it consistent with growth in revenues. In February
1998 the Company entered into an accounts receivable funding revolving credit
agreement with Healthcare Financial Partners-Funding II, L.P. ("HCFP"), on
behalf of five of its subsidiaries, which provides for funding of up to
$4,000,000 based on outstanding receivables. The outstanding balance on this
receivables financing on May 31, 1998 was approximately $1,450,000.

The Company believes that it will meet future financing needs through the
accounts receivable funding to sustain existing operations for the foreseeable
future. The Company also intends to renew the expansion of its operations
through the acquisition or establishment of additional treatment facilities
after the close of Franvale is completed and the residual costs of Good Hope
Center are final. The Company's expansion plans will be dependent upon obtaining
adequate financing as opportunities arise.

<PAGE>
BUSINESS

Introduction

PHC, Inc. (the "Company") is a national health care company specializing in
behavioral healthcare which consists of treating substance abuse, including
alcohol and drug dependency and related disorders, and providing psychiatric
services. The Company currently operates two substance abuse treatment
facilities: Highland Ridge Hospital, located in Salt Lake City, Utah, ("Highland
Ridge")and Mount Regis Center, located in Salem, Virginia, near Roanoke ("Mount
Regis"). The Company operates ten psychiatric facilities: Harbor Oaks Hospital
("Harbor Oaks"), a 64-bed psychiatric hospital located in New Baltimore,
Michigan; Harmony Healthcare ("Harmony Healthcare"), a provider of outpatient
behavioral health services in Las Vegas, Nevada; Total Concept EAP ("Total
Concept"), a provider of outpatient behavioral health services in Shawnee
Mission, Kansas; North Point-Pioneer, Inc. ("NPP") which operates five
outpatient behavioral health centers under the name Pioneer Counseling Center in
the greater Detroit metropolitan area, and Pioneer Counseling of Virginia, Inc.
("PCV"), an 80% owned subsidiary providing outpatient services through a
physicians' practice in Roanoke, Virginia. BSC-NY, Inc. ("BSC") provides
management and administrative services to psychotherapy and psychological
practices in the greater New York City metropolitan area. The Company's
substance abuse facilities provide specialized treatment services to patients
who typically have poor recovery prognoses and who are prone to relapse. These
services are offered in small specialty care and subacute facilities (i.e.,
facilities designed to provide care to individuals who no longer require
hospital care but who require some medical care), which permits the Company to
provide its clients with efficient and customized treatment without the
significant costs associated with the management and operation of general acute
care hospitals. The Company tailors these programs and services to
"safety-sensitive" industries and concentrates its marketing efforts on the
transportation, oil and gas exploration, heavy equipment, manufacturing, law
enforcement, gaming and health services industries.

Harbor Oaks Hospital, the Company's psychiatric hospital, provides
psychiatric care to adults, adolescents and children and draws patients from the
local population. This facility is also used as a mental health resource to
complement its substance abuse facilities. Harmony Healthcare ("Harmony
Healthcare") and Total Concept, EAP ("Total Concept") provide outpatient
psychiatric treatment for adults, adolescents and children with a concentration
of individuals in the gaming industry. BSC-NY, Inc. ("BSC") provides management
and administrative services to Perlow Physicians, PC which provides psychiatric
services under contract to over 35 psychotherapy and psychological practices in
the greater New York City metropolitan area. Additionally, BSC provides billing
and administrative services for the Company's Joint Venture with Lexington
Healthcare Group, Inc., Behavioral Rehab Services of Connecticut, Inc. North
Point - Pioneer, Inc. ("NPP") operates five outpatient psychiatric centers which
provide psychiatric treatment for adults, adolescents and children in the
Metropolitan Detroit area. Pioneer Counseling of Virginia, Inc. ("PCV") is a
physicians' practice specializing in the treatment of behavioral disorders in
adults, adolescents and children in the Roanoke Valley, Virginia area.

The Company's strategy of providing services to particular markets has
resulted in customized, outcome-oriented programs, which the Company believes
produce overall cost savings to the patient or client organization. The
substance abuse facilities provide treatment services designed to prevent
relapse. Such services, while potentially more costly on a per patient stay
basis, often result in long-term health care cost savings to insurers, patients
and patients' families. The goal of the Company's psychiatric treatment programs
is to provide care at the lowest level of intensity appropriate for the patient
in an integrated delivery system that includes inpatient and outpatient
treatment. The integrated nature of the Company's psychiatric program, which
generally involves the same caregivers supervising different treatment
modalities, provides for efficient care delivery and the avoidance of repeat
procedures and diagnostic and therapeutic errors.

The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged into an
inactive publicly held Massachusetts corporation and was the surviving
corporation in the merger. The Company changed its name to "PHC, Inc." as of
November 24, 1992. The Company is based in Massachusetts and is unaffiliated
with an inactive Minnesota corporation of the same name. The Company does
business under the trade name "Pioneer Healthcare." and "Pioneer Behavioral
Health". With the exception of the services provided directly by the Company
under the name Pioneer Development Support Services, the Company operates as a
holding company, providing administrative, legal and programmatic support to its
subsidiaries.

The Company intends to concentrate on owning and operating inpatient and
outpatient substance abuse and psychiatric treatment facilities and to expand
through the acquisition of new facilities.

<PAGE>

PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

Industry Background

The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.

To contain costs associated with behavioral health issues, in the 1980's
many private payors instituted managed care programs for reimbursement, which
include pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient substance
abuse facilities. The Company believes that it has addressed these cost
containment measures by specializing in treating relapse-prone patients with
poor prognoses who have failed in other treatment settings. These patients
require longer lengths of stay and come from a wide geographic area. The Company
continues to develop alternatives to inpatient care including partial day and
evening programs in addition to onsite and offsite outpatient programs.

The Company believes that because of the apparent unmet need for certain
intense clinical and medical services, its strategy has been successful
despite national trends towards outpatient treatment, shorter inpatient stays
and rigorous scrutiny by managed care organizations.

The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population. Highland Ridge in Utah
specializes in providing services to high-risk, relapse-prone chronic alcoholics
and drug addicts. Mount Regis in Virginia specializes in the treatment of
minority groups and dual diagnosis patients (those suffering from both substance
abuse and psychiatric disorders). The Company's clinicians often work directly
with managers of employee assistance programs to select the best treatment
facility possible for their clients.

Each of the Company's facilities operates a case management program for
each patient. This includes a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.

In general, the Company attempts not to accept patients who do not have
either insurance coverage or adequate financial resources to pay for treatment.
Each of the Company's substance abuse facilities does, however, provide
treatment free of charge to a small number of patients each year who are unable
to pay for treatment but who meet certain clinical criteria and who are believed
by the Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.

The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act) (the "Drug Free Workplace Act"),
requires employers who are Federal contractors or Federal grant recipients to
establish drug free awareness programs to inform employees about available drug
counseling, rehabilitation and employee assistance programs and the consequences
of drug abuse violations. In response to the Drug Free Workplace Act, many
companies, including many major national corporations and transportation
companies, have adopted policies that provide for treatment options prior to
termination of employment.

Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company as a
result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.

Highland Ridge

Highland Ridge is a 34-bed alcohol and drug treatment hospital which the
Company has been operating since 1984. It is the oldest free-standing substance
abuse hospital in Utah. Highland Ridge is accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") and is licensed by the Utah
Department of Health. Highland Ridge is recognized nationally for its excellence
in treating substance abuse disorders.

Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.

Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.

A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.

Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a recent research project conducted by the
University of Utah Medical School. The research explored the relationship
between individual motivation and treatment outcomes. The research was regulated
and reviewed by the Human Subjects Review Board of the University of Utah and
was subject to federal standards that delineated the nature and scope of
research involving human subjects. Highland Ridge benefited from this research
by expanding its professional relationships within the medical school community
and by applying the findings of the research to improve the quality of services
the Company delivers.

SPECIALIZED TREATMENT SERVICE

In the spring of 1994, the Company began to operate a crisis hotline
service under contract with a major transportation client. The hotline, Pioneer
Development Support Services, or PDS2 ("PDS2"), is a national, 24-hour telephone
service which supplements the services provided by the client's Employee
Assistance Programs. The services provided include information, crisis
intervention, critical incidents coordination, employee counselor support,
client monitoring, case management and health promotion. The hotline is staffed
by counselors who refer callers to the appropriate professional resources for
assistance with personal problems. Five major transportation companies
subscribed to these services as of June 30, 1997. This operation is physically
located in Highland Ridge Hospital, but services are provided by staff dedicated
to PDS2. PDS2 is currently operated by the parent entity, PHC, Inc.

Mount Regis Center

Mount Regis is a 25-bed, free-standing alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The center, which was acquired in
1987, is the oldest of its kind in the Roanoke Valley. Mount Regis is accredited
by the JCAHO, and licensed by the Department of Mental Health, Mental
Retardation and Substance Abuse Services of the Commonwealth of Virginia. In
addition, Mount Regis operates Changes, a free standing outpatient clinic. The
Changes clinic provides structured intensive outpatient treatment for patients
who have been discharged from Mount Regis and for patients who do not need the
formal structure of a residential treatment program. The program is licensed by
the Commonwealth of Virginia and approved for reimbursement by major insurance
carriers.

The programs at Mount Regis are designed to be sensitive to needs of women
and minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has
established programs which allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are designed to prevent relapse.

General Psychiatric Facilities

Introduction

The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse will enable it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.

The Company's inpatient psychiatry services are offered at Harbor Oaks. The
Company currently operates five outpatient psychiatric facilities.

The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care.
Case management is handled by an attending physician and a case manager with
continuing oversight of the patient as the patient receives care in different
locations or programs. The integrated delivery system allows for better patient
tracking and follow-up, and fewer repeat procedures and therapeutic or
diagnostic errors. Each new patient receives a thorough diagnostic write-up and
a full history is taken. In addition, new patients also receive a full physical
examination after which an individualized treatment program is designed which
may include inpatient and/or outpatient treatment at one or more of the
company's facilities.

Patients are referred from managed health care organizations, state
agencies, individual physicians and by patients themselves. The patient
population at these facilities ranges from children as young as 5 years of age
to senior citizens. The psychiatric facilities treat a larger percentage of
female patients than the substance abuse facilities.

Harbor Oaks

Harbor Oaks Hospital is a 64 bed psychiatric hospital located in New
Baltimore, Michigan, approximately 20 miles northeast of Detroit, which was
acquired by the Company in September, 1994. Harbor Oaks Hospital is licensed by
the Michigan Department of Commerce and is accredited by JCAHO. Harbor Oaks
provides inpatient psychiatric care, partial hospitalization and outpatient
treatment to children, adolescents and adults. Harbor Oaks Hospital has serviced
clients from Macomb, Oakland and St. Clair Counties and has now expanded its
coverage area to include Wayne, Sanilac and Livingston Counties.

Until March, 1998, Harbor Oaks Hospital worked in conjunction with New Life
Treatment Centers, Inc. ("New Life") to offer counseling programs with a
traditional Christian philosophy on an inpatient and partial hospitalization
basis. The contract with New Life had an initial term of two years commencing on
July 25, 1995 and was terminated on May 22, 1998 by mutual agreement.

The Company utilizes the Harbor Oaks facility as a mental health resource
to complement its nationally focused substance abuse treatment programs. Harbor
Oaks Hospital has a specialty program that treats substance abuse patients who
have a coexisting psychiatric disorder. This program provides an integrated
holistic approach to the treatment of individuals who have both substance abuse
and psychiatric problems. The program is offered to both adults and adolescents.

On February 10, 1997, Harbor Oaks Hospital opened an 8-bed adjudicated
residential unit serving adolescents with a substance abuse problem and a
co-existing mental disorder who have been adjudicated to have committed criminal
acts and who have been referred or required to undergo psychiatric treatment by
a court or family service agency. The patients in the program range from 13 to
18 years of age. The program provides patients with educational and recreational
activities and adult life functioning skills as well as treatment. Typically, a
patient is admitted to the unit for 30 days to six months, with a case review at
six months to determine if additional treatment is required. On May 1, 1998 the
State authorized the addition of four beds to the adjudicated residential unit
and on June 26, 1998 the State authorized an additional eight beds for a total
of 20 beds currently available in this unit.

Harmony Healthcare

Harmony Healthcare, located in Las Vegas, Nevada, provides outpatient
psychiatric care to children, adolescents and adults in the local area. Harmony
also operates employee assistance programs for railroads, health care companies
and several large casino companies including Boyd Gaming Corporation, the MGM
Grand, the Mirage and Treasure Island resorts with a rapid response program to
provide immediate assistance 24 hours a day.

Total Concept EAP

Total Concept, an outpatient clinic located in Shawnee Mission, Kansas,
provides psychiatric and substance abuse treatment to children, adolescents and
adults and manages employee assistance programs for local businesses, gaming,
railroads and managed health care companies.

North Point-Pioneer, Inc.

NPP consists of five psychiatric clinics in Michigan. The clinics provide
outpatient psychiatric and substance abuse treatment to children, adolescents
and adults operating under the name Pioneer Counseling Center. The five clinics
are located in close proximity to the Harbor Oaks facility which provides more
efficient integration of inpatient and outpatient services, a larger coverage
area and the ability to share personnel which results in cost savings.

Pioneer Counseling of Virginia, Inc.

PCV provides outpatient psychiatric services to adults, adolescents and
children through a physicians' practice in Roanoke, Virginia. PCV is 80% owned
by the Company. The medical directors, who are employees of the Company, own the
remaining 20%.

BSC-NY, Inc.

BSC provides management and administrative services to psychotherapy and
psychological practices in the greater New York City metropolitan area.
Additionally, BSC provides billing and administrative services for the Company's
Joint Venture with Lexington Healthcare Group, Inc., Behavioral Rehab Services
of Connecticut, Inc.

<PAGE>

Operating Statistics

The following table reflects selected financial and statistical information
for all psychiatric services.

Nine Months Ended Year Ended June 30,
March 31,
1998 1997 1997 1996
Inpatient*
Net patient service
revenues $9,013,937 $10,882,545 $13,557,703 $13,000,822
Net revenues per
patient day(1) $ 408 $ 457 $ 414 $ 385
Average occupancy 52.3% 58.5% 58.8% 63.4%
rate(2)
Total number of
licensed beds
at end of
period 172 172 172 172
Source of Revenues:

Private(3) 86.1% 90.5% 91.6% 90.0%

Government(4) 13.9% 9.5% 8.4% 10.0%

Partial
Hospitalization
and Outpatient

Net Revenues:*

Individual
$5,337,916 $3,573,211 $5,629,760 $3,021,486
Contract $ 597,563 $ 523,093 $1,459,580 $ 503,365

Sources of revenues:
Private 98.2% 97.7% 98.4% 93.9%
Government 1.8% 2.3% 1.6% 6.1%

Other
Psychiatric services

PDSS(5) $ 554,031 $ 441,525 $ 629,761 $ 233,164

Practice
Management(6)$ 644,983 $ 274,597 $ 650,852

* Includes Good Hope Center revenue of:
Inpatient $ 835,916 $1,016,297 $ 1,300,745 $2,119,052
Outpatient $ 340,586 $ 321,276 $ 457,018 $ 451,265

(1) Net revenues per patient day equals net patient service revenues divided by
total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of beds available in such period.
(3) Private pay percentage is the percentage of total patient revenue derived
from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid programs.
(5) PDSS, Pioneer Development and Support Services, provides clinical support,
referrals management and professional services for a number of the Company's
national contracts.
(6) Practice Management revenue is produced through BSC-NY.

<PAGE>

Closed and Discontinued Operations

Franvale

On February 19, 1997, the Company's Franvale Nursing and Rehabilitation
Center ("Franvale") was cited for serious patient care and safety deficiencies
by the Massachusetts Department of Public Health as the result of a routine
survey. A civil penalty of $3,050 per day was imposed which was reduced to
$2,250 per day on March 12, 1997. After an appeal the fine was reduced to
$90,545 in total. At the time of the original citation, the Company was notified
by the Department of Public Health and by the federal agency, HCFA, that
Franvale would be terminated from the Medicare and Medicaid programs unless
Franvale was in substantial compliance with regulatory requirements by March 14,
1997. Franvale submitted a plan of correction to the Department of Public Health
and on March 12, 1997, as the result of a resurvey by the Department of Public
Health, a new statement of deficiencies was issued, which contained a
significant number of violations but recharacterized the level of seriousness of
the deficiencies to a lower degree of violation and which extended the
threatened date of termination to April 30, 1997.

As a result of the new statement of deficiencies, the Department of Public
Health had precluded the Company from admitting new patients to its Franvale
facility until at least April 30, 1997. However, on April 11, 1997, the Company
received authority to admit new patients on a case by case basis. Previous
patients were readmitted to the Franvale facility from a hospital only after a
case by case review by the Department of Public Health. The Company was
obligated to notify the attending physician of each resident of Franvale who was
found to have received substandard care of the deficiency notice and was
obligated also to notify the Massachusetts board which licenses the
administrator of Franvale.

On April 19, 1997 the Department of Public Health, Division of Health Care
Quality completed a follow-up survey of the Franvale Nursing Home. As a result
of this survey it was determined that all deficiencies cited from the April 17,
1997 visit had been corrected and the restrictions on Franvale's ability to
admit patients were lifted.

The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in order to bring
the facility into substantial compliance at the earliest possible date. The
Company engaged Oasis Management Company ("Oasis") on November 1, 1996 to June
30, 1997 to provide management services to Franvale. The Company conducted an
intensive staff review which resulted in a total reorganization. The present
staff was provided with in-service training. The Company is continuing an
extensive program of review to ensure that Franvale remains in compliance.

On January 29, 1998, Franvale Nursing and Rehabilitation Center
("Franvale") was again cited for patient care and safety deficiencies by the
Massachusetts Department of Public Health as a result of a routine survey. A
civil penalty of $6,050 per day was imposed. If the company does not appeal the
imposition of the fines and the deficiency notice, the penalties could be
reduced by 35%. At the time of the citation the Company was notified by the
Department of Public Health and by the federal agency, HCFA, that Franvale will
be terminated from the Medicare and Medicaid programs unless Franvale is in
substantial compliance with regulatory requirements by February 21, 1998. As a
result of this statement of deficiencies Franvale was precluded from readmitting
patients or admitting new patients. As of February 13, 1998 the ban from
readmission was removed, however, Franvale is still unable to admit new patients
until after the resurvey has been completed and the facility is found to be in
substantial compliance with Federal requirements.

On April 14, 1998 the State completed the resurvey of the Company's
Franvale Nursing and Rehabilitation Center ("Franvale") to determine if the
facility had corrected all patient care and safety deficiencies cited by the
Massachusetts Department of Public Health in its January 29, 1998 routine
survey. As a result of the resurvey the facility was found to be in substantial
compliance with regulatory requirements. In their letter of April 23, 1998 the
State Department of Public Health advised the facility that "all deficiencies
were found to have been corrected" and the facility "is now in substantial
compliance ...with the federal regulations applicable to long term care
facilities". The Department of Public Health also advised the facility in this
letter that it was withdrawing its recommendation to the Health Care Finance
Administration (HCFA) that the facility certification be terminated, and
recommending the denial of payment for new admissions and any civil monetary
penalties imposed on the facility cease as of the date the facility alleged that
it was in substantial compliance, which was March 29, 1998.

Despite the successful survey as documented in the Department's letter, the
notice continues by advising the facility that the "limitation on admissions
previously imposed ... shall remain in effect, irrespective of whether HCFA
accepts the state's recommendation to rescind its pending Medicaid termination
action, on the grounds that the Department has initiated and there is currently
pending a license revocation action against the facility.

On February 12, 1998, the Company entered into an Asset Purchase Agreement
with Lexington Healthcare Group, Inc. to sell substantially all the assets and
liabilities of Franvale Nursing and Rehabilitation Center. The assets and
liabilities of Franvale are shown net on the accompanying balance sheet and the
loss from Franvale operations is shown separately under Loss from discontinued
operations. Although the agreement was still being pursued, the inability of
Franvale to admit new patients and the State's pending license revocation made
completion of the sale an impossibility.

As a result of the decrease in census resulting from the inability of
Franvale to admit new patients and the limitations on its ability to re-admit
patients, the monetary penalties and the expenses that have been incurred by the
Company in correcting the cited deficiencies, continued facility cash flow
deficit of approximately $80,000 monthly, the stall of the sale of Franvale and
the probability that the State would not lift the admission freeze on the
facility the Company had no recourse but to file for protection under Chapter 11
of the United States Bankruptcy Code for the wholly owned subsidiary Quality
Care Centers of Massachusetts, Inc. which operates Franvale Nursing and
Rehabilitation Center.

On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care Centers
of Massachusetts, Inc., doing business as Franvale Nursing and Rehabilitation
Center, filed for reorganization under Chapter 11 of the United States
bankruptcy Code in the Eastern Division of the District of Massachusetts at
Boston, Massachusetts. The case was assigned to C J Kenner. On May 27, 1998 on
motion of Franvale, the court authorized the appointment of a Trustee and
appointed Joseph Braunstein as the Chapter 11 Trustee. On May 29, 1998, the
Bankruptcy Court terminated the Chapter 11 proceeding determining that there was
no likelihood of reorganization since the prospective acquirer of the facility
was now imposing certain terms unacceptable to all interested parties and that
the transfer of patients and liquidation of assets could be as readily
effectuated in a state court receivership under the aegis of the Massachusetts
Health Care Statutes and accordingly dismissed the Chapter 11 case. On June 1,
1998, on the Petition of the Attorney General of the Commonwealth of
Massachusetts on behalf of the Department of Public Health with the acquiescence
of Franvale, Robert Griffin was appointed by J. Kottmyer as Receiver to transfer
the patients and close the facility expeditiously.

Although the full extent of the financial impact on PHC, Inc. cannot be
determined at this time, the management of PHC, Inc. does not believe that the
liquidation of the assets and liabilities of Quality Care Centers of
Massachusetts, Inc. will have a substantial negative impact on PHC's financial
position results of operations. Quality Care Centers of Massachusetts, Inc.
posted a loss from Discontinued Operations of approximately $1.8 million in the
nine months ended March 31, 1998 and $1.9 million in the previous fiscal year.
The elimination of this loss will enhance the profitability of PHC.

Good Hope Center

Good Hope Center is a 49-bed substance abuse treatment facility located in
West Greenwich, Rhode Island which, until May, 1998 was operated by the
Company's subsidiary PHC of Rhode Island, Inc.

The Good Hope Center operated at a loss for the past two years because of a
decline in length of stay and lower reimbursements from third party payors.
Efforts to increase length of stay and improve market share were unsuccessful
requiring the close of the facility.

In May, 1998 the Company closed Good Hope Center and entered into an
agreement terminating the lease for the facility. This agreement releases PHRI
from the remaining 16 years on the Good Hope Center property lease in exchange
for approximately $35,000 of the PHRI net fixed assets and a total payment of
approximately $125,000 over the next seven months. The Company estimates that it
will incur aggregate costs of closing this facility, in addition to the lease
agreement cost, of approximately $120,000.

Operating Statistics

The following table reflects closed and discontinued operations:

For the Nine Months For the Year Ended
Ended June 30,
March 31,

1998 1997 1997 1996
Discontinued
Operations-
Franvale:
Income (Loss)
from operations $(1,829,508) $(341,486) $(1,958,756) $(1,216,832)

Closed Operations

Good Hope Center:
Income (Loss)
from operations $ (771,395) $(479,858) $ (642,119) $ (661,645)

The Company does not anticipate additional costs will be incurred as a
result of the closure of Franvale; however, the Company does expect that
approximately $245,000 in additional costs will be incurred through the closure
of Good Hope Center. This amount includes approximately $125,000 to terminate
the lease, $50,000 in payment to former employees for earned time and severance
pay and $70,000 in collection and miscellaneous expenses.

Business strategy

The Company's objective is to become a leading national provider of
treatment services, specializing in substance abuse and psychiatric care.

The Company focuses its marketing efforts on "safety-sensitive" industries.
This focus results in customized outcome oriented programs that the Company
believes produce overall cost savings to the patients and/or client
organizations. The Company intends to leverage experience gained from providing
services to customers in certain industries which it believes will enhance its
selling efforts within these certain industries.

Marketing and Customers

The Company markets its substance abuse, inpatient and outpatient
psychiatric health services both locally and nationally, primarily to safety
sensitive industries, including transportation, oil and gas exploration, heavy
machinery and equipment, manufacturing and healthcare services. Additionally,
the Company markets its services in the gaming industry both in Nevada and
nationally.

The Company employs 9 individuals dedicated to marketing among the
Company's facilities. Each facility performs marketing activities in its local
region. The National Marketing Director of the Company, coordinates the majority
of the Company's national marketing efforts. In addition, employees at certain
facilities perform national marketing activities independent of the National
Marketing Director. The Company, with the support of its owned integrated
outpatient systems and management services, plans to pursue more at-risk
contracts and outpatient, managed health care fee-for-service contracts. In
addition to providing excellent services and treatment outcomes, the Company
will continue to negotiate pricing policies to attract patients for long-term
intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company's
internal professional standards.

The Company's inpatient services are complimented by an integrated system
of comprehensive outpatient mental health clinics and physician practices owned
or managed by the Company. These clinics and medical practices are strategically
located in Nevada, Virginia, Kansas City, Michigan, Utah and New York. They make
it possible for the Company to offer wholly integrated, comprehensive, mental
health services for corporations and managed care organizations on an at-risk or
exclusive fee-for-service basis. Additionally, the Company operates Pioneer
Development and Support Services (PDS2) located in the Highland Ridge facility
in Salt Lake City, Utah. PDS2 provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.

The Company has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Canadian Rail, Conrail,
CSX, the IUE, MCC, MGM, The Mirage, Station Casinos, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.

Competition

The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
and for-profit, other substance abuse facilities and short-term detoxification
centers. Some competitors have substantially greater financial resources than
the Company. The Company believes, however, that it can compete successfully
with such institutions because of its success in treating poor-prognosis
patients. The Company will compete through its focus on such patients, its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.

The Company's psychiatric facilities and programs compete primarily within
the respective geographic area serviced by them. The Company competes with
private doctors, hospital-based clinics, hospital-based outpatient services and
other comparable facilities. The main reasons that the Company competes well are
its integrated delivery and dual diagnosis programming. Integrated delivery
provides for more efficient follow-up procedures and reductions in length of
stay. Dual diagnosis programming provides a niche service for clients with a
primary mental health and a secondary substance abuse diagnosis. The dual
diagnosis service was developed in response to demand from insurers, employees
and treatment facilities.

Revenue Sources and Contracts

The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. Most of the Company's psychiatric patients either have
insurance or pay at least a portion of treatment costs. Free treatment provided
each year amounts to less than 5% of the Company's total patient days.

Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. When non-contract patients are
treated by the Company, they are billed on the basis of the Company's standard
per diem rates and for any additional ancillary services provided to them by the
Company.

Quality Assurance and Utilization Review

The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Company's inpatient facilities are accredited by
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and
the Company's outpatient facilities comply with the standards of National
Commission Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The Company's professional staff, including physicians, social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific discipline, in
addition to each facility's own internal quality assurance criteria. The Company
participates in the federally mandated National Practitioners Data Bank which
monitors professional accreditation nationally.

In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system which
provides assurance that services rendered to individual patients are medically
appropriate and reimbursable. Implementation of these internal policies has been
integral to the success of the Company's strategy of providing services to
relapse-prone, higher acuity patients.

Government Regulation

The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would effect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.

Health Planning Requirements

Some of the states in which the Company operates, and many of the states
where the Company may consider expansion opportunities, have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state determination
of need or certificate of need ("DoN") programs are designed to enable states to
participate in certain federal and state health related programs and to avoid
duplication of health services. DoN's typically are issued for a specified
maximum expenditure, must be implemented within a specified time frame and often
include elaborate compliance procedures for amendment or modification, if
needed. Several states, including the Commonwealth of Massachusetts, have
instituted moratoria on some types of DoN's or otherwise stated an intent not to
grant approvals for certain health services. Such moratoria may adversely affect
the Company's ability to expand in such states, but may also provide a barrier
to entry to potential competitors.

Licensure and Certification

All of the Company's facilities must be licensed by state regulatory
authorities. The Company's Harbor Oaks facility is certified for participation
as a provider in the Medicare and Medicaid programs.

The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company will attempt to ensure that
its facilities are operated in compliance with all such standards and
conditions. To the extent these standards are not met, however, the license of a
facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.

Medicare Reimbursement

Currently the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 1997 11.12% of
revenues for Harbor Oaks were derived from Medicare programs.

The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.

The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated thereunder.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. This target amount
is based upon a facility's reasonable Medicare operating cost divided by
Medicare discharges, plus a per diem allowance for capital costs, during its
base year of operations. It is not possible to predict the ability of Harbor
Oaks to remain PPS-exempt or to anticipate the impact of TEFRA upon the
reimbursement received by Harbor Oaks in future periods.

In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.

Medicaid Reimbursement

Currently the only facility of the Company that receives reimbursement
under any state Medicaid program is Harbor Oaks. A portion of Medicaid costs are
paid by states under the Medicaid program and the federal matching payments are
not made unless the state's portion is made. Accordingly, the timely receipt of
Medicaid payments by a facility may be affected by the financial condition of
the relevant state.

Harbor Oaks is a participant in the Medicaid program administered by the
State of Michigan. Reimbursement is received on a per diem basis, inclusive of
ancillary costs. The rate is determined by the state and is adjusted annually
based on cost reports filed by the Company.

Fraud and Abuse Laws

Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
direct or indirect remuneration intended to induce the referral of patients, the
ordering, arranging, or providing of covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare, Medicaid and other
government-sponsored programs. The federal government has issued regulations
which set forth certain "safe harbors," representing business relationships and
payment arrangements that can safely be undertaken without violation of the
federal Fraud and Abuse Laws. Failure to fall within a safe harbor does not
constitute a per se violation of the federal fraud and abuse laws. The Company
believes that its business relationships and payment arrangements either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.

Employees

As of June 1, 1998, the Company had 310 employees, excluding Franvale and
Good Hope Center, of which 9 were dedicated to Marketing , 102 17 part time) to
finance and administration and 199 (75 part time) to patient care. All of the
Company's 310 employees are leased from Allied Resource Management of Florida,
Inc.("ARMFCO"), a wholly owned subsidiary of HRC ARMCO, Inc. (formerly known as
Alliance Employee Leasing Corporation), a national employee leasing firm. The
Company has elected to lease its employees to provide more favorable employee
health benefits at lower cost than would be available to the Company as a single
employer and to eliminate certain administrative tasks which otherwise would be
imposed on the management of the Company. The agreement provides that ARMFCO
will administer payroll, provide for compliance with workers' compensation laws,
including procurement of workers' compensation insurance and administering
claims, and procure and provide designated employee benefits. The Company
retains the right to reject the services of any leased employee and ARMFCO has
the right to increase its fees at any time upon thirty days' written notice or
immediately upon any increase in payroll taxes, workers' compensation insurance
premiums or the cost of employee benefits provided to the leased employees.

The Company believes that it has been successful in attracting skilled and
experienced personnel; competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relationships with its employees are good.

Insurance

Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, Total Concept,
NPP, BSC and PCV have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate. Highland Ridge has limits of $1,000,000 per claim and $6,000,000 in
the aggregate. Good Hope has coverage of $2,000,000 per claim and $6,000,000 in
the aggregate. In addition, these entities maintain general liability insurance
coverage in similar amounts. The Company's long-term care facility maintained
general and professional liability coverage of $2,000,000, with a limit of
$1,000,000 per claim and an aggregate of $5,000,000 excess coverage. PCV's two
doctors are currently covered by their own malpractice policies.

The Company maintains $1,000,000 of directors and officers liability
insurance coverage and $1,000,000 of general liability insurance coverage. The
Company believes, based on its experience, that its insurance coverage is
adequate for its business and that it will continue to be able to obtain
adequate coverage.

PROPERTY

Executive Offices

The Company's executive offices are located in Peabody, Massachusetts. The
Company's lease in Peabody covers approximately 3,600 square feet for a 60-month
term which expires August 10, 1999 and includes an option to renew. The current
annual payment under the lease is $35,721 and increases to $37,507 in the final
year. The Company also leases a small amount of nearby space in the same
building. The Company believes that this facility will be adequate to satisfy
its needs for the foreseeable future.

Highland Ridge Hospital

The Highland Ridge premises consists of approximately 16,072 square feet of
space occupying two full stories of a three-story building. The Company is in
the final year of a fifteen-year lease, which provides for monthly rental
payments of approximately $21,000 for the remainder of the lease term. The lease
expires on September 30, 1998, and contains an option to renew. During the term
of the lease or any extension thereof, the Company has a right of first refusal
on any offer to purchase the leased premises. The Company believes that these
premises are adequate for its current and anticipated needs.

Mount Regis Center

The Company owns the Mount Regis facility which consists of a three-story
wooden building located on an approximately two-acre site in a residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $500,000. Mount Regis/Changes occupies
approximately 1,750 square feet of office space leased from Pioneer Counseling
of Virginia, Inc. in Salem, Virginia. The Company believes that these premises
are adequate for its current and anticipated needs.

Psychiatric Facilities

The Company owns or leases premises for each of its psychiatric facilities.
The Company believes that all of these premises are adequate for its current and
anticipated needs.

The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$1,600,000 mortgage on this property.

The Company owns the Pioneer Counseling of Virginia building which consists
of 7,500 square feet of office space located in Salem, Virginia. Pioneer
currently leases 1,750 square feet to Mount Regis-Changes and 1,500 square feet
to Blankenship Opticians, an unrelated party. The Pioneer Counseling of Virginia
property is subject to an outstanding mortgage in favor of Dillon & Dillon
Associates with an outstanding balance of $538,605 at fiscal year ended June 30,
1997.

Harmony, Total Concept, NPP and BSC each lease their premises. The Company
believes that each of these premises is leased at fair market value and could be
replaced without significant time or expense if necessary.

<PAGE>

MANAGEMENT

Directors and Officers

The directors and officers of the Company are as follows:

Name Age Position
Bruce A. Shear............... 43 Director, President and Chief
Executive Officer
Robert H. Boswell............ 49 Executive Vice President
Paula C. Wurts............... 49 Controller, Assistant Clerk
and Assistant Treasurer
Gerald M. Perlow, M.D. 60 Director and Clerk
(1)(2)....................
Donald E. Robar (1)(2)....... 61 Director and Treasurer
Howard W. Phillips........... 68 Director
William F. Grieco............ 44 Director
____________

(1) Member of Audit Committee.
(2) Member of Compensation Committee.

All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. The Compensation Committee reviews and sets executive compensation.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.

Information with respect to the business experience and affiliations of the
directors and officers of the Company is set forth below.

BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February, 1996. From 1976 to 1980 he served as Vice President, Financial
Affairs, of the Company. Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over ten years. Mr. Shear received an
M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance from
Marquette University in 1976.

ROBERT H. BOSWELL has served as the Executive Vice President of the Company
since 1992. From 1989 until the spring of 1994 Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment Program--the Cottage Program,
International. Mr. Boswell graduated from Fresno State University in 1975 and
from 1976 until 1978 attended Rice University's doctoral program in philosophy.
Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.

PAULA C. WURTS has served as the Controller of the Company since 1989 and
as Assistant Treasurer since 1993 and as Assistant Clerk since January, 1996.
Ms. Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms.
Wurts received an Associate's degree in Accounting from the University of South
Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and
passed the examination for Certified Public Accountants. She received a Master's
Degree in Accounting from Western New England College in 1996.

GERALD M. PERLOW, M.D. has served as a Director of the Company since May
1993 and as Clerk since February, 1996. Dr. Perlow is a cardiologist in private
practice in Lynn, Massachusetts, and has been Associate Clinical Professor of
Cardiology at the Tufts University School of Medicine since 1972. Dr. Perlow is
a Diplomat of the National Board of Medical Examiners and the American Board of
Internal Medicine (with a subspecialty in cardiovascular disease) and a Fellow
of the American Heart Association, the American College of Cardiology, the
American College of Physicians and the Massachusetts Medical Center. From 1987
to 1990, Dr. Perlow served as the Director, Division of Cardiology, at
AtlantiCare Medical Center in Lynn, Massachusetts. From October 30, 1996 to
March 1, 1997, Dr. Perlow served as President and Director of Perlow Physicians,
P.C. which has a management contract with BSC. Dr. Perlow received compensation
of $8,333 for the period. Dr. Perlow received a B.A. from Harvard College in
1959 and an M.D. from Tufts University School of Medicine in 1963.

DONALD E. ROBAR has served as a Director of the Company since 1985 and as
the Treasurer since February, 1996. He served as the Clerk of the Company from
1992 to 1996. Dr. Robar has been a professor of Psychology since 1961, most
recently at Colby-Sawyer College in New London, New Hampshire. Dr. Robar
received an Ed.D. from the University of Massachusetts in 1978, an M.A. from
Boston College in 1968 and a B.A. from the University of Massachusetts in 1960.

HOWARD W. PHILLIPS has served as a Director of the Company since August 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995. From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr.
Phillips was associated with Oppenheimer & Co. where he was a partner and
Director of Corporate Finance. Mr. Phillips currently is a member of the Board
of Directors of Food Court Entertainment Network, Inc., an operator of shopping
mall television networks, and Telechips Corp., a manufacturer of visual phones.

WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Since November of 1995, he has served as Senior Vice President and
General Counsel for Fresenius Medical Care North America. From 1989 until
November of 1995, Mr. Grieco was a partner at Choate, Hall & Stewart. Mr. Grieco
is a member of the Board of Directors of Fresenius National Medical Care
Holdings, Inc. Mr. Grieco received a BS from Boston College in 1975, an MS in
Health Policy and Management from Harvard University in 1978 and a JD from
Boston College Law School in 1981.

Employment Agreements

The Company has not entered into any employment agreements with its
executive officers. The Company has acquired a $1,000,000 key man life insurance
policy on the life of Bruce A. Shear.

Executive Compensation

Two executive officers of the Company received compensation in the 1997
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1998,1997, and 1996:

Summary Compensation Table
Long Term
Annual Compensation Compensation
Awards

(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities All
Principal Year Salary Bonus Annual Underlying Other
Position Compensation Options/SARs Compensation
($) ($) ($) (#) ($)

Bruce A. Shear..... 1998 $309,167 -- $ 8,363(1) 50,000 $51,256
President and 1997 $294,167 -- $12,633(2) -- --
Chief Executive 1996 $294,063 -- $10,818(3) -- --
Officer

Robert H. Boswell.. 1998 $102,750 -- $ 6,931(4) 15,000 $14,149
Executive Vice 1997 $92,750 -- $ 6,000(5) 5,000 $6,821
President 1996 $80,667 $1,000 $23,750(6) 5,000 $11,250

(1) This amount represents (i) $1,341 contributed by the Company to the
Compan's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $4,768 in
premiums paid by the Company with respect to life insurance for the benefit of
Mr. Shear, and (iii) $2,254 personal use of a Company car held by Mr. Shear

(2) This amount represents (i) $2,687 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $6,769 in
premiums paid by the Company with respect to life insurance for the benefit of
Mr. Shear, and (iii) $3,177 personal use of a Company car held by Mr. Shear.

(3) This amount represents (i) $2,650 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $5,146 in
premiums paid by the Company with respect to life insurance for the benefit of
Mr. Shear, and (iii) $3,022 for the personal use of a Company car held by Mr.
Shear.

(4) This amount represents (i) $6,000 automobile allowance, (ii) $408
contributed by the Company to the Company's Executive Employee Benefit Plan on
behalf of Mr. Boswell, (iii) $408 in other benefits paid by the Company on
behalf of Mr. Boswell and (iv) $115 in Class A Common Stock issued to employees.

(5) This amount represents (i) an automobile allowance.

(6) This amount represents (i) $3,750 automobile allowance, and (ii)
$20,000 net gain from the exercise of options and subsequent sale of stock.

Compensation of Directors

Directors who are full time employees of the Company receive no
compensation for services as members of the Board of Directors. Directors who
are not employees of the Company receive a $2,500 stipend per year and $1,000
for each meeting of the Board of Directors which they attend. In fiscal year
1997 two members of the board of directors of the Company serve on a board of
directors of another entity. Mr. Phillips is a member of the Board of Directors
of Food Court Entertainment Network, Inc., an operator of shopping mall
television networks, and Telechips Corp., a manufacturer of visual phones. Mr.
Grieco is a member of the Board of Directors of Fresenius National Medical Care
Holdings, Inc.

In addition, directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan"). Pursuant to the Non-Employee Director Plan, in
February 1997, Dr. Perlow, Dr. Robar and Mr. Grieco were each granted an option
to purchase 2,000 shares of the Company's Class A Common Stock at an exercise
price of $3.50 per share. Pursuant to the Company's 1993 Stock Plan, in February
of 1997, Mr. Phillips was granted an option to purchase 2,000 shares of the
Company's Class A Common Stock at an exercise price of $3.50 per share. All of
these options are immediately exercisable for 25% of the shares with an
additional 25% becoming exercisable on each of the first three anniversaries of
the grant date.

Additionally, pursuant to the Company's 1993 Stock Plan, in February 1997,
each of Drs. Perlow and Robar and Messrs. Phillips and Grieco was granted an
option to purchase 5,000 shares of the Company's Class A Common Stock at an
exercise price of $3.50 per share. These options become exercisable six months
after the date of the grant for 25% of the shares with an additional 25%
becoming exercisable on each of the first three anniversaries of the grant date.

Stock Plan

The Company's Stock Plan was adopted by the Board of Directors on August
26, 1993 and approved by the stockholders of the Company on November 30, 1993.
The Stock Plan provides for the issuance of a maximum of 300,000 shares of the
Class A Common Stock of the Company pursuant to the grant of incentive stock
options to employees and the grant of nonqualified stock options or restricted
stock to employees, directors, consultants and others whose efforts are
important to the success of the Company.

The Stock Plan is administered by the Board of Directors. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option cannot be less than the market price of the Class A
Common Stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock and
upon exercise of options. Generally, an option is not transferable by the option
holder except by will or by the laws of descent and distribution. Also,
generally, no option may be exercised more than 60 days following termination of
employment. However, in the event that termination is due to death or
disability, the option is exercisable for a period of one year following such
termination.

As of June 30, 1997, the Company had issued options to purchase a total of
207,000 shares of Class A Common Stock under the 1993 Stock Plan at a price per
share ranging from $3.50 to $7.00 per share. On February 18, 1997, the Board of
Directors repriced all outstanding options, other than options granted to
members of the Board of Directors, at $3.50 per share. During the fiscal year
ended June 30, 1998, the Company issued additional options to purchase 227,000
shares of Class A Common Stock under the 1993 Stock Plan at a price per share
ranging from $2.00 to $5.63. Generally, options are exercisable upon grant for
25% of the shares covered with an additional 25% becoming exercisable on each of
the first three anniversaries of the date of grant.

During the fiscal year ended June 30, 1997, 13,375 shares of Class A Common
Stock were issued through the exercise of options by employees and 100 shares
were issued to a former employee. During the fiscal year ended June 30, 1998 no
options were exercised.

On November 17, 1997 the Board of Directors voted to amend the 1993 Stock
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 300,000 shares to 400,000 shares. This amendment was
presented to and approved by the Stockholders at the annual meeting on December
26, 1997.

Issuance of Restricted Stock

On December 17, 1993, the Company issued 11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers of the Company,
respectively, at a purchase price of $4.00 per share. The shares of restricted
stock were issued pursuant to the Company's Stock Plan. Each purchaser paid to
the Company 25% of the purchase price for his or her shares in cash, and the
balance with a non-recourse note. The notes bear interest at 6% per year, are
payable quarterly in arrears, and became due March 31, 1997. To secure the
payment obligation under the non-recourse notes, shares paid for with these
notes have been pledged to the Company. See "Certain Transactions." The notes
reached maturity on March 31, 1997. Two employees were in default. Mark Cowell
forfeited 6,925 shares and Joan Chamberlain forfeited 1,731 shares which are
currently held as treasury stock..

Employee Stock Purchase Plan

On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan") which
became effective February 1, 1996. No more than 100,000 shares may be sold under
this Plan. The price per share shall be the lesser of 85% of the average of the
bid and ask price on the first day of the plan period or the last day of the
plan period. An offering period under the plan began on February 1, 1996 and
ended on January 31, 1997. Seventeen employees purchased an aggregate of 9,452
shares of Class A Common Stock. The second offering period commenced on February
1, 1997 and ended on January 31, 1998. Twenty four employees purchased an
aggregate of 14,743 shares of Class A Common Stock. A new offering commenced on
February 1, 1998 and will end on January 31, 1999. There are twenty-one
employees participating in the third offering under this plan.

On November 17, 1997 the Board of Directors voted to amend The Plan to
increase the number of shares of Class A Common Stock available for issuance
thereunder from 100,000 shares to 150,000 shares. This amendment was presented
to and approved by the Stockholders at the annual meeting on December 26, 1997.

Non-Employee Director Stock Plan

The Company's Non-Employee Director Stock Plan (the "Director Plan") was
adopted by the directors on October 18, 1995 and approved by the Stockholders of
the Company on December 15, 1995. Non-qualified options to purchase a total of
30,000 shares of Class A Common Stock are available for issuance under the
Director Plan.

The Director Plan is administered by the Board of Directors or a committee
of the Board. Under the Director Plan, each director of the Company who was a
director at the time of adoption of the Director Plan and who was not a current
or former employee of the Company received an option to purchase that number of
shares of Class A Common Stock as equals 500 multiplied by the years of service
of such director as of the date of the grant. At the first meeting of the Board
of Directors subsequent to each annual meeting of stockholders, each
non-employee director is granted under the Director Plan an option to purchase
2,000 shares of the Class A Common Stock of the Company. The option exercise
price is the fair market value of the shares of the Company's Class A Common
Stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.

On January 23, 1996, options to purchase a total of 5,500 shares of Class A
Common Stock were issued under the Director Plan at an exercise price of $6.63
per share. On February 18, 1997, options to purchase a total of 6,000 shares of
Class A Common Stock were issued under the Director Plan at an exercise price of
$3.50 per share. On January 22, 1998, options to purchase a total of 6,000
shares of Class A Common Stock were issued under the Director Plan at an
exercise price of $2.06. As of May 31, 1998, none of these options had been
exercised.

On November 17, 1997 the Board of Directors voted to amend the Director
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 30,000 shares to 50,000 shares. This amendment was
presented to and approved by the Stockholders at the annual meeting on December
26, 1997.

The following table provides information about options granted to the named
executive officers during fiscal 1998 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

Individual Grants

(a) (b) (c) (d) (e)
Number of % of
Securities Total
Underlying Options/SA Exercise
Options/SARs Granted or Expiration
Name Granted to Base Date
(#) Employees Price
in ($/Share)
Fiscal
Year
Bruce A. Shear..... 50,000 22.0% $2.63 8/1/2002
Robert H. Boswell.. 10,000 4.4% $2.63 8/1/2002
5,000 2.2% $2.00 11/24/2002

The following table provides information about options exercised by the
named executive officers during fiscal 1997 and the number and value of options
held at the end of fiscal 1997.

(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Value Unexercised Options/SARs
Name on Realized Options/SARs at
Exercise ($) at FY-End ($)
(#) FY-End (#) Exercisable/
Exercisable/ Unexercisable
Unexercisable

Bruce A. Shear........ -- -- 12,500/37,500 $0/$0
Robert H. Boswell..... -- -- 47,600/34,000 $0/$0

Certain Relationships and Related Transactions

For approximately the last ten years, Bruce A. Shear, a director and the
President and Chief Executive Officer of the Company, and persons affiliated and
associated with him have made a series of unsecured loans to the Company and its
subsidiaries to enable them to meet ongoing financial commitments. The
borrowings generally were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company, were entered
into at market rates given the financial condition of the Company and the risks
of repayment at the time the loans were made. As of June 30, 1998, the Company
owed an aggregate of $159,496 to related parties.

During the period ended June 30, 1998, the Company paid Mr. Shear and
affiliates approximately $126,950 in principal and accrued interest under
various notes. As of June 30, 1998, the Company owed Bruce A. Shear $39,496 on a
promissory note, which is dated March 31, 1994, matures on December 31, 1998 and
bears interest at the rate of 8% per year, payable quarterly in arrears, and
requires repayments of principal quarterly in equal installments and Tot Care,
Inc., an affiliate of Bruce A. Shear, $100,000 on promissory notes dated May 28,
1998 and June 9, 1998 which bear interest at the rate of 12% per year and are
payable on demand.

Compliance with Section 16(a) of the Exchange Act

In fiscal year 1998, both Mr. Boswell and Ms. Wurts each failed to file a
Form 4 within the prescribed time limits relating to shares of Class A Common
Stock issued to all employees on March 30, 1998.

<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of capital stock of the Company currently outstanding) as of May
31, 1998 by (i) each person known by the Company to beneficially own more than
5% of any class of the Company's voting securities, (ii) each director of the
Company, (iii) each of the named executive officers as defined in 17 CFR
228.402(a)(2) and (iv) all directors and officers of the Company as a group.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common Stock, except to the extent authority is shared by spouses under
applicable law. In preparing the following table, the Company has relied on the
information furnished by the persons listed below:

Name and Address Amount and Percent
Title of Class of Beneficial Owner Nature of
of Beneficial Class
Owner (11)

Class A Common Stock Gerald M. Perlow *
c/o PHC, Inc. 19,750(1)
200 Lake Street
Peabody, MA 01960
Donald E. Robar 13,875(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA
01960
Bruce A. Shear 14,500(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 38,087(4) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 41,504(5) *
P. O. Box 2047
East Hampton, NY
11937
William F. Grieco 63,280(6)(7) 1.3%
115 Marlborough
Street
Boston, MA 02116
J. Owen Todd 59,280(7) 1.2%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
All Directors and 210,920(8) 4.2%
Officers as a
Group (8 persons)
Class B Common Stock Bruce A. Shear 671,259(10) 91.9%
(9).................. c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 91.9%
Officers as a
Group (8 persons)

<PAGE>

* Less than 1%.
(1) Includes 9,750 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(2) Includes 12,375 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(3) Includes 12,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $2.63 per
share. Excludes an aggregate of 59,280 shares of Class A Common Stock owned
by the Shear Family Trust and the NMI Trust, of which Bruce A. Shear is a
remainder beneficiary.
(4) Includes an aggregate of 34,000 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price range
of $2.00 to $3.50 per share.
(5) Includes 37,504 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 18,752 Units, at a price per unit of
$5.60, of which each unit consists of one share of Class A Common Stock and
one warrant to purchase an additional share of Class A Common Stock at a
price per share of $7.50 and 4,000 shares issuable pursuant to currently
exercisable stock options having an exercise price range of $2.06 to $3.50
per share.
(6) Includes 4,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of
$2.06 to $3.50 per share
(7) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 59,280 shares of the Company's outstanding Common Stock.
Gertrude Shear, Bruce A. Shear's mother, is the lifetime beneficiary of the
Trusts. In addition to the shares held by the Trusts, to the best of the
Company's knowledge, Gertrude Shear currently owns less than 1% of the
Company's outstanding Class B Common Stock.
(8) Includes an aggregate of 93,125 shares issuable pursuant to currently
exercisable stock options. Of those options, 4,125 have an exercise price
of $6.63 per share, 68,250 have an exercise price of $3.50 per share,
17,500 have an exercise price of $2.63 and 2,000 have an exercise price of
$2.06 and 1,250 have an exercise price of $2.00. Also includes 37,504
shares issuable upon the exercise of the Unit Purchase Option as described
in (5).
(9) Each share of Class B Common Stock is convertible into one share of Class A
Common Stock automatically upon any sale or transfer thereof or at any time
at the option of the holder.
(10) Includes 56,369 shares of Class B Common Stock pledged to Steven J. Shear
of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection
with his purchase of his brother's stock in the Company in December 1988.
In the absence of any default under this obligation, Bruce A. Shear retains
full voting power with respect to these shares.
(11) Represents percentage of equity of class, based on numbers of shares listed
under the column headed "Amount and Nature of Beneficial Ownership". Each
share of Class A Common Stock is entitled to one vote per share and each
share of Class B Common Stock is entitled to five votes per share on all
matters on which stockholders may vote (except that the holders of the
Class A Common Stock are entitled to elect two members of the Company's
Board of Directors and holders of the Class B Common Stock are entitled to
elect all the remaining members of the Company's Board of Directors).

Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of May 31, 1998:

Bruce A. Shear .............................37.82%
J. Owen Todd..................................0.7%
William F. Grieco.............................0.7%
All Directors and Officers as a Group
(8 persons).............................38.72%

SELLING SECURITY HOLDERS

The following table sets forth the ownership of the shares offered pursuant
to this Prospectus by the Selling Security Holders as of the dates such
information was provided to the Company. The information contained in the
following table is based on the Company's records and on information provided by
the Selling Security Holders. Since the dates such information was provided to
the Company, such information may have changed. None of the Selling Security
Holders has had any position, or office with the Company or affiliates during
the past three years.

Number of
Name of Selling Shares of Number of Number of
Security Holder Class A Shares of Shares of
Common Stock Class A Class A Common
Owned Common Stock Stock Owned
Before the Offered after the
Offering Offering

Infinity
Investors, Ltd. 90,000 90,000 0
Seacrest Capital,
Ltd. 60,000 60,000 0
Alpine Capital
Partners 25,000 25,000 0
Barrow Street
Research, Inc. 3,000 3,000 0
C. C. R. I.
Corporation 160,000 160,000 0
Brean Murray &
Company 175,000 150,000 25,000
ProFutures Special
Equities Fund, L.P. 850,454 850,454 0
Augustine Fund, L.P. 284,498 284,498 0
Gary D. Halbert 210,740 210,740 0
John F. Mauldin 144,875 144,875 0
Healthcare
Financial
Partners, Inc. 105,000 105,000 0
Irwin Mansdorf 262,159 97,543 164,616
Yakov Burstein 92,688 30,381 62,307

<PAGE>

The Selling Security Holders listed acquired shares or rights to purchase
shares through the following transactions:

The issuance of Convertible Debentures with a face value of $3,125,000
issued at a 20% discount in November 1996 which accrued interest at 7% per year
and were convertible into Class A Common Stock. All Debentures have since been
converted and the Common Stock sold, however, Warrants to purchase 25,000 shares
of Class A Common Stock, at an exercise price of $2.00 expiring 10/7/2001, were
issued to Alpine Capital Partners in conjunction with this transaction as a
commission for services rendered to the Company. Warrants to purchase 150,000
shares, 90,000 to Infinity Investors Ltd and 60,000 to Seacrest Capital Ltd, at
an exercise price of $2.00 expiring 3/31/2002, were also issued in lieu of cash
payment of penalties for late registration of Common Stock. These shares were
previously registered on Registration Statement number 333-71418 in June 1997.

Warrants to purchase 3,000 shares of Class A Common Stock at an exercise
price of $2.80 expiring 2/18/2002, were issued to Barrow Street Research, Inc.
in exchange for investor relations services. These shares were previously
registered on Registration Statement number 333-71418 in June 1997.

Warrants to purchase 160,000 shares of Class A Common Stock at an exercise
price of $2.62 expiring 3/3/2002, were issued to C.C.R.I. Corporation in
exchange for investor relations services. These shares were previously
registered on Registration Statement number 333-71418 in June 1997.

Warrants to purchase 150,000 shares of Class A Common Stock at an exercise
price of $2.50 expiring 5/31/2002, were issued to Brean Murray and Company in
exchange for cash and services rendered. These shares were previously registered
on Registration Statement number 333-44045 in January 1998.

Series A Convertible Preferred Stock was issued in May 1997 with a face
value of $1,000,000. The Preferred Stock paid interest at 6% per year and was
convertible into Class A Common Stock at 80% of the five day closing bid price
as listed on Nasdaq. All Series A Convertible Preferred Stock was converted as
of August 1997. In conjunction with the issue of the Preferred Stock, the
Company issued warrants to purchase 50,000 shares of Class A Common Stock at an
exercise price of $2.75 expiring 6/4/2002, to ProFutures Special Equity Fund,
LP. These shares were previously registered on Registration Statement number
333-44045 in January 1998.

In September 1997 the Company issued units comprised of 172,414 shares of
Class A Common Stock and warrants to purchase 86,207 additional shares of Class
A Common Stock to ProFutures Special Equities Fund, LP in a Private Placement at
a 3.3% discount for $445,000. All shares of Class A Common Stock have since been
sold however all warrants to purchase shares at an exercise price $2.90 expiring
9/30/2002, are still outstanding. These shares of Common Stock were previously
registered on Registration Statement number 333-44045 in January 1998. In
conjunction with this transaction the Company also issued warrants to purchase
3,000 shares of Class A Common Stock at an exercise price of $2.90 expiring
3/10/2003 in payment of the penalty for late registering of the underlying
Common Stock in the above transaction. These shares of Common Stock were
previously registered on Registration Statement number 333-44045 in January
1998.

In March 1998 the Company issued 950 shares of Series B Convertible
Preferred Stock with a face value of $950,000 in a Private Placement. The
Convertible Preferred Stock pays interest at 6% per year until conversion. Each
Share of Series B Preferred Stock is convertible, at the option of its holder,
into Class A Common Stock at 80% of the average closing bid price five days
prior to the conversion date but not less than $1.88 or more than $3.50 per
share. If the conversion price should calculate to be less than $1.88 the
difference is made up in the form of a Note from the Company. Preferred Stock
dividends have preference over any Common Stock Dividends declared and may be
paid in cash or Preferred Stock at the Company's option. Preferred Stock under
this Private Placement was issued to: (i) ProFutures Special Equities Fund,
L.P., 500 shares, for which 684,932 shares of Class A Common Stock are being
Registered with this Registration Statement; (ii) Augustine Fund, L.P., 200
shares, for which 273,973 shares of Class A Common Stock are being Registered
with this Registration Statement; (iii) Gary D. Halbert, 150 shares, for which
205,480 shares of Class A Common Stock are being Registered with this
Registration Statement; (iv) John F. Maudlin, 100 shares, for which 136,985
shares of Class A Common Stock are being Registered with this Registration
Statement. In conjunction with this Private Placement the Company also issued
Warrants to purchase Class A Common Stock as follows: (i) ProFutures Special
Equities Fund, L.P., 26,315 shares; (ii) Augustine Fund, L.P., 10,525 shares;
(iii) Gary D. Halbert, 7,890 shares; and (iv) John F. Maudlin, 5,260 shares all
are exercisable at $2.31 per share and expire 3/18/2003 and are being Registered
with this Registration Statement.

On March 10, 1998 the Company signed a Note for $350,000 with Healthcare
Financial Partners, Inc. The Note bears interest at 3.5% over the Prime Rate and
matured on July 10, 1998. In conjunction with this financing the Company issued
Warrants to purchase 52,500 shares of Class A Common Stock at an exercise price
of $2.31 expiring 3/10/2003. On July 10, 1998 the Company signed an extension on
this Note to extend the maturity date to November 10, 1998. In conjunction with
this extension the Company issued Warrants to purchase 52,500 shares of Class A
Common Stock at an exercise price of $1.81 expiring 7/10/2003. These shares
totaling 105,000 are being Registered with this Registration Statement.

On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress
Centers, Inc., a provider of management and administrative services to
psychotherapy and psychological practices in the greater New York City
Metropolitan Area. In connection with the merger, the Company issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another enity was
formed, Perlow Physicians, P.C. "(Perlow"), to acquire the assest of the medical
practices theretofore serviced by BSC. The acquisition and merger agreements
require additional purchase price to be paid by BSC to the former owners of
Behavioral Stress Centers, Inc. for the three years following the merger date.
The additional purchase price is based on the income of BSC before taxes and is
to be paid in PHC stock, at market value up to $200,000 and the balance, if any,
in cash. In connection with the earnout the former owners agreed to accept full
payment in Class A Common Stock. The Company issued 75,810 shares of registered
Class A Common Stock and 97,543 shares of unregistered Class A Common Stock to
Irwin Mansdorf on March 23, 1998 in lieu of cash as part of the earnout payment
required by the agreements and 23,613 shares of registered Class A Common Stock
and 30,381 shares of unregistered Class A Common Stock to Yakov Burstein on
March 23, 1998 in lieu of cash as part of the earnout payment required by the
agreement. The unregistered shares are being Registered with this Registration
Statement.

DESCRIPTION OF SECURITIES

The Company is authorized to issue up to 20,000,000 shares of Class A Common
Stock, $.01 par value, 2,000,000 shares of Class B Common Stock, $.01 par value,
200,000 shares of Class C Common Stock, $.01 par value, and 1,000,000 shares of
Preferred Stock, $.01 par value. As of June 30, 1998, the Company had 449 record
holders of its Class A Common Stock and 315 record holders of its Class B Common
Stock the only classes of equity securities outstanding as of such date.

Common Stock

The Company has authorized three classes of Common Stock, the Class A
Common Stock, the Class B Common Stock and the Class C Common Stock. Subject to
any preferential rights in favor of the holders of the Preferred Stock, the
holders of the Common Stock are entitled to dividends when, as and if declared
by the Company's Board of Directors. Holders of the Class A Common Stock, the
Class B Common Stock and the Class C Common Stock are entitled to share equally
in such dividends, except that stock dividends (which shall be at the same rate)
shall be payable only in Class A Common Stock to holders of Class A Common
Stock, only in Class B Common Stock to holders of Class B Common Stock and only
in Class C Common Stock to holders of Class C Common Stock.

On liquidation of the Company, after there shall have been set aside for
the holders of Preferred Stock, if any, the full preferential amount to which
they may be entitled, the net assets of the Company remaining available for
distribution to stockholders shall be distributed equally to each share of Class
A Common Stock, Class B Common Stock and Class C Common Stock.

Subject to all the rights which may be granted to holders of the Company's
Preferred Stock, if any, and as otherwise required by Massachusetts law, a
description of the preferences, voting powers, qualifications and special or
relative rights and privileges of the Class A Common Stock, the Class B Common
Stock and the Class C Common Stock is set forth below. Except as otherwise
stated below and as otherwise required by Massachusetts law, each share of Class
A Common Stock, Class B Common Stock and Class C Common Stock has identical
powers, preferences and rights.

Class A Common Stock

The Class A Common Stock is entitled to one vote per share with respect to
all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A Common Stock are
entitled to elect two members to the Company's Board of Directors.

The Class A Common Stock is non-redeemable and non-convertible and has no
pre-emptive rights. The shares of Class A Common Stock offered hereby will be
fully paid and non-assessable.

Class B Common Stock

The Class B Common Stock is entitled to five votes per share with respect
to all matters on which shareholders are entitled to vote, except as otherwise
required by law. The holders of the Class B Common Stock are also entitled to
elect all of the remaining members of the Board of Directors in excess of the
two directors elected by the holders of Class A Common Stock.

The Class B Common Stock is non-redeemable and has no pre-emptive rights.

Each share of Class B Common Stock is convertible, at the option of its
holder, into a share of Class A Common Stock. In addition, each share of Class B
Common Stock is automatically convertible into one fully-paid and non-assessable
share of Class A Common Stock (i) upon its sale, gift or transfer to a person
who is not an affiliate of the initial holder thereof or (ii) if transferred to
such an affiliate, upon its subsequent sale, gift or other transfer to a person
who is not an affiliate of the initial holder. Shares of Class B Common Stock
that are converted into Class A Common Stock will be retired and canceled and
shall not be reissued.

All of the outstanding shares of Class B Common Stock are fully paid and
non-assessable.

Class C Common Stock

The Class C Common Stock is non-voting except as otherwise required by law.
The Class C Common Stock is non-redeemable and has no pre-emptive rights. Since
the Company failed to meet earnings targets as specified in its March 3, 1994
Prospectus, all outstanding Class C Common Stock was canceled as of September
28, 1997.

Preferred Stock

The Board of Directors is authorized, subject to the limitations prescribed
by law and the Company's Articles of Organization, to issue the Preferred Stock
in one or more classes or series and to determine, with respect to any series so
established, the preferences, voting powers, qualifications and special or
relative rights of the established class or series. The Board of Directors may
make this determination and issue shares of Preferred Stock without any prior
consent or approval from the holders of the Company's Common Stock for up to the
1,000,000 shares of Preferred Stock which are currently authorized. Nine hundred
and fifty (950) shares of the Company's Series B Preferred Stock are currently
outstanding.

Each Share of Series B Preferred Stock is convertible, at the option of its
holder, into Class A Common Stock at 80% of the average closing bid price five
days prior to the conversion date but not less than $1.88 or more than $3.50 per
share. If the conversion price should calculate to be less than $1.88 the
difference is made up in the form of a Note from the Company. Preferred Stock
dividends have preference over any Common Stock Dividends declared and may be
paid in cash or Preferred Stock at the Company's option.

Massachusetts Law and Certain Charter Provisions

Anti-Takeover Measures

In addition to the directors' ability to issue shares of Preferred Stock in
series, the Company's Restated Articles of Organization and By-Laws contain
several other provisions that are commonly considered to have an anti-takeover
effect. The Company's Restated Articles of Organization include a provision
prohibiting shareholder action by written consent except as otherwise provided
by law. Under Massachusetts law, action taken by shareholders without a meeting
requires their unanimous written consent. Additionally, under the Company's
By-Laws, the directors may enlarge the size of the Board and fill any vacancies
on the Board.

Under Massachusetts law, any corporation which has a class of voting
securities registered under the Exchange Act is required to classify its board
of directors, with respect to the time for which they severally hold office,
into three classes, unless the board of directors of such corporation or the
stockholders by a vote of two-thirds of the shares outstanding, adopts a vote
providing that the corporation shall be exempt from the foregoing provision. A
provision classifying the Board of Directors is commonly considered to have an
anti-takeover effect. The Company's Board of Directors has voted to exempt the
Company from this provision.

The Company, as a Massachusetts corporation, is subject to the
Massachusetts Business Combination statute and to the Massachusetts Control
Share Acquisition statute. Under the Massachusetts Business Combination statute,
a person (other than certain excluded persons) who acquires 5% or more of the
stock of a Massachusetts corporation without the approval of the Board of
Directors (an "Interested Shareholder"), may not engage in certain transactions
with the corporation for a period of three years. There are certain exceptions
to this prohibition; for example, if the Board of Directors approves the
acquisition of stock or the transaction prior to the time that the person became
an Interested Shareholder, or if the Interested Shareholder acquires 90% of the
voting stock of the corporation (excluding voting stock owned by directors who
are also officers and stock held by certain employee stock plans) in one
transaction, or if the transaction is approved by the Board of Directors and by
the affirmative vote of two-thirds of the outstanding voting stock which is not
owned by the Interested Shareholder.

Under the Massachusetts Control Share Acquisition statute, a person (the
"Acquiror") who makes a bona fide offer to acquire, or acquires, shares of a
corporation's common stock that when combined with shares already owned, would
increase the Acquiror's ownership to at least 20%, 33 1/3%, or a majority of the
voting stock of such corporation, must obtain the approval of a majority of
shares held by all shareholders except the Acquiror and the officers and inside
directors of the corporation in order to vote the shares acquired. The statute
does not require the Acquiror to consummate the purchase before the shareholder
vote is taken.

The foregoing provisions of Massachusetts law and the Company's Restated
Articles of Organization and By-Laws could have the effect of discouraging
others from attempting unsolicited takeovers of the Company and, as a
consequence, they may also inhibit temporary fluctuations in the market price of
the Company's Common Stock that might result from actual or rumored unsolicited
takeover attempts. Such provisions may also have the effect of preventing
changes in the management of the Company. It is possible that such provisions
could make it more difficult to accomplish transactions which shareholders may
otherwise deem to be in their best interests.

Transfer Agent and Registrar

American Stock Transfer & Trust Company, New York, New York, serves as the
Company's Transfer Agent.

NASDAQ System Quotation

Application has been made to approve the shares being offered hereby for
quotation on NASDAQ under the trading symbol PIHC.

<PAGE>

PLAN OF DISTRIBUTION

The shares of Class A Common Stock offered by this Prospectus may be sold
from time to time by the Selling Security Holders. No underwriting arrangements
have been entered into by the Selling Security Holders. The distribution of the
shares offered by this Prospectus by the Selling Security Holders may be
effected in one or more transactions that may take place in the over-the-counter
market, including ordinary broker's transactions, privately negotiated
transactions, or through sales to one or more dealers for resale of such shares
as principals, at prevailing market prices at the time of sale, prices related
to prevailing market prices, or negotiated prices. Underwriter's discounts and
usual and customary or specifically negotiated brokerage fees or commissions may
be paid by a Selling Security Holder in connection with sales of the shares.

In order to comply with certain state securities laws, if applicable, the
shares of Class A Common Stock offered by this Prospectus will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In certain
states, such shares may not be sold unless they have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Arent Fox Kintner Plotkin & Kahn, PPLC.

EXPERTS

The financial statements of PHC, Inc. as of June 30, 1997 and 1996 and for
the years ended June 30, 1997 and 1996 appearing in this Registration Statement
have been audited by Richard A. Eisner & Company, LLP, independent auditors, as
set forth in their report thereon, and are included herein in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.

<PAGE>

PHC, INC. AND SUBSIDIARIES

Contents

Consolidated Financial Statements

Independent auditors' report F-2

Consolidated balance sheets F-3

Consolidated statements of operations F-4

Consolidated statements of changes in F-5
stockholders' equity

Consolidated statements of cash flows F-6

Consolidated notes to financial statements F-7

F-1

<PAGE>

INDEPENDENT AUDITOR' REPORT

Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts

We have audited the accompanying consolidated balance sheets of PHC, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position of
PHC, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years then ended in conformity
with generally accepted accounting principles.

Richard A. Eisner & Company, LLP

Cambridge, Massachusetts
September 19, 1997

<PAGE>

PHC, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
March 31, June 30,
(unaudited)
1998 1997 1996

ASSETS (Notes C and D)
Current assets:
Cash and cash equivalents $ 92,591 $ 844,471 $ 284,044
Accounts receivable, net of allowance for
bad debts of $2,062,093 at Mar 31,1998,
$1,942,602 at June 30, 1997 and
$1,059,774 at June 30, 1996 (Notes A,
C and M) 9,378,264 9,066,763 5,994,997
Prepaid expenses 255,494 346,091 190,773
Other receivables and advances 467,706 249,218 63,282
Deferred income tax asset (Note F) 515,300 515,300 515,300
Other receivables, related party (Note L) 236,980 80,000 --
Net current assets of discontinued operations
(Note J) -- -- 797,187
__________ __________ __________

Total current assets 10,946,335 11,101,843 7,845,583

Accounts receivable, noncurrent 645,000 605,000 740,000
Loans receivable 118,284 134,284 113,805
Property and equipment, net (Notes A and B) 3,426,581 3,525,195 3,022,419
Deferred income tax asset (Note F) 154,700 154,700 154,700
Deferred financing costs, net of amortization 85,695 60,575 69,875
Goodwill, net of accumulated amortization
(Note A) 2,218,901 1,644,252 841,413
Other assets (Note A) 125,034 214,150 150,794
Net assets of operations held for sale (Note J) -- -- 56,682
Other receivables, noncurrent, related party
(Note L) 2,996,452 2,983,177 --
__________ __________ ___________
Total Assets $20,716,982 20,423,176 $12,995,271
__________ __________ __________
LIABILITIES
Current liabilities:
Accounts payable 2,269,118 $ 2,529,126 1,644,827
Notes payable - related parties (Note E) 51,596 51,600 56,600
Current maturities of long-term debt
(Note C) 1,018,039 560,914 233,531
Revolving credit note and secured term note 1,731,938 1,789,971 --
Current portion of obligations under capital 111,729 97,038 83,481
leases (Note D)
Accrued payroll, payroll taxes and benefits 525,960 303,731 287,543
Accrued expenses and other liabilities 548,567 672,154 668,200
Net current liabilities of
discontinued operations (Note J) 1,084,382 334,349 --
_________ _________ __________
Total current liabilities 7,341,329 6,338,883 2,974,182
_________ _________ __________

Long-term debt and accounts payable (Note C) 3,031,530 3,021,540 1,125,484
Obligations under capital leases (Note D) 1,442,063 1,434,816 1,453,994
Notes payable - related parties (Note E) -- 23,696 47,396
Convertible debentures ($3,125,000 less
discount $390,625) (Note C) -- 2,734,375 --
Net long term liabilities of discontinued 1,394,373 1,145,285 977,026
operations (Note J) _________ _________ __________

Total noncurrent liabilities 5,867,966 8,359,712 3,603,900
_________ _________ __________
Total liabilities 13,209,295 14,698,595 6,578,082

Commitments and contingent liabilities (Notes
A, G, H, K, L and M)

STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
shares authorized, 950 and 500 shares issued 10 5 --
and outstanding March 31, 1998 and June 30,
1997 (liquidation preference $950,000)
Class A common stock, $.01 par value;
20,000,000 shares authorized, 4,932,303,
2,877,836 and 2,293,568 shares issued March 49,323 28,778 22,936
31,1998, June 30,1997 and 1996, respectively
Class B common stock, $.01 par value;
2,000,000 shares authorized, 730,292, 730,360
and 812,237 issued and outstanding March 31, 7,303 7,304 8,122
1998, June 30, 1997 and 1996, respectively,
convertible into one share of Class A common
stock
Class C common stock, $.01 par value; 200,000
shares authorized, 199,816 shares issued and -- 1,998 1,998
outstanding in 1997 and 1996
Additional paid-in capital 15,216,280 10,398,630 8,078,383
Notes receivable related to purchase of -- -- (63,928)
31,000 shares of Class A common stock
Treasury stock, 8,656 common shares at cost (37,818) (37,818) --
Accumulated deficit (7,727,411)(4,674,316) (1,630,322)
___________ __________ ___________
Total stockholders' equity 7,507,687 5,724,581 6,417,189
___________ __________ ____________
Total Liabilities & Shareholders
Equity $20,716,982 $20,423,176 $12,995,271

See notes to financial statements F-3

<PAGE>

PHC, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Nine Months Ended
March 31, Year Ended
(Unaudited) June 30,

1998 1997 1997 1996
Revenues:
Patient care, net (Note A) $14,949,416 $14,978,849 $20,700,616 $16,525,672
Management fees (Note L) 644,983 274,597 597,278 --
Other 554,031 441,525 629,761 233,164

Total revenue 16,148,430 15,694,971 21,927,655 16,758,836
___________ __________ __________ ____________
Operating expenses:
Patient care expenses 8,171,428 7,468,614 10,346,111 7,974,811
Cost of management contracts 337,628 232,098 324,440 146,407
Provision for doubtful
accounts 1,479,692 837,524 2,593,573 1,289,105
Administrative expenses 6,759,298 6,227,412 8,622,946 6,777,273
___________ __________ __________ ____________

Total operating expenses 16,748,046 14,765,648 21,887,070 16,187,596
___________ __________ __________ ____________
Income (Loss)from operations (599,616) 929,323 40,585 571,240
___________ __________ __________ ____________
Other income (expense):
Interest income 288,323 105,506 199,976 14,409
Other income, net 180,709 332,641 490,019 211,015
Interest expense (935,145) (949,681) (1,441,030) (396,255)
Gain from operations held for
sale (Note J) -- 36,478 26,853 11,947
___________ __________ __________ ___________

Total other expense (466,113) (475,056) (724,182) (158,884)
___________ __________ __________ ___________

Income (Loss) before income
taxes (benefit) (1,065,729) 454,267 (683,597) 412,356
Income taxes (benefit)(Note F) 105,509 30,000 197,311 (219,161)
___________ __________ ___________ __________
Income(Loss) from continuing
operations $(1,171,238) $ 424,267 $(880,908) $631,517

Income (loss) from
discontinued operations (1,829,508) (341,486) (1,958,756) (1,216,832)
____________ _________ ___________ ___________

Net income (loss) (3,000,746) 82,781 (2,839,664) (585,315)
____________ _________ ___________ ___________

Basic Earnings (Loss)per
common share:
Continuing Operations (.23) .13 (.27) .23
Discontinued Operations (.36) (.11) (.60) (.45)
Total (.58) .02 (.87) (.22)
Basic Weighted average number
of shares outstanding 5,090,919 3,170,222 3,270,175 2,709,504

Diluted Earnings (loss) per
common share:
Continuing Operations (.23) .09 (.27) .18
Discontinued Operations (.36) (.07) (.60) (.34)
Total (.58) .02 (.87) (.16)
Diluted Weighted average
number of shares
outstanding 5,090,919 4,855,753 3,270,175 3,615,514

See notes to financial statements F-4

<PAGE>

PHC, INC. AND SUBSIDIARIES

Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount

Balance - June 30, 1,504,662 $15,047 898,795 $8,988 199,966 $2,000
1995
Payment of notes
receivable
Conversion of 86,554 866 (86,558) (866) (150) (2)
shares
Exercise of options 22,500 225
Issuance of stock
for obligations in 6,600 66
lieu of cash
Exercise of bridge 33,509 335
loan warrants
Sale of stock in
connection 493,750 4,937
with private
placement
Costs related to
private placement
Exercise of IPO 21,493 215
warrants
Issuance of shares 87,000 870
with acquisitions
Exercise of 37,500 375
private placement
warrants
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ________________________________________________________________________
ended June 30, 1996

Balance - June 30, 2,293,568 22,936 812,237 8,122 199,816 1,998
1996
Costs related to
private placements
Issuance of shares 229,500 2,295
with acquisitions
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of 81,877 818 (81,877) (818)
shares
Issuance of
employee stock 9,452 94
purchase plan
shares
Issuance of shares
in connection with 20,000 200
consulting
agreement
Issuance of
warrants with
convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of 1,000 $10
preferred stock
Adjustment related
to beneficial
conversion
Conversion of 229,964 2,300 (500) (5)
preferred stock
Dividend on
preferred stock
Net loss, year ________________________________________________________________________
ended June 30, 1997

Balance - June 30, 2,877,836 $28,778 730,360 $ 7,304 199,816 $1,998 500 $5
1997
Costs related to
private placements
Conversion of Debt 1,331,696 13,317
Conversion of 246,305 2,463 (500) (5)
preferred stock
Issuance of shares 41,024 410
with acquisition
Issuance Private 172,414 1,724
Placement shares
Conversion of 68 1 (68) (1)
Shares
Cancel Class C (199,816) (1,998)
Common Stock
Issue warrants for
services
Issuance of Shares
with 20,870 209
consulting
agreement
Issuance of Shares
with 227,347 2274
Earn out
agreement
Issuance of
employee stock 14,743 147
purchase plan
shares
Issuance of 950 10
preferred stock
Warrant Valuation

Balance - March 4,932,303 $49,323 730,292 $ 7,303 0 $0 950 $10
31, 1998
(Unaudited)

See notes to financial statements
<PAGE>

PHC, INC. AND SUBSIDIARIES (con't)

Consolidated Statements of Changes In Stockholders' Equity

Additional
Paid-in
Capital, Notes Treasury Shares Accumulated
Common Receivable Shares Amount Deficit Total
Stock for Stock

Balance - June 30, $5,554,874 $(75,362) $(1,045,007) $4,460,540
1995
Payment of notes 11,434 11,434
receivable
Conversion of 2 -0-
shares
Exercise of options 113,575 113,800
Issuance of stock
for obligations in 36,184 36,250
lieu of cash
Exercise of bridge 153,617 153,952
loan warrants
Sale of stock in
connection with 1,970,063 1,975,000
private placement
Costs related to (442,395) (442,395)
private placement
Exercise of IPO 137,785 138,000
warrants
Issuance of shares 392,678 393,548
with acquisitions
Exercise of 149,625 150,000
private placement
warrants
Amount paid for
options, not yet 9,375 9,375
issued
Compensatory stock 3,000 3,000
options
Net loss, year
ended June 30, 1996 (585,315) (585,315)

Balance - June 30, 8,078,383 (63,928) (1,630,322) 6,417,189
1996
Costs related to (141,295) (141,295)
private placements
Issuance of shares 838,524 840,819
with acquisitions
Exercise of options 59,709 59,844
Payment of notes 662 662
receivable
Conversion of -0-
shares
Issuance of
employee 30,530 30,624
stock
purchase plan
shares
Issuance of shares
in connection with 79,800 80,000
consulting
agreement
Issuance of
warrants with 125,000 125,000
convertible
debentures
Cancellation of 37,818 8,656 $(37,818) -0-
notes receivable
Payment of notes 25,448 25,448
receivable
Issuance of 999,990 1,000,000
preferred stock
Adjustment related
to beneficial
conversion
feature of 330,284 (200,000) 130,284
convertible
preferred stock
and convertible
debentures
Conversion of (2,295) -0-
preferred stock
Dividend on (4,330) (4,330)
preferred stock
Net loss, year (2,839,664)(2,839,664)
ended June 30, 1997 ______________________________________________________________________

Balance - June 30,
1997 $10,398,630 $ -0- 8,656 $(37,818) $(4,674,316) $5,724,581
Costs related to (228,288) (228,288)
private placements
Conversion of Debt 2,767,101 2,780,418
Conversion of (2,458) 0
preferred stock
Issuance of shares 79,605 80,015
with acquisition
Issuance Private 498,276 500,000
Placement shares
Conversion of -0-
Shares
Cancel Class C 1,998 -0-
Common Stock
Issue warrants for 46,281 46,281
services
Issuance of Shares
with 36,249 36,458
consulting
agreement
Issuance of Shares
with 531,991 534,265
Earn out
agreement
Issuance of
employee stock 35,750 35,897
purchase plan
shares
Issuance of 949,990 950,000
preferred stock
Warrant Valuation 101,155 (52,349) 48,806
(Part Dividend)
Net Loss Nine
months ended (3,000,746) (3,000,746)
March 31,
1998

Balance - March
31, 1998 $15,216,280 $ -0- 8,656 $(37,818) $(7,727,411) $ 7,507,687
(Unaudited)
_________________________________________________________________________

See notes to financial statements F-5
</TABLE>

<PAGE>

PHC, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C> <C> <C>

Nine Months Ended Year Ended
March 31, June 30,
(Unaudited)

1998 1997 1997 1996
Cash flows from operating activities:
Net loss $(3,000,746) $82,781 $(2,839,664) $ (585,315)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-Cash charge of net cash provided
(used) by discontinued operations 999,121 335,183 $ 1,299,795 (426,956)
Deferred tax benefit -- -- -- (418,137)
Depreciation and amortization 334,066 342,340 469,118 377,575
Beneficial conversion feature of -- -- 130,284 --
convertible debt
Compensatory stock options and stock and -- -- 205,000 39,250
warrants issued for obligations
Changes in:
Accounts receivable (710,969) (4,978,221) (2,929,003) (2,038,160)
Prepaid expenses and other current assets 90,597 (340,449) (349,017) (33,364)
Other assets (6,932) 1,743 196,339 671,521
Net assets of operations held for sale -- 56,682 56,682 106,886
Accounts payable (452,565) 476,002 884,299 1,249,654
Accrued expenses and other liabilities 291,201 (105,709) (143,943) 128,054
___________ __________ _________ __________

Net cash used in operating activities (2,456,227) (4,129,648) (3,020,110) (928,992)

Cash flows from investing activities:
Acquisition of property and equipment and (112,911) (198,956) (682,425) (574,443)
intangibles
Loan receivable (13,275) (1,461,645) (3,063,177) (17,462)
Costs related to business acquisition (626,267) (945,116) -- --
Net cash used in investing activities (752,453) (2,605,717) (3,745,602) (591,905)
___________ __________ ___________ ___________

Cash flows from financing activities:
Revolving debt, net (421,230) 1,753,009 1,789,981 --
Proceeds from borrowings 850,000 1,100,000 2,767,373 275,191
Payments on debt (21,450) (17,570) (696,886) (402,828)
Deferred financing costs -- -- 21,498 (711,960)
Issuance of capital stock 2,049,480 1,027,767 944,173 2,109,166
Convertible debt -- 2,656,250 2,500,000 --
__________ _________ _________ ___________

Net cash provided by financing
activities 2,456,800 6,519,456 7,326,139 1,269,569
__________ _________ _________ __________

Net increase (decrease) in cash and cash
equivalents (751,880) (215,909) 560,427 (251,328)
Beginning balance of cash and cash
equivalents 844,471 284,044 284,044 535,372
___________ __________ _________ ___________

Ending balance of cash and cash equivalents $92,591 $68,135 $844,471 $284,044
___________ __________ _________ ___________
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,373,265 $1,002,575 $ 1,279,862 $312,669
Income taxes $ 98,309 $ 30,000 $86,414 $179,550
Supplemental disclosures of noncash
investing and financing activities:
Stock issued for acquisitions of
equipment and services $ 650,738 $ 920,819 $840,819 $393,548
Note payable due for litigation
settlement -- -- -- $225,000
Capital leases -- -- $284,048 $94,699
Conversion of preferred stock $ 584,587 -- $500,000 --
Beneficial conversion feature of
preferred stock -- -- $200,000 --
Conversion of Debt to Common Stock $2,734,375 -- -- --

See notes to financial statements F-6

</TABLE>

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements

June 30, 1997 and 1996 (Unaudited with respect to the nine months ended
March 31, 1998 and March 31, 1997)

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:

PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a psychiatric hospital in Michigan and
psychiatric outpatient facilities in Nevada, Kansas and Michigan. PHC, Inc. also
manages a psychiatric practice in New York, operates an outpatient facility
through a physicians practice, and operates behavioral health centers through
its newest acquisitions. PHC of Utah, Inc. ("PHU") and PHC of Virginia, Inc.
("PHV") provide treatment of addictive disorders and chemical dependency. PHC of
Michigan, Inc. ("PHM") provides inpatient and outpatient psychiatric care. PHC
of Nevada, Inc. ("PHN") and PHC of Kansas, Inc. ("PHK") provide psychiatric
treatment on an outpatient basis. North Point-Pioneer, Inc. ("NPP") operates six
outpatient behavioral health centers under the name of Pioneer Counseling
Centers. Behavioral Stress Centers, Inc. ("BSC") provides management and
administrative services to psychotherapy and psychological practices (see Note
L). Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary
provides outpatient services through a physicians practice (see Note L). Quality
Care Centers of Massachusetts, Inc. ("Quality Care") operates a long-term care
facility known as the Franvale Nursing and Rehabilitation Center. STL, Inc.
("STL") operated day care centers (see Note J). The consolidated financial
statements include PHC and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Until May 31, 1998, the Company operated Good Hope Center, a substance
abuse treatment facility in West Greenwich Rhode Island ("Good Hope"). Until
June 1, 1998 the Company also operated a subacute long-term care facility,
Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree
Massachusetts. On June 1, 1998 Franvale was placed into state receivership. All
financial information for Franvale is reported on the attached financial
statements as discontinued operations. The Company does not expect that the
liquidation of the Franvale Operations will have a material negative impact on
the financial position or results of operation of the Company.

For the year ended June 30, 1996, the Company incurred start-up costs
related to an addition at Quality Care prior to obtaining a license to admit
patients. These costs, amounting to $128,313, are included in discontinued
operations.

During the year ended June 30, 1997, the Company recorded an increase in
its accounts receivable reserve and a substantial portion of the increase was
recorded in the fourth fiscal quarter.

Revenues and accounts receivable:

Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including Medicaid
and Medicare. Revenues under third-party payor agreements are subject to
examination and adjustment, and amounts realizable may change due to periodic
changes in the regulatory environment. Provisions for estimated third party
payor settlements are provided in the period the related services are rendered.
Differences between the amounts accrued and subsequent settlements are recorded
in operations in the year of settlement.

Medicaid reimbursements are currently based on established rates depending
on the level of care provided and are adjusted prospectively at the beginning of
each calendar year. Medicare reimbursements are currently based on provisional
rates that are adjusted retroactively based on annual calendar cost reports
filed by the Company with Medicare. The Company's calendar year cost reports to
Medicare are routinely audited on an annual basis. The Company periodically
reviews its provisional billing rates and provides for estimated Medicare
adjustments. The Company believes that adequate provision has been made in the
financial statements for any adjustments that might result from the outcome of
Medicare audits. F-7

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Revenues and accounts receivable: (continued) The Company has $1,787,000 of
receivables from Medicaid and Medicare at June 30, 1997, which constitute a
concentration of credit risk should Medicaid and Medicare defer or be unable to
make reimbursement payments as due. This amount includes receivables due to
Franvale Nursing and Rehabilitation which is reported as Net current assets of
discontinued operations or Net current liabilities of discontinued operations on
the accompanying Balance Sheet.

Charity care amounted to approximately $725,000 and $865,000 at June 30,
1997 and 1996, respectively and is classified as patient care revenue and an
equal amount of cost is charged to patient care expenses in the statements of
operations.

Property and equipment:

Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:

Assets Estimated
Useful Life

Buildings 20 through 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease

Other assets:

Other assets represent deposits, deferred expenses and covenants not to
compete. Covenants not to compete are amortized over the life of the underlying
agreement using the straight line method.

Goodwill, net of accumulated amortization:

The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over their estimated useful
lives, generally twenty years.

Basic and diluted loss per share:

Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock for each fiscal year excluding Class C Common
Shares held in escrow. Common stock equivalents are not considered in loss years
because they are anti-dilutive.

In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings per share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive affects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share.

Use of estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

F-8

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash equivalents:

Cash equivalents are short-term highly liquid investments with original
maturities of less than three months.

Fair value of financial instruments:

The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.

Impairment of long-lived assets:

During the year ended June 30, 1997 the Company wrote-off the carrying
value of the goodwill for one of its subsidiaries in the amount of approximately
$50,000.

Stock-based compensation:

The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative in fiscal year 1997 which requires disclosure of the
pro forma effects on loss and loss per share as if SFAS No. 123 had been
adopted, as well as certain other information.

Unaudited Interim Financial Statements:

In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included for the nine months ended March 31, 1998 and 1997. Operating results
for the nine months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998.

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised as follows:
June 30,
1997 1996
Land $ 302,359 $ 251,759
Buildings 7,854,419 7,338,838
Furniture and equipment 1,760,359 1,404,716
Motor vehicles 50,889 50,889
Leasehold improvements 385,543 301,067
___________ __________
10,353,569 9,347,269
Less accumulated depreciation and
amortization 1,945,358 1,463,206
Less Net Assets of Franvale Nursing
& Rehabilitation Center
(The above table shows assets related
to Franvale which is presented as
discontinued operations on the
accompanying balance sheet.) 4,883,016 4,861,644
___________ _________

F-9

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, l997 and 1996

NOTE C - LONG-TERM DEBT

Long-term debt is summarized as follows:

June 30,
1997 1996
_____ _____

Note payable with interest at 9% requiring monthly payments
of $1,150 through May 2001 $44,816 $58,154
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1, 1999 40,574 60,163
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal balance
is payable 492,996 505,485
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1, 1999,
collateralized by all assets of PHN and certain
receivables 547,092 735,213
Construction obligations:
Construction note payable collateralized by real estat
and insured by HUD due in monthly installments of
$53,635, including interest at 9.25%, through
December 2035 6,757,422 6,301,986
Other construction obligations to be added to note
payable -- 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5% -- 152,353
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when the
remaining principal balance is payable, collateralized
by all assets of NPP (see Note L) 818,371 --
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when the
remaining principal balance is payable, collateralized by
the real estate 538,605 --
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly installments of
$9,167 beginning April 1998 through February 2001, a
balloon payment of approximately $780,000 plus interest is
due March 2001, interest at prime plus 5% (13.5% at June
30, 1997) collateralized by all assets of PHM with an
additional $500,000 borrowed under the mortgage
subsequen to June 30, 1998 1,100,000 --
__________ _________
10,339,876 8,158,156
Less Amounts applicable to Franvale (shown as
discontinued operations on the accompanying
balance sheet) 6,757,422 6,799,141

Less current maturities 560,914 233,531
_________ ________
Noncurrent maturities $3,021,540 $1,125,484

F-10

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE C - LONG-TERM DEBT (CONTINUED)

Maturities of long-term debt are as follows as of June 30, 1997:

Year Ending
June 30, Amount
1998 $ 560,914
1999 671,381
2000 560,171
2001 1,363,216
2002 20,634
Thereafter 406,138
_____________
$3,582,454

In fiscal year 1997, the Company issued 7% convertible debentures due
December 31, 1998 in the aggregate principal amount of $3,125,000. The number of
shares of Class A common stock into which the debentures may be converted is
determined by dividing the principal amount to be converted by the conversion
price. The conversion price is equal to 94% of the average closing bid price of
the Class A common stock as reported by NASDAQ for the five trading days
immediately preceding the date of conversion. The beneficial conversion feature,
valued at $130,284, was recorded as additional interest. In addition, on March
31, 1997 the Company issued warrants to the debenture holders as compensation
for amending the debenture agreement to allow for a later filing of the
Registration Statement which was originally required to be filed in December
1996. The warrants provide for the purchase of 150,000 shares of Class A common
stock at $2.00 per share and expire in 2003. The warrants were valued at
$125,000. Subsequent to June 30, 1997, all of the convertible debentures were
converted into 1,331,696 shares of Class A common stock.

The Company has entered into a revolving credit note and a secured note
with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are
made based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997). These agreements were renewed to
include three additional facilities for a total amount of $4,000,000 and are
automatically renewable for one-year periods thereafter unless terminated by
either party. Upon expiration, all remaining principal and interest is due. The
notes are collateralized by substantially all of the assets of the Company's
subsidiaries excluding Franvale.

NOTE D - CAPITAL LEASE OBLIGATION

At June 30, 1997, the Company was obligated under various capital leases
for equipment and real estate providing for monthly payments of approximately
$31,000 for fiscal 1998 and terms expiring from December 1997 through February
2014.

The carrying value of assets under capital leases is as follows:

June 30,
1997 1996
__________ __________
Building $1,477,800 $1,477,800
Equipment and improvements 485,004 214,754
Less accumulated depreciation and
amortization (501,732) (400,768)
___________ ____________
$1,461,072 $1,291,786
___________ ___________

F-11

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 1997:

Year Ending Real
June 30, Equipment Property Total
__________ _________ ________ ________
1998 $ 140,307 $ 231,000 $ 371,307
1999 117,083 239,000 356,083
2000 95,121 259,248 354,369
2001 70,828 272,208 343,036
2002 13,557 295,188 308,745
Thereafter -- 4,641,348 4,641,348
_________ ___________ __________

Total future minimum lease
payments 436,896 5,937,992 6,374,888
Less amount representing
interest 83,804 4,556,574 4,640,378

Present value of future
minimum lease payments 353,092 1,381,418 1,734,510
Less amounts attributable
to Franvale 202,656 -- 202,656
Less current portion 59,722 37,316 97,038
_________ _________ _________
Long-term obligations
under capital lease $ 90,714 $1,344,102 $1,434,816
_________ __________ ___________

NOTE E - NOTES PAYABLE - RELATED PARTIES

Related party debt is summarized as follows:
June 30,
1997 1996
________ _________
Note payable, President and principal stockholder,
interest at 8%, due in installments through 1998 $ 55,296 $ 78,996
Notes payable, other related parties, interest at
12% and payable on demand 20,000 24,998
_________ _________
75,296 103,994
Less current maturities 51,600 56,600
_________ ________
$ 23,696 $ 47,394

Maturities of related party debt are as follows at June 30, 1997:

Year Ending
June 30, Amount
1998 $51,600
1999 23,696
_________
$75,296

Related party interest on notes receivable related to the purchase of Class
A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.

F-12

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE F - INCOME TAXES

The Company has the following deferred tax assets included in the accompanying
balance sheets:

Year Ended
June 30,
1997 1996
____________ __________
Temporary differences attributable to:
Allowance for doubtful accounts $ 1,007,000 $ 510,000
Depreciation 147,000 154,700
Other 3,000 5,300
Operating loss carryforward 340,000 --
___________ ___________

Total deferred tax asset 1,497,000 670,000

Less:
Valuation allowance (827,000) --
____________ ___________
Subtotal 670,000 670,000
Current portion (515,300) (515,300)
____________ ___________

Long-term portion $ 154,700 $ 154,700
____________ ___________

The Company had no deferred tax liabilities at June 30, 1997 and 1996.

Income tax expense (benefit) is as follows:
Nine Year Ended
Months June 30,
Ended
March 31,
1998 1997 1996
________ ___________ ___________

Deferred income taxes benefit $ (418,137)
Current income taxes $105,509 $ 197,311 $ 206,546
________ __________ ____________
$105,509 $ 197,311 $ (211,591)
________ __________ ____________

Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:

Nine Months Year Ended
Ended March June 30,
31,
1998 1997 1996
_____________ ____________ ____________
Income tax benefit at
statutory rate $(1,020,254) $ (898,400) $ (271,000)
State income taxes 105,509 197,311 80,850
Increase in valuation
allowance 960,254 827,000 --
Increase due to
nondeductible items,
primarily penalties and
travel and entertainment
expenses 15,000 12,000 12,100
Other 45,000 59,400 (33,541)
____________ __________ ___________

$ 105,509 $ 197,311 $ (211,591)
____________ _________ ___________

At June 30,1997 the Company had a net operating loss carryforward amounting
to approximately $994,000 which expires at various dates through 2012.

Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.

F-13

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through January 2003.
Rent expense for the years ended June 30, 1997 and 1996 was approximately
$752,000 and $450,000, respectively. Minimum future rental payments under
noncancelable operating leases, having remaining terms in excess of one year as
of June 30, 1997 are as follows:

Year Ending
June 30, Amount

1998 $688,105
1999 441,833
2000 297,780
2001 202,876
2002 93,450
Thereafter 136,864
___________
$1,860,908

Litigation:

At June 30, 1997 the Company was involved in two litigation matters related
to the use of its trademark name, PIONEER HEALTHCARE. Pursuant to an agreement
reached in February 1998 on one matter, the Company is now doing business as
Pioneer Behavioral Health in certain jurisdictions.

NOTE H - STOCK PLANS

[1] Stock plans:

The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.

The stock option plan provides for the issuance of a maximum of 400,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.

The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 150,000 shares
may be issued under this plan.

F-14

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE H - STOCK PLANS (CONTINUED)

[1] Stock plans: (continued) Also in October 1995, the Company adopted a
non-employee directors' stock option plan that provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting of
the Board. Through June 30, 1997, options for 11,500 shares were granted under
this plan. A maximum of 50,000 shares may be issued under this plan. Each
outside director shall be granted an option to purchase 2,000 shares of Class A
common stock at fair market value, vesting 25% immediately and 25% on each of
the first three anniversaries of the grant.

In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise durations.

Under the above plans, at June 30, 1997, 179,198 shares were available for
future grant or purchase.

The Company had the following activity in its stock option plans for fiscal 1997
and 1996:

Number Weighted-Average
of Exercise
Shares Price
Per Share
Option plans:
Balance - June 30, 1995 92,000 $5.10
Granted 46,500 $6.20
Cancelled (1,250) $5.00
Exercised (22,500) $5.06
________
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
________
Balance - June 30, 1997 205,375 $4.27
________

Options for 89,250 shares are exercisable as of June 30, 1997 at exercise
prices ranging from $2.87 to $6.63 and a weighted-average exercise price of
approximately $3.71 per share, with a weighted-average remaining contractual
life of approximately three years.

The exercise prices of options outstanding at June 30, 1997 range from
$2.87 to $6.63 per share and have a weighted-average exercise price of
approximately $3.07 per share, with a weighted-average remaining contractual
life of approximately four years.

[2] Stock-based compensation:

The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. There was no compensation expense recognized in
1997 or 1996. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below: Year Ended June 30 1997 1996
_________ _________

Net loss As reported $(2,839,664) $(585,315)
Pro forma (2,893,272) (610,497)
Net loss per share As reported $(0.87) $ (0.22)
Pro forma (0.88) (0.23)

F-15

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE H - STOCK PLANS (CONTINUED)

[2] Stock-based compensation: (continued)

The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected
volatility of 30%; a risk-free interest rate of between 5% and 7%; and an
expected holding period of five years.

The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively.

NOTE I - SEGMENT INFORMATION

At June 30, 1997, the Company's operations were classified into two primary
business segments: substance abuse/psychiatric services and long-term care. The
long-term care segment is reported on the accompanying Financial Statements as
Discontinued Operations.

Year Ended
June 30,
1997 1996
_________ _________
Revenue:
Substance abuse/psychiatric services $ 20,700,616 $ 16,525,672
Long-term care 5,306,717 5,043,922
Other 629,761 233,164
Management fees 597,278 --
_____________ ____________
$ 27,234,372 $ 21,802,758
_____________ ____________
Income (loss) from operations:
Substance abuse/psychiatric services $ 627,341 $ 1,024,245
Long-term care (1,447,468) (826,463)
Other (PDSS) 305,321 86,757
General corporate (427,272) (180,966)
Interest and other income (expense), net (1,700,275) (900,479)
______________ _____________

Loss before income taxes $ (2,642,353) $ (796,906)

Depreciation and amortization:
Substance abuse/psychiatric services $ 449,641 $ 349,437
Long-term care 210,130 176,450
General corporate 19,477 28,138
_____________ ____________
$ 679,248 $ 554,025

Capital expenditures:
Substance abuse/psychiatric services $ 729,661 $ 233,466
Long-term care 213,489 982,978
General corporate 63,150 16,583
_____________ ____________
$ 1,006,300 $ 1,233,027
_____________ ____________
Identifiable assets:
Substance abuse/psychiatric services $ 18,352,342 $10,877,197
Long-term care 7,437,633 8,619,133
General corporate 2,070,834 1,264,205
Net assets of operations held for sale -- 56,682
_____________ ___________
$ 27,860,809 $20,817,217

F-16

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE J - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS

The Company has systematically phased out its day care center operations
(STL). At June 30, 1996, the Company had net assets relating to its day care
centers amounting to approximately $57,000, which primarily represented the
depreciated cost of one remaining real estate parcel. The parcel was sold in
October 1996 at a gain of approximately $38,000.

The Company reported its long term care facility, Franvale Nursing and
Rehabilitation Center as discontinued operations beginning December 31, 1997
based on the pending sale to Lexington Healthcare Group, Inc. On May 26, 1998,
PHC, Inc.'s wholly owned subsidiary, Quality Care Centers of Massachusetts,
Inc., which operates Franvale Nursing and Rehabilitation Center, filed for
reorganization under Chapter 11. On May 29, 1998, the Bankruptcy Court
terminated the Chapter 11 proceeding determining that there was no likelihood of
reorganization since the prospective acquirer of the facility was now imposing
certain terms unacceptable to all interested parties and that the transfer of
patients and liquidation of assets could be as readily effectuated in a state
court receivership under the aegis of the Massachusetts Health Care Statutes and
accordingly dismissed the Chapter 11 case. On June 1, 1998, a receiver was
appointed to transfer the patients and close the facility expeditiously.

Although the full extent of the financial impact on PHC, Inc. cannot be
determined at this time, the management of PHC, Inc. does not believe that the
liquidation of the assets and liabilities of Quality Care Centers of
Massachusetts, Inc. will have a substantial negative impact on PHC's financial
position and results of operations. Quality Care Centers of Massachusetts, Inc.
posted a loss from Discontinued Operations of approximately $1.8 million in the
nine months ended March 31, 1998 and $1.9 million in the previous fiscal year.
The elimination of this loss will enhance the profitability of PHC.

NOTE K - CERTAIN CAPITAL TRANSACTIONS

In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:

Number of Exercise Expiration
Description Units/Shares Price Date

Bridge warrants 5,024 units $4.38 per unit September 1998
Unit purchase option 148,171 units $5.91 per unit March 1999
IPO warrants 1,681,832 shares $6.29 per share March 1999
Private placement warrants 715,682 shares $3.93 per share January 1999
Bridge warrants 34,710 shares $7.39 per share March 1999
Warrant for services 25,000 shares $6.88 per share October 2001
Warrant for services 3,093 shares $3.39 per share February 2002
Consultant warrant
(see below) 160,000 shares $2.62 per share March 2002
Convertible debenture
warrants (Note C) 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000

Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.

In June 1997, the Company received $1,000,000 in exchange for the issuance
of Series A convertible preferred stock and warrants to purchase 50,000 shares
of Class A common stock. The warrants are exercisable at $2.75 per share and
expire in 2000. The warrants were valued at $30,000. The number of shares of
Class A common stock into which the preferred stock may be converted is equal to
80% of the closing bid price of the Class A common stock as reported by NASDAQ
for the five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. Subsequent to
year-end the 500 remaining shares of preferred stock were converted into 246,305
shares of Class A common stock. The issuance of these securities will result in
the issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.

Cumulative preferred dividends are at the rate of $60 per share per year,
payable quarterly. Dividends are payable in cash or in shares of preferred stock
at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330.

Certain Consultant Warrants may be canceled if certain stock prices, as
defined in the agreement, are not achieved by March 3, 1998.

In February 1996, the Company issued, in a private placement, units
comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395. Subject to the terms and conditions of the
applicable warrant agreement, each warrant is exercisable for one share of Class
A common stock at an exercise price of $4.00, subject to adjustment upon certain
events. The warrants expire in January 1999. Upon the issuance of the units
described above, certain additional shares of Class A common stock or securities
exercisable therefor become issuable under the antidilution provisions of
certain outstanding securities of the Company.

F-17

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

Subsequent to June 30, 1997, the Class C common stock was canceled and
retired because of restrictions on the release of the stock, due to
earnings
targets which were not achieved.

Subsequent to June 30, 1997, the Company issued a warrant which expires May
2002 for the purchase of 150,000 shares of common stock in exchange for services
at an exercise price of $2.50 per share. The Company also issued warrants to
purchase 191,617 shares of common stock in conjunction with private placements.
These warrants expire in September 2002 and March 2003 and have exercise prices
ranging from $2.31 to $2.90 per share.

NOTE L - ACQUISITIONS

On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:

Accounts receivable $231,509
Equipment and other assets 54,397
Covenant not to compete 10,500
Goodwill 671,359
Accrued benefits payable (13,765)
_________
$954,000
_________

On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a period of four years.

On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:

Equipment and other assets $20,000
Covenant not to compete 10,000
Goodwill 40,548
________
$70,548
________

In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.

In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:

Office equipment $ 18,000
Covenants not to compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_________
$608,159

F-18

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE L - ACQUISITIONS (CONTINUED)

Concurrent with the asset purchase agreement, NPP entered into an employment
agreement with a former owner which requires an annual salary of $150,000 and an
annual bonus. The agreement is effective for four years and is automatically
extended for successive one year terms unless terminated. The salary and bonus
are subject to adjustment based on collected billings.

NPP also entered into a management agreement whereby $1,500 per month would be
paid for
five years to the former owners.

Subsequent to year-end, under the employment agreement, the Company issued
15,000 unregistered shares of Class A common stock.

The purchase price of BSC was allocated as follows:

Goodwill $63,600
Equipment and other assets 20,000
_______
$83,600
_______

The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral Stress Centers, Inc. for the three years following
the merger date. The additional purchase price is based on the income of BSC
before taxes and is to be paid in PHC stock, at market value up to $200,000 and
the balance, if any, in cash.

BSC also entered into a management agreement with Perlow. The agreement requires
Perlow to pay 25% of its practice expenses to BSC on a monthly basis over a
five-year period with an automatic renewal for an additional five-year period.
Effective January 1, 1998 the management agreement was amended to pay 20% of the
practice expenses to BSC in management fees.

On November 1, 1996, BSC entered into a lease agreement for its facilities. The
lease payments are due in equal monthly installments over a three year period
with an option to extend annually for three additional years. The lease is to be
paid by Perlow in accordance with the management agreement.

On January 17, 1997, with an effective date of January 1, 1997, the Company
entered into a Stock Exchange Agreement with a Virginia corporation owned by two
individuals to whom the Company has an outstanding note payable. The corporation
consists of private practices of psychiatry. The Stock Exchange Agreement
provided that in exchange for $50,000 in cash and 64,500 shares of restricted
Class A common stock, the Company received an 80% ownership interest in the
Virginia corporation. The Company also paid $80,444 in legal fees in connection
with the Agreement. Concurrent with the Stock Exchange Agreement the two owners
of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional services and each

F-19

<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE L - ACQUISITIONS (CONTINUED)

was granted an option to purchase 15,000 shares of Class A common stock at an
exercise price of $4.87 per share. The options expire on April 1, 2002. Each
agreement requires an annual salary of $200,000 and expires in five years.
Further, a Plan and Agreement of Merger was executed whereby the Virginia
corporation was merged into PCV.

On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).

In accordance with the above agreements the purchase price was allocated as
follows:

Land $ 50,600
Building 540,000
Covenant not to compete 50,000
Goodwill 285,038
_________
$ 925,638
_________

In accordance with the agreement the two owners will be paid a finders fee for
all subsequently acquired medical practices within a 200 mile radius of PCV and
those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.

Information is not available to present pro forma financial information relating
to the 1997 acquisitions. The Company has so advised the Securities and Exchange
Commission and has received a no action letter with respect to this matter. Had
the acquisitions made during the fiscal years ended June 30, 1996, been made as
of July 1, 1995, the pro forma effect on the Company's results of operations
would have been immaterial.

NOTE M - SALE OF RECEIVABLES

The Company has entered into a sale and purchase agreement whereby third-party
receivables are sold at a discount with recourse. The interest rate is
calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at
June 30, 1997 and 1996, respectively. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totaled approximately
$3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively,
and are included in interest expense in the accompanying consolidated statement
of operations. Subsequent to June 30, 1997 the Company refinanced this debt with
Healthcare Financial Partners, Inc. to provide for receivables funding and
liquidate the debt due to Finova Capital from PHC of Virginia, Inc. and PHC of
Rhode Island, Inc. and provide receivables funding for Pioneer Counseling of
Virgina, Inc.

NOTE N - OTHER EVENTS SUBSEQUENT TO JUNE 30, 1997

In September 1997, the Company received $500,000 in exchange for the issuance of
172,414 shares of unregistered Class A common stock.

On March 26, 1998 the Company issued 227,347 shares of the Company's Class A
Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY,
Inc. in full payment for the earn-out due to be paid to them for the year ended
October 31, 1997.

Also, subsequent to June 30, 1997, the Company purchased the assets of an
outpatient clinic in Virginia for 26,024 shares of Class A common stock and
$50,000 in cash. The clinic's operations will be included in PCV.

On March 10, 1998 the Company issued a warrant to purchase 52,500 shares of PHC,
Inc. Class A Common Stock, exercisable at $2.38 per share, to Healthcare
Financial Partners, Inc. in conjunction with a $350,000 financing provided to
PHC, Inc.

On July 10, 1998 the Company issued a warrant to purchase 52,500 shares of PHC,
Inc. Class A Common Stock, exercisable at $2.00 per share, to Healthcare
Financial Partners, Inc. in conjunction with the payment extension granted on
the $350,000 financing provided to PHC, Inc.

F-20

<PAGE>

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers

Section 6 of the Company's Restated Articles of Organization provides, in
part, that the Company shall indemnify its directors, trustees, officers,
employees and agents against all liabilities, costs and expenses, including but
not limited to amounts paid in satisfaction of judgments, in settlement or as
fines and penalties, and counsel fees, reasonably incurred by such person in
connection with the defense or disposition of or otherwise in connection with or
resulting from any action, suit or proceeding in which such person may be
involved or with which he or she may be threatened, while in office or
thereafter, by reason of his or her actions or omissions in connection with
services rendered directly or indirectly to the Company during his or her term
of office, such indemnification to include prompt payment of expenses in advance
of the final disposition of any such action, suit or proceeding.

In addition, the Restated Articles of Organization of the Company, under
authority of the Business Corporation Law of the Commonwealth of Massachusetts,
contain a provision eliminating the personal liability of a director to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction from which the director derived an improper
personal benefit. The foregoing provision also is inapplicable to situations
wherein a director has voted for, or assented to, the declaration of a dividend,
repurchase of shares, distribution or the making of a loan to an officer or
director, in each case where the same occurs in violation of applicable law.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

<PAGE>

Section 6 of the Registrant's Restated Articles of Organization provides,
in part, that the Registrant shall indemnify its directors, trustees, officers,
employees and agents against all liabilities, costs and expenses, including but
not limited to amounts paid in satisfaction of judgments, in settlement or as
fines and penalties, and counsel fees, reasonably incurred by such persons in
connection with the defense or disposition of or otherwise in connection with or
resulting from any action, suit or proceeding in which such person may be
involved or with which he or she may be threatened, while in office or
thereafter, by reason of his or her actions or omissions in connection with
services rendered directly or indirectly to the Registrant during his or her
term in office, such indemnification to include prompt payment of expenses in
advance of the final disposition of any such action, suit or proceeding.

In addition, the Restated Articles of Organization of the Registrant, under
authority of the Business Corporation Law of the Commonwealth of Massachusetts,
contain a provision eliminating the personal liability of a director to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction from which the director derived an improper
personal benefit. The foregoing provision also is inapplicable to situations
wherein a director has voted for, or assented to, the declaration of a dividend,
repurchase of shares, distribution, or the making of a loan to an officer or
director, in each case where the same occurs in violation of applicable law.

Item 25. Other Expenses of Issuance and Distribution

It is estimated that the following expenses will be incurred in connection
with the proposed offering hereunder:

SEC Registration Fee .................$ 756
NASDAQ Listing Fees ..................$ 7,500
Legal Fees and Expenses ...............$35,000
Accounting Fees and Expenses ..........$15,000
Miscellaneous ........................$ 4,244

Total...........$62,500

The Registrant will bear all expenses shown above.

Item 26. Recent Sales of Unregistered Securities

In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities without registering such
securities under the Securities Act.

On July 7, 1995 the Company issued a warrant for the purchase of up to
1,600 shares of Class A Common Stock at an exercise price of $5.47 to Westergard
Publishing in payment for investor relations services.

On November 1, 1995 the Company issued 75,000 shares of Class A Common
Stock to Norton A. Roitman in exchange for the acquisition by the Company of Dr.
Roitman's interest in Harmony Healthcare.

On February 8, 1996 the Company issued 79 units, each of which consisted of
6,250 shares of Class A Common Stock, and 9,375 warrants, each of which is
exercisable for one share of Class A Common Stock at an exercise price of $4.00
per share to 11 investors in a private placement, which resulted in net proceeds
to the Company of approximately $1,524,800.

On March 15, 1996 the Company issued 12,000 shares of Class A Common Stock
to Ronald J. Dreier in exchange for the acquisition by the Company of Mr.
Dreier's interest in Total Concept.

On April 15, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Peter Mintz as
payment for investor relations services.

On April 23, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Barrow Street
Research as payment for investor relations services.

On September 30, 1996 the Company issued 6,000 shares of Class A Common
Stock to Leon Rubenfair and 9,000 shares of Class A Common Stock to Alan
Rickfelder in exchange for the acquisition by the Company of their interest in
NPP.

On November 1, 1996 the Company issued 114,375 shares of Class A Common
Stock to Dr. Irwin Mansdorf and 35,625 shares of Class A Common Stock to Dr.
Yakov Burstein in exchange for the acquisition by the Company of Drs. Mansdorf's
and Burstein's interest in BSC.

On January 13, 1997 the Company issued 32,250 shares of Class A Common
Stock to each of Dr. Himanshu Patel and Dr. Mukesh P. Patel in exchange for the
acquisition by the Company of their interest in PCV.

On November 11, 1996 the Company issued a warrant to purchase up to 25,000
shares of Class A Common Stock at an exercise price of $6.88 per share to Alpine
Capital Partners as payment for consulting services. The exercise price of the
warrants was adjusted to $2.00 in July 1997.

On February 18, 1997, the Company issued a warrant to purchase up to 3,000
shares of Class A Common Stock at an exercise price of $3.50 per share to Barrow
Street Research as payment for investor relation services.

On December 6, 1996 the Company issued 7% Convertible Debentures due
December 31, 1998 in the aggregate face amount of $3,125,000 (the "Debentures")
to Infinity Investors Ltd. ("Infinity") and Seacrest Capital Limited
("Seacrest") resulting in $2,500,000 of proceeds to the Company.

On March 31, 1997 the Company issued a warrant to purchase up to 90,000
shares of Class A Common Stock to Infinity and a warrant to purchase up to
60,000 shares of Class A Common Stock to Seacrest at an exercise price of $2.00
per share in consideration of Infinity and Seacrest waiving certain liquidated
damages payable to them pursuant to the Debentures.

On March 3, 1997 the Company issued a warrant to purchase up to 160,000
shares of Class A Common Stock at an exercise price of $2.62 per share to
C.C.R.I. Corporation as payment for consultant services.

On March 4, 1997 the Company issued 100 shares of Class A Common Stock to
Charles E. Hauff a former employee in consideration of past employment services.

On October 2, 1997 the Company also issued 172,414 shares of the Company's
Class A Common Stock to ProFutures Special Equities Fund, L.P. in a private
placement finalized in September 1997 resulting in net proceeds to the Company
of approximately $445,000.

On October 2, 1997 the Company also issued 26,024 shares of the Company's
Class A Common Stock to Counseling Associates of Southwest Virginia, Inc. in
connection with the acquisition of the assets of Counseling Associates of
Southwest Virginia, Inc.

In September 1997 the Company issued a warrant to purchase up to 150,000
shares of Class A Common Stock at an exercise price of $2.50 per share to Brean
Murray and Company, Inc. in exchange for $100.00 and services rendered.

In September 1997 the Company issued a warrant to purchase up to 86,207
shares of Class A Common Stock at an exercise price of $2.90 per share to
ProFutures Equity Fund in conjunction with a private placement.

In March 1998 the Company issued a warrant to purchase up to 3,000 shares
of Class A Common Stock at an exercise price of $2.90 per share to ProFutures
Equity Fund in conjunction with a private placement.

On March 10, 1998 the Company issued a warrant to purchase 52,500 shares of
PHC, Inc. Class A Common Stock, exercisable at $2.38 per share, to Healthcare
Financial Partners, Inc. in conjunction with a $350,000 financing provided to
PHC, Inc.

On March 18, 1998 the Company issued warrants to purchase 49,990 shares of
Class A Common Stock at an exercise price of $2.31 per share to ProFutures
Special Equities Fund, L.P.(26,315 shares), Augustine Fund, L.P. (10,525
shares), Gary D. Halbert (7,890) and John F. Mauldin (5,260 shares) in
conjunction with a private placement.

On March 26, 1998 the Company issued 227,347 shares of the Company's Class
A Common Stock to the former owners of Behavioral Stress Centers, Inc. now
BSC-NY, Inc. in full payment for the earn-out due to be paid to them for the
year ended October 31, 1997.

None of the sales of securities described above involved an underwriter.
Each sale was made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act on the basis that such sales by the
Registrant did not involve a public offering. Additionally, the February 8, 1996
private placement was made in reliance upon Regulation D of the Securities Act
of 1933 pursuant to which the Registrant filed a Form D on January 25, 1996.

<PAGE>
Item 27. Exhibits

Exhibits Index

Exhibit No. Description

3.1 Restated Articles of Organization of the Registrant, as amended.
(Filed as exhibit 3.1 to the Company's Registration Statement on
March 2, 1994)
3.1.1 Articles of Amendment filed with the Commonwealth of
Massachusetts on January 28, 1997.
3.2 By-laws of the Registrant, as amended. (Filed as exhibit 3.2 to
the Company's Post-Effective Amendment No. 2 on Form S-3 to
Registration Statement on Form SB-2 under the Securities Act
of 1933 dated November 13, 1995. Commission file number
333-71418).
3.3 Certificate of Vote of Directors establishing a Series of a
Class of stock dated June 3, 1997.
4.1 Form of Warrant Agreement. (Filed as exhibit 4.1 to the Company's
Registration Statement on March 2, 1994)
4.2 Form of Unit Purchase Option. (Filed as exhibit 4.4 to the
Company's Registration Statement on March 2, 1994)
4.3 Form of warrant issued to Robert A. Naify, Marshall Naify, Sarah
M. Hassanein and Whitney Gettinger. (Filed as exhibit 4.6 to the
Company's Registration Statement on Form 3 dated March 12, 1996.
Commission file number 333-71418).
4.4 Form of Warrant Agreement by and among the Company, American
Stock Transfer & Trust Company and AmeriCorp Securities, Inc.
executed in connection with the Private Placement. (Filed as
exhibit 4.8 to the Company's Registration Statement on Form 3
dated March 12, 1996. Commission file number 333-71418).
4.5 Form of Warrant Agreement issued to Alpine Capital Partners, Inc.
to purchase 25,000 Class A Common shares dated October 7, 1996.
(Filed as exhibit 4.15 to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on
November 5, 1996. Commission file number 0-23524).
4.6 Form of Warrant Agreement issued to Barrow Street Research, Inc.
to purchase 3,000 Class A Common shares dated February 18, 1997.
(Filed as exhibit 4.17 to the Company's Registration Statement on
Form SB-2 dated April 15, 1997. Commission file number
333-25231).
4.7 Form of Consultant Warrant Agreement by and between PHC, Inc.,
and C.C.R.I. Corporation dated March 3, 1997 to purchase 160,000
shares Class A Common Stock. Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated April 15, 1997.
Commission file number 333-25231).
4.8 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for 50,000 shares of Class A Common Stock
dated 6/4/97. (Filed as exhibit 4.22 to the Company's
Registration Statement on Form SB-2 dated April 15, 1997.
Commission file number 333-25231).
4.9 Warrant Agreement by and between Brean Murray & Company and PHC,
Inc. dated 07/31/97 (See 10.125). (Filed as exhibit 4.23 to the
Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number
0-23524).
4.10 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for up to 86,207 shares of Class A Common
Stock dated 09/19/97. (Filed as exhibit 4.25 to the Company's
report on Form 10-KSB, filed with the Securities and Exchange
Commission on October 14, 1997. (Commission file number 0-23524).
4.11 Transfer from Seacrest Capital Securities of PHC, Inc. and
securities to Summit Capital Limited dated 12/19/97. (Filed as
exhibit 4.26 to the Company's report on Form 10-KSB, filed with
the Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
4.12 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, LP for 3,000 shares of Class A Common Stock.
(Filed as exhibit 4.27 to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission
on April 29, 1998. Commission file number 0-23524).
4.13 Subscription Agreements and Warrants for Series B Convertible
Preferred Shares and Warrants by and between PHC, Inc.,
ProFutures Special Equities Fund, L.P., Gary D. Halbert, John F.
Mauldin and Augustine Fund, L.P. dated March 16, 1998. (Filed as
exhibit 4.28 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 29, 1998.
Commission file number 0-23524)
4.14 Notice and Agreement of Termination of Lease and Option to
Purchase; Bill of Sale; Assignment of Licenses; Promissory Note;
and Guaranty by and between NMI Realty, Inc. and PHC of Rhode
Island, Inc. dated May 31, 1998. (Filed as exhibit 4.28 to the
Company's Current Report on Form 8-K/A, filed with the Securities
and Exchange Commission on June 5, 1998. Commission file number
0-23524).
*4.15 Warrant to purchase up to 52,500 shares of Class A Common Stock
by and between PHC, Inc., and HealthCare Financial Partners, Inc.
dated March 10, 1998.
*4.16 Warrant to purchase up to 52,500 shares of Class A Common Stock
by and between PHC, Inc., and HealthCare Financial Partners, Inc.
dated July 10, 1998.
*5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC.
10.1 1993 Stock Purchase and Option Plan of PHC, Inc., as amended
December 26, 1997. (Filed as exhibit 10.1 to the Company's
Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated
November 13, 1995. Commission file number 333-71418).
10.2 Form of Warrant Agreement for Bridge financing with List of
bridge investors holding warrant agreements and corresponding
numbers of bridge units for which warrant is exercisable. (Filed
as exhibit 10.6 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 33-71418).
10.3 Lease Agreement between Palmer-Wells Enterprises and AIHS, Inc.
and Edwin G. Brown, dated September 23, 1983, with Addendum
dated March 23, 1989, and Renewal of Addendum dated April 7,
1992. (Filed as exhibit 10.14 to the Company's Registration
Statement on Form SB-2 dated March 2, 1994. Commission file
number 33-71418).
10.4 Note of PHC of Virginia, Inc. in favor of Himanshu S. Patel and
Anna H. Patel, dated April 1, 1995, in the amount of $10,000.
Filed as exhibit 10.29 to the Company's annual report on Form
10-KSB, filed with the Securities and Exchange (Commission
file number 0-23524) on October 2, 1995.
10.5 Note of PHC of Virginia, Inc. in favor of Mukesh P. Patel and
Falguni M. Patel, dated April 1, 1993, in the amount of $10,000.
(Filed as exhibit 10.30 to the Company's Registration Statement
on Form SB-2 dated March 2, 1994. Commission file number
33-71418).
10.6 Deed of Trust Note of Mount Regis Center Limited Partnership in
favor of Douglas M. Roberts, dated July 28, 1987, in the amount
of $560,000, guaranteed by PHC, Inc., with Deed of Trust executed
by Mount Regis Center, Limited Partnership of even date (filed
as exhibit 10.33 to Form SB-2 dated March 2, 1994). Assignment
and Assumption of Limited Partnership Interest, by and between
PHC of Virginia Inc. and each assignor dated as of June 30,
1994.(filed as exhibit 10.57 to Form 10-KSB on September 28, 1994)
10.7 Security Agreement Note of PHC of Virginia, Inc. in favor of
Mount Regis Center, Inc., dated July 28, 1987, in the amount of
$90,000, guaranteed by PHC, Inc., with Security Agreement, dated
July 1987. (Filed as exhibit 10.34 to the Company Registration
Statement on Form SB-2 dated March 2, 1994. Commission file
number 33-71418)
10.8 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated
December 1988, in the amount of $195,695; Pledge Agreement by
and between Bruce A. Shear and Steven J. Shear, dated December
15, 1988; Stock Purchase Agreement by and between Steven J. Shear
and Bruce A. Shear, dated December 1, 1988. (Filed as exhibit
10.52 to the Company's Registration Statement on Form SB-2
dated March 2, 1994. Commission file number 33-71418).
10.9 Note of PHC, Inc. in favor of Bruce A. Shear, dated March 31,
1994, in the amount of $110,596. (Filed as exhibit 10.56 to the
Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission on September 28, 1994.
Commission file number 0-23524)
10.10 Regulatory Agreement for Multifamily Housing Projects, by and
between Quality Care Centers of Massachusetts, Inc. and Secretary
of Housing and Urban Development, dated September 8, 1994;
Mortgage of Quality Care Centers of Massachusetts, Inc. in favor
of Charles River Mortgage, dated September 8, 1994; Mortgage Note
of Quality Care Centers of Massachusetts, Inc. in favor of
Charles River Mortgage Company, Inc., in the amount of
$6,926,700, dated September 8, 1994; Security Agreement by and
between Quality Care Centers of Massachusetts, Inc. and Charles
River Mortgage Company, Inc., dated September 8, 1994; Standard
Form Agreement Between Owner and Architect for Housing Services,
by and between Quality Care Centers of Massachusetts, Inc. and
David H. Dunlap Associates, Inc., dated November 5, 1992;
Construction Contract by and between Quality Care Centers of
Massachusetts, Inc. and Corcoran Jennison Construction Co., Inc.,
dated September 8, 1994, and related documents. (Filed as exhibit
10.61 to the Company's annual report on Form 10-KSB, filed with
the Securities and Exchange Commission on September 28, 1994.
Commission file number 0-23524)
10.11 Lease and Option Agreement, by and between NMI Realty, Inc. and
PHC of Rhode Island, Inc., dated March 16, 1994 (Filed as an
exhibit to the Company's annual report on Form 10-KSB, filed
with the Securities and Exchange Commission on September 28,
1994. Commission file number 0-23524). As amended on May 31,
1998. (see exhibit 10.64 filed herewith).
10.12 Secured Promissory Note of PHC of Rhode Island, Inc. in favor of
Good Hope Center, Inc., dated March 16, 1994, in the amount of
$116,000. (Filed as exhibit 10.67 to the Company's annual
report on Form 10-KSB, filed with the Securities and Exchange
Commission on September 28, 1994. Commission file number
0-23524) as amended on May 31, 1998 (see exhibit 10.64 filed
herewith)
10.13 Lease Agreement by and between Conestoga Corp. and PHC, Inc.,
dated July 11, 1994. (Filed as exhibit 10.69 to the Company's
annual report on Form 10-KSB, filed with the Securities and
Exchange Commission on September 28, 1994. Commission file
number 0-23524).
10.14 Renewal of Lease Addendum between Palmer Wells Enterprises and
PHC of Utah, Inc., executed February 20, 1995. (Filed as exhibit
10.73 to the Company's annual report on Form 10-KSB, filed with
the Securities and Exchange on October 2, 1995. Commission
file number 0-23524)
10.15 1995 Employee Stock Purchase Plan. (Filed as exhibit 10.74 to the
Company's Post-Effective Amendment No. 2 on Form S-3 to
Registration Statement on Form SB-2 under the Securities Act
of 1933 dated November 13, 1995. Commission file number
333-71418).
10.16 1995 Non-Employee Director Stock Option Plan. Filed as exhibit
10.75 to the Company's Post-Effective Amendment No. 2 on Form
S-3 to Registration Statement on Form SB-2 under the
Securities Act of 1933 dated November 13, 1995. Commission
file number 333-71418).
10.17 Note of PHC of Nevada, Inc., in favor of LINC Anthem
Corporation, dated November 7, 1995; Security Agreement of
PHC, Inc., PHC of Rhode Island, Inc., and PHC of Virginia,
Inc., in favor of LINC Anthem Corporation, dated November 7,
1995; Loan and Security Agreement of PHC of Nevada, Inc., in
favor of LINC Anthem Corporation, dated November 7, 1995;
Guaranty of PHC, Inc., in favor of LINC Anthem Corporation,
dated November 7, 1995; Stock Pledge and Security Agreement of
PHC, Inc., in favor of LINC Anthem Corporation, dated
November 7, 1995. (Filed as exhibit 10.76 to the Company's
Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933
dated November 13, 1995. Commission file number 333-71418).
10.18 Secured Promissory Note in the amount of $750,000 by and
between PHC of Nevada, Inc. and LINC Anthem Corp. (Filed as
exhibit 10.77 to the Company's Post-Effective Amendment No. 2 on
Form S-3 to Registration Statement on Form SB-2 under the
Securities Act of 1933 dated November 13, 1995. Commission
file number 333-71418).
10.19 Stock Pledge by and between PHC, Inc. and Linc Anthem
Corporation (Filed as exhibit 10.81 to the Company's report on
Form 10-KSB, filed with the Securities and Exchange Commission
on September 28, 1994. )
10.20 Custodial Agreement by and between LINC Anthem Corporation and
PHC, Inc. and Choate, Hall and Stewart dated July 25, 1996.
(Filed as exhibit 10.85 to the Company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission
on February 25, 1997. Commission file number 0-23524)
10.21 Loan and Security Agreement by and between Northpoint-Pioneer
Inc. and LINC Anthem Corporation dated July 25, 1996. (Filed as
exhibit 10.86 to the Company's quarterly report on Form 10-QSB,
filed with the Securities and Exchange Commission on December
5, 1996. Commission file number 0-23524).
10.22 Corporate Guaranty by PHC, Inc., PHC of Rhode Island, Inc.,
PHC of Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem
Corporation dated July 25, 1996 for North Point-Pioneer, Inc.
(Filed as exhibit 10.87 to the Company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission
on December 5, 1996. Commission file number 0-23524).
10.23 Stock Pledge and Security Agreement by and between PHC, Inc. and
LINC Anthem Corporation. (Filed as exhibit 10.88 to the
Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.24 Secured Promissory Note of North Point-Pioneer, Inc. in favor of
LINC Anthem Corporation dated July 25, 1996 in the amount of
$500,000. (Filed as exhibit 10.89 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.25 Lease Agreement by and between PHC, Inc. and 94-19 Associates
dated October 31, 1996 for BSC-NY, Inc. (Filed as exhibit 10.90
to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.26 Note by and between PHC Inc. and Yakov Burstein in the amount
of $180,000. (Filed as exhibit 10.91 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.27 Note by and between PHC, Inc. and Irwin Mansdorf in the amount
of $570,000. (Filed as exhibit 10.92 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.28 Employment Agreement by and between BSC-NY, Inc. and Yakov
Burstein dated November 1, 1996. (Filed as exhibit 10.93 to the
Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.29 Consulting Agreement by and between BSC-NY, Inc. and Irwin
Mansdorf dated November 1, 1996. (Filed as exhibit 10.94 to the
Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.30 Agreement and Plan of Merger by and among PHC, Inc., BSC-NY,
Inc., Behavioral Stress Centers, Inc., Irwin Mansdorf, and
Yakov Burstein dated October 31, 1996. (Filed as exhibit 10.95
to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.31 Employment Agreement by and between Perlow Physicians, P.C. and
Yakov Burstein dated November 1, 1996. (Filed as exhibit 10.98
to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.32 Agreement for Purchase and Sale of Assets by and between
Clinical Associates and Clinical Diagnostics and PHC, Inc.,
BSC-NY, Inc., Perlow Physicians, P.C., Irwin Mansdorf, and
Yakov Burstein dated October 31, 1996. (Filed as exhibit 10.99
to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.33 Consulting Agreement by and between Perlow Physicians, P.C. and
Irwin Mansdorf dated November 1, 1996. (Filed as exhibit 10.100
to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on December 5, 1996.
Commission file number 0-23524).
10.34 First Amendment to Lease Agreement and Option Agreement by and
between NMI Realty, Inc. and PHC of Rhode Island, Inc. dated
December 20, 1996. (Filed as an exhibit to the Company's
Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated
November 13, 1995. Commission file number 333-71418), as amended
on May 31, 1998. (see exhibit 10. )
10.35 Mortgage by and between PHC of Michigan, Inc. and HCFP Funding
Inc. dated January 13, 1997 in the amount of $2,000,000. (Filed
as exhibit 10.106 to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission on
February 25, 1997 Commission file number 0-23524).
10.36 Employment Agreement for Dr. Himanshu Patel; Employment
Agreement for Dr. Mukesh Patel; and Fringe Benefit Exhibit for
both of the Patels' Employment Agreements. (Filed as exhibit
10.107 to the Company's quarterly report on Form 10-QSB, filed
with the Securities and Exchange Commission on February 25,
1997 Commission file number 0-23524).
10.37 Unconditional Guaranty of Payment and Performance by and between
PHC, Inc. in favor of HCFP. (Filed as exhibit 10.112 to the
Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on February 25, 1997
Commission file number 0-23524).
10.38 Amendment number 1 to Loan and Security Agreement dated May 21,
1996 by and between PHC, of Utah, Inc. and HCFP Funding providing
collateral for the PHC of Michigan, Inc. Loan and Security
Agreement. (Filed as exhibit 10.113 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange
Commission on February 25, 1997 Commission file number 0-23524).
10.39 Employment Agreement by and between Perlow Physicians P.C. and
Nissan Shliselberg, M.D dated March, 1997. (Filed as exhibit
10.114 to the Company's Registration Statement on Form SB-2 dated
April 15, 1997. Commission file number 333-25231).
10.40 Option and Indemnity Agreement by and between PHC, Inc. and
Nissan Shliselberg, M.D dated February, 1997. (Filed as exhibit
10.115 to the Company's Registration Statement on Form SB-2 dated
April 15, 1997. Commission file number 333-25231).
10.41 Secured Term Note by and between PHC of Michigan, Inc. and
Healthcare Financial Partners - Funding II, L.P. in the amount of
$1,100,000 dated March, 1997. (Filed as exhibit 10.116 to the
Company's Registration Statement on Form SB-2 dated April 15,
1997. Commission file number 333-25231).
10.42 Mortgage between PHC of Michigan, Inc. and Healthcare Financial
Partners - Funding II, L.P. in the amount of $1,100,000.00
dated March, 1997 for Secured Term Note. (Filed as exhibit
10.117 to the Company's Registration Statement on Form SB-2
dated April 15, 1997. Commission file number 333-25231).
10.43 Submission of Lease between PHC, Inc. and Conestoga Corporation
dated 11/09/95 for space at 200 Lake Street, Suite 101b, Peabody,
MA 01960. (Filed as exhibit 10.119 to the Company's Registration
Statement on Form SB-2 dated April 15, 1997. Commission file
number 333-25231).
10.44 Master Equipment Lease Agreement by and between PHC, Inc. and
LINC Capital Partners dated March 18, 1997 in the amount of
$200,000. (Filed as exhibit 10.121 to the Company's Registration
Statement on Form SB-2 dated April 15, 1997. Commission file
number 333-25231).
10.45 Agreement between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997. (Filed as exhibit 10.122 to
the Company's report on Form 10-KSB, filed with the Securities
and Exchange Commission on October 14, 1997 Commission file
number 0-23524)
10.46 Master Contract by and between Family Independence Agency and
Harbor Oaks Hospital effective January 1, 1997. (Filed as
exhibit 10.122 to the Company's report on Form 10-KSB, filed with
the Securities and Exchange Commission on October 14, 1997
Commission file number 0-23524)
10.47 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000
by and between Dillon and Dillon Associates and Pioneer
Counseling of Virginia, Inc. (Filed as exhibit 10.124 to the
Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997 Commission file number
0-23524)
10.48 Financial Advisory Agreement, Indemnification Agreement and Form
of Warrant by and between Brean Murray & Company and PHC, Inc.
dated 06/01/97. (Filed as exhibit 10.125 to the Company's report
on Form 10-KSB, filed with the Securities and Exchange Commission
on October 14, 1997 Commission file number 0-23524)
10.49 Secured Term Note; Mortgage; Environmental Indemnity; Agreement
Guaranty by PHC, Inc.; and Amendment No. 2 Loan and Security
Agreement by and between Healthcare Financial; and PHC, Inc. of
Michigan dated December, 1997. (Filed as exhibit 10.129 to the
Company's Registration Statement on Form SB-2 dated January 8,
1997. Commission file number 333-25231).
10.51 Promissory Note of Quality Care Center of Massachusetts, Inc. in
favor of CMS Therapies dated December 17, 1997 in the amount of
$312,468.94. (Filed as exhibit 10.131 to the Company's 10Q-SB
dated February 17, 1998.)
10.52 First Amendment to Sale and Purchase Agreement by and between
LINC Financial Services, Inc., LINC Finance Corporation VII and
PHC of Rhode Island dated January 20, 1995 and Sale and Purchase
Agreement dated March 6, 1995. (Filed as exhibit 10.132 to the
Company's 10Q-SB dated February 17, 1998.)
10.55 Agreement by and between PHC, Inc., and Irwin Mansdorf and Yakov
Burstein dated March 2, 1998. (Filed as exhibit 10.135 to the
Company's Current Report on Form 8-K, filed with the Securities
and Exchange ommission on April 29, 1998. Commission file number
0-23524).
10.56 Secured Bridge Loan to be made to PHC, Inc. by HCFP Funding II,
Inc. in the amount of $350,000 dated March 10, 1998. (Filed as
exhibit 10.136 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 29,
1998. Commission file number 0-23524))
10.57 First Amendment to Mortgage between PHC of Michigan, Inc. and
HCFP Funding, Inc. (Filed as Exhibit 10.137 to the Company's
10Q-SB filed on May 15, 1998.)
*10.58 Secured Unconditional Guaranty of Payment and Performance by and
between BSC-NY, Inc. and HCFP Funding II, Inc. in the amount of
$350,000.
*10.59 Loan and Security Agreement by and among HCFP Funding, Inc., and
PHC of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc.,
PHC of Rhode Island, Inc., and Pioneer Counseling of Virginia,
Inc. dated as of February 18, 1998.
*10.60 Credit Line Deed of Trust by and between PHC of Virginia, Inc.,
and HCFP Funding II, Inc. dated July, 1998.
*10.61 Amendment No. 1 to Secured Bridge Note dated July 10, 1998 by and
between PHC, Inc. and HCFP Funding II, Inc.
*10.62 Promissory Note for $50,000 dated May 18, 1998 by and between
PHC, Inc. and Tot Care, Inc.
*10.63 Promissory Note for $50,000 dated June 9, 1998 by and between
PHC, Inc. and Tot Care, Inc.
*10.64 Letter Agreement dated May 31, 1998 by and between NMI Realty,
Inc. and PHC of Rhode Island, Inc. to terminate the Lease and
Option Agreement entered into March 16, 1994.
16.1 Letter on Change in Independent Public Accountants. (Filed as an
exhibit to the Company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on September 28, 1994 and
as exhibit 16.1 in the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission on April 29,
1998. Commission file number 0-23524)
*21.1 List of Subsidiaries.
*23.1 Consent of Independent Auditors.
*23.3 Consent of Arent Fox Kintner Plotkin & Kahn, PPLC. Included in
exhibit 5.1
* Filed Herewith
<PAGE>

Item 28. Undertakings

Undertakings Required by Regulation S-B, Item 512(a).

The undersigned Registrant hereby undertakes

(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) include any prospectus required by Section 10(a)(3) of
the Securities Act;

(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental chang e in the information
in the Registration Statement; and

(iii) include any additional or changed material
information on the plan of distribution.

(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registr ation statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.

(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.

Undertakings Required by Regulation S-B, Item 512(e).

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any arrangement, provision or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

Undertakings Required by Regulation S-B, Item 512(f).

The undersigned Registrant hereby undertakes to:

(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective; and

(2) For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Peabody, State of Massachusetts, on 24th day of July,
1998.

PHC, INC.

By: /s/ Bruce A. Shear
President and
Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Bruce A.
Shear his or her true and lawful attorney-in fact and agent, each acting alone,
with full power of substitution and resubstitution, for him or her in his or her
name, place and stead, in any and all capacities, to sign any or all Amendments
(including post-effective Amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing appropriate or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Signature Title Date

By: /s/ Bruce A. Shear President and Chief July 24, 1998
Bruce A. Shear Executive
Officer and Director
(principal
executive officer)

By: /s/ Paula C. Wurts Controller, Assistant July 24, 1998
Paula C. Wurts Treasurer
and Assistant Clerk
(principal
financial officer)

By: /s/ Gerald M. Perlow Clerk and Director July 24, 1998
Gerald M. Perlow

By: /s/ Donald E. Robar Treasurer and Director July 24, 1998
Donald E. Robar

By: /s/ Howard W. Phillips Director July 24, 1998
Howard W. Phillips

By: /s/ William F. Grieco Director July 24, 1998
William F. Grieco

*By: /s/ Bruce A. Shear July 24, 1998
Bruce A. Shear
as attorney-in-fact

<PAGE>

EXHIBIT INDEX

4.15 Warrant to purchase up to 52,500 shares of Class A Common Stock
by and between PHC, Inc., and HealthCare Financial Partners,
Inc. dated March 10, 1998.
4.16 Warrant to purchase up to 52,500 shares of Class A Common Stock
by and between PHC, Inc., and HealthCare Financial Partners,
Inc. dated July 10, 1998.
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC.
10.58 Secured Unconditional Guaranty of Payment and Performance by
and between BSC-NY, Inc. and HCFP Funding II, Inc. in the
amount of $350,000.
10.59 Loan and Security Agreement by and among HCFP Funding, Inc.,
and PHC of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia,
Inc., PHC of Rhode Island, Inc., and Pioneer Counseling of
Virginia, Inc. dated as of February 18, 1998.
10.60 Credit Line Deed of Trust by and between PHC of Virginia, Inc.,
and HCFP Funding II, Inc. dated July, 1998.
10.61 Amendment No. 1 to Secured Bridge Note dated July 10, 1998 by
and between PHC, Inc. and HCFP Funding II, Inc.
10.62 Promissory Note for $50,000 dated May 18, 1998 by and between
PHC, Inc. and Tot Care, Inc.
10.63 Promissory Note for $50,000 dated June 9, 1998 by and between
PHC, Inc. and Tot Care, Inc.
10.64 Letter Agreement dated May 31, 1998 by and between NMI Realty,
Inc. and PHC of Rhode Island, Inc. to terminate the Lease and
Option Agreement entered into March 16, 1994.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
23.3 Consent of Arent Fox Kintner Plotkin & Kahn, PPLC. Included in
exhibit 5.1