U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                 FORM 10-KSB

[X] Annual  report under  section 13 or 15(d) of the  Securities  Exchange Act
    of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1997
[ ] Transition  report under section 13 or 15(d) of the  Securities  Exchange
    Act of 1934 [NO FEE REQUIRED] for the transition period from ____ to _____.

Commission file number: 0-23524

                                  PHC, INC.
                (Name of small business issuer in its charter)

MASSACHUSETTS                                          04-2601571
(State or  other  jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization)


200 LAKE STREET, SUITE 102, PEABODY, MA                            01960
(Address of principal  executive offices)                        (Zip Code)

 

Issuer's telephone number:  (978) 536-2777 (New area code)

              Securities registered under Section 12(b) of the Act:

                                      NONE.

              Securities registered under Section 12(g) of the Act:

           Units (each unit consisting of one share of CLASS A COMMON
                         STOCK AND ONE CLASS A WARRANT)
                                (Title of class)

                 CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (Title of class)

         CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
                                (Title of class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing  requirements  for the past 90 days. Yes
No X

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

The issuer's revenues for the fiscal year ended June 30, 1997 were $27,234,372.

     The  aggregate  market  value of the voting  stock  held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked prices of such stock,  as of September 15, 1997, was  $13,351,977.
(See definition of affiliate in Rule 12b-2 of Exchange Act).

     At September  15,  1997,  4,470,866  shares of the issuer's  Class A Common
Stock, 730,331 shares of the issuer's Class B Common Stock and 199,816 shares of
the issuer's Class C Common Stock were outstanding.

     TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                   Yes No X

<PAGE>

PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

INTRODUCTION

     PHC, Inc.(the "Company") is a national health care company  specializing in
the treatment of behavioral  health care including  alcohol and drug  dependency
and related disorders, psychiatric care and long term care. The Company operates
3 substance  abuse  facilities,  6 psychiatric  facilities  and 1 long-term care
facility.  Through the Company's  facilities,  it provides specialized treatment
services to substance abuse patients who typically have poor recovery  prognoses
and who are prone to relapse;  psychiatric  care to  children,  adolescents  and
adults, on an inpatient and outpatient basis; and traditional geriatric care and
specialized  subacute services.  In addition,  the Company provides  psychiatric
services  under contract to  approximately  35 long-term  care  facilities.  The
Company's national customers include  organizations  within the  transportation,
gaming and railroad  industries such as CSX,  American  Airlines,  MGM,  General
Electric and International Brotherhood of Electrical Works.

     The Company's  substance abuse 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.  The Company operates  substance abuse facilities in Salt Lake City,
Utah, West Greenwich, Rhode Island and Salem, Virginia.

     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 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 is affiliated with a number of outpatient
providers  and has a contract  to provide  employee  assistance  services to the
employees  of Suffolk  County,  New York.  North Point - Pioneer,  Inc.  ("NPP")
provides outpatient  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  "safety-sensitive"  industry  focused  strategy  results in
customized  outcome oriented  programs that the Company believes produce overall
cost savings to the  patients  and/or the client  organization.  The Company has
been able to leverage its industry  knowledge to gain additional  clients within
each of its targeted industries.  The Company believes that 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
Company's  psychiatric  treatment  programs  provide care at the lowest level of
intensity appropriate for the patient in an integrated delivery system including
inpatient and outpatient  treatment.  The integrated  nature of these  programs,
generally  involves the same  caregivers  for  different  treatment  modalities,
provides for efficient care delivery and the avoidance of repeat  procedures and
diagnostic and  therapeutic  errors.  The Company plans to expand its operations
through the  acquisition  or  establishment  of additional  substance  abuse and
psychiatric treatment facilities.

     Franvale,  the Company's  long-term  care  facility,  provides  traditional
geriatric  care services as well as  specialized  subacute  services to the high
acuity segment (patients  requiring a significant amount of medical care) of the
geriatric  population and to younger  patients who require  skilled nursing care
for longer terms than typically  associated  with a general acute care hospital.
Since  long  term care is not a part of the  Company's  core  business,  Pioneer
continuously  looks  for the best  strategic  alternative  for  Franvale  but no
specific plans have been formulated at this time.

     The Company was organized as a Delaware  corporation in 1976 under the name
American  International  Health  Services,  Inc.  and  changed its name to "PHC,
Inc.," on November 24, 1992. The Company  operates as a holding  company,  doing
business  under the trade name  Pioneer  Healthcare,  with the  exception of the
services  provided  directly by the Company  under the name Pioneer  Development
Support  Services.  The  Company's  executive  offices  are  located at 200 Lake
Street,  Suite 102,  Peabody,  Massachusetts,  01960 and its telephone number is
(978) 536-2777.

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 chemical  dependencies,  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 1980s,
many private payors instituted  managed care programs for  reimbursement,  which
included 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 chemical 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 on site and off site 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.

      Company Operations

     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 three  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  including high-risk,
relapse-prone  chronic  alcoholics,  drug  addicts,  minority  groups  and  dual
diagnosis  patients  (those  suffering from both substance abuse and psychiatric
disorders).  The Company concentrates on providing services to insurers, managed
care  networks  and  health  maintenance   organizations  for  both  adults  and
adolescents.  The  Company's  clinicians  often work  directly  with managers of
employee  assistance programs to select the best treatment facility possible for
their clients.


<PAGE>

     Each of the Company's  facilities  operates a case  management  program for
each  patient  including  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 care or services  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  does not 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",  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.  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
safety sensitive industries,  such as railroads,  airlines,  trucking firms, oil
and gas  exploration  companies,  heavy  equipment  companies and  manufacturing
companies.

      HIGHLAND RIDGE

     Highland Ridge is a 34-bed alcohol and drug treatment  hospital  located in
Salt Lake  City,  Utah,  and is the  oldest  free-standing  chemical  dependency
hospital  in Utah.  Highland  Ridge is  accredited  by the Joint  Commission  on
Accreditation  of  Healthcare  Organizations  ("JCAHO"),  licensed  by the  Utah
Department of Health and 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 testing, psychiatric support, stress management, dietary
planning, vocational counseling and pastoral support. Highland Ridge also offers
extensive aftercare assistance.  Individuals for whom treatment is inappropriate
are referred to other community and professional resources.

     Highland Ridge periodically  conducts or participates in research projects.
For example,  Highland  Ridge was the site of a recent  research  project  being
conducted by the University of Utah Medical  School.  The research  explored the
relationship between individual motivation and treatment outcomes. This research
was regulated and reviewed by the Human Subjects  Review Board of the University
of Utah and was subject to federal standards that delineate 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.

      See "Description of Properties" - Highland Ridge.

      MOUNT REGIS

     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.

 .  See "Description  of Properties"- Mount Regis.
   See "Description of Properties"- Changes.


<PAGE>

     GOOD HOPE CENTER

     Good Hope is a 49-bed  substance abuse treatment  facility  located in West
Greenwich,  Rhode Island. In addition to the West Greenwich facility,  Good Hope
has a satellite  location  providing  outpatient  programs in North  Smithfield,
Rhode  Island.  Good Hope  provides  both adult and  adolescent  programs  on an
inpatient,  outpatient and day treatment basis. The satellite site operates both
outpatient and day treatment  substance  abuse  programs.  

     Good Hope  concentrates  on providing  services to  insurers,  managed care
networks and health  maintenance  organizations  (HMOs).  Good Hope provides the
same  quality  of  individualized  treatment  provided  by the  Company's  other
facilities  by  working   closely  with  the  staff  of  managed  care  and  HMO
organizations.  The Company  recognizes that not all clients are in need of, nor
are appropriate  recipients of, acute care alcohol and drug treatment  services.
Good Hope also utilizes its  outpatient  programs to provide a continuum of care
to local  patients.  The day treatment  license  permits  treatment of substance
abuse, which encompasses primary diagnoses of both alcohol abuse and drug abuse.
Good Hope's substance abuse treatment  program for adolescents also fills a need
of the Company's other facilities for a reliable referral for adolescents.  Most
of the patients treated at Good Hope are from the New England area.

     Good Hope  continues to operate at a loss because of a decline in length of
stay and lower  reimbursements from third party payors.  However,  the Company's
management  team  is  focused  on  reducing  expenses,  increasing  revenue  and
enhancing  programming  and has recently  established new contracts which should
help to stabilize the patient census.

See "Description of Properties" - Good Hope Center


DESCRIPTION OF PROPERTIES

Facility             Location              Square Feet Annual Rent  Lease Term
                                           ____________ ___________  _________
Highland Ridge      Salt Lake City, Utah      16,072     $252,000      9/30/98
Mount Regis Center  Salem, Virginia           14,000      N/A        N/A   (1)
Changes             Salem, Virginia            1,750     $ 18,000    N/A
Good Hope Center    West Greenwich, RI        25,000     $231,000    N/A   (2)
Good Hope Center    North Smithfield, RI       2,180     $ 20,400     10/31/98

(1)  The building is owned by the Company.
(2)  The  Company  has an  irrevocable  option  to  purchase  the  property  for
     $1,150,000  on  March  1,  1998  or  $1,100,000  on  March  1,  1999 or any
     subsequent March 1 through the end of the lease.

GENERAL PSYCHIATRIC FACILITIES

      Company Operations

     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
primary  competitive  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 more effectively.

     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.

     Harbor Oaks Hospital works 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. This program has
attracted  patients  from  across  the  state and  throughout  the  midwest  and
northeast  United States.  The contract with New Life had an initial term of two
years  commencing  on July 25, 1995 is  currently  being  renegotiated  with all
operations continuing as amended until a new contract is finalized.  Harbor Oaks
pays New Life a monthly fee equal to 50% of net receipts  from the program,  not
including receipts from Medicare,  Medicaid,  CHAMPUS and other federally funded
programs.  In the original  agreement Harbor Oaks was required to pay New Life a
minimum  of  $52,500  per month  and a fixed  fee of  $7,500  per month for each
patient  whose  treatment  is  covered  by a  federally  funded  program.  In an
amendment to this contract in November 1996 the minimum payment  requirement was
decreased from $52,500 to $35,000 per month.

     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.

      HARMONY HEALTHCARE

     Harmony  Healthcare,  an outpatient  clinic  located in Las Vegas,  Nevada,
provides psychiatric care to children, adolescents and adults in the local area.
Harmony  Healthcare also operates  employee  assistance  programs for railroads,
healthcare  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 operates five  psychiatric  clinics in Michigan  under the name Pioneer
Counseling Centers.  These clinics provide outpatient  psychiatric and substance
abuse  treatment to children,  adolescents  and adults.  The clinics,  which are
located near the Harbor Oaks  facility,  provide 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, an outpatient clinic located in Salem, Virginia,  provides psychiatric
services to adults, adolescents and children referred by a physicians' practice.
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. BSC is
affiliated  with several  hundred  outpatient  providers  and, in addition,  has
contracts to provide  employee  assistance  services to the employees of Suffolk
County, New York and to employees of certain other companies.


 DESCRIPTION OF PROPERTIES

     Facility            Location           Square Feet  Annual Rent Lease Term
                                            ___________  ___________  __________
Harbor Oaks            New Baltimore,MI          32,000        N/A       N/A(1)
Harmony Healthcare     Las Vegas, NV              4,865   $102,165      5/31/00
Total Concept          Shawnee Mission, KS          150     $4,800      9/30/98
North Point-Pioneer    Farmington Hills, MI       4,992   $ 65,936     01/31/04
North Point-Pioneer    Sterling Heights, MI       2,937   $ 59,969     08/31/01
North Point-Pioneer    Birmingham, MI             3,135   $ 56,430     06/30/01
North Point-Pioneer    Livonia, MI                2,960   $ 50,566      4/30/99
North Point-Pioneer    Clinton Township, MI       3,355   $ 33,427     12/31/97
Pioneer Counseling VA  Salem, VA                  5,700        N/A      N/A (1)
(1)  The building is owned by the company.

OPERATING STATISTICS

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

                                                      Year Ended June 30,
                                         1997          1996           1995
             Inpatient
Net patient service revenues      $13,557,703     $13,000,822     $9,871,623
                                    
Net revenues per patient day(1)   $       414     $       385     $      358
                                    
Average occupancy rate(2)                  58.8%           63.4%          65.3%
Total number of licensed beds at          172             172            172
end of period
Source of Revenues:
   Private(3)                              91.6%           90.0%          89.8%
   Government(4)                            8.4%           10.0%          10.2%
    Partial Hospitalization and
            Outpatient
Net Revenues:
   Individual                     $ 5,629,760     $ 3,021,486     $2,228,210
   Contract                       $ 1,459,580     $   503,365
Sources of revenues:
   Private                                 98.4%           93.9%          94.6%
   Government                               1.6%            6.1%           5.4%
      Other Psychiatric services
      PDS2(5)                     $   629,761      $  233,164      $ 128,157
                                                           
      Practice Management(6)      $   650,852
                                           
(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)  PDS2, 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>

      LONG-TERM CARE FACILITY

      FRANVALE

     The  Company  owns and  operates a  128-bed,  multi-level,  long-term  care
facility in Braintree,  Massachusetts.  For the fiscal year ended June 30, 1997,
Franvale operated at 84.1% of capacity

     Currently,  the  majority  of the  services  provided by the Company at its
Franvale  facility are skilled nursing services.  The short-term  rehabilitation
and subacute  services  provided  include several forms of intravenous  therapy,
total parenteral  (intravenous)  nutrition and pain  management.  Other subacute
services offered include hospice care,  wound  management and tracheotomy  care.
The skilled  therapeutic  services offered by the Company include  occupational,
physical and speech therapy,  respiratory  modalities and continence  retraining
programs.  Franvale was the first  long-term care facility in  Massachusetts  to
hold DPH  certification  in all of the  modalities of  parenteral  (intravenous)
infusion therapy,  and is a leader among long-term care facilities in responding
to the needs of the managed care market and for providing  transfusion  services
in a setting that combines the prerequisite skill and cost  effectiveness.  With
completion of the addition and renovation project,  the Company is expanding the
subacute  services it offers to include  expanded  respiratory  therapy services
(i.e.,  mechanically  assisted  ventilation),   peritoneal  and  neurobehavioral
therapeutic services.

     The Company owns the two story  building in which Franvale is located which
consists of  approximately  44,000 square feet. The Company  believes that these
premises are adequate for its current and anticipated needs.
 
     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 on November 1, 1996 through 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.

     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  which  accrued,  and the expenses  that were
incurred  by the  Company  in an  attempt  to cure the cited  deficiencies,  the
Company  experienced a material  adverse effect on its financial  results in the
latter part of the fiscal year ended June 30, 1997,  particularly  in the fourth
quarter of 1997 and anticipates the possibility of continued  adverse  financial
impacts in future  quarters.  A new  management  team is in place and  marketing
efforts have begun to show positive results.  Pioneer continuously looks for the
best  strategic  alternative  for Franvale  although no specific plans have been
formulated at this time.

OPERATING STATISTICS

     The following table reflects selected financial and statistical information
for Franvale:

                                                     Year ended June 30,
                                           1997          1996         1995
    Net patient service revenues    $  5,306,717   $ 5,043,922   $ 4,180,471
                                                     
    Net revenues per patient        $        135   $       137   $       135
    day(1)...................... 
    Average occupancy rate(2)                 84.1%         87.1%         92.7%
    Total number of licensed beds            128           128            91
    at end of period............                          
    Source of revenues:
         Private(3).............              12.5%          8%            8%
         Government(4)..........              87.5%         92%           92%
                                                                   

(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 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 days derived from
     all payors other than Medicare and Medicaid.
(4)  Government  pay  percentage is the percentage of total patient days derived
     from the Medicare and Medicaid programs.

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.

     The  Company  also  intends to pursue  at-risk  contracts  and  outpatient,
managed care fee-for-service contracts.

     The Company intends to pursue strategic  acquisitions that will provide the
Company with a greater  geographic  reach,  while  incorporating  the  Company's
integrated   delivery   system.   The  Company  may  also  engage  in  strategic
acquisitions  which will enable it to expand the service  offerings it currently
provides.




<PAGE>

 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.

     The  Company  employs  10  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 complemented 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 and enable
the Company to offer a broad range of 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.

     The  Company's  marketing  efforts for its  long-term  care  facility  will
continue to emphasize  the  specialized,  transitional  subacute  care  services
provided by  Franvale.  The  Company  hopes to continue  its  relationship  with
existing  acute care  hospitals for  transitional  patients and to develop other
networks  with health care  providers  to increase its census,  particularly  of
higher paying private pay and long-term care insured patients.


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  system  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.

     With  respect  to  long-term  care,  the  Company's   competitors   include
hospitals,  long-term care  facilities and hospices which provide both custodial
and  subacute  care.  The Company  competes  in the  long-term  market  within a
catchment area of an approximately  25-mile radius from its Franvale center. The
success of a long-term care facility depends on various  factors,  including the
quality of its amenities and facility,  the professionalism of its staff and its
location. The Company believes that it can compete successfully in the long-term
care market,  notwithstanding  the fact that its competitors are numerous and in
many cases have greater financial  resources than the Company,  by continuing to
provide intensive,  cost-effective and innovative treatment and by acquiring new
facilities  or  upgrading  its existing  facilities,  as it has done through the
construction  and  renovation  project at Franvale,  so that the physical  plant
appeals to private paying patients.

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 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  substance  abuse
facilities.  Free  treatment  provided  each year amounts to less than 5% of the
Company's total patient days.
 
     Each contract with an  institution  is negotiated  separately,  taking into
account the  insurance  coverage  provided to  employees  and  members,  and may
provide for  differing  amounts of  compensation  to the  Company for  different
subsets of employees and members  depending upon such coverage.  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 additional  ancillary services
provided to them by the Company.

QUALITY ASSURANCE AND UTILIZATION REVIEW

     The Company has established a comprehensive  quality  assurance  program at
all of its  facilities.  Such 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.  The Company's  professional staff,  including physicians,  social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure for their specific discipline,  as well as
the internal  professional staff requirements adopted by each of the facilities.
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.

     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 and will
like continue to do so. Additionally,  congressional spending reductions for the
Medicaid  program  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.  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.

      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.  DoNs  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 DoNs 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 Franvale and Harbor Oaks facilities are certified for
participation as providers 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,  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 reviews 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  facilities  of  the  Company  that  receive  Medicare
reimbursement  are Franvale and Harbor Oaks.  At Franvale  21.2% of revenues are
derived from Medicare  programs and at Harbor Oaks 11.1% of revenues are derived
from  Medicare  programs.   The  Medicare  program  reimburses   long-term  care
facilities  for routine  operating  costs,  capital costs and  ancillary  costs.
Routine  operating  costs are subject to a routine cost  limitation set for each
location.  Such routine cost  limitations are not applicable for the first three
years of the facility's operations. Owing to its high acuity patient population,
Franvale has received an exception to this routine cost limit for calendar years
1993,  1994, 1995 and 1996.  Capital costs include interest  expenses,  property
taxes,  lease payments and depreciation  expense.  Interest and depreciation are
calculated  based upon the original  owner's  historical  cost (plus the cost of
subsequent  capital  improvements)  when changes in  ownership  occur after July
1984.  Ancillary  costs are reimbursed at actual cost to Medicare  beneficiaries
based on prescribed cost allocation principles.

     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  facilities of the Company that receive  reimbursement
under any state  Medicaid  program are  Franvale  and 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.

     The Franvale facility  participates in the Medicaid program administered by
the Commonwealth of  Massachusetts.  For 1996 and 1995,  Massachusetts  Medicaid
continued to reimburse skilled nursing facilities on an acuity based prospective
system.  The 1996 and 1995 rates are based on costs reported and acuity data for
1993 and are adjusted by inflation factors.  Under the rate formula  established
for 1997, Massachusetts nursing facilities received an average increase in their
Medicaid rates of approximately 2.4%.

     Actual  reimbursement  of  long-term  care  costs  under the  Massachusetts
Medicaid program is based in part upon the acuity levels of individual patients.
Any changes by the Commonwealth to the methods used to determine  patient acuity
will therefore affect Medicaid  reimbursement to providers of long-term care. At
this time the Company  cannot  predict the impact of future year rate changes on
its operations.

     Payment to Medicaid  providers in  Massachusetts  may be delayed or reduced
due to budgetary  constraints or limited availability of revenues due to general
economic conditions affecting the Commonwealth.  Such delays and reductions have
occurred in the past and no assurance can be given that future  reductions  will
not be made in the  scope  of  covered  services  or the  rate  of  increase  in
reimbursement  rates, or that future reimbursement will be adequate to cover the
provider's  cost  of  providing  service.  The  effect  of such  limitations  or
reductions will be to require  management to carefully manage costs so that they
will come within available reimbursement revenues, if possible.

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 or
the ordering or  providing  of certain  covered  services,  items or  equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion  from  participation  in the Medicare  and Medicaid  programs and from
state programs  containing similar provisions relating to referrals of privately
insured patients.  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. 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 September 15, 1997, the Company had 523  employees,  of which 10 were
dedicated  to Marketing , 152 (31 part time) to finance and  administration  and
361 (166 part time) to patient care. Of the  Company's  523  employees,  389 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
a substantial portion of 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  maintains
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.

ITEM 2.           DESCRIPTION OF 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 effective September 10, 1994 at an annual base rent of $28,800 in the first
year,  $32,400 in the second  year,  $34,020 in the third  year,  $35,721 in the
fourth  year and  $37,507 in the fifth  year.  The  Company  believes  that this
facility will be adequate to satisfy its needs for the foreseeable future.

      HIGHLAND RIDGE
     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  fourteenth  year of a  fifteen-year  lease term,  which lease  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

     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.  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.
The Mount Regis Center  property is subject to an outstanding  mortgage in favor
of Douglas Roberts with an outstanding  balance of $492,996 at fiscal year ended
June 30, 1997.

      GOOD HOPE

     The Company  leases the West  Greenwich  facility  which  consists of three
buildings,  containing  a total of  approximately  25,000  square  feet from NMI
Realty, Inc., at an annual rent of $206,000 for the second year, $231,000 in the
third  through  fifth years,  $255,000 in the sixth year and $255,000 plus 5% of
previous  year's rent per year in years seven through  twenty of the lease.  The
Company has an irrevocable option to purchase the property for $1,300,000 at the
end of the  second  year,  for  $1,200,000  at the end of the  third  year,  for
$1,150,000  at the end of the fourth year and for  $1,100,000  at any time after
the end of the  fifth  year  through  the  end of the  term  of the  lease.  The
satellite  office is leased from Park Square Medical for $1,700 per month.  This
lease expires  October 31, 1998.  The Company  believes that these  premises are
adequate for its current and anticipated needs.

      HARBOR OAKS

     Harbor Oaks is located in New Baltimore,  Michigan,  approximately 20 miles
northeast  of  Detroit.  The  Company  owns the  property  on which  Harbor Oaks
operates,  consisting of a one-story  brick and wood frame  building  comprising
approximately  32,000  square  feet and  which is used  for the  operation  of a
psychiatric  hospital,  and the underlying  real estate of  approximately  three
acres.  There have been two  additions to the  building;  in 1982,  19 beds were
added and, in 1988, a new  administrative  area and  gymnasium  were built.  The
Company   believes  that  these  premises  are  adequate  for  its  current  and
anticipated   needs.  The  Harbor  Oaks  Hospital  property  is  subject  to  an
outstanding   mortgage  in  favor  of  Healthcare  Financial  Partners  with  an
outstanding balance of $1,100,000 at fiscal year ended June 30, 1997.


<PAGE>


      HARMONY HEALTHCARE

     The Harmony premises  consists of approximately  4,865 square feet of space
located on the third floor of the building known as Charleston  Tower located at
1701 West Charleston Boulevard,  Las Vegas, Nevada. The property is under a four
year lease which  provides for lease payments of $8,514.00 per month plus common
area  charges of 3.48% of project  expenses.  The  Company  believes  that these
premises are adequate for its current needs.

      TOTAL CONCEPT

     Total Concept subleases approximately 150 square feet of space for $400 per
month from The Menniger Clinic in Shawnee,  Kansas.  The property is under a one
year lease.  The Company  believes  that these  premises  are  adequate  for its
current and anticipated needs.

      NORTH POINT-PIONEER

     There  are  five   separate   locations   in  Michigan   from  which  North
Point-Pioneer  operates.  The Farmington  Hills office  consists of 4,922 square
feet of space which is under lease through January 31, 2004 and requires current
lease  payments of $5,408 per month.  The Sterling  Heights  office  consists of
2,937  square  feet of space which is under  lease  through  August 31, 2001 and
requires  current  lease  payments of $5,018 per month.  The  Birmingham  office
consists of 3,135  square feet of space  which is under lease  through  June 30,
2001 and requires current lease payments of $4,702 per month. The Livonia office
consists of 2,960  square feet of space which is under lease  through  April 30,
1999 and  requires  current  lease  payments  of $4,193 per month.  The  Clinton
Township  office  consists  of 3,355  square  feet of space which is under lease
through  December 31, 1997 and  requires  current  lease  payments of $5,571 per
month.

      PIONEER COUNSELING OF VIRGINIA

     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.

      FRANVALE

     The Company  owns the real  property and  improvements  for  Franvale.  The
operations  are located in a two-story  building  comprising  44,000 square feet
which is located on an approximately  two-acre parcel of land. The real property
was owned by PHC, Inc. until September 8, 1994, at which time it was transferred
to its subsidiary, Quality Care Centers of Massachusetts,  Inc., ("QCC"). At the
time the  property was  transferred  to QCC,  QCC  purchased an adjoining  5,825
square foot parcel of land and  refinanced  its  existing  debt and financed the
costs of renovations and the addition of 37 beds to the long-term care facility.
The  Company  believes  that these  premises  are  adequate  for its current and
anticipated  needs. The Franvale property is subject to an outstanding  mortgage
in favor of Charles River  Mortgage  Company and guaranteed by the US Department
of Housing and Urban  Development  with an outstanding  balance of $6,757,422 at
fiscal year ended June 30, 1997.

ITEM 3.           LEGAL PROCEEDINGS.


     The  Company   received  a  notice  from  Pioneer  Health  Care,   Inc.,  a
Massachusetts  non-profit corporation demanding that the Company discontinue use
of its PIONEER  HEALTHCARE  trademark  upon the grounds that that mark infringes
the rights of Pioneer Health Care,  Inc. under  applicable  law.  Pioneer Health
Care, Inc.  threatened to proceed with the necessary legal action to prevent the
Company from using the PIONEER  HEALTHCARE  mark, and to seek a cancellation  of
the  registration  that has been issued by the U.S. Patent Trademark Office (the
"PTO") to the  Company  for the  PIONEER  HEALTHCARE  mark,  unless the  Company
complied  with this  demand.  The Company  refused to comply  with this  demand,
whereupon  Pioneer  Health  Care,  Inc.  filed a petition in the PTO seeking the
cancellation of the Company's  registration of its PIONEER HEALTHCARE trademark.
The Company thereupon  commenced  litigation in the United States District Court
for the District of Massachusetts seeking a declaratory judgment that its use of
the PIONEER HEALTHCARE  trademark does not infringe any rights of Pioneer Health
Care,  Inc.  under  applicable  law,  and that it has the right to maintain  its
registration of that mark. Pioneer Health Care, Inc. has filed a counterclaim in
that litigation  seeking injunctive and monetary relief against the Company upon
claims of trademark infringement, trademark dilution and unfair competition. The
Company is defending itself  vigorously  against those claims.  Proceedings upon
the  petition  filed  by  Pioneer  Health  Care,  Inc.  in the PTO  seeking  the
cancellation of the Company's  registration of its PIONEER HEALTHCARE  trademark
have been stayed pending the  resolution of the litigation  between the parties.
Although the Company regards Pioneer Health Care, Inc.'s  counterclaims as being
without merit,  an adverse  decision  could result in money damages  against the
Company and  required  discontinuance  by the Company of the PIONEER  HEALTHCARE
mark could  result in costs to the Company  which could have a material  adverse
effect on the Company.

     In January 1996, the Company  received notice that Mullikin Medical Center,
A Medical Group, Inc., located in Artesia, California, filed a petition with the
PTO seeking  cancellation of the  registration of the PIONEER  HEALTHCARE  mark.
This  cancellation  proceeding  has been  suspended  pending  the outcome of the
litigation described above.


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended June 30, 1997.


DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  directors  and  officers  of the  Company  as of June 30,  1997 are as
follows:


         NAME                 AGE                       POSITION
Bruce A. Shear                 42   President,  Chief Executive Officer
                                      and Director
Robert H. Boswell              48   Executive Vice President
Paula C. Wurts                 48   Controller, Assistant Clerk and Assistant
                                      Treasurer
Gerald M. Perlow, M.D. (1)(2)  59   Director and Clerk
Donald E. Robar (1)(2)         60   Director and Treasurer
Howard W. Phillips             67   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.  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 MBA from
Suffolk  University  in 1980 and a BS 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  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, 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 BS in Accounting  from  Northeastern  University in 1989 and
passed the examination for Certified Public Accountants.  She received an MBA 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 1996 to March
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 BA from Harvard College in 1959 and
an MD from Tufts University School of Medicine in 1963.

     DONALD E. ROBAR has served as a Director of the Company  since 1985 and has
served as the Treasurer  since  February 1996. He served as 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 a Ed.D. from the University of Massachusetts in 1978, an MA from Boston
College in 1968 and a BA from the University of Massachusetts in 1960.

     HOWARD W.  PHILLIPS  has served as a Director of the Company  since  August
1996 and has been employed by the Company as a public relations specialist since
August 1995.  From 1982 until  October  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,  the
Company's  principal outside legal counsel.  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
in 1978 and a JD from Boston College Law School in 1981.




<PAGE>

PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  Units,  Class A Common Stock and Class A Warrants have been
traded on the NASDAQ  National  Market  under the  symbols  "PIHCU,"  "PIHC" and
"PIHCW,"  respectively,  since the Company's  initial public  offering which was
declared  effective on March 3, 1994.  There is no public trading market for the
Company's Class B and Class C Common Stock.  The following table sets forth, for
the  periods  indicated,  the high and low sale price of the  Company's  Class A
Common Stock, as reported by NASDAQ.

 1996                             HIGH     LOW

       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
       through September
       15, 1997

     On September  15, 1997,  the last reported sale price of the Class A Common
Stock was $3.00.  On September  15, 1997 there were 109 holders of record of the
Company's  Class A Common Stock,  321 holders of record of the Company's Class B
Common Stock and 322 holders of the Company's  Class C Common  Stock.  Since the
Company  failed  to meet  earnings  targets  as  stipulated  in its  March  1994
prospectus,  the  Company's  Class C Common  Stock was  canceled  and retired on
September 28, 1997.

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 in the 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.


ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

     The following is a discussion  and analysis of the financial  condition and
results of operations of the Company for the years ended June 30, 1997 and 1996.
It should be read in conjunction with the consolidated  financial statements and
notes  thereto  appearing  elsewhere  herein.  During  the fiscal  year  several
operations were acquired which make comparability of period results difficult.

     The Company is a provider of health care services  through several chemical
dependency   centers,   an  acute  psychiatric   hospital,   several  outpatient
psychiatric  centers  and  a  long-term  care  facility   (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  significantly  as a  percentage  of total
revenue although 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.  While it is
anticipated that a number of the proposed regulatory changes may have a positive
impact on the Company's  business,  there can be no assurance that other changes
may not adversely affect the Company.

     Over the past several years,  the Company has been  systematically  phasing
out its day care center  operations due to declining  profitability and its lack
of fit with the Company's health care  operations.  At June 30, 1997 the Company
has completely eliminated these operations with the sale of the last parcel real
estate.

RESULTS OF OPERATIONS

YEARS ENDED JUNE 30, 1997 AND 1996

      
     The  Company  experienced  a loss for  fiscal  year  ended  June  30,  1997
primarily as a result of an increase in the Provision for Doubtful  Accounts and
the increased  expenses  incurred and decline in census  related to the Franvale
State  Survey in February  which  placed the  facility in Jeopardy  Status which
precluded  admissions  for a period of time.  Census  levels at Franvale did not
increase as soon as anticipated after the state resurveyed and lifted the ban on
admissions. Occupancy at Franvale for the fiscal year ended June 30, 1997 was at
84.1% as  compared  to 87.1% for the  fiscal  year ended  June 30,  1996.  A new
management team is in place at Franvale and marketing efforts have begun to show
positive results including some increase in census.  Pioneer  continuously looks
for  strategic  alternatives  for Franvale  which is not a part of the Company's
core business but has not formed any definitive plans at this time.

     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.  The Provision for
Doubtful  Accounts  increased  from  $1,894,087  in fiscal  1996 as  compared to
$3,397,693 in fiscal 1997. A substantial  portion of the increase in the reserve
was recorded in the fourth fiscal  quarter.  The company is currently  reviewing
these adjustments to determine if some of the adjustments  should have been made
in prior fiscal quarters.

     Total patient care revenue from all facilities increased 25% to $27,234,372
for the year ended June 30,  1997 from  $21,802,758  for the year ended June 30,
1996.  Net patient care revenue from  psychiatric  services  increased  30.8% to
$21,927,655  for the fiscal year ended June 30, 1997 compared to $16,758,836 for
the year ended June 30, 1996.  Net patient  revenue at the  Company's  long-term
care facility  increased to $5,306,717 for fiscal 1997 (5.2%) from $5,043,922 in
fiscal 1996 which is attributable to an increase in patient census. Although the
gross number of patients increased the percentage of occupancy  decreased due to
the increase in available beds.

     Total  patient  care  expenses  for  all  facilities   increased  20.3%  to
$14,436,784 for the year ended June 30, 1997 from $12,004,383 for the year ended
June 30, 1996.  Patient care expenses for psychiatric  services were $10,346,111
for the fiscal year ended June 30, 1997 compared to  $7,974,811  for fiscal year
ended June 30, 1996 a 29.7%  increase.  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

     During  the  second  quarter  of  1997,  the  Company  issued   Convertible
Debentures  due December 31, 1998 in the aggregate  face amount of $3,125,000 to
Infinity  Investors Ltd. and Seacrest Capital Limited resulting in $2,500,000 of
proceeds to the Company.  In the third quarter of 1997,  in connection  with the
issuance of the Convertible Debentures,  the Company issued warrants for 150,000
shares to Infinity  Investors Ltd. and Seacrest  Capital  Limited at an exercise
price of $2.00  per  share.  As of  September  15,  1997 all of the  Convertible
Debentures  have been  converted to Class A Common  Stock.  A total of 1,331,696
shares of Class A Common Stock were issued for this conversion and in payment of
related interest.

     During the fourth fiscal  quarter of 1997,  the Company issued 1,000 shares
of Convertible  Preferred Stock for a total of $1,000,000 to ProFutures  Special
Equities  Fund,  L.P.  resulting  in proceeds  to the  Company of  approximately
$873,705.  The June 30, 1997 financial statements reflect the conversion of half
of the Convertible Preferred Stock  into 229,964 shares of Class A Common Stock.
As of September 15, 1997 the remaining Convertible Preferred Stock was converted
to 246,305 shares of Class A Common Stock.

     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  17.2%  to  $11,255,000  at June  30,  1997  from  approximately
$9,606,000 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  December  of  1996,  PHC  of  Utah,   Inc.  and  Healthcare   Financial
Partners-Funding  II, L.P.  ("HCFP") entered into a revolving credit  agreement,
pursuant to which HCFP will provide  funding of up to $1,000,000 to PHC of Utah,
Inc.  In  February  of 1997,  PHC of  Michigan,  Inc.  and HCFP  entered  into a
revolving  credit  agreement,  pursuant to which HCFP will provide funding up to
$1,500,000 to PHC of Michigan,  Inc. Both of these revolving  credit  agreements
are secured by the assets of the subsidiary.

     The Company  currently has a mortgage of  $1,100,000  secured by the Harbor
Oaks facility.

     At June 30, 1997 the Company  had  approximately  $905,700 in cash and cash
equivalents,  working capital of approximately  $4,763,000 and a working capital
ratio of  approximately  1.6 to 1.  Management  believes  that the  Company  has
adequate resources to fund operations for the foreseeable future.  However,  the
Company is constantly  seeking less  expensive  alternative  financing to insure
that it will  have the  necessary  capital  to fund  expansion  of its  existing
business and to pursue acquisition opportunities as they arise.

     The Company has made significant  progress toward the accomplishment of its
acquisition  and expansion  strategy  during the fiscal year by  completing  the
acquisition  of its  out  patient  psychiatric  operations  in  Michigan  (North
Point-Pioneer,  Inc.) and its first  psychiatric  practice  ownership  in Salem,
Virginia.  These  acquisitions  are key  components  in the  culmination  of the
Company's  vision to provide a fully  integrated  delivery system in psychiatric
care.

     Through merger the Company acquired a psychiatric  management  operation in
New York (BSC-NY, Inc.) which manages psychotherapy and psychological  practices
in New York.  Also in  connection  with the merger  another  entity was  formed,
Perlow  Physicians,  P.C.  ("Perlow"),  to  acquire  the  assets of the  medical
practices now serviced by BSC. The Company  advanced Perlow the funds to acquire
those  assets and at June 30,  1997 Perlow  owed the  Company  $3,063,177  which
includes,  in addition to acquisition  costs,  management fees of  approximately
$511,000 and interest on the advances of approximately  $176,000. It is expected
that the obligations will be paid over the next several years and,  accordingly,
most of these amounts have been classified as long term.

     Subsequent to year end the Company issued  172,414  Shares of  Unregistered
Class A Common Stock to ProFutures  Special  Equities  Fund,  L.P.  resulting in
proceeds to the company of approximately $445,000.

     Also  subsequent  to year end the  Company  completed  the  acquisition  of
Counseling Associates, an outpatient clinic in Blacksburg, Virginia, for 26, 024
shares of Class A Common Stock and $50,000 in cash. This clinics operations will
be  included  in Pioneer  Counseling  of  Virginia,  Inc.  which is an 80% owned
subsi
diary.

ITEM 7.           FINANCIAL STATEMENTS
                                                            AT PAGE

Index........................................                  F-1
Reports of Independent Auditors..............                  F-2
Consolidated Balance Sheets..................                  F-3
Consolidated Statements of Operations........                  F-4
Consolidated Statements of Changes in Stockholders'            F-5
Equity.......................................
Consolidated Statements of Cash Flows........                  F-6
Notes to Financial Statements................                  F-7



<PAGE>

                                   PART III

ITEM 9.     Directors, Executive Officers, Promoters and Control Persons

     Information  required  by  Item  401  and  Item  405 of  Regulation  S-B is
contained in Part I of this report.

Compliance With Section 16(A) Of  The Exchange Act

     In fiscal year 1997, both Mr. Grieco and Mr. Phillips failed to timely file
Form 3 upon joining the Company's  Board of Directors.  In addition,  Dr. Robar,
Mr.  Boswell,  Ms. Wurts and Mr. Phillips each filed a Form 4 relating solely to
the grant of options  outside  of the  prescribed  time  limits.  These  grants,
however,  could have been  reported on Form 5, in which case they would not have
been due until August 14, 1997.  Additionally,  for fiscal year 1997,  Dr. Robar
failed to timely  file a From 4 relating  to the sale of the  Company's  Class A
Common  Stock and Mr.  Boswell and Ms. Wurts each failed to timely file a Form 4
relating to the purchase of the Company's Class A Common Stock.

ITEM 10.    Executive compensation.  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 1997, 1996 and 1995:


                         Summary Compensation Table
                                                          Long Term   
                                                         Compensation
                             Annual Compensation             Awards            

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

Bruce A. Shear.....   1997  $294,167    --   $12,633(1)     --        --
  President and       1996  $294,063    --   $10,818(2)     --        --
Chief Executive       1995  $237,500    --   $ 8,412(3)     --        --
Officer                                         

Robert H. Boswell..   1997  $ 92,750    --   $ 6,000(4)    5,000    $ 6,821
  Executive Vice      1996  $ 80,667  $1,000 $23,750(5)    5,000    $11,250
President             1995  $ 69,750    --   $ 6,000(4)   15,000    $28,050 


(1)  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 Company car held
     by Mr. Shear.

(2)  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.

(3)  This  amount  represents  (i)  $2,450  contributed  by the  Company  to the
     Company's  Executive  Employee  Benefit Plan on behalf of Mr.  Shear,  (ii)
     $1,195 in premiums  paid by the Company  for club  memberships  used by Mr.
     Shear for  personal  activities  and (iii)  $4,767 in premiums  paid by the
     Company with respect to life insurance for the benefit of Mr. Shear.

(4)  This amount represents (i) an automobile allowance

(5)  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  employees of the Company  receive no  compensation  for
services as members of the Board. Directors who are not employees of the Company
receive  $2,500  stipend per year and $1,000 for each Board meeting they attend.
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
"Director Plan"). In fiscal year 1997, Howard Phillips, a member of the board of
directors of the Company served 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. No other executive officers or directors
of the Company served on a board of directors of any other entity.



<PAGE>

COMPENSATION COMMITTEE
     The  Compensation  Committee  consists of Mr.  Donald Robar and Dr.  Gerald
Perlow.  The  compensation  Committee met once during fiscal 1997. Mr. Shear did
not participate in discussions concerning, or vote to approve, his salary.

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
upon  exercise  of  options.  Generally,  an option is not  transferable  by the
optionholder  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.  On August 1, 1997 the
Company  issued an  additional  75,000  options at an  exercise  price of $2.63.
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.

   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 fair market  value
on the Offering Date or 85% of the fair market value of a share on the date such
right is exercised.  Currently  there is an offering period under the plan which
began on  February 1, 1997 and will end on January  31,  1998.  There are thirty
employees participating in this plan period.

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 each  annual  meeting of the
Board of Directors of the Company  following the initial grant described  above,
each nonemployee  director 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,  a total of 5,500  options  were  issued  under the
Director Plan at an exercise  price of $6.63 per share.  On February 18, 1997, a
total of 6,000 options were issued under the Director Plan at an exercise  price
of $3.50. As of September 15, 1997, none of these options had been exercised.


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.

     On September  30, 1996 the company  issued  15,000  shares of the Company's
Class A Common Stock as part of the acquisition of North Point. The Company also
issued  150,000  shares  of the  Company's  Class A Common  Stock as part of the
acquisition of BSC. The Company also issued 64,500 shares of the Company's Class
A Common Stock as part of the acquisition of Pioneer Counseling of Virginia.

                   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,  Class B Common Stock and Class
C Common  Stock  (the only  classes of capital  stock of the  Company  currently
outstanding) as of September 15, 1997 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:



<PAGE>


                              Name and Address    Amount and Nature  Percent
      Title of Class        of Beneficial Owner     of Beneficial       of
                                                        Owner         Class 
                                                                       (12)
Class A Common Stock       Gerald M. Perlow           16,000(1)          *
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           Donald E. Robar             9,250(2)          *
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           Bruce A. Shear             17,500(3)          *
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           Robert H. Boswell          31,824(4)          *
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           Howard W. Phillips         37,968(5)          *
                           P. O. Box 2047
                           East Hampton, NY
                           11937
                           William F. Grieco          59,780(6)(7)      1.3%
                           115 Marlborough Street
                           Boston, MA   02116
                           J. Owen Todd               59,280(7)         1.3%
                           c/o Todd and Weld
                           1 Boston Place
                           Boston, MA  02108
                           All Directors and         188,247(8)         4.1%
                           Officers as a Group
                           (7 persons)
Class B Common Stock (9)   Bruce A. Shear            671,259(10)       91.9%
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           All Directors and         671,259           91.9%
                           Officers as a Group
                           (7 persons)
Class C Common Stock(13)   Bruce A. Shear            156,502(11)       78.3%
                           c/o PHC, Inc.
                           200 Lake Street
                           Peabody, MA   01960
                           J. Owen Todd               13,173(7)         6.5%
                           c/o Todd and Weld
                           1 Boston Place
                           Boston, MA  02108
                           William F. Grieco          13,173(7)         6.5%
                           115 Marlborough Street
                           Boston, MA   02116
                           All Directors and         169,675           84.93%
                           Officers as a Group
                           (7 persons)

*    Less than 1%.
(1)  Includes  6,000 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $3.50 to $6.63 per share.
(2)  Includes  7,750 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $3.50 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 30,250  shares of Class A Common  Stock  issuable
     pursuant to currently  exercisable stock options at an exercise price range
     of $2.63 to $3.50 per share.
(5)  Includes   37,468  shares   issuable  upon  the  exercise  of  a  currently
     exercisable  Unit Purchase  Option for 18,734 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 500  shares  issuable  pursuant  to  currently
     exercisable stock options having an exercise price of $3.50 per share.
(6)  Includes 500 shares of Class A Common Stock issuable  pursuant to currently
     exercisable stock options, having an exercise price of $3.50 per share
(7)  Messrs.  Todd  and  Grieco  are  the  two  trustees  of  the  Trusts  which
     collectively hold 72,453 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  and  4.97% of the  Company's
     outstanding Class C Common Stock.
(8)  Includes an  aggregate  of 71,500  shares  issuable  pursuant to  currently
     exercisable stock options.  Of those options,  2,750 have an exercise price
     of $6.63 per share,  51,250 have an  exercise  price of $3.50 per share and
     17,500  have an  exercise  price of  $2.63.  Also  includes  37,468  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) Includes  12,526  shares of Class C 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.  Excludes an aggregate of
     13,173  shares of Class C Common  Stock owned by the Shear Family Trust and
     the NMI  Trust  (the  "Trusts"),  of which  Bruce A.  Shear is a  remainder
     beneficiary.
(12) 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).  The
     Class C Common Stock is non-voting.
(13) Since the Company  failed to meet  earnings  targets as  stipulated  in its
     March 1994 Prospectus,  the Company's Class C Common Stock was canceled and
     retired as of  September  28,  1997.  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 September 15, 1997:

              Bruce A. Shear .........................41.39%
              J. Owen Todd..............................0.7%
              William F. Grieco.........................0.7%
              All  Directors  and  Officers as a Group
              (7 persons)........................      42.2%


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

RELATED PARTY INDEBTEDNESS

     For  approximately  the last ten years,  Bruce A. Shear, a director and the
President,  Chief  Executive  Officer and Treasurer 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, 1997,  the Company owed an aggregate of $75,296 to related  parties.  During
the year ended June 30,  1997,  the  Company  paid an  aggregate  of $114,771 in
principal and accured interest under various Notes to related parties.

     As of June  30,  1997,  the  Company  owed  Bruce  A.  Shear  $55,296  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.


<PAGE>


                         

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K.

      (a)   EXHIBITS.

     The  exhibit  numbers  in the  following  list  correspond  to the  numbers
assigned to such exhibit in the Exhibit Table of Item 601 of Regulation S-B. The
Company  will furnish to any  stockholder,  upon  written  request,  any exhibit
listed below upon payment by such  stockholder  to the Company at the  Company's
reasonable expense in furnishing such exhibit.


Exhibits Index
 
Exhibit No.                             Description

       ++1.1 Form of Underwriting Agreement.
        +3.1 Restated Articles of Organization of the Registrant, as amended.
       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.
         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.
        +4.2 Specimen certificate representing Class A Common Stock.
        +4.3 Form of  Certificates  representing  redeemable  Class A  Warrants
             (form of  certificate  representing  redeemable  Class A  Warrants
             included in Exhibit 4.1).
        +4.4 Form of Unit Purchase Option.
        #4.5 Form of warrant issued to Barrow Street  Research,  Inc. and Peter
             G. Mintz.
        #4.6 Form of warrant issued to Robert A. Naify,  Marshall Naify,  Sarah
             M. Hassanein and Whitney Gettinger.
        #4.7 Form of  Subscription  Agreement  prior to the  Purchase  of Units
             Consisting  of Shares  of Class A Common  Stock  and  Warrants  to
             Purchase Class A Common Stock.
    ###4.7.1 Regulation D Securities  Subscription  Agreement  among PHC, Inc.,
             Infinity   Investors  Ltd.  and  Seacrest  Capital  Limited  dated
             October  1996.
         4.8 Form of  Warrant  Agreement  by and  among the  Company,  American
             Transfer & Trust Company and AmeriCorp  Securities,  Inc. executed
             in connection with the Private Placement.
    ###4.8.1 7%  Convertible  Debenture  issued to Infinity  Investors  Ltd. in
             the principal amount of $1,975.000.
         4.9 Form of  Certificates  representing  the  New  Warrants  (form  of
             certificate representing New Warrants included in Exhibit 4.8).
    ###4.9.1 7%  Convertible  Debenture  to  Seacrest  Capital  Limited  in the
             principal amount of $1,250.000.
     ###4.10 Book   Entry   Transfer   Agent   Agreement   among   PHC,   Inc.,
             Infinity  Investors  Ltd.,  Seacrest  Capital Limited and American
             Stock Transfer & Trust Company dated October 7, 1996.
     ###4.11 Registration  Rights Agreement among PHC, Inc., Infinity Investors
             and  Seacrest Capital Limited dated October 7, 1996.
        4.12 Form  of   Subscription   Agreement  for  the  Purchase  of  Units
             Consisting  of Shares  of Class A Common  Stock  and  Warrants  to
             Purchase Class A Common Stock.
        4.13 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.
        4.14 Form of  Certificates  representing  the  New  Warrants  (form  of
             certificate representing New Warrants included in Exhibit 4.8).
        4.15 Form of Warrant Agreement issued to Alpine Capital Partners,  Inc.
             to purchase 25,000 Class A Common shares dated October 7, 1996.
        4.16 Stock Exchange  Agreement by and between PHC, Inc. and Psychiatric
             & Counseling Associates of Roanoke, Inc.
      @ 4.17 Form of Warrant  Agreement issued to Barrow Street Research,  Inc.
             to  purchase  3,000  Class A  Common  shares  dated  February  18,
             1997.
      @ 4.18 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.
      @ 4.19 Amendment  Agreement by and between PHC, Inc.,  Infinity Investors
             Ltd.,  and  Seacrest  Capital  Limited as parties to  Regulation D
             Securities  Subscription Agreement dated October 7, 1996.


<PAGE>
Exhibit Index (Con't)

Exhibit No.                             Description

      @ 4.20 Loan and Security  Agreement by and between PHC of Michigan,  Inc.
             and HCFP  Funding,  Inc.  dated  March 11,  1997 in the  amount of
             $300.000.
      @ 4.21 Subscription  Agreement  by and between PHC,  Inc. and  ProFutures
             Special   Equities  Fund,  L.P.  for  1,000  shares  of  Series  A
             Convertible Preferred Stock.
      @ 4.22 Warrant Agreement by and between PHC, Inc. and ProFutures  Special
             Equities Fund, L.P. for 50,000 shares of Class A Common  Stock.
        4.23 Warrant Agreement by and between  Brean Murray & Company and PHC.,
             Inc. date 07/31/97 (See 10.125).
        4.24 Subscription  Agreement  by and between PHC, Inc. and  ProFutures
             Special  Equities  Fund,  L.P. to purchase  PHC, Inc. Units dated
             09/19/97.
        4.25 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.
      xxx5.1 Opinion of Choate, Hall & Stewart.
   x****10.1 1993 Stock  Purchase and Option Plan of PHC,  Inc., as amended and
             subject to approval of the Company's shareholders.
      x+10.2 Form of Stock Option Agreement of PHC, Inc.
      x+10.3 Form of  Restricted  Stock  Agreement  with List of employees  and
             directors  who  have  entered  into  agreement  and  corresponding
             numbers of shares.
       +10.4 Form of Subscription  Agreement for Bridge  financing with List of
             bridge   investors   who   have   entered   into   agreement   and
             corresponding amounts subscribed for.
      ++10.5 Form of 8%  Subordinated  Notes of PHC,  Inc.  with List of bridge
             investors who have purchased notes and principal amounts thereof.
       +10.6 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.
       +10.7 Lease  Agreement  between  Blackacre  Realty Trust and PHC,  Inc.,
             dated April 30, 1985,  with  amendments  dated May 22, 1986, on or
             about March 9, 1988, and May 1, 1992.
     ***10.9 Lease Agreement between David H. Bromm and Changes,  a division of
             Mount Regis, dated April 1, 1995.
      +10.10 Lease  Agreement  between  PHC,  Inc.  and Quality Care Centers of
             Massachusetts,  Inc.,  dated June 30, 1988,  as amended on October
             25, 1989.
      +10.11 Option to Purchase  Agreement  between PHC,  Inc. and Quality Care
             Centers of Massachusetts, Inc., dated July 6, 1993.
      +10.12 Lease  Agreement  between  Anna Meta  Leonhard  & Claire  Leonhard
             Morse  and  PHC,  Inc.,  dated  December  13,  1989;  Approval  of
             Assignment of lease by PHC, Inc. to PHC of California,  Inc. dated
             December 13, 1989.
      +10.13 Settlement  Conference  Order,  dated  February  1,  1993,  in the
             matter of AIHS of  California,  Inc.  v.  Claire  Leonhard  Morse;
             Letter  from  Jerry  M.  Ackeret  to  Godfrey  J.  Tencer,   dated
             September  24,  1993,  confirming  extension  of  the  Settlement;
             Letter  from  Godfrey  J.  Tencer  to  Jerry  M.  Ackeret,   dated
             October 4,  1993,  accepting  extension in letter of September 24,
             1993;  Letter from Jerry M. Ackeret to PHC,  Inc.,  dated February
             15,  1994,  agreeing to  extension  of closing of the  purchase of
             the property to  March 8, 1994.
      +10.14 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;   Tenant  Acceptance  Letter  to  The  Mutual  Benefit  Life
             Insurance Company and Palmer-Wells  Enterprises,  executed by PHC,
             Inc. and Edwin G. Brown, dated June 6, 1989.
      +10.15 Sample Equipment Lease with Trans National Leasing Corp.
      +10.16 Note of PHC,  Inc. in favor of Tot Care,  Inc.,  dated  January 1,
             1991, in the amount of $55,000.
      +10.17 Note of PHC, Inc. in favor of Humpty Dumpty  School,  Inc.,  dated
             March 1, 1991, in the amount of $25,000.

<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

      +10.18 Note of PHC,  Inc.  in favor of Bruce  A.  Shear,  dated  April 1,
             1993,  in  the  amount  of  $152,500;  Subordination  letter  from
             Aquarius  Realty to Malden  Trust  Company  as to $50,000 of debt,
             dated 1983,  regarding  debt of PHC,  Inc.;  Subordination  letter
             from Bruce A. Shear and Steven J. Shear,  individually,  to Malden
             Trust Company as to $80,000 of debt,  dated 1983,  regarding  debt
             of PHC, Inc.
      +10.19 Note of PHC,  Inc.  in favor of Steven J.  Shear,  dated  April 1,
             1993, in the amount of $25,000.
      +10.20 Note of PHC,  Inc.  in favor of  Gertrude  Shear,  dated April 15,
             1993, in the amount of $27,700.
      +10.21 Note of PHC,  Inc. in favor of Mark S. Cowell and Karen K. Cowell,
             dated May 5, 1993, in the amount of   $10,000.
      +10.22 Note of PHC, Inc. in favor of Trans National Leasing Corp.,  dated
             May 17, 1993, in the amount of $50,000.
      +10.26 Advance  Funding  Agreement  by and among  Quality Care Centers of
             Massachusetts,   Inc.,   Kelspride   Nursing   Homes,   Inc.   and
             Continental  Medical  Systems,  Inc.,  dated  June 30,  1988,  and
             amendment  thereto  dated  June 30,  1992;  Note of  Quality  Care
             Centers of  Massachusetts,  Inc. in favor of  Continental  Medical
             Systems,  Inc.,  dated June 30,  1992,  in the amount of $240,084;
             Mortgage,  Security  Agreement  and  Assignment  by PHC,  Inc.  to
             Continental  Medical  Systems,  Inc.,  dated  June 30,  1988,  and
             amendment  thereto  dated June 30,  1992;  Security  Agreement  by
             Quality  Care  Centers  of  Massachusetts,   Inc.  to  Continental
             Medical Systems,  Inc., dated June 30, 1988, and amendment thereto
             dated  June  30,  1992;   Guaranty  of  PHC,   Inc.  in  favor  of
             Continental  Medical  Systems,  Inc.  dated  June  30,  1988,  and
             amendment  thereto  dated  June  30,  1992;  Guaranty  of Bruce A.
             Shear,  individually,  dated June 30, 1988, and amendment  thereto
             dated June 30, 1992 and  Guaranty  Fee , Inc. in favor of Bruce A.
             Shear in  consideration  of June 30,  1988,  Guaranty on behalf of
             PHC, Inc.;  Waiver and Agreement by and among PHC,  Inc.,  Quality
             Care Centers of Massachusetts,  Inc., Continental Medical Systems,
             Inc. and CMS Capital Ventures, Inc., dated October 13, 1993.
      +10.28 Purchase and Sale Agreement by and between Alternative  Counseling
             Services,  Inc. and PHC of Virginia,  Inc.,  dated March 22, 1993;
             Note of PHC of Virginia,  Inc. in favor of Alternative  Counseling
             Services,  Inc.,  dated  April 1, 1993,  in the amount of $30,000;
             Note of PHC of Virginia,  Inc. in favor of Alternative  Counseling
             Services,  Inc.,  dated  April 1,  1993,  in the amount of $15,485
             with Changes Clinic  Collections on Purchased  Receivables,  April
             1, 1993 - September 7, 1993.
    ***10.29 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.
      +10.30 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.
      +10.31 Mount Regis Center,  Limited Partnership Agreement and Certificate
             of Limited Partnership,  dated July 24,  1987, by and among PHC of
             Virginia,  Inc. and limited partners;  Form of Letter Agreement of
             limited  partners  dated  October 18,  1993,  with List of Selling
             Limited Partners and Units to be sold.
      +10.32 Contract  for  Purchase  and Sale of Real  Estate  by and  between
             Douglas M.  Roberts,  PHC of Virginia,  Inc. and PHC,  Inc.  dated
             March 31, 1987, with amendment dated July 28, 1987.
      +10.33 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.
      +10.34 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.


<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

      +10.35 Form of  Agreement  amending  Deed of Trust  Note (by Mount  Regis
             Center Limited  Partnership to Douglas M. Roberts,  dated July 28,
             1987) and Security  Agreement  Note (by PHC of  Virginia,  Inc. to
             Mount Regis  Center,  Inc.,  dated July 28, 1987,  and assigned by
             Mount Regis to Douglas M. Roberts,  effective  August 1,  1987) by
             and between  Douglas M.  Roberts,  PHC of  Virginia,  Inc.,  Mount
             Regis Limited Partnership and PHC, Inc., dated September, 1991.
      +10.37 Note of Quality  Care Centers of  Massachusetts,  Inc. in favor of
             Bruce A. Shear, dated April 1, 1993, in  the amount of $10,000.
       10.38 Exhibit intentionally omitted.
      +10.42 Note of PHC of California,  Inc. in favor of Bruce A. Shear, dated
             April 1, 1993, in the amount of $100,000.
      +10.43 Note of PHC of  California,  Inc.  in  favor  of  Marin  Addiction
             Counseling  & Treatment,  Inc.,  dated  January 30,  1990,  in the
             amount  of  $273,163  with   Agreement,   dated  April  26,  1990,
             evidencing  assignment  of  note  by  Marin  Addiction  Counseling
             Treatment,  Inc. to Circle of Help, Inc.; Asset Purchase Agreement
             by and between Marin  Addiction  Counseling & Treatment,  Inc. and
             PHC of  California,  Inc.,  dated January 19, 1990;  Waiver Letter
             from Circle of Help, Inc. to PHC, Inc., dated February 15, 1994.
      +10.45 Promissory  Note and Corporate  Guarantee of STL, Inc. in favor of
             Joseph and  Theodora  Koziol,  dated  November  30,  1992,  in the
             amount of $40,000,  Corporate Guarantee by PHC, Inc., with Release
             of All Demands of even date attached.
      +10.50 Letter  agreement  between PHC, Inc. and Leonard M. Krulewich,  as
             assignee  of  the  ENOBLE  Corporation,   dated  April  26,  1993,
             relative to the  transfer  of  ownership  of the DoN;  Request for
             Transfer of DoN, dated May 28, 1993;  Request for Transfer of Site
             of  DoN,   dated  May  28,   1993;   Request  for   Extension   of
             Authorization  Period  from June 27,  1993,  dated June 24,  1993;
             Letter   from   counsel   of   AtlantiCare   Medical   Center   to
             Massachusetts Department of Public Health, dated July 13, 1993.
    ***10.51 Medical Director Agreement between Mukesh P. Patel and Mount
             Regis Center, dated September 1, 1991.
      +10.52 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.
      +10.53 Management   Agreement  by  and  between  STL,  Inc.  and  Lillian
             Furbish, dated September 8, 1993.
      +10.55 Letter  Agreement  by and between  PHC,  Inc.  and the Utah Group,
             dated November 5, 1993.
     **10.56 Note of PHC,  Inc.  in favor of Bruce A.  Shear,  dated  March 31,
             1994, in the amount of $110,596.
     **10.57 Consent of PHC,  Inc.  and PHC of Virginia,  Inc.,  dated June 10,
             1994,  as to  the  transfer  of  partnership  property  to  PHC of
             Virginia,  Inc.;  Deed by and between Mount Regis Center,  Limited
             Partnership  and PHC of  Virginia,  Inc.,  dated  June  10,  1994;
             Consent to Transfer by Douglas M.  Roberts,  dated June 23,  1994;
             Form of Mount Regis Center,  Limited  Partnership  Assignment  and
             Assumption  of Limited  Partnership  Interest,  by and between PHC
             of  Virginia,  Inc. and each  assignor  dated as of June 30, 1994;
             Mount   Regis   Center,   Limited   Partnership   Certificate   of
             Cancellation of Limited Partnership, filed June 30, 1994.
     **10.58 Letter  from PHC of  California,  Inc.  to Circle  of Help,  Inc.,
             dated  September 20, 1994,  confirming  agreement as to payment by
             PHC of California,  Inc. to Circle of Help,  Inc. in the amount of
             $100,000  as  full  satisfaction  of  promissory  note  of  PHC of
             California,  Inc.  in  favor  of Marin  Addiction  Counseling  and
             Treatment,  Inc. in the amount of $273,163  which was  assigned to
             Circle of Help, Inc. on April 26, 1990.


<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

     **10.59 Settlement  Agreement and Mutual General  Release,  by and between
             PHC of  California,  Inc. and of the Anna Leonhard  Trust,  Arnold
             Leonhard,  individually and as Trustee of the Anna Leonhard Trust,
             and Lloyd Leonhard.
     **10.60 Estoppel,  Consent  and  Subordination  Agreement,  by and between
             Zions First National Bank and Highland Ridge Hospital,  dated June
             30, 1994.
     **10.61 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.
     **10.62 First Amendment to Management Agreement,  by and between STL, Inc.
             and Lillian Furbish, dated September 21, 1994.
      *10.63 Asset  Purchase  Agreement by and between  Good Hope Center,  Inc.
             and the Company, dated as of  January 21, 1994.
     **10.64 Lease and Option  Agreement,  by and between NMI Realty,  Inc. and
             PHC of Rhode Island, Inc., dated March 16, 1994.
     **10.65 Tenant Estoppel  Certificate of PHC of Rhode Island, Inc. to Fleet
             National Bank, dated September 13,  1994.
     **10.66 Subordination,  Non-Disturbance and Attornment  Agreement,  by and
             among Fleet  National  Bank,  PHC of Rhode  Island,  Inc.  and NMI
             Realty, Inc., dated September 13, 1994.
     **10.67 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.
     **10.68 Asset Sale Agreement by and between  Harbor Oaks Hospital  Limited
             Partnership and the Company, dated June 24, 1994.
     **10.69 Lease  Agreement by and between  Conestoga  Corp.  and PHC,  Inc.,
             dated July 11, 1994.
     **10.70 Letter from counsel of PHC,  Inc. to  Massachusetts  Department of
             Public Health, dated August 31,1994,  requesting, on behalf of the
             Company and ENOBLE,  that the  Massachusetts  Department of Public
             Health  place  them on the agenda of the  Public  Health  Council,
             with attachments.
     ++10.71 Sale and Purchase  Agreement  by and between PHC of Rhode  Island,
             Inc. and LINC Finance Corporation VIII, dated January 20, 1995
    +++10.72 Sale and Purchase  Agreement by and between PHC of Virginia,  Inc.
             and LINC Finance Corporation VIII, dated March 6, 1995
    ***10.73 Renewal of Lease  Addendum  between Palmer Wells  Enterprises  and
             PHC of Utah, Inc., executed February 20, 1995.
   ****10.74 1995  Employee  Stock  Purchase  Plan,  subject to approval of the
             Company's shareholders.
   ****10.75 1995 Non-Employee  Director Stock Option Plan, subject to approval
             of the Company's shareholders.
   ****10.76  Note   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.


<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

   ****10.77 Secured  Promissory  Note  in  the  amount  of  $7,500,000  by and
             between PHC of Nevada, Inc. and  LINC Anthem Corp.
     ##10.78 Loan and Security  Agreement for  $1,000,000 by and between PHC Of
             Utah, Inc. and HealthPartners Funding LP.
     ##10.79 HealthPartners Revolving Credit Note.
     ##10.80 Guaranty of HealthPartners Revolving Credit Note
     ##10.81 Stock   Pledge  by  and  between   PHC,   Inc.   and  Linc  Anthem
             Corporation
     ##10.82 Asset  Purchase  Agreement  by  and  between  Harmony  Counseling,
             Inc. and PHC, Inc.
     ##10.83 Asset  Purchase  Agreement by and between Total  Concept  Employee
             Assistance Program, Inc.
     ++10.84 Security  Agreement  by  and  between  PHC,  Inc.,  PHC  of  Rhode
             Island,  Inc.,  PHC of  Virginia,  Inc.,  PHC of Nevada,  Inc. and
             LINC Anthem Corporation dated July 25, 1996.
   +++++10.85 Custodial  Agreement by and between LINC Anthem  Corporation  and
              PHC, Inc. and Choate, Hall and  Stewart dated July 25, 1996.
    ++++10.86 Loan and  Security  Agreement  by and between  Northpoint-Pioneer
              Inc. and LINC Anthem Corporation dated July 25, 1996.
    ++++10.87 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.
    ++++10.88 Stock  Pledge and Security  Agreement  by and between  PHC,  Inc.
              and LINC Anthem Corporation.
    ++++10.89 Secured  Promissory  Note of North  Point-Pioneer,  Inc. in favor
              of LINC  Anthem  Corporation  dated  July 25,  1996 in the amount
              of $500,000.
    ++++10.90 Lease  Agreement  by and between PHC,  Inc. and 94-19  Associates
              dated October 31, 1996 for BSC-NY, Inc.
    ++++10.91 Note by and  between  PHC Inc.  and Yakov  Burstein in the amount
              of $180,000.
    ++++10.92 Note by and between PHC,  Inc.  and Irwin  Mansdorf in the amount
              of $570,000.
    ++++10.93 Employment  Agreement  by and  between  BSC-NY,  Inc.  and  Yakov
              Burstein dated November 1, 1996.
    ++++10.94 Consulting  Agreement  by and  between  BSC-NY,  Inc.  and  Irwin
              Mansdorf dated November 1, 1996.
    ++++10.95 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.
    ++++10.96 Assignment  and  Assumption  Agreement  dated  October  31,  1996
              by and between Clinical Associates and Perlow Physicians, P.C.
    ++++10.97 Bill of Sale  by and  between  Clinical  Diagnostics  and  Perlow
              Physicians, P.C.
    ++++10.98 Employment  Agreement by and between Perlow Physicians,  P.C. and
              Yakov Burstein dated November 1, 1996.
    ++++10.99 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.
   ++++10.100 Consulting  Agreement  by and  between  Perlow  Physicians,  P.C.
              and Irwin Mansdorf dated November 1, 1996.
   ++++10.101 Option  Agreement by and between  Pioneer  Healthcare  and Gerald
              M. Perlow M.D., dated November 15, 1996.
 xx****10.102 Asset  Purchase  Agreement by and among Norton A. Roitman,  M.D.,
              Clinical   Services   of   Nevada,   Inc.,   Harmony   Healthcare
              Services, Inc. and the Company dated October 28, 1995.
       10.103 Secured  Bridge Note in the  principal  amount of $400,000 by and
              between PHC of Michigan,  Inc. and HealthCare Financial Partners,
              Inc. dated January 13, 1996.


<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

       10.104 Guaranty  by PHC.  Inc.  for  Secured  Bridge  Note in  principal
              amount of $400,000 by and between  PHC  Michigan  and  HealthCare
              Financial Partners, Inc. dated January 17, 1997.
  *****10.105 First  Amendment to Lease  Agreement and Option  Agreement by and
              between NMI Realty,  Inc.  and PHC of Rhode  Island,  Inc.  dated
              December 20, 1996.
       10.106 Mortgage by and between PHC of  Michigan,  Inc.  and HCFP Funding
              Inc. dated January 13, 1997 in the amount of $2,000,000.
       10.107 Employment   Agreement  for  Dr.   Himanshu   Patel;   Employment
              Agreement for Dr. Mukesh Patel;  and Fringe  Benefit  Exhibit for
              both of the Patels' Employment Agreements.
       10.108 Plan of Merger by and between  Pioneer  Counseling  of  Virginia,
              Inc. and  Psychiatric & Counseling Associates of Roanoke, Inc.
       10.109 Sales  Agreement by and between  Dillon & Dillon  Associates  and
              Pioneer  Counseling  of  Virginia  Inc.  for  building  and  land
              located at 400 East  Burwell  St.,  Salem  Virginia in the amount
              of $600,000.
       10.110 Loan and Security Agreement by and between PHC of Michigan,  Inc.
              and HCFP Funding Inc., in the amount of $1,500,000.
  ++++10.111 Revolving  Credit  Agreement  by  and  between  HCFP  and  PHC  of
             Michigan, Inc. in the amount of $1,500.000.
 +++++10.112 Unconditional  Guaranty of Payment and  Performance by and between
             PHC, Inc. in favor of HCFP.
 +++++10.113 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.
    @ 10.114 Employment  Agreement by and between  Perlow  Physicians  P.C. and
             Nissan Shliselberg, M.D dated March, 1997.
    @ 10.115 Option and  Indemnity  Agreement  by and  between  PHC,  Inc.  and
             Nissan Shliselberg, M.D dated February, 1997.
    @ 10.116 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.
    @ 10.117 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.
    @ 10.118 Mortgage  between PHC of  Michigan,  Inc. and HCPF Funding in the
             amount of  $1,500.000.00  dated March,  1997 for Revolving Credit
             Note.
    @ 10.119 Submission of Lease  between PHC,  Inc. and Conestoga  Corporation
             dated 11/09/95 for space at 200 Lake Street,  Suite 101b, Peabody,
             MA  01960.
    @ 10.120 Agreement  by and  between  PHC of  Michigan,  Inc.  and New  Life
             Treatment  Centers,  Inc. dated July 1, 1996 to provide  treatment
             and care.
    @ 10.121 Lease Line of Credit  Agreement by and between PHC,  Inc. and LINC
             Capital Partners dated March 18, 1997 in the amount of $200,000.
      10.122 Agreement  between  Family  Independence  Agency and  Harbor  Oaks
             Hospital effective January 1, 1997.
      10.123 Master  Contract by and  between  Family  Independence  Agency and
             Harbor Oaks Hospital effective January 1, 1997.
      10.124 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. (Related to Exhibit 10.109).
      10.125 Financial Advisory  Agreement, Indemnification Agreement  and Form
             of Warrant by  and between  Brean Murray & Company  and  PHC, Inc. 
             dated 06/10/97.
      10.126 Employmen   Agreemen  by  and between  Harbor  Oaks  Hospital  and 
             Sudhir  Lingnurkar  and  Pioneer  Counseling  Center  and   Sudhir
             Lingnurkar dated August 1, 1997.
      10.127 Asset Purchasing  Agreement,  Restrictive  Covenants Agreement and 
             Lease with Option to Purchase by and between Pioneer Counseling of
             Virginia, Inc. and Dianne Jones-Freeman dated  August _____, 1997.
      10128  Employment Agreement by and between Pioneer Counseling of Virginia
             and Dianne Jones-Freeman dated August _____, 1997.
      ##16.1 Letter on Change in Independent Public Accountants.
    ****21.1 List of Subsidiaries.
        23.1 Consent of Independent Auditors.
        23.2 Exhibit intentionally omitted.


<PAGE>

Exhibit Index (Con't)

Exhibit No.                             Description

        23.3 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
        99.1 Cautionary   Statement   for   Purposes   of  the  "Safe   Harbor"
             Provisions  of the  Private  Securities  Litigation  Reform Act of
             1995.
           + Filed as an exhibit to the  Company's  Registration  Statement  on
             Form   SB-2 dated March 2, 1994 (Commission file number 33-71418).
          ++ Filed as an  exhibit  to the  Company's  quarterly  report on Form
             10-QSB,   filed  with  the  Securities  and  Exchange   Commission
             (Commission  file  number  0-23524)  on  February  14,  1995.
         +++ Filed as an  exhibit  to the  Company's  quarterly  report on Form
             10-QSB,   filed  with  the  Securities  and  Exchange   Commission
             (Commission  file  number 0-23524) on May 15, 1995.
        ++++ Filed as an  exhibit  to the  Company's  quarterly  report on Form
             10-QSB,   filed  with  the  Securities  and  Exchange   Commission
             (Commission  file number 0-23524) on December 5, 1996.
       +++++ Filed as an  exhibit  to the  Company's  quarterly  report on Form
             10-QSB,   filed  with  the  Securities  and  Exchange   Commission
             (Commission  file number 0-23524) on February 25, 1997.
           * Filed as an  exhibit to the  amendment  to the  Company's  Current
             Report   on   Form   8-K,    filed   with   the   Securities   and
             Exchange  Commission  (Commission  file number  0-23524) on August
             15, 1994.
          ** Filed  as an  exhibit  to the  Company's  annual  report  on Form
             10-KSB,   filed  with  the  Securities  and  Exchange  Commission
             (Commission  file  number  0-23524)  on  September  28, 1994.
         *** Filed  as an  exhibit  to the  Company's  annual  report  on  Form
             10-KSB,   filed  with  the  Securities  and  Exchange  (Commission
             Coommission  file  number  0-23524)  on  October  2,  1995.
        **** 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 33-71418).
       ***** 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 33-71418).
           # Filed as an exhibit to the  Company's  Registration  Statement  on
             Form 3  dated March 12, 1996 (Commission file number 33-714418).
          ## Filed as an exhibit to the Company's report on Form 10-KSB,  filed
             with the  Securities  and Exchange  Commission  on  September  28,
             1994.
          ## Filed as an exhibit to the Company's  Current  Report on Form 8-K,
             filed    with   the    Securities    and    Exchange    Commission
             (Commission  file number  0-23524) on November 5, 1996.
           x Management contract or compensatory plan or arrangement.
          xx Shown as  Exhibit  10.76  in  Registration  Statement  on Form S-3
             dated  March 12, 1996.
         xxx Filed as an Amendment to SB-2, filed May    1997.
           @ Filed as an exhibit to the  Company's  Registration  Statement  on
             Form SB-2 dated April 15, 1997 (Commission file number 333-71418).
  


<PAGE>
                                  SIGNATURES


     In accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of
1934,  the  registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                                                            PHC, INC.




Date: October 14, 1997                           By: /S/ BRUCE A. SHEAR
                                                       Bruce A. Shear
                                                       President and Chief
                                                       Executive Officer


     In accordance  with the  Securities  Exchange Act of 1934,  this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.


 SIGNATURE                             TITLE(S)                      DATE


/s/ BRUCE A. SHEAR                  President, Chief         October 14, 1997
    Bruce A. Shear                  Executive Officer and
                                    Director
                                    (principal executive 
                                    officer)

/s/ PAULA C. WURTS                  Controller and Assistant  October 14, 1997
    Paula C. Wurts                  Treasurer
                                    (principal financial and
                                    accounting officer)

/s/ GERALD M. PERLOW                Director                  October 14, 1997
    Gerald M. Perlow


/s/ DONALD E. ROBAR                 Director                  October 14, 1997
    Donald E. Robar


/s/  HOWARD PHILLIPS                Director                  October 14, 1997
     Howard Phillips


/s/ WILLIAM F. GRIECO               Director                  October 14, 1997
    William F. Grieco


<PAGE>

    PHC, INC. AND SUBSIDIARIES

         Contents

         Consolidated Financial Statements

   Independent auditors' report                                 F-2

   Balance sheets as of June 30, 1997 and 1996                  F-3

   Statements of operations for the years ended
    June 30, 1997 and 1996                                      F-4

   Statements of changes in stockholders' equity for the 
    years ended June 30, 1997 and 1996                          F-5

   Statements of cash flows for the years ended June 30,        F-6
    1997 and 1996

   Notes to financial statements                                F-7







   F-1
                                                    


<PAGE>

                                              Richard A. Eisner & Company, LLP
                                                   Accountants and Consultants





INDEPENDENT AUDITORS' 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





                                                                            F2
     University  Place,  124 Mt.  Auburn  Street,  Suite  200,  Harvard  Square,
Cambridge, MA 02138 Telephone (617) 576-5790, Fax (617) 497-5490
New              York,              NY              Melville,               NY
Cambridge, MA                  Florham Park, NJ


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets

                                                                       June 30,
1997                                                                      1996
ASSETS (Notes C and D)
 Current assets:
    Cash and cash equivalents
<TABLE>
<CAPTION>
<S>                                                                                    <C>            <C>  
                                                                                                            
                                                                                          $   905,692   $   293,515
   Accounts receivable, net of allowance for bad debts of .............................    
   $2,982,138 at June 30, 1997 and                                                              
   $1,492,983 at June 30, 1996 (Notes A, C and M) .....................................    10,650,368     8,866,065
   Prepaid expenses ...................................................................       375,382       259,893
   Other receivables and advances .....................................................       260,212        66,513
   Deferred income tax asset (Note F) .................................................       515,300       515,300
   Other receivables, related party (Note L)
                                                                                               80,000     
                                                                                               ______     _________
    Total current assets ..............................................................    12,786,954    10,001,286

Accounts receivable, noncurrent .......................................................       605,000       740,000
Loans receivable ......................................................................       134,284       113,805
Property and equipment, net (Notes A and B) ...........................................     8,408,211     7,884,063
Deferred income tax asset (Note F) ....................................................       154,700       154,700
Deferred financing costs, net of amortization .........................................       751,325       772,823
Goodwill, net of accumulated amortization (Note A) ....................................     1,644,252       841,413
Restricted deposits and funded reserves ...............................................       170,874
Other assets (Note A) .................................................................       222,032       252,445
Net assets of operations held for sale (Note J) .......................................        56,682
Other receivables, noncurrent, related party (Note L) .................................                 ___________
                                                                                                          2,983,177

                                                                                          $27,860,809   $20,817,217

LIABILITIES
Current liabilities:
   Accounts payable ...................................................................   $ 4,171,334    $ 3,127,052
   Notes payable - related parties (Note E) ...........................................        51,600         56,600
   Current maturities of long-term debt (Note C) ......................................       580,275        403,894
   Revolving credit note and secured term note ........................................     1,789,971
   Current portion of obligations under capital leases (Note D) .......................       139,948         88,052
   Accrued payroll, payroll taxes and benefits ........................................       703,842        715,515
   Accrued expenses and other liabilities
                                                                                              587,024        738,784

      Total current liabilities
                                                                                            8,023,994      5,129,897

Long-term debt and accounts payable (Note C) ..........................................     9,759,601      7,754,262
Obligations under capital leases (Note D) .............................................     1,594,562      1,468,475
Notes payable - related parties (Note E) ..............................................        23,696         47,394
Convertible debentures ($3,125,000 less discount $390,625) ............................                  ____________
(Note C) ..............................................................................     2,734,375

      Total noncurrent liabilities ....................................................    14,112,234      9,270,131

      Total liabilities ...............................................................    22,136,228     14,400,028

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,
500 shares issued and outstanding in 1997 (liquidation ................................             5
preference $504,333)
Class A common stock, $.01 par value; 20,000,000 shares
authorized, 2,877,836 and 2,293,568 shares issued and .................................        28,778         22,936
outstanding in 1997 and 1996, respectively
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 730,360 and 812,237
issued and outstanding in 1997 and 1996, respectively .................................         7,304          8,122
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 outstanding in 1997 and .........................         1,998          1,998
                                                                                                                1996
Additional paid-in capital ............................................................    10,398,630      8,078,383
Notes receivable related to purchase of 31,000 shares of Class ........................       (63,928)
A common stock
Treasury stock, 8,656 shares at cost ..................................................       (37,818)
Accumulated deficit
                                                                                           (4,674,316)     (1,630,322)
                                                                                          ___________     ___________

      Total stockholders' equity
                                                                                            5,724,581       6,417,189

                                                     
                                                                          $27,860,809     $20,817,217
 </TABLE>                                                                 
See notes to financial statements


                                                                           F-3



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Operations
 
 
June 30,
 1997                                                                1996
Revenues:
   Patient care, net (Note A)                         $26,007,333  $21,569,594
   Management fees (Note L)                               597,278
   Other                                                  629,761      233,164
                                                      ___________  ___________

      Total revenue                                     
                                                       27,234,372   21,802,758

Operating expenses:
   Patient care expenses                               14,436,784   12,004,383
   Cost of management contracts                           324,440      146,407
   Provision for doubtful accounts                      3,397,693    1,894,087
   Administrative expenses                             10,341,973    7,800,715

      Total operating expenses                         28,500,890   21,845,592
                                                       __________   __________
                                                         
Loss from operations                                  (1,266,518)     (42,834)
                                                       __________   __________
Other income (expense):
Interest income                                           201,286       14,486
Other income, net                                         490,327      211,292
Start-up costs (Note A)                                              (128,313)
Interest expense                                      (2,094,301)    (863,484)
Gain from operations held f                               26,853       11,947

      Total other expense                             (1,375,835)    (754,072)

Loss before income taxes (benefit)                    (2,642,353)    (796,906)
Income taxes (benefit) (Note F)                          197,311     (211,591)

Net Loss                                             $(2,839,664)   $(585,315)

Net loss per share (Note A)                               $(.87)       $(.22)

Weighted average number of shares outstanding          3,270,175    2,709,504
 
See notes to financial
statements
F-4



<PAGE>

PHC, INC.  AND SUBSIDIARIES


Consolidated statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>

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

<S>           <C>       <C>      <C>     <C>     <C>      <C>    <C>      <C>        

Balance - June 30,    1,504,662 $15.047 898,795  $8.988 199.966   $2,000
1995
Payment of notes
receivable
Conversion of shares    86,554      866 (86,558)  (866)   (150)      (2)
Exercise of options     22,500      225
Issuance of stock
for obligations in       6,600       66
lieu of cash     
Exercise of bridge
loan warrants           33,509      335
Sale of stock in
connection with        493,750    4,937
private placement
Costs related to
private placement
Exercise of IPO         21,493      215
warrants
Issuance of shares
with acquisitions       87,000      870
Exercise of private
placement warrants      37,500      375
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
with acquisitions      229,500    2,295
Exercise of options     13,475      135
Payment of notes
receivable
Conversion of shares    81,877      818 (81,877)  (818)
Issuance of employee
stock purchase plan      9,452       94
shares
Issuance of shares      20,000
in connection with
consulting agreement                200
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,                                                 
1997                  2,877,836 $28,778 730,360 $7,304 199,816   $1,998      500    $ 5                     
                                                           

</TABLE>

See notes to financial statements



<PAGE>


PHC, INC.  AND SUBSIDIARIES (con't)

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

                       Additional     Notes                       Accumulated
                        Paid-in     Receivable   Treasury Shares    Deficit     Total
                        Capital,    for Stock
                      Common Stock
                                                 Shares   Amount
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 shares             2                                                   -0-
Exercise of options        113,575                                               113,800
Issuance of stock
for obligations in          36,184                                                36,250
lieu of cash      
Exercise of bridge
loan warrants              153,617                                               153,952
Sale of stock in
connection with          1,970,063                                             1,975,000
private placement
Costs related to
private placement        (422,395)                                             (442,395)
Exercise of IPO            137,785                                               138,000
warrants
Issuance of shares
with acquisitions          392,678                                               393,548
Exercise of private
placement warrants         149,625                                               150,000
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
private placements       (141,295)                                             (141,295)
Issuance of shares
with acquisitions          838,524                                               840,819
Exercise of options         59,709                                                59,844
Payment of notes                            662                                      662
receivable
Conversion of shares                                                                 -0-
Issuance of employee
stock purchase plan         30,530                                                30,624
shares
Issuance of shares
in connection with
consulting agreement        79,800                                                 80,00
Issuance of warrants
with convertible           125,000                                               125,000
debentures
Cancellation of
notes receivable                         37,818    8,656 $(37,818)                   -0-
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 stock
and convertible
debentures
Conversion of              (2,295)                                                   -0-
preferred stock
Dividend on                                                           (4,330)    (4,330)
preferred stock
Net loss, year ended
June 30, 1997         ____________ ____________  _______ _________(2,839,664) (2,839,664)

Balance - June 30,     $10,398,630        -0-    8,656   $37,818) $(4,674,316)$5,724,581
1997                           
</TABLE>

See notes to financial statements                                F-5




<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                                          June 30,
                                                                                       1997            1996

<S>                                                                             <C>             <C>      

       Cash flows from operating activities:
        Net loss                                                                    $(2,839,664     $ (585,315)
        Adjustments to reconcile net loss to net cash used
          in operating activities:
         Deferred tax benefit                                                                         (418,137)
         Depreciation and amortization                                                  679,248        554,025 
         Beneficial conversion feature of convertible debt                              130,284
         Compensatory stock options and stock and warrants issued for 
           obligations                                                                  205,000         39,250
         Changes in:
           Accounts receivable                                                       (1,649,303)
                                                                                                    (2,985,052)
           Prepaid expenses and other current assets                                   (309,188)
                                                                                                       (69,978)
           Other assets                                                                 113,419       (107,711)
           Net assets of operations held for sale                                        56,682        106,886
                                                                                                       
           Accounts payable                                                           1,044,282      1,414,089

          Accrued expenses and other liabilities                                       (167,763)       295,475 
                                                                                         
                                
             Net cash used in operating activities                                   (2,737,003)    (1,756,468) 
      Acquisition of property and equipment and intangibles                            (895,914)    (1,557,419)
                                                                       
      Loan receivable                                                                (3,063,177)       (17,462)

             Net cash used in investing activities                                   (3,959,091)    (1,574,881)

    Cash flows from financing activities:
      Revolving debt, net                                                             1,789,981
      Proceeds from borrowings                                                        2,749,505      2,043,748

                                                                                     
     Payments on debt                                                                 (696,886)      (402,828)
                                                                              
      Deferred financing costs                                                           21,498       (711,960)
                                                                                        
      Issuance of capital stock                                                         944,173      2,109,166
      Convertible debt                                                                2,500,000
 
         Net cash provided by financing activities                                    7,308,271      3,038,126

    Net increase (decrease) in cash and cash equivalents                                612,177       (293,223)
                                                               
    Beginning balance of cash and cash equivalents                                      293,515        586,738
                                                                                      
    Ending balance of cash and cash equivalents                                     $   905,692    $   293,515
  
    Supplemental cash flow information:
      Cash paid during the year for:
          Interest                                                                   $ 1,933,133    $   779,898
         Income taxes                                                                $    86,414    $   187,120

    Supplemental disclosures of noncash investing and financing activities:
      Stock issued for acquisitions of equipment and services                        $   840,819    $   393,548

                    
      Note payable due for litigation                                                               $   225,000
settlement
                                                                                                   
      Capital leases                                                                $   284,048     $    94,699
                                                                                                   
      Conversion of preferred stock                                                 $   500,000
      Beneficial conversion feature of preferred stock                              $   200,000

      See notes to financial statements                                             F-6

</TABLE>


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

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  nursing  home  in   Massachusetts,   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"), PHC of Virginia,  Inc. ("PHV") and PHC of Rhode Island,
Inc.   ("PHR")   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.

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 other expense
in the  accompanying  statement  of  operations  under the  caption  "Start-up
Costs".

During the year ended June 30, 1997,  the Company  recorded an increase in its
accounts  receivable  reserve,  a  substantial  portion  of the  increase  was
recorded in the fourth  fiscal  quarter.  The Company is  currently  reviewing
these adjustments to determine if some of these  adjustments  should have been
made in prior fiscal quarters.

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.

A  substantial  portion of the Company's  revenue at the Franvale  Nursing and
Rehabilitation  Center  is  derived  from  patients  under  the  Medicaid  and
Medicare  programs.  There have been, and the Company  expects that there will
continue  to be,  a  number  of  proposals  to  limit  Medicare  and  Medicaid
reimbursement,  as well as  reimbursement  from certain  private payor sources
for both Franvale and substance abuse treatment center  services.  The Company
cannot  predict at this time  whether any of these  proposals  will be adopted
or, if adopted and  implemented,  what effect such proposals would have on the
Company.

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 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.

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:

                                  Estimated
                                 Useful Life
              Assets
               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.

Loss per share:

Net loss per  share is based on the  weighted  average  number  of  shares  of
common stock  outstanding  during each period  excluding Class C common shares
held in escrow.  Common stock  equivalents  have been excluded  since they are
antidilutive.

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 ACCOUNTIN 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.

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

                                                    $8,408,211 $7,884,063


  NOTE C - LONG-TERM DEBT

     At June 30, 1996, the Company had  substantially  completed an addition and
renovation  to the Quality  Care  facility in which 37 new beds were added.  The
Company  financed  this  addition  and  renovation  through  the  United  States
Department of Housing and Urban Development  ("HUD").  At June 30, 1997 and June
30, 1996 unamortized  deferred  financing costs related to the construction note
payable totalled  $690,750 and $711,960,  respectively,  and are being amortized
over the life of the note.  Interest costs  capitalized in conjunction  with the
construction approximated $65,250.


                                                                             F-9



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, l997 and 1996

NOTE C - LONG-TERM DEBT (CONTINUED)
<TABLE>
<S>                                                                                       <C>                   <C>   

         Long-term debt is summarized as follows:
                                                                           June, 30,
                                                                                                  1997         1996
          Note payable with interest at 9% requiring monthly payments of $1,150                $44,816       $58,154
           through May 2001                                                                              
          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 estate 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                      1,100,000

                                                                                            10,339,876    8,158,156
          Less current maturities                                                              580,275      403,894

          Noncurrent maturities                                                             $9,759,601   $7,754,262
                                                                                            

</TABLE>





                                                                      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                                       $580,275
                 1999                                        692,681
                 2000                                        583,450
                 2001                                      1,388,742
                 2002                                         48,624
                 Thereafter                                7,046,104

                                                         $10.339.876

     In 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 expire on February
1999 and July 1998,  respectively,  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.


NOTE D - CAPITAL LEASE OBLIGATION

     At June 30, 1997, the Company is 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                (501,732)   (400,768)
       amortization

                                                       $1,461,07  $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                                   
<TABLE>
<S>                                      <C>             <C>             <C>    
                                                           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                                        4,641,341      4,641,348

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

       Present value of future
       minimum
            lease payments                  353,092      1,381,418      1,734,510
       Less current portion                 102,632         37,316        139,948

       Long-term obligations under         $250,460     $1,344,102     $1,594,562
       capital lease
</TABLE>

     The Company has an  irrevocable  option to purchase the real property noted
above  for  $1,150,000  on March 1, 1998 or  $1,100,000  on March 1, 1999 or any
subsequent March 1 through the end of the lease.


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          20,000   24,998
12% and payable on demand

                                                           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:
<TABLE>
<S>                                                         <C>          <C>   
                                                                      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)
             Current portion                                  (515,300)  (515,300)

                Long-term portion                              $154,700  $154,700
</TABLE>

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

Income tax expense (benefit) is as follows:
<TABLE>
<S>                                                          <C>         <C>

                                                                  YearEnded
                                                                        June 30,    
                                                               1997       1996
          Deferred income taxes benefit                                 $(418,137)
          Current income taxes                                 $197,311   206,546
                                                                        
                                                               $197,311 $(211,591)
</TABLE>

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

<TABLE>
<S>                                                          <C>          <C>   
                                                                    Year Ended
                                                                      June 30, 
                                                                  1997      1996
          Income tax benefit at statutory rate                $(898,400)    $(271,000)
                                                              
          State income taxes                                    197,311        80,850
          Increase in valuation allowance                       827,000
          Increase due to nondeductible items, primarily
             penalties and travel and entertainment expenses     12,000        12,100
          Other                                                  59,400       (33,541)

                                                              $ 197,311     $(211.591)
</TABLE>

     The  Company  has  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:

     The Company is involved in  litigation  related to the use of its trademark
name,  PIONEER  HEALTHCARE,  in an action pending before a federal court. If the
Company were required to  discontinue  using the PIONEER  HEALTHCARE  mark,  the
costs and/or monetary  damages related to the litigation  involved could have an
adverse effect on the Company's financial performance.

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 300,000
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 1 00,000
shares may be issued under this plan.

     Also in October 1995, the Company  adopted a nonemployee  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 1 1,500  shares were  granted  under this plan.  A maximum of
30,000  shares may be issued  under this plan.  Each outside  director  shall be
granted an option to purchase 2,000 shares of Class A
                                                                         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)

     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  179,198  shares are  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 Price
                                                 Shares               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                                $(585,315)
                            reported        $(2,839,664)
                            Pro forma       (2,893,272)       (610,497)
       Net loss per         As                  $(0.87)       $(0.22)
       share                reported
                            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

     The  Company's  continuing  operations  are  classified  into  two  primary
business segments: substance abuse/psychiatric services and long-term care.
                                                          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                      $283,782        $818,188
                  Long-term care                 (1,447,468)      (826,463)
                  Other                              324,440       146,407
                  General corporate                (427,272)      (180,966)
                  Interest and other income expense,
                    net                           (1,375,835)     (754,072)

                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

     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.


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             4,814 units       $4.57 per unit    September 1998
  Unit purchase option        146,077 units     $5.99 per unit    March 1999
  IPO warrants                1,657,821 shares  $7.50 per share   March 1999
  Private placement warrants  703,125 shares    $4.00 per share   January 1999
  Bridge warrants             33,696 shares     $7.50 per share   March 1999
  Warrant for services        25,000 shares     $6.88 per share   October 2001
  Warrant for services        3,000 shares      $3.50 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 for the purchase
of 150,000  shares of common stock in exchange for services.  The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.

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 note-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.

     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 entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices  theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire  those  assets and at June 30, 1997  Perlow owed the Company  $3,063,177
which  includes  in  addition  to   acquisition   costs,   management   fees  of
approximately $51 1,000 and interest on the advances of approximately  $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly,  most of these  amounts have been  classified  as  noncurrent.  The
Company has no ownership interest in Perlow.

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.

     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




                                                                       F-19

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE L - ACQUISITIONS (CONTINUED)

     services and each 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 is 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 totalled  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. The agreement expires December 31, 1997.


NOTE N - SUBSEQUENT FINANCING

     In  September  1997,  the Company  received  $500,000  in exchange  for the
issuance of 170,414 shares of unregistered Class A common stock.

     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.




                                                                        F-20  


<PAGE>
EXHIBIT 21.1

NAME OF SUBSIDIARY         DOING BUSINESS AS (NAME)              STATE OF
                                                               INCORPORATION

PHC, Inc.                  Pioneer Healthcare               Massachusetts
                           PDS2
                                                            
PHC of Utah, Inc.          Highland Ridge Hospital          Massachusetts
                                                            
PHC of Virginia, Inc.      Mount Regis Center               Massachusetts
                           Changes

PHC of  Rhode Island, Inc. Good Hope Center                 Massachusetts

PHC of Michigan, Inc.      Harbor Oaks Hospital             Massachusetts

PHC of  Nevada, Inc.       Harmony Healthcare               Massachusetts

Harmony Behavioral                                          Nevada
Healthcare

Northpoint-Pioneer, Inc.   Pioneer Counseling Center        Massachusetts

PHC of Kansas, Inc.        Total Concept EAP                Massachusetts

Quality Care Centers of    Franvale Nursing and             Massachusetts
Massachusetts, Inc.        Rehabilitation Center
                                                            
PHC of California, Inc.    Marin Grove                      Massachusetts

Pioneer Counseling of      Counseling Associates of         Massachusetts
Virginia, Inc.             Virginia, Inc Massachusetts
                           Counseling Associates of
                           Virginia

BSC-NY, Inc.               Behavioral Stress Center         New York

STL, Inc.                                                   Massachusetts

Professional Health                                         New York
Associates, Inc.

<PAGE>

Exhibit 4.23                                                       APPENDIX B


           FORM OF WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK


No. 1

                                                                150,000 Shares

FOR VALUE RECEIVED,  PHC, Inc. (the  "Company"),  hereby  certifies that Brean
Murray & Co.,  Inc., or a permitted  assign  thereof,  is entitled to purchase
from the Company,  at any time or from time to time  commencing  June 1, 1997,
and prior to 5:00  P.M.,  New York City time,  on May 31,  2002,  one  hundred
fifty thousand  (150,000)  fully paid and  nonassessable  shares of the common
stock,  of the Company for an aggregate  purchase price of $375,000  (computed
on the basis of US $2.50 per share).  Upon  issuance,  40,000  shares shall be
fully  vested  and the  balance  shall be 10,000  per month on the 1st of each
month for the next 11 months  beginning  with the month of July 1997  provided
that  agreement  between  Brean  Murray  and the  Company  dated  June 1, 1997
remains in full force and effect and has not been  terminated  by either party
as of an  application  vesting  date.  (Hereinafter,  (i) said  common  stock,
together with any other equity  securities  which may be issued by the Company
with  respect  thereto or in  substitution  therefore,  is  referred to as the
"Common Stock," (ii) the shares of the Common Stock  purchasable  hereunder or
under any other  Warrant  (as  hereinafter  defined)  are  referred  to as the
"Warrant  Shares," (iii) the aggregate  purchase  price payable  hereunder for
the Warrant Shares is referred to as the "Aggregate  Warrant  Price," (iv) the
price payable  hereunder for each of the Warrant  Shares is referred to as the
"Per Share Warrant Price," (v) this Warrant,  all identical warrants issued on
the date hereof and all warrants  hereafter issued in exchange or substitution
for this Warrant or such other  warrants are referred to as the "Warrants" and
(vi) the holder of this  Warrant is referred to as the "Holder" and the holder
of this  Warrant and all other  Warrants  are  referred to as the  "Holders").
The  Aggregate  Warrant  Price is not  subject  to  adjustment.  The Per Share
Warrant Price is subject to adjustment as hereinafter  provided;  in the event
of any such  adjustment,  the number of Warrant  Shares  shall be  adjusted by
dividing the Aggregate  Warrant Price by the Per Share Warrant Price in effect
immediately after such adjustment.

I.          Exercise of Warrant.

      A.    Cashless Exercise

      This  Warrant  may be  exercised,  in whole at any time or in part  from
      time to time,  commencing June 1, 1997, and prior to 5:00 P.M., New York
      City  time,  on May 31,  2002,  by the Holder by the  surrender  of this
      Warrant (with the subscription  form at the end hereof duly executed) at
      the address set forth in  Subsection  9(a) hereof,  together with proper
      payment  of the  Aggregate  Warrant  Price,  or the  proportionate  part
      thereof if this  Warrant  is  exercised  in part.  Payment  for  Warrant
      Shares shall be made by certified or official  bank check payable to the
      order of the Company or the Warrant may be  exercised  by  surrender  of
      the Warrant  without payment of any other  consideration,  commission or
      remuneration,  by execution of the cashless  exercise  subscription form
      (at the end hereof,  duly  executed.   The number of shares to be issued
      in exchange for the Warrant will be computed by subtracting  the Warrant
      Exercise  Price from the  closing  bid price of the common  stock on the
      date of receipt of the cashless exercise subscription form,  multiplying
      that  amount by the number of shares  represented  by the  Warrant,  and
      dividing by the closing bid price as of the same date.



<PAGE>


      If this  Warrant is  exercised  in part,  this Warrant must be exercised
      for a number of whole  shares of the  Common  Stock,  and the  Holder is
      entitled to receive a new Warrant  Covering  the  Warrant  Shares  which
      have not been exercised and setting forth the proportionate  part of the
      Aggregate  Warrant Price  applicable to such Warrant  Shares.  Upon such
      surrender of this Warrant,  the Company will (a) issue a certificate  or
      certificates  in the name of the Holder for the largest  number of whole
      shares of the Common  Stock to which the Holder  shall be entitled  and,
      if this Warrant is exercised in whole,  in lieu of any fractional  share
      of the Common Stock to which the Holder  shall be  entitled,  pay to the
      Holder  cash in an  amount  equal to the fair  value of such  fractional
      share  (determined in such  reasonable  manner as the Board of Directors
      of the Company shall  determine),  and (b) deliver the other  securities
      and  properties  receivable  upon the exercise of this  Warrant,  or the
      proportionate  part  thereof  if this  Warrant  is  exercised  in  part,
      pursuant to the provisions of this Warrant.

II    Reservation of Warrant Shares; Listing.

      The Company agrees that,  prior to the  expiration of this Warrant,  the
      Company will at all times (a) have  authorized and in reserve,  and will
      keep  available,  solely for  issuance or delivery  upon the exercise of
      this Warrant,  the shares of the Common Stock and other  securities  and
      properties  as from time to time shall be  receivable  upon the exercise
      of this Warrant,  free and clear of all restrictions on sale or transfer
      and free and clear of all pre-emptive rights.

III.  Protection Against Dilution.

      A.    If,  at any  time or from  time to  time  after  the  date of this
            Warrant,  the Company  shall issue or distribute to the holders of
            shares of Common Stock  evidences of its  indebtedness,  any other
            securities  of the Company or any cash,  property or other  assets
            (excluding a  subdivision,  combination  or  reclassification,  or
            dividend  or  distribution  payable  in shares  of  Common  Stock,
            referred to in Subsection  3(b), and also excluding cash dividends
            or cash  distributions  paid out of net profits legally  available
            therefor if the full amount  thereof,  together  with the value of
            other dividends and distributions made substantially  concurrently
            therewith or pursuant to a plan which  includes  payment  thereof,
            is  equivalent  to not more than 5% of the  Company's  net  worth)
            (any  such  nonexcluded  event  being  herein  called  a  "Special
            Dividend"),  the Per Share  Warrant  Price  shall be  adjusted  by
            multiplying  the Per  Share  Warrant  Price  then in  effect  by a
            fraction,  the numerator of which shall be the then current market
            price of the Common  Stock  (defined as the average for the thirty
            consecutive  business days immediately prior to the record date of
            the daily  closing  price of the Common  Stock as  reported by the
            NASDAQ  system less the fair market  value (as  determined  by the
            Company's  Board of Directors)  of the evidences of  indebtedness,
            securities or property,  or other assets issued or  distributed in
            such Special Dividend  applicable to one share of Common Stock and
            the  denominator  of which shall be such then current market price
            per share of Common  Stock.  An  adjustment  made pursuant to this
            Subsection  3(A)  shall  become  effective  immediately  after the
            record date of any such Special Dividend.

      B.    In case the Company  shall  hereafter (i) pay a dividend or make a
            distribution on its capital stock in shares of Common Stock,  (ii)
            subdivide  its  outstanding  shares of Common Stock into a greater
            number of shares,  (iii) combine its outstanding  shares of Common
            Stock   into  a  smaller   number  of  shares  or  (iv)  issue  by
            reclassification  of its Common Stock any shares of capital  stock
            of the Company,  the Per Share  Warrant Price shall be adjusted so
            that the Holder of any Warrant upon the  exercise  hereof shall be
            entitled to receive the number of shares of Common  Stock or other
            capital   stock  of  the   Company   which  he  would  have  owned
            immediately  prior  thereto.  An adjustment  made pursuant to this
            Subsection  3(B)  shall  become  effective  immediately  after the
            record  date in the case of a dividend or  distribution  and shall
            become effective  immediately after the effective date in the case
            of  a  subdivision,  combination  or  reclassification.  If,  as a
            result of an  adjustment  made pursuant to this  Subsection  3(B),
            the Holder of any  Warrant  thereafter  surrendered  for  exercise
            shall become  entitled to receive shares of two or more classes of
            capital  stock or shares of Common Stock and other  capital  stock
            of the Company,  the Board of Directors (whose determination shall
            be  conclusive  and shall be described in a written  notice to the
            Holder  of any  Warrant  promptly  after  such  adjustment)  shall
            determine  the  allocation of the adjusted Per Share Warrant Price
            between  or among  shares  of such  classes  or  capital  stock or
            shares of Common Stock and other capital stock.

      C.    Except  as  provided  in  Subsection  3(A) and  3(D),  in case the
            Company  shall  hereafter  issue  or  sell  any  rights,  options,
            warrants or  securities  convertible  into Common Stock  entitling
            the holders  thereof to purchase  Common  Stock or to convert such
            securities  into Common Stock at a price per share  (determined by
            dividing (i) the total amount,  if any,  received or receivable by
            the  Company  in  consideration  of the  issuance  or sale of such
            rights,  options,  warrants  or  convertible  securities  plus the
            total consideration,  if any, payable to the Company upon exercise
            or  conversion  thereof  (the "Total  Consideration")  by (ii) the
            number  of  additional   shares  of  common  stock  issuable  upon
            exercise  or  conversion  of such  securities)  less than the then
            current  Per  Share  Warrant  Price in  effect on the date of such
            issuance or sale,  the Per Share  Warrant  Price shall be adjusted
            as of the date of such  issuance  or sale so that  the same  shall
            equal  the price  determined  by  dividing  (i) the sum of (a) the
            number of shares of Common Stock  outstanding  on the date of such
            issuance or sale  multiplied  by the Per Share  Warrant Price plus
            (b) the  Total  Consideration  by (ii) the  number  of  shares  of
            Common  Stock  outstanding  on the date of such  issuance  or sale
            plus the  maximum  number of  additional  shares  of Common  Stock
            issuable  upon  exercise or  conversion  of such  securities.  The
            provision of this  section  shall not apply to the issuance of any
            shares of Common Stock on the exercise  conversion  or exchange of
            any   rights,   options,   warrants  or   convertible   securities
            outstanding  on the date  hereof  or any  such  shares  issued  to
            employees,  directors,  or consultants,  pursuant to the Company's
            Non-Employee  Director Plan,  Omnibus Stock Plan or Employee Stock
            Purchase   Plan  based  upon  the  number  of  options  or  shares
            currently authorized under such plan increased by 50%.

      D.    In case of any capital reorganization or reclassification,  or any
            consolidation  or  merger to which the  Company  is a party  other
            than a  merger  or  consolidation  in  which  the  Company  is the
            continuing  corporation,  or in case of any sale or  conveyance to
            another  entity of the  property  of the Company as an entirety or
            substantially  as an  entirety,  or in the  case of any  statutory
            exchange of securities  with another  corporation  (including  any
            exchange   effected  in  connection  with  a  merger  of  a  third
            corporation  (including any exchange effected in connection with a
            merger of a third  corporation  into the  Company),  the Holder of
            this  Warrant  shall have the right  thereafter  to  convert  such
            Warrant  into the kind and  amount  of  securities,  cash or other
            property  which  he would  have  owned or have  been  entitled  to
            receive immediately after such  reorganization,  reclassification,
            consolidation,  merger, statutory exchange, sale or conveyance had
            this Warrant been  converted  immediately  prior to the  effective
            date  of  such  reorganization,  reclassification,  consolidation,
            merger,  statutory  exchange,  sale or conveyance  and in any such
            case, if necessary,  appropriate  adjustment  shall be made in the
            application  of the  provisions  set forth in this  Section 3 with
            respect to the rights and  interests  thereafter  of the Holder of
            this  Warrant  to the end that the  provisions  set  forth in this
            Section 3 shall thereafter  correspondingly be made applicable, as
            nearly as may  reasonably  be, in  relation to any shares of stock
            or other  securities  or be, in relation to any shares of stock or
            other  securities  or  property  thereafter   deliverable  on  the
            conversion  of  this  Warrant.   The  above   provisions  of  this
            Subsection    3(D)   shall    similarly    apply   to   successive
            reorganizations,   reclassifications,   consolidations,   mergers,
            statutory  exchanges,  sales or  conveyances.  The  issuer  of any
            shares  of  stock  or  other  securities  or  property  thereafter
            deliverable   on  the   conversion   of  this  Warrant   shall  be
            responsible  for  all of the  agreements  and  obligations  of the
            Company   hereunder.    Notice   of   any   such   reorganization,
            reclassification,  consolidation, merger, statutory exchange, sale
            or  conveyance  and of said  provisions  so  proposed  to be made,
            shall be mailed to the  Holders of the  Warrants  not less than 30
            days prior to such event.  A sale of all or  substantially  all of
            the  assets  of  the  Company  for  a   consideration   consisting
            primarily of securities  shall be deemed a consolidation or merger
            for the foregoing purposes.

      E.   No  adjustment  in the Per Share  Warrant  Price  shall be required
           unless such adjustment  would require an increase or decrease of at
           least $0.05 per share of Common Stock; provided,  however, that any
           adjustments  which  by  reason  of  this  Subsection  3(e)  are not
           required  to be made  shall  be  carried  forward  and  taken  into
           account in any subsequent  adjustment;  provided further,  however,
           that adjustments  shall be required and made in accordance with the
           provisions of this Section 3 (other than this  Subsection  3(e) not
           later than such time as may be required  in order to  preserve  the
           tax-free  nature of a distribution to the Holder of this Warrant or
           Common  Stock  issuable  upon  exercise  hereof.  All  calculations
           under this  Section 3 shall be made to the  nearest  cent or to the
           nearest  1/100th of a share,  as the case may be.  Anything in this
           Section 3 to the  contrary  notwithstanding,  the Company  shall be
           entitled to make such  reductions in the Per Share  Warrant  Price,
           in  addition  to those  required  by this  Section  3, as it in its
           discretion  shall  deem to be  advisable  in order  that any  stock
           dividend,  subdivision  of  shares  or  distribution  of  rights to
           purchase stock or securities  convertible or exchangeable for stock
           hereafter  made by the  Company  to its  shareholders  shall not be
           taxable.

      F.   Whenever  the Per Share  Warrant  Price is  adjusted as provided in
           this Section 3 and upon any  modification of the rights of a Holder
           of Warrants in  accordance  with this Section 3, the Company  shall
           promptly  obtain,  at its  expense,  a  certificate  of a  firm  of
           independent public  accountants of recognized  standing selected by
           the Board of  Directors  (who may be the  regular  auditors  of the
           Company)  setting  forth the Per Share Warrant Price and the number
           of  Warrant  Shares  after  such  adjustment  or the effect of such
           modification,  a  brief  statement  of  the  facts  requiring  such
           adjustment  or  modification  and the manner of computing  the same
           and cause  copies of such  certificate  to be mailed to the Holders
           of the Warrants.

      G.   If  the  Board  of  Directors  of the  Company  shall  declare  any
           dividend or other  distribution  with respect to the Common  Stock,
           other than a cash  distribution out of earned surplus,  the Company
           shall mail notice  thereof to the Holders of the  Warrants not less
           than 15  days  prior  to the  record  date  fixed  for  determining
           shareholders  entitled  to  participate  in such  dividend or other
           distribution.

IV.   Fully Paid Stock, Taxes.

      The Company  agrees that the shares of the Common Stock  represented  by
      each and every  certificate for Warrant Shares delivered on the exercise
      of this Warrant shall,  at the time of such delivery,  be validly issued
      and  outstanding,  fully  paid and  nonassessable,  and not  subject  to
      pre-emptive  rights,  and the Company  will take all such actions as may
      be necessary to assure that the par value or stated  value,  if any, per
      share of the  Common  Stock is at all  times  equal to or less  than the
      then Per Share Warrant Price.  The Company further  covenants and agrees
      that it will pay,  when due and  payable,  any and all Federal and state
      stamp,  original  issue or similar taxes which may be payable in respect
      of the issue of any Warrant Share or certificate therefor.

V.    Registration Under Securities Act of 1933.

      A.    The  Company  agrees  that if,  at any time and from  time to time
            during  the  period  commencing  on June 1, 1997 and ending on May
            31, 2002,  the Board of Directors of the Company  shall  authorize
            the  filing  of  a  registration  statement  or  a  post-effective
            amendment  to a  registration  statement  (any  such  registration
            statement  being  hereinafter  called a  "Subsequent  Registration
            Statement")  under the Act other than a registration  statement on
            Form S-8 or other form which does not  include  substantially  the
            same  information  as would be  required in a form for the general
            registration  of securities) in connection with the proposed offer
            of any of its  securities  by it or any of its  shareholders,  the
            Company  will  (i)  promptly  notify  the  Holder  and each of the
            Holders,  if any, of other  Warrants  and/or  Warrant  Shares that
            such Subsequent  Registration Statement will be filed and that the
            Warrant  Shares which are then held,  and/or which may be acquired
            upon  the  exercise  of the  Warrants,  by  the  Holder  and  such
            Holders,  will,  at the Holder's  and such  Holders'  request,  be
            included in such Subsequent Registration  Statement,  (ii) include
            in  the  securities   covered  by  such  Subsequent   Registration
            Statement  all Warrant  Shares  which it has been so  requested to
            include,  (iii)  use its best  efforts  to cause  such  Subsequent
            Registration  Statement to become effective as soon as practicable
            and (iv) take all other  action  necessary  under any  Federal  or
            stat   law or regulation of any  governmental  authority to permit
            all Warrant  Shares  which it has been so  requested to include in
            such Subsequent  Registration Statement or to be sold or otherwise
            disposed  of, and will  maintain  such  compliance  with each such
            Federal  and  state  law  and   regulation  of  any   governmental
            authority  for the  period  necessary  for  the  Holder  and  such
            Holders to effect the proposed sale or other disposition.

      B.    Whenever  the Company is required  pursuant to the  provisions  of
            this  Section  5 to  include  Warrant  Shares  in  a  registration
            statement  or  a   post-effective   amendment  to  a  registration
            statement,  the Company  shall (i) furnish each Holder of any such
            Warrant  Shares and each  underwriter  of such Warrant Shares with
            such  copies  of  the   prospectus,   including  the   preliminary
            prospectus,  conforming to the Act,  (and such other  documents as
            each such Holder or each such underwriter may reasonably  request)
            in order to  facilitate  the sale or  distribution  of the Warrant
            Shares,  (ii) use its best  efforts to  register  or qualify  such
            Warrant Shares under the blue sky laws (to the extent  applicable)
            of such  jurisdiction or  jurisdictions as the Holders of any such
            Warrant  Shares and each  underwriter of Warrant Shares being sold
            by such  Holders  shall  reasonably  request  and (iii)  take such
            other  actions as may be  reasonably  necessary  or  advisable  to
            enable such Holders and such  underwriters  to consummate the sale
            or distribution in such  jurisdiction  or  jurisdictions  in which
            such  Holders  shall have  reasonably  requested  that the Warrant
            Shares be sold.

      C.    The Company  shall pay all expenses  incurred in  connection  with
            any  registration  or other action  pursuant to the  provisions of
            this Section 5, other than  underwriting  discounts and applicable
            transfer taxes relating to the Warrant Shares.

<PAGE>

      D.    The Company  will  indemnify  the Holders of Warrant  Shares which
            are   included   in   each   Subsequent   Registration   Statement
            substantially  to the same extent as the  Company has  indemnified
            the underwriters  (the  "Underwriters")  of its public offering of
            Common  Stock  pursuant  to the  Underwriting  Agreement  and such
            Holders  will  indemnify  the Company  (and the  underwriters,  if
            applicable)  with  respect  to  information  furnished  by them in
            writing to the Company for inclusion therein  substantially to the
            same extent as the Underwriters have indemnified the Company.

VI.   Limited Transferability.

      This Warrant may not be sold,  transferred,  assigned or hypothecated by
      the  Holder  until  the  first  anniversary  hereof  except  (a)  to any
      successor  firm or  corporation  of Brean Murray & Co., Inc., (b) to any
      of the officers,  managing  directors,  any associates of Brean Murray &
      Co.,  Inc.,  to a finder that has been  recognized by both parties or of
      any such successor  firm or (c) in the case of an  individual,  pursuant
      to such  individual's last will and testament or the laws of descent and
      distribution,  and is so transferable only upon the books of the Company
      which it shall cause to be maintained  for the purpose.  The Company may
      treat the  registered  Holder of this Warrant as he or it appears on the
      Company's  books  at any  time  as the  Holder  for  all  purposes.  The
      Company  shall  permit   any Holder of a Warrant or his duly  authorized
      attorney,  upon written  request  during  ordinary  business  hours,  to
      inspect and copy or make extracts from its books showing the  registered
      holders  of  Warrants.   All  warrants   issued  upon  the  transfer  or
      assignment  of this Warrant will be dated the same date as this Warrant,
      and all rights of the Holder  thereof shall be identical to those of the
      Holder.

VII.  Loss, etc., of Warrant.

      Upon  receipt  of  evidence  satisfactory  to the  Company  of the loss,
      theft,  destruction  or  mutilation  of this  Warrant,  and of indemnity
      reasonably  satisfactory to the Company,  if lost,  stolen or destroyed,
      and upon surrender and cancellation of this Warrant,  if mutilated,  the
      Company  shall  execute  and deliver to the Holder a new Warrant of like
      date, tenor and denomination.

VIII. Warrant Holder Not Shareholders.

      Except as otherwise  provided herein,  this Warrant does not confer upon
      the Holder  any right to vote or to  consent  to or receive  notice as a
      shareholder  of  the  Company,  as  such,  in  respect  of  any  matters
      whatsoever,  or any other fights or liabilities as a shareholder,  prior
      to the exercise hereof.

IX.   Communication.

      No notice or other  communication  under this Warrant shall be effective
      unless,  but any notice or other  communication  shall be effective  and
      shall be deemed to have been  given if,  the same is in  writing  and is
      mailed by first-class mail, postage prepaid, addressed to:

      A.    the Company at 200 Lake Street, Suite 102, Peabody, Massachusetts
            01960

      B.    the Holder at 570 Lexington  Avenue,  New York, New York 10022, or
            such other address as the Holder has  designated in writing to the
            Company.

<PAGE>

X.    Headings.

      The  headings  of  this  Warrant  have  been  inserted  as a  matter  of
      convenience and shall not affect the construction hereof.

XI.   Applicable Law.

      This Warrant shall be governed by and  construed in accordance  with the
      law of the  Commonwealth of  Massachusetts  without giving effect to the
      principles of conflicts of law thereof.

IN WITNESS  WHEREOF,  the Company has caused this  Warrant to be signed by its
Chief Executive  Officer and its corporate seal to be hereunto  affixed by its
Secretary this 31st day of July, 1997.

                                 PHC,INC.

                                 By:___________________
                                 Bruce Shear
                                 Chief Executive Officer
ATTEST:

_____________________
Assistant Clerk

[Corporate Seal]


<PAGE>


                                  SUBSCRIPTION


The  undersigned,   _________________   pursuant  to  the  provisions  of  the
foregoing  Warrant,  hereby agrees to subscribe  for and purchase  -----------
shares  of the  Common  Stock  of  PHC,  Inc.  Common  stock  covered  by said
Warrant,  and makes payment  therefor in full at the price per share  provided
by said Warrant.

Dated:  ___________________________       Signature:  ________________________

                                          Address:   _________________________

                                                     ________________________

                                   ASSIGNMENT

FOR VALUE RECEIVED  ___________________ hereby sells, assigns and transfers unto
______________ the foregoing Warrant and all rights evidenced thereby,  and does
irrevocably  constitute  and appoint  attorney,  to transfer said Warrant on the
books of PHC, Inc.


Dated:  ___________________________       Signature:  ________________________

                                          Address:  _________________________

 
                                                    _________________________




FOR VALU RECEIVED  ________________________  hereby  assigns and transfers  unto
______________  the right to  purchase  shares of the  Common  Stock of  Pioneer
Healthcare,  Inc. by the foregoing  Warrant,  and a  proportionate  part of said
Warrant and the rights evidenced  hereby,  and does  irrevocably  constitute and
appoint  attorney,  to transfer  that part of said  Warrant on the books of PHC,
Inc.

Dated:  ___________________________       Signature:  ________________________

                                          Address:   _________________________

                                                     _________________________



<PAGE>


                         CASHLESS EXERCISE SUBSCRIPTION


The  undersigned,  ___________________________,  pursuant to the provisions of
the foregoing Warrant,  hereby agrees to subscribe to that number of shares of
Common Stock of PHC, Inc. as are issuable in  accordance  with the formula set
forth in paragraph  l(b) of the Warrant,  and makes payment  therefore in full
by surrender and delivery of this Warrant.

Dated: _______________________      Signature:  ___________________________

                                    Address:  _____________________________
<PAGE>
Exhibit 4.24
                            SUBSCRIPTION AGREEMENT

                                  PHC, INC.

      THE  SECURITIES  WHICH ARE THE  SUBJECT TO THIS  SUBSCRIPTION  AGREEMENT
HAVE  NOT BEEN  REGISTERED  UNDER  THE  SECURITIES  ACT OF 1933 OR  UNDER  THE
SECURITIES  LAWS OF ANY  STATE AND WILL BE  OFFERED  AND SOLD IN  RELIANCE  ON
EXEMPTIONS FROM THE REGISTRATION  REQUIREMENTS OF THESE LAWS BY VIRTUE OF PHC,
INC.'S  INTENDED   COMPLIANCE  WITH  SECTIONS  3(b),  4(2)  AND  4(6)  OF  THE
SECURITIES  ACT OF 1933,  THE  PROVISIONS  OF  REGULATION D UNDER SUCH ACT AND
SIMILAR  EXEMPTIONS  UNDER STATE LAW. THESE  SECURITIES HAVE NOT BEEN APPROVED
OR  DISAPPROVED  BY  ANY  REGULATORY  AUTHORITY.  ANY  REPRESENTATION  TO  THE
CONTRARY IS A CRIMINAL OFFENSE.

      The undersigned purchaser,  (hereafter the "Purchaser") hereby offers to
purchase  Units of PHC, Inc.  (the  "Company"),  a publicly  held  corporation
formed  under the laws of the  Commonwealth  of  Massachusetts.  This offer to
purchase  may,  for any reason  whatsoever,  be revoked  by the  Purchaser  or
rejected by the Company prior to acceptance of this offer by the Company.

      Section 1.1 Purchase  and Sale of Units.  Upon the  following  terms and
conditions,  the  Company  shall  issue  and  sell to the  Purchaser,  and the
Purchaser  shall  purchase  from the  Company,  the number of Units  indicated
herein.  Each Unit  shall  consist of four (4) shares  (the  "Shares")  of the
Company's  Class A Common Stock,  $.01 par value per share  ("Common  Stock"),
and  warrants  for  the  purchase  of two (2)  Shares  of  such  Common  Stock
(referred to herein as a "Warrant" or collectively as "Warrants").

      Section  1.2  Purchase  Price.  The  purchase  price for the Units  (the
"Purchase  Price")  shall be four (4)  multiplied by the lesser of: (a) $2.90;
or (b) the average of the  closing bid prices of the Common  Stock as reported
by NASDAQ  during the fifteen  (15)  consecutive  trading days  preceding  the
Closing Date (but not including such date).

      Section 1.3  The Closing  

      (a)  The   closing  of  the   purchase   and  sale  of  the  Units  (the
"Closing"),  shall  take place at the  offices  of  Choate,  Hall & Stewart at
10:00 a.m.  local Boston,  Massachusetts  time, on the later of the following:
(i) the date on which the last to be  fulfilled  or  waived of the  conditions
set forth in Section 4.1 and 4.2 hereof and  applicable  to the Closing  shall
be fulfilled  or waived in  accordance  herewith,  or (ii) such other time and
place  and/or on such other dale as the  Purchaser  and the Company may agree.
The date on which the Closing  occurs is  referred  to herein as the  "Closing
Date".

      (b) On the Closing  Date,  the Company  shall  deliver to the  Purchaser
certificates  representing the Shares  registered in the name of the Purchaser
and the Warrant Agreement  representing the Warrants,  and the Purchaser shall
deliver  to the  Company  the  Purchase  Price for all the Units by  cashier's
check or wire  transfer  in  immediately  available  funds to such  account as
shall be designated in writing by the Company.  In addition,  each party shall
deliver all documents,  instruments  and writings  required to be delivered by
such party pursuant to this Agreement at or prior to the Closing.



<PAGE>

      Section 1.4   Covenant to Register.

      (a) For  purposes  of this  Section,  the  following  definitions  shall
               apply:

            (i)   The  terms  "register,"   "registered,"  and  "registration"
refer to a  registration  under the  Securities  Act of 1933,  as amended (the
"Act"),  effected by preparing and filing a registration  statement or similar
document  in  compliance  with the Act,  and the  declaration  or  ordering of
effectiveness of such registration statement, document or amendment thereto.

            (ii) The term  "Registrable  Securities"  means the  Shares of the
Company's  Class A  Common  Stock  comprising  the  Units  and  issuable  upon
conversion of the Warrants and the Remedy Warrants,  if any, or upon any other
stock issued in payment of dividends,  or otherwise  issuable pursuant to this
Agreement  and any  securities  of the Company or  securities of any successor
corporation  issued as, or  issuable  upon the  conversion  or exercise of any
warrant,  right  or other  security  that is  issued  as a  dividend  or other
distribution  with respect to, or in exchange  for, or in  replacement  of the
Units.

            (iii)  The term  "holder  of  Registrable  Securities"  means  the
Purchaser  and any  permitted  assignee  of  registration  rights  pursuant to
Section 1.4(h).

      (b)    (i) The  Company  shall as soon as possible  file a  registration
statement on Form SB-2 covering all the Registrable Securities,  and shall use
its best efforts to cause such  registration  statement to become effective on
or  before   ninety   (90)  days  after  the   Closing   Date  (the   "Initial
Registration").  In the event such  registration is not so declared  effective
or does not  include  all  Registrable  Securities,  a holder  of  Registrable
Securities  shall  have the right to  require  by notice in  writing  that the
Company  register all or any part of the  Registrable  Securities held by such
holder (a "Demand  Registration")  and the Company shall thereupon effect such
registration  in accordance  herewith (which may include adding such shares to
an  existing  shelf  registration).  The  parties  agree that if the holder of
Registrable   Securities  demands   registration  of  less  than  all  of  the
Registrable  Securities,  the Company,  at its option, may nevertheless file a
registration  statement  covering all of the Registrable  Securities.  If such
registration  statement is declared  effective with respect to all Registrable
Securities  and  the  Company  is in  compliance  with  it  obligations  under
Subsection  (d) of this Section 1.4, the demand  registration  rights  granted
pursuant  to  the  Subsection   (b)(i)  shall  cease.  If  such   registration
statement  is  not  declared   effective  with  respect  to  all   Registrable
Securities or if the Company is not in compliance  with such  obligation,  the
demand registration rights described herein shall remain in effect.

            (ii)  The  Company  shall  not be  obligated  to  effect  a Demand
Registration  under  Subsection  (b)(i)  above:  (A) if all of the  Restorable
Securities held by the holder of Registrable  Securities which are demanded to
be  covered  by the  Demand  Registration  are,  at the  time of such  demand,
included  in  an  effective  registration  statement  and  the  Company  is in
compliance with its obligations  under Subsection (d) of this Section 1.4; (B)
if all of the Registrable  Securities may be sold under Rule 144(k) of the Act
and the Company's  transfer agent has accepted an instruction from the Company
to such effect; or (C) at any time after two (2) years from the Closing Date.

            (iii) Subject  to  Subsection  (iv)(B)  hereof,  the  Company  may
suspend the effectiveness of any such  registration  effected pursuant to this
Subsection  (b) in the event and for such period of time as, such a suspension
is  required  by the rules and  regulations  of the  Securities  and  Exchange
Commission  ("SEC").  The  Company  will use its best  efforts  to cause  such
suspension to terminate at the earliest possible date.






                                            2


<PAGE>

            (iv)  (A)   If   the   registration   covering   all   Registrable
Securities  is not  effective by the ninety first (91st) day after the Closing
date (the  "Effective  Date"),  other  than by reason  of the  failure  of any
holder of  Registrable  Securities  to provide  the Company  with  information
pursuant to Section 1.4(e)  hereof,  the Company shall deliver to Purchaser as
liquidated  damages  warrants for the purchase of 3,000 Shares of Common Stock
for each  thirty  (30) day  period  thereafter  (the  number  of  Shares to be
pro-rated  daily) (the "Remedy  Warrants"),  until the earlier of (A) the date
that the Common  Stock is  registered  pursuant to an  effective  registration
statement  or (B) one (1) year after the  Closing  Date.  The Remedy  Warrants
shall have the same terms including,  without  limitation,  exercise price and
expiration, as the Warrants comprising the Units.

                  (B)    If,   following   such   effectiveness,   either  the
effectiveness  of  the  Registration  Statement  is  suspended  or  a  current
prospectus  meeting the requirements of Section 10 of the Act is not available
for delivery by the Purchaser  (either  referred to herein as a "suspension"),
the Company shall deliver to Purchaser as liquidated  damages Remedy  Warrants
until the earlier (i) the suspension is terminated,  or (ii) the date on which
the Company is no longer required to effect a demand registration  pursuant to
Section 1.4(b) (ii) thereof.

                  (C)   Any  Remedy  Warrants   deliverable  pursuant  to  the
foregoing  provisions of this  subsection (iv) shall be delivered on or before
the fifth  (5th) day  following  the end of the  calendar  month in which such
payment obligation arose.

                  (D)  This subsection is in addition to the provisions of
                       Section 7.2(a) hereof.

      (c) If the Company  proposes to register  (including  for this purpose a
registration   effected  by  the  Company  for  shareholders  other  than  the
Purchaser)  any of its stock or other  securities  under the Act in connection
with a public offering of such  securities  (other than a registration on Form
S-4, Form S-8 or other limited  purpose form) and all  Registrable  Securities
have  not  theretofore  been  included  in  a  registration   statement  under
Subsection  (b) of this  Section  1.4 which  remains  effective,  the  Company
shall,  at such time,  promptly  give all  holders of  Registrable  Securities
written notice of such  registration Upon the written request of any holder of
Registrable  Securities  given within  twenty (20) days after  receipt of such
notice by the holder of  Registrable  Securities,  the  Company  shall use its
best  efforts  to  cause  to be  registered  under  the  Act  all  Registrable
Securities  that  such  holder  of  Registrable   Securities  requests  to  be
registered.   However,  the  Company  shall  have  no  obligation  under  this
Subsection  (c)  if  (i)  the  Registrable  Securities  may  be  sold  without
registration  under Rule 144(k) and the Company's  transfer agent has accepted
an  instruction  from  the  Company  to such  effect,  (ii)  the  Registration
Statement  is filed more than two (2) years after the Closing  Date,  or (iii)
to the extent that,  with respect to any  underwritten  offering  initiated by
the Company later than one calendar year  following the Closing,  the managing
underwriter of such offering  reasonably notifies such holder(s) in writing of
its determination  that the Registrable  Securities or a portion thereof shall
be excluded therefrom.

     (d)   Whenever   required   under   this   Section   1.4  to  effect  the
registration of any Registrable Securities including,  without limitation, the
Initial  Registration,  the Company  shall,  as  expeditiously  as  reasonably
possible:

           (i)  Prepare  and file  with the SEC a  registration  statement  or
amendment  thereto with  respect to such  Registrable  Securities  and use its
best  efforts to cause such  registration  to become  effective as provided in
Section 1.4(b)(i),  and keep such registration statement effective for so long
as any holder of Registrable  Securities  desires to dispose of the securities
covered by such registration  statement;  provided,  however, that in no event
shall the  Company be required to keep the  Registration  Statement  effective
for a period greater than two (2) years from the Closing Date;

           (ii)   Prepare   and  file  with  the  SEC  such   amendments   and
supplements  to  such  registration  statement  and  the  prospectus  used  in
connection  with such  registration  statement  as may be  necessary to comply
with  the  provisions  of the  Act  with  respect  to the  disposition  of all
securities  covered by such  registration  statement and notify the holders of
the  filing  and  effectiveness  of  such   Registration   Statement  and  any
amendments or supplements;

                                    3

<PAGE>

           (iii)  Furnish  to  each  holder  of  Registrable  Securities  such
numbers  of  copies  of  a  current   prospectus,   including  a   preliminary
prospectus,  conforming  with  the  requirements  of the  Act,  copies  of the
registration  statement  any  amendment or  supplement  to any thereof and any
documents  incorporated  by reference  therein and such other  documents,  all
free of  charge,  as such  holder of  Registrable  Securities  may  reasonably
require in order to  facilitate  the  disposition  of  Registrable  Securities
owned by such holder of registrable Securities;

           (iv) Use its best  efforts to register  and qualify the  securities
covered by such  registration  statement under such other  securities or "Blue
Sky"  laws of such  jurisdictions  as shall  be  reasonably  requested  by the
holder of Registrable Securities;

           (v) Notify each holder of  Registrable  Securities  immediately  of
the  happening  of any event as a result of which the  prospectus  included in
such registration  statement,  as then in effect, includes an untrue statement
of  material  fact or omits to state a  material  fact  required  to be stated
therein or necessary to make the  statements  therein not  misleading in light
of the  circumstances  then  existing,  and use its best  efforts to  promptly
update and/or correct such prospectus;

           (vi)  Furnish,   at  the  request  of  any  holder  of  Registrable
Securities  in  connection  with  any  underwritten  public  offering,  (A) an
opinion  of  counsel  of  the  Company,   dated  the  effective  date  of  the
registration  statement,  in form and substance reasonably satisfactory to the
holder and its counsel and covering,  without limitation,  such matters as the
due  authorization and issuance of the securities being registered and certain
matters  pertaining to disclosure under and compliance with securities laws by
the  Company  in  connection  with  the  registration  thereof  and/or  (B)  a
"comfort" letter or letters of the Company's  independent  public  accountants
provided  at  the  Company's   expense  in  form  and   substance   reasonably
satisfactory to the holder and its counsel;

            (vii)  Use its best  efforts  to list the  Registrable  Securities
covered by such registration  statement with any national market or securities
exchange on which such securities are then listed;

           (viii)   Make   available   for   inspection   by  the   holder  of
Registrable  Securities,  upon request,  all SEC Documents (as defined  below)
filed subsequent to the Closing and require the Company's officers,  directors
and employees to supply all information  reasonably requested by any holder of
Registrable Securities in connection with such registration statement; and

           (ix)  Furnish  to each  holder  of  Registrable  Securities  prompt
notice  of the  commencement  of any  stop-order  proceedings  under  the Act,
together  with copies of all documents in  connection  therewith,  and use its
best efforts to obtain withdrawal of any such stop order as soon as possible.

     (e)   Upon request of the Company, each holder of Registrable  Securities
will furnish to the Company in  connection  with any  registration  under this
Section such  information  regarding  itself,  the Registrable  Securities and
other  securities  of the  Company  held by it,  and the  intended  method  of
disposition of such  securities as shall be reasonably  required to effect the
registration of the Registrable  Securities held by such holder of Registrable
Securities.  The intended  method of  disposition  (Plan of  Distribution)  of
such  securities  as so  provided  by  Purchaser  shall  be  included  without
alteration in the Registration  Statement covering the Registrable  Securities
and shall not be changed without the prior written consent of the Purchaser.







                                      4




<PAGE>


     (f)  (i) The  Company  shall  indemnify,  defend and hold  harmless  each
holder  of  Registrable  Securities  which  are  included  in  a  registration
statement  pursuant to the  provisions  of  Subsections  (b) or (c) hereof and
each of its officers,  directors,  employees,  agents, partners or controlling
persons (within the meaning of the Act) (each,  an  "indemnified  party") from
and against,  and shall reimburse such indemnified  party with respect to, any
and  all  claims,  suits,  demands,   causes  of  action,   losses,   damages,
liabilities,  costs or  expenses  ("Liabilities")  to which  such  indemnified
party may become subject under the Act or otherwise,  arising from or relating
to (A) any untrue  statement or alleged untrue  statement of any material fact
contained in such registration statement,  any prospectus contained therein or
any amendment or supplement  thereto,  or (B) the omission or alleged omission
to state therein a material  fact  required to be stated  therein or necessary
to make the statements  therein,  in light of the  circumstances in which they
were made, not misleading;  provided,  however,  that the Company shall not be
liable in any such case to the extent  that any such  Liability  arises out of
or is based upon an untrue statement or omission so made in strict  conformity
with information  furnished by such indemnified party in writing  specifically
for use in a registration statement.

          (ii)     in  the  event  of  any  registration   under  the  Act  of
Registrable  Securities  pursuant to  Subsections  (b) or (c),  each holder of
such Registrable  Securities hereby severally agrees to indemnity,  defend and
hold harmless the Company,  and its officers,  directors,  employees,  agents,
partners,  or controlling  persons  (within the meaning of the Act) (each,  an
"indemnified  party") from and against,  and shall reimburse such  indemnified
party with  respect  to,  any and all  Liabilities  to which such  indemnified
party may become subject under the Act or otherwise,  arising from or relating
to (A) any untrue  statement or alleged untrue  statement of any material fact
contained in such registration statement,  any prospectus contained therein or
any amendment or supplement  thereto,  or (B) the omission or alleged omission
to state therein a material  fact  required to be stated  therein or necessary
to make the statements  therein,  in light of the  circumstances in which they
were made, not misleading;  provided,  that such holders will be liable in any
such  case to the  extent  and only to the  extent,  that  any such  Liability
arises  out  of or is  based  upon  an  untrue  statement  or  alleged  untrue
statement  or  omission  or  alleged   omission  made  in  such   registration
statement,  prospectus or amendment or supplement thereto in reliance upon and
in conformity with written  information  furnished by such holder specifically
for use in the preparation thereof.

          (iii) Promptly after receipt by any  indemnified  party of notice of
the commencement of any action,  such  indemnified  party shall, if a claim in
respect  thereof  is to be  made  against  another  party  (the  "indemnifying
party") hereunder,  notify such party in writing thereof,  but the omission so
to notify such party shall not relieve such party from any Liability  which it
may have to the  indemnified  party  other than under this  Section  and shall
only relieve it from any Liability which it may have to the indemnified  party
under this section if and to the extent an  indemnifying  party is  materially
prejudiced  by such  omission.  In case  any  such  action  shall  be  brought
against any  indemnified  party and such  indemnified  party  shall  notify an
indemnifying party of the commencement  thereof,  the indemnifying party shall
be entitled to  participate in and, to the extent it shall wish, to assume and
undertake the defense  thereof with counsel  reasonably  satisfactory  to such
indemnified  party,  and,  after  notice  from the  indemnifying  party to the
indemnified  party of its  election  so to assume and  undertake  the  defense
thereof,  the indemnifying  party shall not be liable to the indemnified party
under  this  section  for any  legal  expenses  subsequently  incurred  by the
indemnified   party  in  connection   with  the  defense  thereof  other  than
reasonable  costs of  investigation  and of liaison  with counsel so selected;
provided,  however,  that if the  defendants  in any such action  include both
parties and the indemnified  party shall have reasonably  concluded that there
may be  reasonable  defenses  available  to them which are  different  from or
additional to those  available to the  indemnifying  party or if the interests
of the  indemnified  party  reasonably  may be  deemed  to  conflict  with the
interests of the  indemnifying  party,  the  indemnified  party shall have the
right to select a  separate  counsel  and to assume  such legal  defenses  and
otherwise to  participate  in the defense of such action,  with the reasonable
expenses and fees of one such separate counsel and other  reasonable  expenses
related to such  participation to be reimbursed by the  indemnifying  party as
incurred.




                                      5


<PAGE>

      (g) (i) With  respect to the  inclusion  of  Registrable  Securities  in
a registration  statement  pursuant to Subsections (b) or (c), all fees, costs
and expenses of and  incidental  to such  registration,  inclusion  and public
offering  shall  be  borne  by  the  Company;  provided,   however,  that  any
securityholders  participating in such registration  shall bear their pro-rata
share of the underwriting discounts and commissions,  if any, incurred by them
in connection with such registration.

         (ii) The fees,  costs and  expenses  of  registration  to be borne by
the  Company  as  provided  in this  Subsection  (g)  shall  include,  without
limitations all registration,  filing and NASD fees,  printing expenses,  fees
and  disbursements  of counsel and accountants for the Company,  and all legal
fees and  disbursements  and other expenses of complying with state securities
or Blue Sky laws of any  jurisdiction or  jurisdictions in which securities to
be  offered  are  to be  registered  and  qualified.  Subject  to  appropriate
agreements  as to  confidentiality,  the Company  shall make  available to the
holders  of  Registrable  Securities  and  their  counsel  its  documents  and
personnel for due diligence  purposes.  Except as otherwise  provided  herein,
fees and  disbursements  of counsel and accountants  for the selling  security
holders shall be borne by the respective selling security holders.

      (h) The rights to cause the  Company to  register  all or any portion of
Registrable  Securities  pursuant  to  this  Section  1.4 may be  assigned  by
Purchaser to a transferee  or  assignee.  Within a reasonable  time after such
transfer,  the  Purchaser  shall notify the Company of the name and address of
such  transferee or assignee,  and the  securities  with respect to which such
registration  rights are being assigned.  Such  assignment  shall be effective
only if, immediately following such transfer,  the further disposition of such
securities  by the  transferee  or assignee is  restricted  under the Act. Any
transferee  asserting  registration  rights  hereunder  shall  be bound by the
applicable provisions of this Agreement.

      (i) The Company  shall not agree to allow the holders of any  securities
of  the  Company  to  include  any of  their  securities  in any  registration
statement  filed  by the  Company  pursuant  to  Subsection  (b)  unless  such
inclusion will not reduce the amount of the  Registrable  Securities  included
therein.

      Section  1.5  Company  Standoff.  Except in a business  combination,  or
under existing  employee stock incentive or purchase plans,  the Company shall
not for  its own  account  effect  any  public  sale  or  distribution  of any
securities   similar  to  the   Registrable   Securities  or  any   securities
exercisable for or convertible or changeable  into the Registrable  Securities
during  the  thirty  (30) days  prior to,  and  during  the  thirty  (30) days
immediately following,  the effective date of any registration statement filed
or amended  pursuant to Section 1.4(b);  provided,  however,  that the Company
may effect  such  public  sale or  distribution  during  the thirty  (30) days
immediately  following the effective  date of such  registration  statement if
such sale or  distribution  of  securities  is at a price  equal to or greater
than 125% of the last trade price of the Company's  Common Stock on the day of
Closing.

      Section  2.1  Representations  and  Warranties  of  the  Purchaser.  The
Purchaser makes the following representations and warranties to the Company.

      (a)  Accredited  Investor.  The Purchaser is an  "accredited  investor",
as such term is defined in Rule 501(a) of Regulation D, promulgated  under the
Act.




                                      6



<PAGE>

      (b)  Speculative  Investment.  The Purchaser is aware that an investment
in  the  Units  is @y  speculative  and  subject  to  substantial  risks.  The
Purchaser  is capable  of bearing  the high  degree of  economic  risk and the
burden of this  venture,  including,  but not limited to, the  possibility  of
complete  loss of the  Purchaser's  investment  in the  Units  and  underlying
Common Stock which make  liquidation  of this  investment  impossible  for the
indefinite future.

      (c)  Disposition.  The Purchaser  understands that neither the Units nor
the  underlying  Common  Stock have been  registered  under the Act. The Units
are being acquired by reason of a specific  exemption under the Act as well as
under certain state statutes for  transactions  by an issuer not involving any
public  offering  and that any  disposition  of the Units may,  under  certain
circumstances,  be inconsistent with this exemption and may make the Purchaser
an  "underwriter"  within the meaning of the Act. The  Purchaser  acknowledges
that the Units  purchased  must be held and may not be sold,  transferred,  or
otherwise disposed of for value unless they are subsequently  registered under
the  Act ,  sold  pursuant  to  Rule  144 of the  Act,  or an  exemption  from
registration under the Act is available.

      (d)  Privately  Offered.  The offer to  acquire  the Units was  directly
communicated  to the  Purchaser in such manner that the  Purchaser was able to
ask questions of and receive  answers  concerning  the terms and conditions of
this  transaction.  At no time was the Purchaser  presented  with or solicited
by  or  through  any   leaflet,   public   promotional   meeting,   television
advertisement, or any other form of general advertising.

      (e) Purchase for  Investment.  The Units are being  acquired  solely for
the Purchaser's own account, for investment,  and are not being purchased with
view to the resale,  distribution,  subdivision or  fractionalization  thereof
without a valid registration with applicable Governmental authorities.

      Section 2.2 Representations  and Warranties of the Company.  The Company
hereby makes the following representations and warranties to the Purchaser:

      (a)  Organization  and  Qualifications.  The  Company  is a  corporation
duly  incorporated  and  existing  in  good  standing  under  the  laws of the
Commonwealth  of  Massachusetts  and has the requisite  corporate power to own
its  properties  and to carry on its  business  as now  being  conducted.  The
Company does not have any  subsidiaries  except as listed in Exhibit A hereto.
The Company and each such  subsidiary,  if any, is duly qualified as a foreign
corporation  to do business and is in good standing in every  jurisdiction  in
which the nature of the business  conducted or property owned by it makes such
qualifications  necessary  other than those in which the failure so to qualify
would not have a Material  Adverse  Effect.  "Material  Adverse  Effect",  for
purposes of this  Subscription  Agreement  (as it may be amended  from time to
time, the "Agreement"),  means any adverse effect on the business, operations,
properties,  prospects  or  financial  condition of the entity with respect to
which term is used and which is  material  to such  entity and other  entities
controlled by such entity taken as a whole.

      (b)  Authorization  Enforcement.  (i)  The  Company  has  the  requisite
corporate  power and authority to enter into and perform this Agreement and to
issue  the Units  and  Registrable  Securities  in  accordance  with the terms
hereof,  (ii) the execution and delivery of this  Agreement by the Company and
the consummation by it of the transactions  contemplated hereby have been duly
authorized  by all  necessary  corporate  action,  and no  further  consent or
authorization  of the Company or its Board of  Directors  or  stockholders  is
required,  (iii) this  Agreement  has been duly  executed and delivered by the
Company,  (iv) this  Agreement  constitutes a valid and binding  obligation of
the  Company  enforceable  against the  Company in  accordance  with its terms
(except  as such  enforceability  may be  limited  by  applicable  bankruptcy,
insolvency,  reorganization,  moratorium, liquidation or similar laws relating
to, or affecting  generally the enforcement of creditor's  rights and remedies
or by other equitable  principles of general application) and (v) prior to the
Closing Date, any necessary  Certificate of Amendment to the Company's Charter
authorizing Company to issue all of the Units and Registrable  Securities will
have been filed with the Massachusetts  Secretary of State and will be in full
force and  effect,  enforceable  against the  Company in  accordance  with the
terms of such amended Charter.

                                      7

      (c)  Authorized   Capital:   Rights  or   Commitments   to  Stock:   The
authorized  capital  stock of the  Company  consists of  20,000,000  shares of
Class A Common  Stock,  2,000,000  shares  of Class B  Common  Stock,  200,000
shares of Class C Common  Stock  and  1,000,000  shares of Series A  Preferred
Stock;  there  are  4,470,866  shares  of  Class A  Common  Stock  issued  and
4,462,210  shares  of such  Class A Common  Stock  outstanding;  there  are no
shares of such Preferred Stock issued and  outstanding;  and, upon issuance of
the Units in  accordance  with the terms hereof,  there will be  approximately
4,643,282  shares of such Common Stock and no shares of such  Preferred  Stock
issued.

     All of the  outstanding  shares of the  Company's  Common Stock have been
validly issued and are fully paid and  non-assessable.  Except as set forth in
Exhibit A hereto or as  described  in the SEC  Documents,  no shares of Common
Stock are entitled to preemptive  rights or registration  rights and there are
no  outstanding  options,  warrants,  scrip,  rights to subscribe to, calls or
commitments of any character  whatsoever  relating to, or securities or rights
convertible  into,  any shares of capital stock of the Company,  or contracts,
commitments,  understandings,  or  arrangements by which the Company is or may
become  bound to issue  additional  shares of capital  stock of the Company or
options,  warrants,  scrip, rights to subscribe to, or commitments to purchase
or acquire,  any shares,  or securities or rights  convertible into shares, of
capital stock of the Company.  The Company has furnished or made  available to
the  Purchaser  true  and  correct   copies  of  the  Company's   Articles  of
Organization  as in  effect  on the  date  hereof  (the  "Charter"),  and  the
Company's By-Laws, as in effect on the date hereof (the "By-Laws").

     (d)  Issuance  of  Units.  The  issuance  of  the  Units  has  been  duly
authorized  and, when paid for and issued in accordance with the terms hereof,
the Units shall be validly issued,  fully paid and non-assessable.  The Common
Stock  issuable upon  conversion of the Warrants will be duly  authorized  and
reserved for issuance  and, upon  conversion,  will be validly  issued,  fully
paid and  non-assessable  and the holders  shall be entitled to all rights and
preferences accorded to a holder of Common Stock.

      (e) No  Conflicts.  The  execution,  delivery  and  performance  of this
Agreement  by  the  Company  and  the  consummation  by  the  Company  of  the
transactions  contemplated  hereby  do  not  and  will  not  (i)  result  in a
violation  of the  Company's  Charter  or By-Laws or (ii)  conflict  with,  or
constitute  a default  (or an event which with notice or lapse of time or both
would become a default)  under,  or give to others any rights of  termination,
amendment,  acceleration  or  cancellation  of, any  agreement,  indenture  or
instrument  to which the  Company or any of its  subsidiaries  is a party,  or
result in a violation  of any  federal,  state,  local or foreign  law,  rule,
regulation,  order, judgment or decree (including Federal and state securities
laws and regulations)  applicable to the Company or any of its subsidiaries or
by which any property or assets of the Company or any of its  subsidiaries  is
bound  or  affected  (except  for  such  conflicts,  defaults,   terminations,
amendments,   accelerations,   cancellations  and  violations  as  would  not,
individually or in the aggregate,  have a Material Adverse  Effect);  provided
that,  for  purposes of such  representation  as to Federal,  state,  local or
foreign  law,  rule or  regulation,  no  representation  is made  herein  with
respect to any of the same  applicable  solely to the Purchaser and not to the
Company.  The  business of the Company is not being  conducted in violation of
any law,  ordinance or  regulations  of any  governmental  entity,  except for
violations  which either singly or in the aggregate do not and will not have a
Material Adverse Effect.  The Company is not required under Federal,  state or
local law,  rule or  regulation  in the United  States to obtain any  consent,
authorization  or order of, or make any  filing  (other  than any  filing of a
vote establishing a class or series of stock with the Massachusetts  Secretary
of State) or registration with, any court or governmental  agency in order for
it to execute,  deliver or perform any of its obligations under this Agreement
or issue and sell the Units in  accordance  with the terms hereof  (other than
any SEC, NASD or state securities  filings which may be required to be made by
the Company  subsequent to the Closing,  and any registration  statement which
may  be  filed   pursuant   hereto);   provided  that,  for  purposes  of  the
representation  made in this  sentence,  the Company is  assuming  and relying
upon the  accuracy  of the  relevant  representations  and  agreements  of the
Purchaser herein.





                                      8


<PAGE>

     (f)  SEC  Documents,  Financial  Statements.  The  Common  Stock  of  the
Company is  registered  pursuant to Section 12(g) of the  Securities  Exchange
Act of 1934,  as amended  (the  "Exchange  Act")  and,  except as set forth in
Exhibit A, the Company  has filed on a timely  basis all  reports,  schedules,
forms,  statements and other documents required to be filed by it with the SEC
pursuant  to  the  reporting  requirements  of  the  Exchange  Act,  including
material filed pursuant to Section 13(a) or 15(d),  in addition to one or more
registration  statements  and  amendments  thereto  heretofore  filed  by  the
Company  with the SEC under the Act (all of the  foregoing  including  filings
incorporated  by  reference  therein  being  referred  to  herein  as the "SEC
Documents").  The Company  directly or through its agent has  delivered to the
Purchaser true and complete  copies of the SEC Documents.  The Company has not
provided to the Purchaser any information which,  according to applicable law,
rule or  regulation,  should have been  disclosed  publicly by the Company but
which has not been so disclosed,  other than with respect to the  transactions
contemplated by this Agreement.

     Except as set forth in  Exhibit A, as of their  respective  dates the SEC
Documents  complied in all material  respects with the requirements of the Act
or the  Exchange Act as the case may be and the rules and  regulations  of the
SEC promulgated  thereunder and other federal, state and local laws, rules and
regulations  applicable to such SEC  Documents,  and none of the SEC Documents
contained  any  untrue  statement  of a  material  fact or  omitted to state a
material fact required to be stated  therein or necessary in order to make the
statements  therein, in light of the circumstances under which they were made,
not  misleading.  Except as set forth in Exhibit A, the  financial  statements
of the  Company  included  in the  SEC  Documents  comply  as to  form  in all
material  respects with applicable  accounting  requirements and the published
rules and  regulations of the SEC or other  applicable  rules and  regulations
with  respect  thereto.  Such  financial  statements  have  been  prepared  in
accordance  with  generally  accepted  accounting   principles  applied  on  a
consistent  basis during the periods  involved (except (i) as may be otherwise
indicated in such  financial  statements  or the notes  thereto or (ii) in the
case of  unaudited  interim  statements,  to the extent  they may not  include
footnotes  or may be condensed or summary  statements)  and fairly  present in
all material  respects the  financial  position of the Company as of the dates
thereof and the  results of  operations  and cash flows for the  periods  then
ended (subject, in the case of unaudited statements,  to normal year-end audit
adjustments).

     (g) No Material  Adverse  Change.  Since the date through  which the most
recent  quarterly  report of the  Company on Form 10-Q has been  prepared  and
filed  with the SEC,  a copy of which is  included  in the SEC  Documents,  no
Material  Adverse Effect has occurred or exists with respect to the Company or
any of its subsidiaries.

     (h) No Undisclosed  Liabilities.  The Company and its  subsidiaries  have
no material  liabilities  or  obligations  not disclosed in the SEC Documents,
other than those  incurred in the ordinary  course of the  Company's or any of
its  subsidiaries'  respective  businesses since the date of the most recently
filed SEC Documents which,  individually or in the aggregate,  do not or would
not have a Material Adverse Effect on the Company or any of its subsidiaries.

     (i) No  Undisclosed  Events or  Circumstances.  No event or  circumstance
has occurred or exists with respect to the Company or any of its  subsidiaries
or  their  respective  businesses,   properties,   prospects,   operations  or
financial condition which, under applicable law, rule or regulation,  requires
public  disclosure  or  announcement  by the Company but which has not been so
publicly announced or disclosed.

     0)  No  General  Solicitation.  Neither  the  Company,  nor  any  of  its
affiliates,  or, to the best of its  knowledge,  any  person  acting on its or
their  behalf,  has  engaged  in any form of general  solicitation  or general
advertising  (within the meaning of  Regulation D under the Act) in connection
with the offer or sale of the Units.




                                      9


<PAGE>

      (k)  No  Integrated  Offering.  Neither  the  Company,  nor  any  of its
affiliates,  nor any person  acting on its or their  behalf  has,  directly or
indirectly,  made any offers or sales of any security or solicited  any offers
to buy any security,  under  circumstances that would require  registration of
the Units under the Act.

      Section 3.1 Securities Compliance.  The Company shall notify the SEC and
NASD, in accordance with their requirements,  of the transactions contemplated
by this Agreement,  and shall take all other necessary  action and proceedings
as may be required and permitted by applicable law, rule and  regulation,  for
the legal and valid issuance of the Units,  and the Common Stock issuable upon
conversion thereof, to the Purchaser.

      Section  3.2  Registration  and  Listing.  Until at least  two (2) years
after all Registrable Securities have been registered,  the Company will cause
its Common Stock to continue to be registered  under  Sections  12(b) or 12(g)
of the  Exchange  Act,  will comply in all  respects  with its  reporting  and
filing  obligations under such Exchange Act, will comply with all requirements
related to any  registration  statement  filed  pursuant to this Agreement and
will not take any action or file any  document  (whether or not  permitted  by
the Act or the Exchange Act or the rules  theretunder) to terminate or suspend
such  registration  or to  terminate  or  suspend  its  reporting  and  filing
obligations under said Acts,  except as permitted  herein.  Until at least two
(2) years after all Registrable  Securities have been registered,  the Company
will take all action  within its power to  continue  the listing or trading of
its  Common  Stock on the  NASDAQ  Small  Cap  Market  and will  comply in all
respects with the Company's reporting,  filing and other obligations under the
bylaws  or rules  of the NASD and  NASDAQ.  The  covenants  set  forth in this
Section  3.2 shall not be deemed to  prohibit a merger,  sale of all assets or
other corporate  reorganization  if the entity  surviving or succeeding to the
Company is bound by this Agreement  with respect to its  securities  issued in
exchange  for  or  in  replacement  of  the  Units  or  Common  Stock  or  the
consideration  received for or in  replacement of the Units or Common Stock is
cash.

      Section 3.3 Right of First Refusal and  Most-Favored-Nation  Clause.  If
at any time  before  the end of the  thirty  (30)  day  period  following  the
effective  date of a  registration  statement  filed  pursuant  to Section 1.4
hereof the Company  proposes to issue Common Stock or  securities  convertible
into  or  exercisable  for  Common  Stock  or  other  convertible  securities,
pursuant to an offering  exempt from  registration  under the Act, the Company
shall provide to Purchaser  reasonable advance notice of all the terms of such
proposed  issuance.  The Purchaser  shall have the right to purchase or refuse
to purchase all or any part of such  securities  proposed to be issued in such
offering,  and shall have at least  seventy  two (72) hours  after  receipt of
such notice to review the terms of the proposed issuance.

      If the Company  issues  Common Stock or securities  convertible  into or
exercisable  for  Common  Stock or other  convertible  securities  at any time
during the one hundred  eighty day  following the Closing Date at an effective
price per share of Common  Stock which is lower than the  conversion  price of
the  Units at that  time,  then the  Company  shall  issue to each  holder  an
additional  number  of shares of  Common  Stock  necessary  to match the lower
issue  price.  This  Section  shall not be  applicable  to issuances of Common
Stock,   or   options    granted   at   market   price,    pursuant   to   any
shareholder-approved  option plan  covering not more than 10% of the Company's
outstanding stock.

      Section 3.4 Sale  Restrictions.  Purchaser  agrees not to sell more than
ten  thousand  (10,000)  Shares of Common  Stock of the Company on any trading
day without the prior written consent of the Company.

      Section 4.1  Conditions  Precedent to the  Obligation of the Company to 
Sell the Units.  The obligation  hereunder of the Company to issue and/or sell
the Units to the  Purchaser is subject to the  satisfaction,  at or before the
Closing,  of each of the conditions set forth below.  These  conditions may be
waived by the Company at any time in its sole discretion.




                                    10

<PAGE>

            (a) Accuracy of the  Purchaser's  Representations  and Warranties.
The  representations and warranties of the Purchaser shall be true and correct
in all  material  respects as of the date when made and as of the Closing Date
as though made at that time (except for  representations  and warranties  that
speak as of a particular date).

      (b)  Performance  by the Purchaser.  The Purchaser  shall have performed
all  agreements  and  satisfied  all  conditions  required to be  performed or
satisfied by the Purchaser at or prior to the Closing.

      (c) No  Injunction.  No  statute,  rule,  regulation,  executive  order,
decree, ruling or injunction shall have been enacted, entered,  promulgated or
endorsed by any court or  governmental  authority  of  competent  jurisdiction
which prohibits the  consummation  of any of the actions  contemplated by this
Agreement.

      (d)   Legal  action.  No  legal  action,  suit or  proceeding  shall  be
pending or  threatened  which seeks to restrain or prohibit  the  transactions
contemplated by this Agreement.

      Section 4.2 Conditions  Precedent to the Obligation of the Purchaser to 
Purchase the Units.  The obligation  hereunder of the Purchaser to acquire and
pay for the Units is subject to the  satisfaction,  at or before the  Closing,
of each of the conditions set forth below.  These  conditions may be waived by
the Purchaser at any time in its sole discretion.

      (a)  Accuracy  of  the  Company's  Presentations  and  Warranties.   The
representations  and  warranties  of the Company  shall be true and correct in
all  material  respects as of the date when made and as of the Closing Date as
though  made at that time  (except for  representations  and  warranties  that
speak as of a particular date).

       (b)  Performance  by the Company.  The Company shall have performed all
agreements and satisfied all conditions  required to be performed or satisfied
by the Company at or prior to the Closing.

      (c) NASDAQ.  From the date hereof to the  Closing  Date,  trading in the
Company's  Common Stock shall not have been suspended by the SEC or the NASDAQ
Small Cap Market  (except for any  suspension  of trading of limited  duration
agreed to  between  the  Company  and the NASDAQ  Small Cap  Market  solely to
permit  dissemination  of material  information  regarding the  Company),  and
trading in  securities  generally  as reported  by NASDAQ  shall not have been
suspended  or limited or minimum  prices  shall not have been  established  on
securities whose trades are reported by NASDAQ.

      (d) No  Injunction.  No  statute,  rule,  regulation,  executive  order,
decree, ruling or injunction shall have been enacted, entered,  promulgated or
endorsed by any court or  governmental  authority  of  competent  jurisdiction
which prohibits the  consummation of any of the  transactions  contemplated by
this Agreement.

      (e) Opinion of Counsel,  Etc. The Purchaser  shall have received  before
or at the  Closing an opinion of  counsel to the  Company  (covering,  without
limitation,  such of the matters set forth in Section  2.2(a) through (e)), as
are in form and  substance  reasonably  satisfactory  to the Purchaser and its
counsel,  and such other  certificates  and  documents as the Purchaser or its
counsel shall reasonably require incident to the Closing.

      Section 5.1 Legend on Stock.  Each  certificate  representing the Shares
of Common shall be stamped or otherwise imprinted with a legend  substantially
in the following form:

      THESE  SECURITIES HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF
      1933 OR ANY STATE  SECURITIES  LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
      SALE EXCEPT PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT UNDER SUCH
      ACT AND ANY APPLICABLE STATE  SECURITIES LAW OR AN APPLICABLE  EXEMPTION
      FROM SUCH REGISTRATION REQUIREMENTS.

                                         11


<PAGE>

      The Company agrees to  immediately  (within five (5) business days after
receipt  of  certificates)  reissue  certificates  representing  the Shares of
Common  Stock  without  the  legend  set  forth  above at such time as (a) the
holder thereof is permitted to dispose of such Shares  pursuant to Rule 144(k)
under the Act, (b) the  securities  are sold to a purchaser or purchasers  who
(in the opinion of counsel to such holders,  in form and substance  reasonably
satisfactory  to the  Company  and its  counsel)  are able to  dispose of such
securities  publicly  without  registration  under  the  Act,  or  (iii)  such
securities are registered under the Act.

      Section  6.1  Termination  bv  Mutual  Consent.  This  Agreement  may be
terminated at any time prior to the Closing by the mutual  written  consent of
the Company and the Purchaser.

      Section  6.2 Other  Termination  This  Agreement  may be  terminated  by
action of the Board of Directors or other  governing  body of the Purchaser or
the Company at any time if the Closing shall not have been  consummated by the
fifth (5th) business day following the date of this  Agreement,  provided that
the party seeking to terminate the Agreement is not in breach of the AgreemenL

      Section 6.3 Automatic  Termination.  This Agreement shall  automatically
terminate  without any further  action of either  party  hereto if the Closing
shall not have occurred by the seventh  (7th)  business day following the date
of this Agreement,  provided,  however,  that any such  termination  shall not
terminate the liability of any party which is then in breach of the Agreement.

      Section  7.1  Fees  and  Expenses.  Except  as  otherwise  set  forth in
Section  1.4  hereof  each  party  shall  pay the  fees  and  expenses  of its
advisers,  counsel,  accountants  and  other  experts,  if any,  and all other
expenses  incurred  by such party  incident to the  negotiation,  preparation,
execution,  delivery and performance of this Agreement.  The Company shall pay
all stamp and other taxes and duties  levied in  connection  with the issuance
of the Units and Common Stock pursuant hereto.

      Section 7.2 Specific Enforcement, Consent to Jurisdiction.

      (a)  The  Company  and  the   Purchaser   acknowledge   and  agree  that
irreparable  damage  would  occur in the event that any of the  provisions  of
this Agreement  were not performed in accordance  with their specific terms or
were otherwise  breached.  It is accordingly  agreed that the parties shall be
entitled to an  injunction or  injunctions  to prevent or cure breaches of the
provisions  of this  Agreement  and to  enforce  specifically  the  terms  and
provisions hereof,  this being in addition to any other remedy to which either
of them may be entitled by law or equity.

      (b) The Company and the Purchaser  each (i) hereby  irrevocably  submits
to the  jurisdiction  of the United States  District Court and other courts of
the United  States  sitting in Texas for the  purposes of any suit,  action or
proceeding  arising  out of or  relating  to this  Agreement  and (ii)  hereby
waives,  and agrees not to assert in any such suit action or  proceeding,  any
claim that it is not  personally  subject to the  jurisdiction  of such court,
that the suit,  action or  proceeding is brought in an  inconvenient  forum or
that the venue of the suit,  action or  proceeding  is  improper.  The Company
and the  Purchaser  each  consents to process  being  served in any such suit,
action or  proceeding  by mailing a copy  thereof to such party at the address
in effect for notices to it under this  Agreement and agrees that such service
shall  constitute  good and sufficient  service of process and notice thereof.
Nothing in this paragraph  shall affect or limit any right to serve process in
any other manner permitted by law.

      Section 7.3 Entire  Agreement:  Amendment.  This Agreement  contains the
entire  understanding  of the  parties  with  respect to the  matters  covered
hereby and, except as specifically  set forth herein,  neither the Company nor
the Purchaser  makes any  representation,  warranty,  covenant or  undertaking
with respect to such  matters.  No provision of this  Agreement  may be waived
or amended  other  than by a written  instrument  signed by the party  against
whom enforcement of any such amendment or waiver is sought.



                                       12

<PAGE>

      Section  7.4  Notices  Any  notice or other  communication  required  or
permitted  to be given  hereunder  shall be in writing and shall be  effective
(a) upon  hand  delivery  or  delivery  by telex  (with  correct  answer  back
received),  telecopy or  facsimile at the address or number  designated  below
(if  delivered  on a business  day during  normal  business  hours  where such
notice is to be received),  or the first  business day following such delivery
(if delivered  other than on a business day during normal business hours where
such  notice  is to be  received)  or (b) on the  second  (2nd)  business  day
following  the date of mailing  by express  courier  service,  fully  prepaid,
addressed to such address,  or upon actual receipt of such mailing,  whichever
shall first occur.  The addresses for such communications shall be:

to the Company:   Bruce A. Shear, President and Chief Executive Officer
                  PHC, Inc.
                  200 Lake Street -- Suite 102
                  Peabody, Massachusetts 01960

to the Purchaser: At the  address set forth at the foot of this  Agreement  or
                  as specified in writing by Purchaser.

Any party  hereto may from time to time  change  its  address  for  notices by
giving at least ten (10) days' written  notice of such changed  address to the
other party hereto.

      Section  7.5  Waivers.  No waiver by either  party of any  default  with
respect to any provision,  condition or requirement of this Agreement shall be
deemed  to be a  continuing  waiver  in the  future  or a waiver  of any other
provision,  condition or requirement  hereof,  nor shall any delay or omission
of either  party to  exercise  any right  hereunder  in any manner  impair the
exercise of any such right accruing to it thereafter.

      Section 7.6 Headings.  The headings herein are for convenience  only, do
not  constitute a part of this  Agreement  and shall not be deemed to limit or
affect any of the provisions hereof.

      Section  7.7  Governing  Law.  This  Agreement  shall be governed by and
construed  and enforced in  accordance  with the internal  laws of the present
state  of  incorporation  of  the  Company  without  regard  to  such  state's
principles of conflict of laws.

      Section  7.8  Survival.   The  representations  and  warranties  of  the
Company  and  the  Purchaser  contained  in  herein  and  the  agreements  and
covenants  set forth in  Sections  1.1  through  1.5,  3.1 through 3.4 and 7.1
through 7.16 shall survive the Closing for a period of one year.

      Section 7.9  Publicity.  The Company  agrees that it will not  disclose,
and will not  include in any public  announcement,  the name of the  Purchaser
without its consent,  unless and until such  disclosure  is required by law or
applicable regulation, and then only to the extent of such requirement.

      Section  7.10  NASDAQ.  The term  "NASDAQ" or "NASDAQ  Small Cap Market"
herein  refers  to the  principal  market  on which  the  Common  Stock of the
Company is traded.  If the Common  Stock is listed on a  securities  exchange,
or if another  market  becomes the principal  market on which the Common Stock
is  traded  or  through  which  price  quotations  for the  Common  Stock  are
reported,  the term  "NASDAQ" or "NASDAQ  Small Cap Market" shall be deemed to
refer to such exchange or other principal market.

      Section  7.11  Acceptance.  Execution  and  delivery  of this  Agreement
shall  constitute  an  offer  to  purchase  the  Units,  which  offer,  unless
previously  revoked by the  Purchaser,  may be  accepted  or  rejected  by the
Company,  in its sole  discretion  for any cause or for no cause  and  without
liability to the  Purchaser.  The Company  shall  indicate  acceptance of this
Agreement by signing as indicated on the signature page hereof.
                                      13




<PAGE>

      Section 7.12 Binding  Agreement.  Upon  acceptance of this  Agreement by
the Company, the Purchaser agrees that he may not cancel,  terminate or revoke
any agreement of the Purchaser made  hereunder,  and that this Agreement shall
survive the death or  disability  of the  Purchaser  and shall be binding upon
heirs,   successors,    assigns,   executors,    administrators,    guardians,
conservators or personal representatives of the Purchaser.

      Section 7.13  Incorporation  by Reference.  All Information set forth on
the signature page is incorporated as integral terms of this Agreement.

      Section  7.14  Counterparts.  This  Agreement  may be signed in multiple
counterparts,  which  counterparts  shall constitute one and the same original
signature.

      Section  7.15  Severability.  If any  portion  of this  Agreement  shall
be held  illegal,  unenforceable,  void or voidable by any court,  each of the
remaining terms hereof shall  nevertheless  remain in full force and effect as
a separate contract.

      Section  7.16  Successors  and Assigns This  Agreement  shall be binding
upon and inure to the  benefit  of the  parties  hereto  and their  respective
successors and permitted assigns.



                THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY.
                         THE SIGNATURE PAGE FOLLOWS.




















                                      14

<PAGE>


     IN WITNESS  WHEREOF,  the Purchaser has executed this Agreement on the date
set forth below.

For the purchase price per Unit of $11.60, the Purchaser tenders herewith the
      full purchase price of:
      Five Hundred Dollars ($500,000)

The exact name(s) (Including correct, legible spelling) and the information
under which title will be taken is as follows:    (Please print or type):

      ProFutures Special Equities, Fund, L.P.
      1310 Highway 620 South - Suite 200, Austin, Texas  78734

  Social Security or IRS Employer Identification Number(s): 74-2786952

Signature of Purchaser:

Name of Purchaser:
      ProFutures Special Equities, Fund, L.P.
      By:  ProFutures Fund Management, Inc., a General Partner

By:  ________________________________ Dated:  September 19, 1997

Name:    Gary D. Halbert
Title:   President

Accepted By:

PHC, Inc., a Massachusetts corporation

By:  __________________________________________

Name:     Bruce A. Shear
Title:    President
                                      15



<PAGE>


                                  EXHIBIT A
                     to PHC, Inc. Subscription Agreement

Section 2.2(a): PHC, Inc.  Subsidiaries:

PHC of Utah, Inc.                       New Baltimore, MI 48047
D/B/A Highland Ridge Hospital
4578 Highland Drive
Salt Lake City, UT 84117

PHC of Virginia, Inc.                   PHC of Rhode Island, Inc.
D/B/A Mount Regis Center                D/B/A Good Hope Center
D/B/A Changes                           P.O. Box 1491
405 Kimball Avenue                      Coventry, RI 02816-0029
Salem, VA 24153

Quality Care Centers of Mass, Inc.      Pioneer Counseling of Virginia, Inc.
D/B/A Franvale Nursing & Rehab Center   (80% Owned)
20 Pond Street                          D/B/A Pioneer Counseling of Virginia
Braintree, MA 02184                     D/B/A Counseling Associates of Virginia
                                        400 East Burwell street
                                        Salem, VA 24153

PHC of Nevada, Inc.                     PHC of Kansas, Inc.
D/B/A Harmony Healthcare                D/B/A Total Concept EAP
2340 Paseo del Prado, Bldg.  D          7451 Szwitzer, Suite 101
Las Vegas, NV 89102                     Shawnee Mission, KS 66203

Northpoint - Pioneer, Inc.              Professional Health Associates
D/B/A Pioneer Counseling Center         94-19 59 Avenue
31700 W. 13 Mile; Suite 201             Elmhurst, NY 11373
Farmington hills, MI 48334

BSC-NY, Inc.
D/B/A Behavioral Stress Center
94-19 59 Avenue
Elmhurst, NY 11373

Harmony Behavioral Health
2340 Paseo del Prado, Bldg.  D
Las Vegas, NV 89102

PHC of Michigan, Inc.
D/B/A Harbor Oaks Hospital
35031 23 Mile Road


<PAGE>

                             EXHIBIT A (cont'd.)

Section 2.2(f):

The  Company  failed to file two years' of audited  financial  statements  for
Behavioral  Stress  Centers,   Inc.  and  Clinical  Diagnostics  and  Clinical
Associates,  as described in the December 18, 1996 letter from Choate,  Hall &
Stewart to Mr.  Robert  Bayless of the  Securities  and  Exchange  Commission,
attached hereto as Exhibit 1.



<PAGE>

                                  EXHIBIT 1

 
                              CHOATE, HALL &- STEWART
                        A PARTNERSHIP INCLUDING PROFESSIONAL    1934 Act
                                    CORPORATIONS
                                   EXCHANGE PLACE               Form 8-K
                                  53 STATE STREET                Item 7
Roslyn G. Daum            BOSTON, MASSACHUSETTS 02109-2891
(617) 248-5069                TELEPHONE (617) 248-5000
                              FACSIMILE (617) 248-4000
                                   TELEX 49615800

                                         December 18, 1996


Securities and Exchange Commission
450 Fifth Street
Judiciary Plaza
Washington, D.C. 20549

Attention:  Mr. Robert Bayless
                   Associate Director
                   (Chief Accountant)
                   Division of Corporation Finance
                   Mail Stop 3-10

RE:  PHC, Inc.
       Commission File No. 0-23524

Dear Mr. Bayless:

      I am writing on behalf of our client,  PHC, Inc. (the  "Company") and at
the  suggestion  of Mr. Wayne Carnall and Mr.  William  Carter of the staff of
the  Securities and Exchange  Commission  (the  "Commission").  The subject of
this letter was discussed  between Mr. Carnall and Grant F. Waite, a member of
the firm of  Richard A.  Eisner &  Company,  LLC,  the  Company's  independent
certified  public  accountants  on December 3, 1996.  I spoke with Mr.  Carter
today.

      I am writing to request that the Division of  Corporation  Finance agree
that it will not recommend any  enforcement  action  against the Company based
solely on its failure to file  certain  audited  financial  information  of an
acquired  business  as  required  by  Item 7 of  Form  8-K  in  the  following
circumstances:

      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  and long-term  care.
Effective  October 31,  1996,  the  Company  acquired  through a  wholly-owned
subsidiary (the  "Subsidiary"),  Behavioral  Stress centers,  Inc., a New York
corporation  which  provided   management  and   administrative   services  to
psychotherapy  and  psychological  practices in the New York City metropolitan
area. The Subsidiary  concurrently  entered into a Management Agreement with a
newly formed professional  corporation (the "Professional  Corporation") which
acquired certain assets,  including service contracts with 35 nursing homes in
the  New  York  Metropolitan   area,  of  Clinical   Associates  and  Clinical
Diagnostics,  entities owned by the owners of Behavior  Stress  Centers,  Inc.
Behavioral Stress Centers,  Inc., Clinical Diagnostics and Clinical Associates
are hereinafter referred to as the "Acquired Companies".




<PAGE>

Mr. Robert Bayless
December 18, 1996
Page 2

      As  merger  consideration,  the  Company  issued  150,000  shares of its
Class A Common  Stock to the owners of  Behavioral  Stress  Centers,  Inc.  In
addition,  the Company is  obligated  to pay the Sellers 49% of the profits of
the  Subsidiary  over the next three years plus an additional  amount equal to
four times 49% of the profits  during the third year,  payable partly in stock
and partly in cash and notes.  The profits of the  Subsidiary for this purpose
will include the fees from the  Professional  corporation.  The purchase price
for the assets of Clinical  Associates and Clinical  Diagnostics  was $750,000
which was paid by the Company pursuant to a promissory note.

      The Acquired  Companies  utilized  the cash basis method of  accounting.
Their  record  keeping  was  rudimentary  at best.  For  example,  revenue was
recognized   by  the   Acquired   Companies   upon  the  receipt  of  payment,
irrespective  of when  services  were  rendered.  unfortunately,  the Acquired
Companies did not retain, in all circumstances,  the documentation required to
verify the date on which services were rendered,  and some of the records that
were retained were  destroyed in a basement  flood.  Accordingly,  there is no
consistent and accurate  record  available that would allow the  determination
of the  period  in which a  service,  resulting  in a  payment,  was  actually
rendered.

      In addition,  it appears chat the Acquired Companies did not invoice all
services  rendered  and in many  cases  did not  create  invoices  in a timely
manner.  Some of the  records  of  invoices  which  were  retained  were  also
destroyed in the flood  described  above,  and the Acquired  Companies did not
retain  backup  information  in a secure,  off-site  location.  As a result of
the poor record-keeping of the Acquired  Companies,  it is impossible to trace
invoices  to  determine  whether  payment  has been  received  or whether  the
services were billed.

      Prior to the  acquisition of the Acquired  Companies and in light of the
  inability  of the  Company  to  verify  certain  accounting  records  of the
  Acquired  Companies,  the Company spent significant time and effort studying
  the  prudence  of the  acquisition  and  whether  the  transaction  would be
  economically  beneficial to the Company and its shareholders.  Among the due
  diligence  conducted  by the  Company  was an attempt to  substantiate  cash
  basis income by  verifying  actual cash  deposits to various  bank  accounts
  maintained  by the  Acquired  Companies  through  analysis of  corresponding
  deposit  slips  and   photocopies   of  checks   provided  by  the  Acquired
  Companies.  In  its  internal  analysis  of  expected  cash  flow  from  the
  Acquired  Companies,  the  Company  excluded  any  items  that  did not seem
  representative  of  revenue  derived  from the  rendering  of  service.  The
  Company  reviewed  the check  ledgers of the  Acquired  Companies to analyze
  their  expenses,  verifying  that all  checks  were  accounted  for based on
  their  sequential  numbering.  In  analyzing  the  economic  impact  on  the
  Company  of  the  proposed   acquisition,   the  Company  assumed  that  all
  non-payroll  expenses  were to be included in the  expenses of the  Acquired
  Companies and made an independent  estimate of payroll expenses based on the
  Company's personnel costs.

      The  structure of the  transaction  was designed to limit the  potential
exposure  of  the  Company   arising  from  the   transaction.   Much  of  the
consideration  payable to the sellers is in the form of an  earn-out  based on
the  profitability  of the  Subsidiary.  The  Agreement  and  Plan  of  Merger
contains  representations  of the Sellers relating to the average cash flow of
the Acquired Companies;  if these representations prove untrue, in addition to
the Company's normal contractual  indemnities and rights,  there is a right of
set-off  against the  consideration  payable to the  sellers.  The  Management
Agreement  entitles the Company,  for the 90-day period following the Closing,
to set off against its $750,000  note to the sellers a pro raga  reduction for
each  nursing home which may  terminate  its  contract  with the  Professional
Corporation.


<PAGE>
   Mr.  Robert Bayless
   December 18, 1996
   Page 3




            In addition to the financial  testing described above, the Company
conducted  extensive due diligence  which  included  inquiries  concerning the
reputation  of the sellers and the  Acquired  Companies,  a review of all bank
accounts,  a review of all material  contracts,  insurance matters,  copies of
all  licenses  and  registrations  and a  review  of all  tax  returns  of the
Acquired  Companies  for  the  tax  years  from  1992-1995.  Based  on its due
diligence  review,  the Company  believes that the acquisition of the Acquired
Companies will be beneficial to the Company and its shareholders.

      Pursuant  to Item  310(c)  of Form  S-B  (whether  as in  effect  on the
closing of the acquisition or as subsequently  amended) , it is estimated that
the  Acquired  Companies  are  of  maximum  significance  to the  Company.  On
November  14,  1996,  in its Report an Form  10-QSB (as amended by a filing of
Form 10-QSB-A-1 on December 5, 1996),  the Company reported on the acquisition
of the  Acquired  -Companies.  Such  filing  did  not  include  any  financial
information  for the  Acquired  Companies.  Pursuant  to Item 7(a) (4) of Form
8-K.  the  Company  is  obligated  to file two  years'  of  audited  financial
statements for the Acquired  Companies within 60 days after the Report on Form
8-K is filed  (in this  case,  not  later  than  January  13.  1997).  For the
reasons stated above, the Company's  independent public  accountants,  Richard
A. Eisner & Company,  LLP, have indicated to the Company that they will not be
able to  conduct  an  audit  of the  Acquired  Companies  in  accordance  with
generally  accepted  accounting   standards  for  the  periods  required.   In
addition,  the  Company  believes  that  it will be  virtually  impossible  to
produce  unaudited  financial  statements  for the  Acquired  Companies  on an
accrual basis in accordance with generally accepted accounting  principles for
the  period  prior to the  Closing.  The  Company  intends  to file a Form 8-K
shortly  which  will  explain  its  inability  to file  the  required  audited
financial statements for the Acquired Companies.

     We understand  that the staff  generally  will not waive the  requirement
for  audited   financial   statements  set  forth  in  Item  7  of  Form  8-K.
Accordingly,  we are writing to request in the circumstances that the Division
of Corporation  Finance agree not to recommend  enforcement action against the
Company  for its  failure  to file the  audited  financial  statements  of the
Acquired Companies as required by Item 7 of Form 8-K.

     Please call me at the direct dial number set forth above  should you have
any  questions   concerning  this  request.   Thank  you  for  your  time  and
consideration of this matter.

                                                Very truly yours,

                                                  Roslyn G. Daum




William H. Carter, Esq.                         Mr. Wayne E. Carnall
Office of Chief Counsel                               Office of Chief
Accountant
Mail Stop 3-3                                   Mail Stop 3-13









1/312141


<PAGE>

EXHIBIT 10.122                      Contract No:            RFC-97-2002
                                    License No:             CA50149
                                    Index Code:             96000
                                    Prog Cost Acct (PCA):   72213
                                    Agency Object Code:     6325
                                    Commodity Code:         952-41
(Sealed)                            Federal ID#:            04-3232990
                                    Mail Code               001
                                    Method of Payment:      Per Diem

                                    AGREEMENT
                                     between
                           FAMILY INDEPENDENCE AGENCY
                                       and
                              HARBOR OAKS HOSPITAL

I.   INTRODUCTION

This  Agreement,  effective the lst day of January,  1997, and ending the 30th
day of  September,  1998,  is by and  between the Family  Independence  Agency
having a mailing address of 235 S. Grand,  P.O. Box 30037,  Lansing,  Michigan
48909 (hereinafter  referred to as the "Agency"),  and Harbor Oaks Hospital, a
licensed,  child  caring  organization  having a mailing  address  of 200 Lake
Street,  Suite  102,  Peabo dy  MA  01960  (hereinafter  referred  to  as  the
"Contractor").

The parties to this  Agreement  have  entered  into Master  Contract  #FC-127,
previously or concurrently  with the execution of this Service  Contract.  The
terms of the Master Contract  referred to above are incorporated into and made
a part of  this  Service  Contract.  If  termination  of the  Master  Contract
occurs, this Service Contract shall terminate.

This   Agreement   is  for  the   purpose   of   specifying   the  rights  and
responsibilities  of the Agency and the  Contractor in the joint  provision of
foster  care  services  to  children  and to assure  that those  services  are
provided in a manner and to a degree  which will serve the best  interests  of
each of those children.

                                   WITNESSETH:

WHEREAS,  the  Agency  has been  designated  to  cooperate  with  the  Federal
government  and with all other  departments  or  agencies  of the State in any
plans  established  in  cooperation  with  the  Federal  government,   and  is
authorized  to contract  with State or local units of  government  and private
agencies under the provisions of MCLA 400.14 through 400.122; and,

WHEREAS,  the Agency has the authority to purchase  services  under Title IV B
and Title IV E of the Social  Security Act and under  provisions of MCL 400.14
through 400.122; and,

WHEREAS,  the children of the State of Michigan have a right to permanence and
stability and shall not be left in temporary,  non-permanent  situations,  any
longer than necessary, and,

WHEREAS,  Bruce A. Shear has  lawful  authority to bind the  Contractor to the
terms set forth in this Agreement.
<PAGE>
NOW,  THEREFORE,  in  consideration  of the above, and in consideration of the
promises and mutual covenants hereinafter contained,  the parties hereto agree
as follows:

II.  LOCATION OF FACILITIES

The  Contractor  shall provide  services  described  herein in the  facilities
located at:

35031 23 Mile Road
New Baltimore, MI 48047

III.  CLIENT PROFILE

A.   Eligible clients

Services  provided by the Contractor under this Agreement are limited to those
children  and  families  for whom the  Agency  can  legally  provide  care and
services  and for whom the  Agency  makes a State  payment.  Only PA 150 youth
referred by CIC are eligible.

County  child-care  funded  children  referred  to the  Agency  for  care  and
supervision  by probate  court order but for whom the Agency may have no legal
responsibility to make a payment, are eligible clients.

CIC Placed Youth

     1 . The  Contractor   agrees  to  participate  with  the  Agency  in  the
         provision  of service  to  specified  Agency,  Act 150 wards who have
         been referred  through the Central  Intake  Committee  (CIC) for care
         and  supervision  and  subsequently   assigned  to  the  Contractor's
         facility.

     2.  The  Contractor  agrees  to give  admission  priority  to youth to be
         served  under the terms of this  Agreement  whenever  such  youth are
         referred  to  the   Contractor   and  a  vacant  bed  exists  in  the
         Contractors  facility or is  projected to exist within 2 weeks of the
         Central  Intake  Committee  (CIC)  assignment  date up to the  number
         specified  in  Section  III.,  Part D. 3.  This  shall  not limit the
         number of placements to that number,  and the  Contractor may provide
         additional beds for CIC referred youth.

     3.  The  Contractor  shall  provide  services  described  herein to youth
         having the following characteristics:

           a. Male wards  committed  to the  Agency  under the  provisions  of
           P.A. 150.

           b.  Referred  through the Central  intake  Committee  (CIC)  except
               wards ordered into secure  institution  at the time of referral
               by the local Juvenile Court judge.

                                       -2-
<PAGE>
B.   Method for Determination of Eligibility

  The Agency shall determine the children and families' eligibility.

C.   Geographic Area to be Served

     1    The  Contractor  shall  provide all  services  described  herein the
          following  geographic  area:  Wayne,  Oakland,  Genesee  and  Macomb
          Counties.

     2.   The Contractor may by  arrangement  with the Agency's  placing local
          office and the Agency's Bureau of Child and Family Services  provide
          services to  Agency-referred  children and families from other areas
          of the State.

D.   Number of Clients to be Served

     1   On no day during this  Agreement  period,  shall there be more than 8
         children in placement for whom the Agency has the  responsibility  to
         make a State payment.

     2.  The Agency does not  guarantee  any minimum  number of  referrals  or
         youth in care at any point in time.

     3.  Of the number of  children  in #1.,  there shall be no more than 8 of
         these children who are designated as CIC placed youth.

  E. Admission Criteria

  The criteria for  admission  outlined in the  behavior and  diagnostic  grid
  shall be  considered  indicative  of the  Contractors  capability to provide
  services.  It is understood  by both parties that  behaviors of one child or
  some  children  in a program  can  affect the  Contractors  ability to serve
  children  who  are  referred  subsequently.  It is also  understood  by both
  parties  that  combinations  of  behaviors  may  influence  intake  decision
  making.  The behavior and diagnoses  which the  Contractor  shall accept are
  as follows:




                                       -3-



<PAGE>

                                    MILD*       MODERATE**     SEVERE***
1.  EATING DIFFICULTIES
a)  Anorexia Nervosa                 yes         n/a            no
b)  Bulimia                          yes         n/a            no
c)  Pica                             no          no             no
d)  Feeding or other Eating Problems no          no             no

2.  SEXUAL CONCERNS
a)  Sexually Active                  yes         yes            no
b)  Masturbation                     yes         yes            no
c)  Sexually Abused                  yes         yes            no
   
    Homosexual Behavior              to be evaluated on an individual basis

3.   AGGRESSIVE BEHAVIOR
a)   Assaultive with Adults          yes         based on an    no
b)   Assaultive with Peers           yes         individual     no
c)   Destructive of Property         yes         evaluation     no
d)   Sexually Assaultive Toward      n/a         n/a            no
     Adults
e)   Sexually Assaultive Toward      n/a         n/a            no
     Peers

4.   ADJUSTMENT DIFFICULTIES
a)   Fire Setting                    n/a         n/a            yes
b)   Substance Abuse                 yes         yes            yes
c)   Substance Experimentation       yes         yes            yes
d)   Withdrawn                       yes         yes            yes
e)   Stealing                        yes         yes            yes
f)   Oppositional Behavior           yes         yes            yes
g)   School Truancy                  yes         yes            yes
h)   Verbally Abusive                yes         yes            yes
i)   Runaway                         yes         yes            yes

5.   SELF DESTRUCTIVE
a)   Talks About Suicide             yes         yes            yes
b)   Has Attempted Suicide           n/a         n/a            yes
c)   Self-mutilation                 yes         yes            yes

6.   FUNCTIONAL DISORDERS
a)   Lacks Age-Appropriate           yes         yes            no
     Self-Care Skills
b)   Encopresis                      yes         yes            no
c)   Enuresis                        yes         yes            no

7.   ATTENTION DEFICITS
a)   Hyperactive                     yes         yes            yes
b)   Attention Span Problems         yes         yes            yes

8.   AFFECTIVE DIFFICULTIES
a)   Depression                      yes         yes            yes

                                          -4-

<PAGE>
9. PHYSICAL AND EMOTIONAL/     CONTRACTOR          CONTRACTOR'S DEGREE
    INTELLECTUAL               SPECIALIZES         OF TREATMENT
    DISABILITIES****           IN THIS AREA        CAPABILITY IN THIS AREA

                             YES   NO       MILD*   MODERATE**  SEVERE***

a)  Mentally Impaired        yes            yes      yes         no
                                   _____
b)  Emotionally Impaired     yes            yes      yes         no
                                   _____
c)  Hearing Impaired         yes            yes      yes         no
                                   _____
d)  Visually Impaired        yes            yes      yes         no
                                   _____
e)  Speech & Language
     Impaired                yes   _____    yes      yes         yes
f)  Specific Learning
    Disability               yes   _____    yes      yes         no
g)  Severely Multiple
     Impaired                _____          _____    _____       _____
                                     x
h) Preprimary Impaired       _____          _____    _____       _____
                                     x
i)  Physical or Otherwise
    Health Impaired         _____
                                     x
j)  Epileptic Seizures             _____    yes      _____       _____
                             x
k)  Psychotic                      _____    yes      yes         yes
                             x

DEFINITIONS-
*    MILD:  This  behavior  has  occurred  only  once or  twice in the past 12
     months with each episode  lasting for a short period of time and was mild
     in its expression.

**   MODERATE:  This  behavior  has  occurred  3-5 times in the past 12 months
     with  each  episode  lasting  for an  extended  period  of  time  and was
     moderate in its expression.

***  SEVERE:  This  behavior  has  occurred  6 or more  times  in the  past 12
     months with each episode  lasting for an extended  period of time and was
     severe in its expression.

NOTE: The  handicaps  listed in a-i above are defined in the Michigan  Special
Education  Rules,  August,  1982,  R340.1703 - R340.1714.  The levels mild and
moderate  equate  to  educable  and  trainable  respectively  for a.  Mentally
Impaired.

The conditions listed in a-k must be verified by a professional qualified to
diagnose the particular disability.

                                       -5-
<PAGE>
F.  Program Focus

    Pioneer Residential Program serves adjudicated,  adolescent males from the
    ages of 12 to 18. We will serve  adolescents  whose function show evidence
    of sufficient adaptive behaviors,  and cognitive/intellectual capacity  to
    utilize  modalities  offered by the program.  The capacity of this program
    is limited to eight (8).

    The  services   provided  to  residents   are  an   educational   program,
    recreational  activities and adult life functioning  skills. The residents
    will  also be  given:  a  medical  status  evaluation  with  treatment  as
    indicated;  psychiatric  evaluation by a Board Certified Child  Adolescent
    psychiatrist;  psychological  testing as needed;  social work  evaluation,
    consultation and follow up; discharge  planning;  spiritual  services;  24
    hour direct care services;  nutritional  services;  and  immunizations  as
    needed.  Outside  resources  will also  provide  the  following  services:
    dental  services,   emergency  medical  services,  optical  services,  and
    vocational rehabilitation as needed.

    The  residential   program  will  maintain  and  establish   policies  and
    procedures pertaining to the following:  for admission to the program each
    resident will have an admission  assessment  completed in conjunction with
    their  care  manager to  determine  appropriate  placement.  There will be
    written  policies  describing  the care  given to the  resident  including
    24-hour  residential  care,  nursing  care  available  as  needed,  and  a
    behavioral  modification program.  Upon discharge,  there will be policies
    describing  discharge  placement based on the individual  resident's needs
    in conjunction with their case manager/representative.

IV.  Services  to be  Provided:  Throughout  the  term of this  Agreement  the
     Contractor   shall  maintain  the  capability  to  provide   services  as
     specified  in the  treatment  plan  for each  child  and  his/her  family
     accepted for care 24 hours a day, 365 days a year.

     A.   Basic Residential Care

     The  following  maintenance  elements  are  considered  essential  to the
     physical and  emotional  well-being of children in  out-of-home  care and
     shall be  provided by the  Contractor.  If, in the opinion of the Agency,
     these are not provided by the  Contractor  for each child  covered by the
     terms of this Agreement,  the Agency may consider  immediate  termination
     of this Agreement.

     Food,  shelter;  ongoing  clothing needs;  personal  incidentals  such as
     personal  allowances and school  supplies;  routine  health,  medical and
     dental care; routine transportation;  supervision of the child; emotional
     nurturing;  and  discipline  which  shall  not be  punitive  but shall be
     relevant   to  the  growth  and   development   of  the  child.   Routine
     transportation  is defined as any travel,  including  family  visitation,
     required by the child or family for treatment purposes which occurs in the

                                       -6-

<PAGE>
     Contractor's  geographic  area  to  be served,  Section  III, C. tha   may
     not  reasonably  be provided by the parents or other  funding  source. Each
     of these  maintenance  items  shall be  provided  in a manner and degree to
     which each child  and family can  experience a living  environment that is
     inviting,  clean,   well  maintaine  and  meets  each child's sustenance,  
     physical and emotional health needs.

B.   Social Services

Defined as a comprehensive  and  coordinated set of activities  concerned with
the  investigation  and  resolution  of the  problems  which  necessitate  the
child's out-of-home placement (except for emergency shelter services).

     1 .  Referral Acceptance

     The  Contractor  shall accept and act on  referrals  from the Agency upon
     receipt of the Agency's referral packet. Any  contractor/agency  forms or
     narrative  information  required  on a  referral  must  be  completed  by
     Contractor  staff from  information  in the Agency's  referral  packet or
     other   sources.   Agency   staff  shall  not  be  required  to  complete
     application  or other  Contractor  forms for inclusion in the agency case
     record or agency files or for any other  purpose.  The Agency's  referral
     packet shall include:

          a.  Copy of the  commitment  order or placement  and care order from
              the court, or appropriate  documentation of  authorization  from
              the local law enforcement agency.

          b.  Copy of the  Initial  Service  Plan,  Updated  Service  Plan(s),
              progress  report(s),  and  Termination  Summary(ies)  from prior
              placement(s)   if   applicable  as  required  by  Child  Welfare
              Licensing  (CWL)  rules and Agency  policy as  specified  in the
              Agency's  Services  Manual (SM).  If any of these  documents are
              incomplete  at  placement,   the  completed  materials  must  be
              forwarded to the Contractor within two weeks of placement.

          C.  Photocopy of the birth verification,  or copy of the request for
              verification.  The Agency  shall  immediately  forward a copy of
              the birth verification upon receipt.

          d.  If  available,  copy  of  the  Youth  Health  Record  (FIA-1662,
              FIA-1663,  and FIA-1664) or other  documentation of physical and
              dental  examination(s)  within the past 12 months  and  history,
              including immunization record.





                                       -7-
<PAGE>
     e.   Photocopy   of  the  active Medicaid (MA) card  or  the  MA  recipient
     identification  (ID) number,  if the child is active for MA and the card is
     not available. If MA must be opened for the child, the Agency shall provide
     a copy of the MA recipient ID number as soon as available.

f.   Photocopy of Social Security Card or the application  (SS-5).  The Agency
     shall immediately forward a copy of Social Security card upon receipt.

g.   Initial  Placement  Outline  and  Information   Record   (FIA-3307),   if
     required,  or other documentation  required by Agency policy as specified
     in the SM or CWL rules.

h.  Court study(ies)/report(s), if available.

i.  Educational report(s), if available and applicable.

j.  Copy(ies) of psychological/psychiatric report(s), if available.

In  that   psychological   assessments  are  routinely   required  for  intake
decision-making if an otherwise  appropriate referral is made, and if there is
no current psychological  assessment  available,  the Contractor shall arrange
and pay for an  assessment  as a part of the referral  acceptance  process and
established per diem rate.

k.   Copy of the  Protective  Services  5-day  Placement  Packet and  Transfer
     Summary  as  specified  in the  Agency's  SM, if  applicable.  Additional
     Protective Services reports shall be forwarded when completed.

The Agency's local office shall be notified,  within 5 working days of receipt
of  appropriate  referral  materials,  of the  decision  to set up the initial
interview,  reject or accept the child, and if accepted, the admission date or
status on a waiting  list.  If an  initial  interview  is held,  the  Agency's
local  office  shall  be  notified  within  3  working  days of  rejection  or
acceptance  of the  referral  and if accepted  the date of  admission,  or the
status  on  waiting   list.   If  a  child  is   rejected,   the  reasons  for
non-acceptance shall be given to the Agency in writing within 5 working days.

The  Contractor  shall not refuse to  consider  providing  services to a youth
solely  based on the fact that the youth is  handicapped,  which is defined as
emotionally  impaired,  hearing  impaired,  mentally  impaired,  physically or
otherwise health impaired,  learning disabled,  speech or language impaired or
visually impaired.


                                       -8-

<PAGE>
2.   Intake Assessment

The Contractor  shall not accept a child for placement prior to the signing of
an Individual  Service  Agreement  (FIA-3600) by both the  Contractor  and the
Agency's local office.  When a child is placed in an  out-of-county,  private,
child-caring  institution  and the  Agency's  placing  local  office  requests
monitoring  service from the Agency's  local office where the child is placed,
the FIA-3600 shall clearly state which Agency local office is responsible  for
ongoing  monitoring of the child's care.  The FIA-3600 shall state whether the
Contractor  or the Agency's  placing  local office  shall be  responsible  for
ongoing service to the child's family.

3.   Case Plan

Within the initial 30 days of placement  (the intake  period),  the Contractor
shall  submit to the Agency's  local  office an Initial  Service Plan (ISP) as
specified  in the  Agency's  SM and prepare a plan for  ongoing  provision  of
service and care.  This plan shall include:

     a.  An  assessment  of current  functioning  of the child and family unit
         which includes, but is not limited to, siblings.

     b.  An  appraisal of resources  available  to the  Contractor  to resolve
         problems identified.

     c.  A statement of the immediate and  long-term  treatment  goals and the
         methods relating to the specific behavior  precipitating  out-of-home
         placement and which when met,  shall enable the child to be placed in
         a non-institutional setting.

     d.  A projected time limit for reaching  treatment  goals and anticipated
         next placement.

  4. Reporting

     a.  At the end of every 90 day period the  Contractor  shall  complete an
         Updated  Service Plan Format  containing a reassessment of the child,
         the status of the  attainment of goals and the  establishment  of new
         goals as specified in the SM.

     b.  The Contractor  shall prepare and submit to the Agency's local office
         a narrative  termination  and release  summary within 10 working days
         of a child leaving care.

     c.  The  Contractor  shall  complete  and  retain  an  Attendance  Record
         (FIA-667)  provided  by  the  Agency  or  a  similar  record  of  the
         Contractor's design containing like data.

                                       -9-

<PAGE>

d.   The  Contractor  shall  agree to  continue  services to each child for at
     least  30  days  following  written  notification  to the  Agency  of the
     Contractor's  decision to terminate  the child from  placement.  However,
     in order to avoid  termination of placement,  to provide adequate care to
     the child and to define  those  children  who need  specific,  additional
     resources,  the Contractor  shall not issue a 30-day  notification  until
     contact has been made with the Agency's  local office worker  supervising
     the  placement  and the Agency's  Office of Children  Service's  contract
     initiator  or  designee  and  a  determination  has  been  made  on  what
     resources  are needed to preserve the placement and meet the needs of the
     child.

The Contractor,  by accepting the child,  has indicated an ability to meet the
child's  service  needs as described in the written  referral  material.  This
includes the provision of sufficient  structure  and  supervision  to continue
service to  children  who  exhibit  dangerous  and  self-destructive  behavior
identified before or at the time of admission.

The  Contractor   shall  request  the  Agency  to  remove  a  child  from  the
Contractors program in less than 30 days only if the following  conditions are
met:

     1)  The behaviors or their  intensity  which endanger the child or others
         were  not  made  known  to  the  Contractor  before  or  at  time  of
         admission, and

     2)  The youth  makes  actual  physical  attacks  upon other  persons  and
         requires ongoing restraint to prevent harm to self or others, or

     3)   The youth  makes an overt  suicide  attempt and  hospitalization  is
          necessary, and

     4)   The  actual  behavior  considered  dangerous  to self or  others  is
          grossly  deviant from what the Agency has specified as acceptable in
          the Admission Criteria, Section III., E.

     Non-physical   disruption  of,  or  non-cooperation  in  program  is  not
     sufficient  reason for the Contractor to request  immediate  removal of a
     child.

     5)   When a child who must be terminated from the Contractors  care is in
          need  of  further  residential   treatment,   the  Contractor  shall
          cooperate  with  the  Agency  in  the   identification  of  specific
          treatment needs and possible alternative placements.

                                      -10-

<PAGE>
         6)   Any  time  the  Agency's  local  office  staff  do not  meet the
              responsibilities  outlined  in this  Agreement,  the  Contractor
              shall  notify the local  office  director  responsible  for case
              management  planning.  If  the  dispute  is  not  resolved,  the
              Contractor  is to contact the local office  director's  chain of
              command in the Agency.  This includes those  situations in which
              the   Agency's   local  office  staff  do  not  respond  to  the
              Contractor's  request for  removal  under  IV.B.4.d.  In no case
              shall  the  Contractor  discharge  a  child  to a  non-licensed,
              non-supervised living arrangement.

         7) The Contractor  shall complete and submit to the Agency,  medical,
            dental and all other  reports as  specified  in the  FIA-3600.  If
            the youth  remains in the  Contractor's  care beyond 10 months the
            Contractor  shall  cooperate  with the Agency in  completing a new
            FIA-3600.

         8) The Contractor shall report any release,  AWOL,  serious injury or
            illness  requiring  hospitalization  of a  child  to the  Agency's
            local  office  and  parent  within  24 hours of the  incident  and
            confirm the  information,  in writing,  within five working  days.
            The death of a child shall be reported  immediately  to the parent
            or next of kin  and the  Agency's  local  office.  This  shall  be
            confirmed in writing to the Agency's  local office within five (5)
            working days

CIC Referral Process

The Contractor shall participate in and cooperate fully with the CIC process.

     The  Contractor  shall  consider  for  admission  to its  facility  youth
     referred to the  Contractor by the CIC  Committee  for  assignment to its
     facility within the network of service facilities.

     The  Contractor  shall  review  referral  information  which  conforms to
     requirements  of the Agency's  SM.  Referral  information  which does not
     comply with these  requirements  shall be returned to the originator with
     a request for  specific  information  and the  Contractor  shall,  in the
     meantime,   notify  the  CIC  Committee  of  any  delay   resulting  from
     insufficient referral information.

Referral Review

Within 3 working days of receipt of appropriate  referral information from the
Agency,  the Contractor  shall notify the CIC Committee and the Agency's local
office of its intention to conduct a pre-placement  interview,  in conformance
with the  Contractor's  admissions  criteria as  specified in Section Ill. E.,
of this Agreement.

                                      -11-
<PAGE>

Acceptance for Placement

On the day of the pre-placement interview,  when possible, but no later than 3
working days after the  pre-placement  interview the  Contractor  shall notify
the CIC Committee and the Agency's local office of acceptance or rejection
of the youth for placement.

Once the  Contractor  has notified the CIC  Committee  and the Agency's  local
office  of its  decision  to accept a  referred  youth  for  placement  in its
facility,  it will  admit  the  youth  within  10  working  days if there is a
vacancy within the limits of Section III.  D. 3.

      The  Contractor  and the Agency's local office shall prepare and sign an
      Individual   Service   Agreement   FIA-3600  (or  equivalent)  prior  to
      placement.

      The Contractor shall notify the CIC Committee of the date of placement.

      The Contractor  shall provide  services to the youth and his family both
      during  placement  and  after  release  from the  Contractor's  facility
      unless  special  circumstances  exist  which  indicate  a need  for  the
      Agency's  local office to provide a portion of such service.  In such an
      exception,  the conditions of the exception and the  responsibilities of
      the  Contractor as well as the Agency's local office are to be specified
      on the FIA-3600 prior to placement in the Contractor's facility.

  Reporting

   At the end of every 90 day period the Contractor  shall complete an Updated
   Service Plan Format  containing a reassessment of the child,  the status of
   the attainment of goals and the  establishment of new goals as specified in
   the Agency's SM.

   The  Contractor  shall  prepare and submit to the  Agency's  local office a
   narrative  termination  and  release  summary  within 10 working  days of a
   child leaving care.

   The  Contractor  shall complete and retain an Attendance  Record  (FIA-667)
   provided  by the  Agency or a  similar  record  of the  Contractors  design
   containing like data.

   The  Contractor  shall  maintain  client case files in accordance  with the
   administrative rules for child caring institutions.
   The Contractor shall provide services to a youth and his family until:
   Release is approved by the Juvenile Court, or


                                      -12-


<PAGE>
    The CIC Committee and the Contractor  mutually agree to a reassignment  to
    a Training School Center, or

    Emergency  reassignment back to the geographically aligned Training School
    Center is made by the Contractor for any of the following reasons:

          The youth shall receive  services more  appropriate to his treatment
          needs if reassigned.

          The youth's  assaultive  behavior  poses a clear  danger to himself,
          other youth, or staff.

          The youth  will not  remain  in the  Contractor's  facility  and his
          behavior is a risk to the community.

The Contractor  shall comply with RSD Operations  policy  governing  emergency
reassignment.

Any time Agency staff do not meet the  responsibilities  outlined in Section V
the  Contractor  shall notify the Agency's local office  director  responsible
for case management planning.  If the dispute is not resolved,  the Contractor
is to contact the local office director's chain of command in the Agency.

The Contractor shall complete other reports as specified by the FIA-3600.

The  Contractor  shall  notify  the  Agency  worker  of  any  release,   AWOL,
hospitalization,  death, arrest or any other unusual legal or medical incident
involving a child in placement.

Truancy Procedures

The  Contractor  shall  comply  with  RSD  Operations   policy  regarding  the
procedures  for  reporting  truancies and obtaining  apprehension  orders.  In
addition,  the  Contractor  shall  take the  following  actions  to prevent or
control truancy:

      Provide training for staff regarding measures to avoid truancies.

      Re-integrate  truants  back  into the  program  with  discussion  of the
      incident via staff/team meetings.

The Contractor shall record  successful  truancies of CIC youth on its Monthly
Case Event  Report to the  Institutional  Data  Center,  documenting  the time
(hour and date) of departure  and return,  and recording any arrest during the
course of the  truancy  or a  petition  filed as a result of  alleged  actions
during the truancy.


                                      -13-

<PAGE>

5.   Legal or Court Related

The  Contractor  shall  cooperate  with the Agency in matters  relating to any
legal or court  activities  concerning the child. The Contractor shall provide
primary  court  testimony,  recommendations,  and  reports  to  the  court  as
requested by the court or the Agency when  providing  primary case services to
a child and to the family  specified  on the  FIA-3600.  If court  reports and
recommendations  are  requested,  they  shall be sent to the Agency for review
prior to the court hearing.

6.   Discipline

The Contractor  shall have a discipline  policy that shall be directed  toward
positive  behavior  development  and which shall exclude and prohibit any form
of  corporal  punishment  of any  child  in  care.  Discipline  practices  and
treatment plans shall conform to the Contractors discipline policy.

7.  Individual or Group Therapy/Counseling

The Contractor shall provide direct counseling  services for each child either
individually or in group sessions.  This shall be provided at least weekly.

8.  Intervention  with  Parents  and  Coordinating  Activities  to Assure the 
    Involvement of the Child's Family:

The Contractor  shall,  in accordance with each child's  individual  treatment
plan:

    a.   Include the family in the  development of the case plan for the child
         within the first 30 days or as otherwise  specified by the  FIA-3600.
         If other  siblings  have been  placed in  family  foster  care with a
         child placing  agency,  the FIA-3600's for all children shall specify
         that,  in  general,  family work shall be the  responsibility  of the
         child  placing  agency,  and  the  FIA-3600  for  the  youth  in  the
         Contractor's  care shall specify that home visits and post  placement
         planning shall be  coordinated  with the child placing  agency.  This
         does not preclude the Contractor from family  intervention  necessary
         for the child's treatment.

    b    Offer  transportation  assistance,  and  flexible  hours  to meet the
         family's time schedule to facilitate the family's  accomplishment  of
         the treatment goals.

    c.   Provide an  identifiable  area for family  visits which offer privacy
         and comfort.


                                      -14-
<PAGE>

d.   Include a  specific  plan as to  attainment  of family  goals and  needs,
     delineation of roles of the Contractor,  Agency worker(s),  and family to
     accomplish these goals.

9.   Transitional  Service With the Child After He/She  Leaves  Placement  The
     Contractor shall:

     a.   Submit a  discharge  services  plan to the  Agency  worker,  with an
          assessment  of the  child/family  situation  within  14  days of the
          child  leaving  residential  care,  as specified in the Agency's SM.
          The  following   information   shall  be   documented   and  may  be
          incorporated in an Updated Service Plan:

          1)  Reason for termination.

          2)  Location of child.

          3)  Summary of services provided during care.

          4)  Assessment of child's and the parent's  needs which remain to be
              met.

          5)  A statement that the termination has been explained to:

              -  The child in a manner  consistent  with  his/her  capacity to
                 understand.

              -  The parent(s),  the foster parents, the referring agency, and
                 the person(s) assuming custody of the child.

           6)  Provision for follow-up services.

           7)  A summary explaining circumstances if an unplanned termination.

           8)   Medical information must be given to the parents at this time.

      b.   Assign  according  to  each  child's  individual  treatment  plan a
           social  services  worker  to  maintain  contact  with the child and
           family for the first 60 days  following  placement  if the child is
           placed  in a family  setting  unless  such  service  is  waived  in
           writing by the Agency's local office.





                                      -15-
<PAGE>

      c. Make at least  one home  visit  per  month to  assist  the  child and
         family  in   re-establishing   family  equilibrium  unless  otherwise
         specified on the  FIA-3600,  unless such service is waived  according
         to IV., B., 2.

      d.  Submit  a final  report  to the  Agency  worker,  within  90 days of
          placement discharge,  which updates the case information through the
          60 day transition  period.  The final report shall provide an update
          to  the  discharge  plan  including  family   contacts,   collateral
          contacts,  agency and family  activities  to achieve unmet goals and
          objectives  and an assessment of the  child/family  situation at the
          end of the 60 day transition period.

10.   Child Care

Defined as those activities  necessary to meet the daily physical,  social and
emotional needs of the child.  The Contractor shall:

      a.   Provide  a minimum  of 2 on-duty  direct  child  contact  staff for
           every 4 youth  during  non-school  hours:  7:00 a.m.  to 11:00 p.m.
           (includes program coordinator).

      b.   Maintain  a minimum of 1 on-duty  direct  child  contact  staff for
           every 4 youth  during  sleeping  hours:  11:00 p.m. to 7:00 a.m. Of
           these staff 1 shall be awake during this period.

      c.   There  shall be,  within 10  minutes,  on-call  Contractor  support
           staff or contracted staff for emergency assistance at all times.

      d.   Have available an emergency plan for  contacting  police,  fire, or
           medical resource staff.

      e.   Provide a minimum  of 50 hours  new staff  orientation  to be given
           within the first  thirty days of  employment.  A minimum of 2 hours
           per month staff development shall be provided to direct care staff.

  11. Education - The Contractor shall:

      a.  Assure that every youth is provided an approved  educational program
          within  five (5) days of  admission,  and/or job  training or career
          exploration  program  within  the  first  25 days of  enrollment  in
          school.

      b.  Screen for  possible  educational  handicaps;  and, if a handicap is
          suspected,  refer  to an  Individual  Education  Planning  Committee
          (IEPC) within the first 30 days to assess,  plan and place the youth
          in the most appropriate education/vocational program.


                                      -16-
<PAGE>

     c.  For youth with identified  handicaps for whom  termination or release
         is  planned,  an  exit  review  of  the  educational  plan  is  to be
         initiated at least 30 days prior to placement  in the  community  and
         forwarded to the Agency's local office.

     d.  Assure that staff shall be available to the school  program in crisis
         situations.

12.  Non-Routine  Health Care The Contractor shall assure that specific health
     care is provided,
     including:

     a.   Special diets provided as needed and regularly  reassessed utilizing
          appropriate specialized personnel.

     b.   Availability  of  rehabilitative,  physical or dental  procedures by
          medical personnel.

     c.   Review of prescriptive non-routine health care by medical personnel.

     d.   Coordination   with  the  Agency  for  securing  of   prosthetic  or
          mechanical equipment.

     e.   Utilization  of enrolled  Medicaid  providers for health  procedures
          unless an exception is given by the Agency.

  13. Wardrobe

      The  Contractor  shall  assure that the child has an adequate  wardrobe,
      which  includes  at  least  those  items  as  defined  by  the  Clothing
      Inventory  Checklist  (FIA-3377)  while in  placement  and upon  leaving
      placement.  Problems with adequacy of wardrobe while in placement  shall
      be  documented  on the Updated  Service  Plan.  When the child is absent
      the  Contractor  shall  have a  process  in place  to keep  the  child's
      wardrobe  and  possessions  safe  until  claimed  by  the  child  or the
      Agency.  If  the  possessions  are  not  claimed  within  90  days,  the
      Contractor  shall return the  possessions  to the Agency at the Agency's
      discretion.

  14. Recreation Activities

      Defined as a planned,  age  appropriate,  regular,  and recurring set of
      staff-supervised  leisure  time  events  designed to support the child's
      treatment plan.  The Contractor shall:




                                      -17-
<PAGE>

     a. Provide a minimum of 1 hour(s) per day per child of  activities  which
        shall  contain  a  variety  of  physical,  intellectual,   social  and
        cultural opportunities indoors and outdoors.

     b.   Assign  a  minimum  of  1  staff  for  every  4  youth  to  directly
     supervise the activities.

     These recreational  activities shall be supported by appropriate supplies
     and equipment that are in serviceable  condition or resources outside the
     contracting agency.

C.   Related Services .

     The  Contractor  shall  provide  the  following  in  accordance  with the
     treatment  plan for an  individual  youth.  The costs for these  elements
     are included in the reimbursement rate:

     1 .  Psychological Services

          Defined as various professional  activities or methods,  provided by
          a  licensed   psychologist  or  a  limited  licensed   psychologist,
          including   therapy  with  children   individually   or  in  groups,
          consultation    with   staff,    administering    and   interpreting
          psychological tests and work with parents.

          a.  The Contractor shall provide as needed,  the recommended  number
              of hours of psychological  services to an individual child on an
              as needed basis.

          b.  The Contractor shall provide psychological therapy as follows:

                  As needed by a staff psychologist.

          c.  The Contractor shall provide  psychological  testing as follows:
    as needed.

          d.   The  Contractor  shall provide  psychological  consultation  to
    staff as follows:

               On an as needed basis.

      2.   Psychiatric Services

      Defined as various  professional  activities or methods,  performed by a
      medical  doctor  certified by the Michigan  Medical Board in psychiatry,
      including  individual  or  group  therapy,  diagnostic  interviews  with
      children, and consultation or supervision of agency staff.


                                      -18-

<PAGE>
         a.   The Contractor shall provide as needed,  the recommended  number
              of hours of psychiatric  services to an individual  child, on an
              as needed basis.

         b.   Contractor shall. provide psychiatric services to children as
              follows:

                    Initial  psychiatric  evaluation and provide  treatment as
                    needed.   Additionally,   the   Contractor   will  provide
                    medication   review  for  youth   receiving   psychotropic
                    medication.

         c.   The  Contractor  shall  provide   psychiatric   consultation  or
              supervision of agency staff as follows: none.

     3.  School Support Services

         Defined as individual  educational  assistance to children,  provided
         as a supplement to their on-going educational  programs, to help them
         participate  in  either  basic or  special  education  programs.  The
         Contractor shall provide:

         a. Evidence for the child's  need for  tutorial  service as indicated
            by the IEPC.

         b. Tutorial  staff  with  appropriate   educational   credentials  to
            provide the special service.

         c. A minimum of 1 hour per week of face-to-face tutor-child contact.

         d. An  educational  assessment at regular time intervals to determine
            the continued need for this service.

D.   Staffing

     The  Contractor  shall  provide  trained  staff  sufficient to adequately
     fulfill the terms of this  Agreement  and shall  demonstrate a good faith
     effort to recruit and employ staff which  reflect the racial,  ethnic and
     cultural composition of t he Contractor's client population.

E.   Program Performance Objectives

     During the contract  period the  Contractor  shall maintain a performance
     level at or above the standards listed below:

     1.   The  percentage  of youth  released  to a less  structured  setting*
          shall  be  at  least  60%.   Fifty   percent   (50%)  is   minimally
          acceptable.**



                                      -19-
<PAGE>

2.   The  percentage  of youth  released  to a less  structured  setting*  who
     continue to reside in a less  structured  placement  three  months  after
     discharge shall be at least 85%.**

3.   No more  than  16% of all  youth  placed  with  the  Contractor  shall be
     discharged from the facility while on truancy status.**

4.   The average length of stay for  pre-adolescent  youth (age 12 and younger
     at intake)  shall be 15 months or less.  The  average  length of stay for
     adolescent  youth  (age 13 and  over at  intake)  shall be 10  months  or
     less.**

     *A  less  structured  setting  is  defined  as  a  family  placement  and
     includes:  own home,  relative home, legal guardian,  foster family home,
     foster family group home,  adoption,  independent  living.  This excludes
     placements  into shelter  care and any facility  licensed as a child care
     institution.

     **Youth who  remained in the  Contractor's  facility  less than one month
     shall be excluded.

     Data Verification

     Within 30 days of  receipt,  the  Contractor  shall  review and verify in
     writing  the  accuracy  of  data  provided  by the  Agency  in  measuring
     achievement of the objectives as specified in Section V., B.

     For CIC Placed Children

     The  Contractor's  performance  shall be  evaluated  by  means of  Agency
     review  of  compliance   with  the  General   Provisions  and  Contractor
     Responsibilities as outlined in Section I. and IV. of this Agreement.

     The  Contractor  shall  provide  data for  program  evaluation  using the
     following  Bureau  of Child  and  Family  Services  Residential  Services
     Division's  (RSD)  Program  Objective  and RSD's  actual  performance  as
     comparison criteria.

     a.   At least 75% (minimum  acceptable) - 85% (Program  Objective) of the
          youth  placed  under this  agreement  shall  complete the program as
          planned.  (A  Truancy  Completion  is not to be counted as a Planned
          Completion).

     b.   Youth entering the program with  educational  skills at or above the
          fifth  grade  level  shall  achieve an average  gain in grade  level
          equivalent  to 1.0 (minimum  acceptable)  - 1.5 (Program  Objective)
          grade levels per year.


                                      -20-

<PAGE>

         c.   Youth  entering  the program with  educational  skills below the
              fifth grade level shall  achieve an average  gain in grade level
              equivalent   to  1.0   (minimum   acceptable)   -  1.2  (Program
              Objective) grade levels per year.

              Note:     The average  gain in grade  level is accessed  through
              pre- and  post-administration of an educational achievement test
              and  an  Index  of   Educational   Achievement.   The  index  is
              determined by the following formula:

              Average gain in grade level

              Average length of stay (in days) divided by 365.

         d.   No  more  than  21%  of  youth   receiving   services  from  the
              Contractor shall be formally  re-arrested within three months of
              release.

         e.   No  more  than  42%  of  youth   receiving   services  from  the
              Contractor shall be formally  re-arrested within 12 months after
              release.

         f.   At least 62% of youth  receiving  services  from the  Contractor
              shall be  productive  (in school,  skill  training or  employed,
              part or full-time) three months after release.

         g. Definitions:

            1)  A Crisis  Completion  is a release  for an  escalation  into a
                more highly  structured  setting  such as return to a training
                school  center,  to a  mental  health  hospital  or  to  adult
                prosecution.

            2)  A Truancy  Completion is a release of a youth while on truancy
                status who has been truant longer than 6 hours.

            3)  A  Planned  Completion  is a release  of youth  which is not a
                Truancy Completion or a Crisis Completion.

F.   Availability of Outside Reviews and Audits

     The  Contractor  shall make available to the Agency copies of any outside
     reviews or audits  relating  to the  contracted  program.  Audits must be
     conducted in compliance with federal  requirements and in accordance with
     the Agency's "Accounting Manual for Foster Care Agencies".




                                      -21-
<PAGE>

G.   Corrective Action Requirements:

     If a program review by the Agency  reveals a lack of compliance  with the
     requirements of this Agreement, the Contractor shall:

1    Meet with the Agency to discuss the noncompliance,

2.   Prepare a corrective plan of action within 30 days of that meeting and,

3.   Achieve  compliance within 60 days of receipt of the Agency's approval of
     the  corrective  action plan (unless  other time frames are agreed to, in
     writing,  by the  Agency)  or the Agency may  terminate  this  Agreement,
     subject to the terms of the Master Agreement.


  H. Audited Requirements

     1   The   Contractor   shall  have  an  annual  audit   conducted  by  an
         independent certified public accountant.

     2.   The  Contractor  shall  submit  to the  Agency,  no  later  than the
          fifteenth  day  of  the  fifth  month   following  the  end  of  the
          Contractors fiscal year, copies of:

          a.   Audited   financial   statements  which  shall  disclose  (with
               explanation  in  Notes)  any  amounts  due to the  Agency  as a
               result  of  an  overpayment,   excessive   initial  payment  or
               Contractor financial non-compliance with the contract.

          b.   The management letter to the Contractor.

          c.   All  information   (including   Functional  Expense  Statement)
               required by the  "Accounting  Manual for Foster Care  Agencies"
               revised October, 1994.

               Mail audit reports to:

               Family Independence Agency
               Financial and Internal Control Administration
               235 S. Grand Avenue, Suite 1516
               P.O. Box 30037
               Lansing, Michigan 48909

        3. However,  if an  OMB-AL  133  Audit is  required  because  of other
           Federal funding sources,  the Contractor is required to provide the
           A-133 report and all opinions and management letters to the Agency.




                                      -22-
<PAGE>

         Additional Provisions

         The Contractor shall comply with the provisions of:

         Act Number 114 of the Public Acts of 1984,  as amended,  and known as
         the Interstate Compact on the placement of children;

         Act Number 238 of the Public Acts of 1975,  as amended,  and known as
         the
         Child Protection Law;

         Act Number 162 of the Public Acts of 1982,  as amended,  and known as
         the
         Nonprofit Corporation Act;

         Act Number 204 of the Public Acts of 1994,  as amended,  and known as
         the Children's Ombudsman Act;

         Act Number 116 of the Public Acts of 1 973, as amended,  and known as
         the Child Care Organization Act;

         Chapter X of Act Number 288 of the Public  Acts of 1939,  as amended,
         and known as the Adoption Code;

         Act Number 203 of the Public Acts of 1994,  as amended,  and known as
         the Foster Care and Adoption Services Act.

V.   AGENCY RESPONSIBILITIES

     A.   Referrals

          1 .  The Agency shall be  responsible  for  determination  of client
               eligibility for funding.

          2.   The Agency shall provide to the  Contractor  referral  material
               which complies with IV., B., I., above.

          3.   The Agency  shall not  transfer  legal  responsibility  for any
               child to the Contractor except as provided herein.

     B.   Monitoring

          1 . The  Agency's  Bureau  of Child  and  Family  Services  shall be
              responsible  for  program  review and may  review,  analyze  and
              comment  on all  activities  covered  within  the  terms of this
              Agreement.  If  program  review by the  Agency  reveals  lack of
              compliance  with  the   requirements  of  this  Agreement,   the
              following procedure shall be implemented:

              a. The Agency shall notify the  Contractor,  in writing,  of the
                 problem.

                                      -23-
<PAGE>
         b.   The  Agency's  Bureau of Child and  Family  Services  shall meet
              with the Contractor to discuss and examine stated problems.

         c.   The Agency's  Bureau of Child and Family  Services shall request
              the  Contractor  to  submit a  corrective  plan of action to the
              Agency within 30 days of the meeting.

         d.   After the  Contractor's  plan of action  has been  reviewed  and
              approved  by the  Agency's  Bureau of Child and Family  Services
              the  Contractor's  compliance  shall  be  reviewed  in 60  days,
              unless  other  time  frames  are  agreed  upon in writing by the
              Agency.

     2.  The Agency shall be  responsible  for data  collection,  analysis and
         reporting for the Program Performance Objectives in Section IV., E.

     The Agency  shall  furnish to the  Contractor  data for  verification  of
     accuracy  prior to analysis  and  reporting.  The Agency  shall allow the
     Contractor  30 calendar  days for review and  verification  in writing of
     the accuracy of the data.  Furthermore,  no negative  action  specific to
     these  objectives  shall be taken  against  the  Contractor  prior to the
     development  and  the   distribution  of  data  which  relates  to  these
     performance   objectives  to  all  child  care  institution   contractors
     throughout the state.

C.   Service Planning and Delivery

     1 .  The Agency shall  cooperate  with the  Contractor in completing  the
          FIA-3600  and in  developing  a  service  plan  for  the  child  and
          family.  If the youth is to remain in the  Contractors  care  beyond
          10 months the Agency's  local  office shall  initiate a new FIA-3600
          at 10 months.

     2.   When  direct  Agency  service  is  specified  on the  FIA-3600,  the
          Agency's  local office shall provide such service and shall complete
          an Updated  Services Plan Format and forward it to the Contractor at
          the end of each  ninety-day  period  following  the Initial  Service
          Plan.

     3.  When a child who must be terminated from the Contractor's  care is in
         need  of  further   residential   treatment,   the  Contractor  shall
         cooperate  with  the  Agency  in  the   identification   of  specific
         treatment needs and possible alternative placements.

     4.  The Agency's local office with case planning  responsibility  for the
         child  shall  review  and  approve  or  request  modification  of the
         Contractor's  30 day Initial  Service  Plan  Format and each  Updated
         Service Plan Format  submitted by the  Contractor  as required by the
         SM.

                                      -24-
<PAGE>

    5.   The Agency's  local office shall provide the Contractor a copy of the
         Payment  Authorization  (FIA-626)  at the time of  placement  for ail
         State paid placements.

    6.   The  Agency's  local  office  shall assure that the child has a basic
         wardrobe,  as defined by the Clothing Inventory Checklist  (FIA-3377)
         upon entering the Contractor's care.

    7.   The Agency's local office,  except in emergencies or when constrained
         by a court  order or  parental  demand,  shall  give at least 30 days
         notification  to  the  Contractor  of  any  discharge  decision  made
         without the Contractors concurrence.

    8.   In accordance with Section IV., B., 4., d., the Agency,  through both
         the  local  office   supervising   the  placement  and  the  contract
         initiator or designee shall  cooperate with the Contractor to provide
         program  support  that shall  enable a child to remain in  placement.
         The contract  initiator  or designee,  within one working day of this
         determination,  shall  initiate  the Agency's  process for  approving
         additional  resource payments which may be determined to be needed by
         the  three   parties.   When  the   Contractor   provides  a  written
         notification  of the  decision to  terminate  in 30 days the Agency's
         local office supervising the placement shall:

         a. Acknowledge receipt of the notification within 5 working days.

         b. Provide at least weekly  contacts with the Contractor to advise of
            progress in arranging another placement.

         c. Move the child from the Contractor's care within 30 days.

     9.   Upon the  Contractors  request,  and if the conditions  specified in
          Section  IV.,  B.,  4.,  d., 1) and 2),  related to a child who is a
          danger to self or others have been met,  the Agency shall remove the
          child within 24 hours.

     10.  The Agency shall visit the child in  placement,  as specified in the
          SM.

D.   Payments

     1.   Overpayments  identified  by  the  Contractor  upon  receipt  of the
          bi-weekly Payment to Agency list (BG-047),  shall be refunded to the
          Agency  within 60 days.  The  Contractor  shall  notify  the  Agency
          immediately of overpayment and upon documented  reconciliation  with
          any underpayment return the net overpayment to the Agency.

     2.   The Contractor's  per diem rate(s) for services  provided under this
          Agreement  shall be $260.38 for the period  January 1, 1997  through
          December 31, 1997, SUBJECT TO THE TERMS OF THE MASTER

                                      -25-

<PAGE>

         AGREEMENT.  The  Administrative  Rate for the period  after  December
         31,  1997 and the  length of time that  rate  shall  remain in effect
         shall be mutually agreed upon by the parties to this Agreement.

         No  reimbursement  shall be made for any youth in care who exceed the
         Contractor's maximum limit as stated in Section III, paragraph D., 1.

    3.   If an  individual  child  or group of  children  require  specialized
         programming   which  is  outside  the  Contractor's   normal  program
         components,  but which is within the Contractor's ability to provide,
         a special payment for this programming may be negotiated  between the
         Contractor  and the Agency  through the Agency's  Bureau of Child and
         Family   Services.   When  an   individual   child's   needs  require
         specialized   programming   which  cannot  be  provided   within  the
         Contractor's service,  payment by the Agency to a subcontractor shall
         be reimbursed within the limits of Master Contract,  Section VIII, A,
         entitled   "Subcontracts".   This  section  does  not  apply  to  the
         provision  of  services  which  may  otherwise  be  specified  in the
         contract  such as:  psychological,  psychiatric  and  school  support
         services.

    4.   The Agency shall make  bi-weekly  payments to the Contractor for care
         and  services  provided to eligible  clients  under the terms of this
         Agreement  unless written notice is sent by the Agency  notifying the
         Contractor of the  implementation  date of a positive billing system.
         Should positive  billing be instituted  within the effective dates of
         this   Agreement,   the   Agency   shall,   from   the  date  of  its
         implementation,  make payment to the  Contractor  approximately  four
         weeks  after  receipt  by the  Agency of the  Contractor's  bi-weekly
         payment voucher.

     5.  For County Child Care funded children,  the Agency is not statutorily
         obligated  to make  payment  to the  Contractor.  Payment  for  these
         children is the statutory  responsibility  of the County.  If payment
         is not made, the Agency shall make  reasonable  efforts to assist the
         Contractor  to compel  the  County to pay.  This  Agreement  shall be
         amended to conform to final judicial interpretation of the law.

F.   Legal or Court Related

     The Agency shall involve the Contractor in matters  relating to any legal
     or court  activities  concerning  the  youth  while  in the  Contractor's
     care. If the Contractor is to be involved in the court  proceedings,  the
     Agency shall provide the  Contractor  with written  reports for court use
     upon request, subject to confidentiality requirements imposed by statute.





                                      -26-
<PAGE>

IN WITNESS WHEREOF, the Agency and the Contractor have caused this Agreement
to be executed by their respective officers duly authorized to do so.



Dated at  Peabody, Massachusetts         HARBOR OAKS HOSPITAL
                                           (Contractor)

this 2nd  day June, 1997                 By:  /s/ Bruce A. Shear
                                         Bruce A. Shear, President


Witness:  /s/ Stuart A. Kaufman
Stuart A. Kaufman, Dir. of Corp. SVC.



Dated at Lansing, Michigan              FAMILY INDEPENDENCE AGENCY

this 25th day of June, 1997             By:  /s/ Stephen Hilh
                                             Director

Witness:  /s/ Jeffrie L. Herts








                                      -27-

<PAGE>
Exhibit 4.25

     THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE  SECURITIES  ACT OF 1933, AS AMENDED,  AND MAY NOT BE  TRANSFERRED  IN
VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF
THIS WARRANT.

    Shares Issuable Upon Exercise:   Up to 86,207 shares of the Class A Common
                                     Stock, $.01 par value, of PHC, Inc.

                                WARRANT AGREEMENT

     THIS WARRANT  AGREEMENT  dated as of September  19, 1997 is entered into by
PHC,  Inc.(the   "Company") and  ProFutures  Special  Equities  Fund, L.P. (the
"Holder").
                              W I T N E S S E T H:

     WHEREAS,  the Board of  Directors  has of the  Company has  authorized  the
issuance to the Holder of the warrant (the "Warrant") of the Company represented
by this Warrant Agreement,  which Warrant entitles the Holder to purchase,  upon
the terms and conditions  hereinafter set forth, shares of the Company's Class A
common stock, $0.01 par value per share (the "Class A Common Stock").

     NOW, THEREFORE,  in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:

                                    ARTICLE I

                                GRANT OF WARRANT

     For value received, this Warrant Agreement entitles the Holder to subscribe
for and  purchase up to 86,207  shares of Class A Common  Stock,  at a price per
share of $2.90 (the "Warrant  Price").  As used herein,  the term "Shares" shall
mean the  Company's  Class A Common  Stock,  or any stock into or for which such
Class A Common Stock shall have been or may  hereafter be converted or exchanged
pursuant  to the  Articles of  Organization  of the Company as from time to time
amended as provided by law and in such articles (hereinafter the "Charter"), and
the term "Grant Date" shall mean  September  19,  1997.  The number of shares of
Class A Common Stock  purchasable  pursuant to the rights granted  hereunder and
the  purchase  price for such  shares of Class A Common  Stock  are  subject  to
adjustment pursuant to the provisions contained in this Warrant Agreement.

                                   ARTICLE II

                       EXERCISE OF WARRANT; EXERCISE PRICE

     Section 2.1 Term. Subject to the provisions of this Warrant Agreement,  the
purchase right represented by this Warrant Agreement is exercisable, in whole or
in part,  at any time and from time to time  from and  after the Grant  Date and
prior to September 19, 2002 (the "Exercise Period").

<PAGE>

     Section 2.2 Method of Exercise.  The  purchase  right  represented  by this
Warrant Agreement may be exercised by the holder hereof, in whole or in part and
from time to time,  by the  surrender of this warrant (with the Form of Election
attached  hereto as  Exhibit A duly  executed ) at the  principal  office of the
Company and by the payment to the Company by  certified or bank check or by wire
transfer,  of an amount equal to the Warrant  Price  multiplied by the number of
shares then being purchased (the "Exercise Price").

     Section  2.3  Issuance  of Shares of Common  Stock.  As soon as  reasonably
practicable  after the exercise of all or part of the purchase right represented
by this Warrant Agreement,  the Company shall (provided that it has received the
Form of Election duly  executed,  accompanied  by payment of the Exercise  Price
pursuant to Section 2.2 hereof for each of the shares of Class A Common Stock to
be  purchased)  cause  certificates  for the  number of shares of Class A Common
Stock to be issued in respect of this  Warrant  Agreement  to be delivered to or
upon the order of the Holder,  registered  in such name as may be  designated by
such holder;  provided  that if the Class A Common Stock is to be  registered in
the name of any entity or person other than the Holder,  the Company may require
evidence of compliance by the Holder with all applicable securities laws.

                                  ARTICLE III

                  RESERVATION AND AVAILABILITY OF COMMON STOCK;
                            ADJUSTMENTS; REGISTRATION

     Section 3.1 Reservation of Common Stock.  The Company  covenants and agrees
that it will cause to be kept available out of its authorized and unissued Class
A Common Stock,  or its  authorized  and issued Class A Common Stock held in its
treasury,  the number of shares of Class A Common Stock that will be  sufficient
to permit the exercise in full of this Warrant Agreement.

     Section 3.2 Common Stock to be Duly  Authorized and Issued,  Fully Paid and
Non-assessable.  The  Company  covenants  and agrees  that it will take all such
action as may be  necessary  to ensure  that all shares of Class A Common  Stock
delivered upon exercise of this Warrant Agreement shall, at the time of delivery
of the certificates for such shares,  be duly and validly  authorized and issued
and fully paid and non-assessable shares.

     Section 3.3 Common Stock  Record Date.  Each person or entity in whose name
any  certificate  for shares of Class A Common Stock is issued upon the exercise
of this  Warrant  Agreement  shall for all purposes be deemed to have become the
holder of record of the shares of Class A Common Stock  represented  thereby on,
and such  certificate  shall be dated, if  practicable,  the date upon which the
Form of Election was duly executed and payment of the aggregate  Exercise  Price
was made  pursuant to Section 2.2 hereof.  Prior to the exercise of this Warrant
Agreement, the Holder shall not be entitled to any rights of a stockholder of

                                        2

<PAGE>


the Company  with  respect to the shares of Class A Common  Stock for which this
Warrant Agreement shall be exercisable, including, without limitation, the right
to  vote,  to  receive  dividends  or other  distributions  or to  exercise  any
preemptive  rights  and shall  not be  entitled  to  receive  any  notice of any
proceedings of the Company, except as provided herein.

     Section 3.4  Adjustment of Warrant  Price and Number of Shares.  The number
and kind of securities  purchasable  upon the exercise of the Warrant  Agreement
and the Warrant Price shall be subject to adjustment  from time to time upon the
occurrence of certain events, as follows:

     3.4  (a)  Reclassification.  In  case of any  reclassification,  change  or
conversion  of the  Company's  Class A Common  Stock (other than a change in par
value,  or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination),  the Company,  shall execute a new
Warrant Agreement (in form and substance reasonably  satisfactory to the Holder)
providing  that the  Holder of this  Warrant  Agreement  shall have the right to
exercise  such new Warrant  Agreement  and upon such exercise and payment of the
then  applicable  Warrant  Price to receive,  in lieu of each Share  theretofore
issuable upon exercise of this Warrant Agreement,  the kind and amount of shares
of  stock,   other   securities,   money  and  property   receivable  upon  such
reclassification  or change  by a holder  of one share of Class A Common  Stock.
Such new Warrant Agreement shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
3.4. The provisions of this Section 3.4 (a) shall  similarly apply to successive
reclassifications and changes.

     3.4 (b)  Subdivision or  Combination of Shares.  If the Company at any time
while this Warrant Agreement  remains  outstanding and unexpired shall subdivide
or combine its Class A Common Stock,  the Warrant Price and the number of Shares
issuable upon exercise hereof shall be equitably adjusted.

     3.4 (c) Stock  Dividends.  If the  Company at any time  while this  Warrant
Agreement is outstanding and unexpired shall pay a dividend payable in shares of
Class A Common Stock (except any distribution  specifically  provided for in the
foregoing  Sections 3.4 (a) and (b)),  then the Warrant Price shall be adjusted,
from and after the date of  determination  of  shareholders  entitled to receive
such  dividend or  distribution,  to that price  determined by  multiplying  the
Warrant Price in effect  immediately  prior to such date of  determination  by a
fraction (a) the numerator of which shall be the total number of shares of Class
A Common Stock  outstanding  immediately prior to such dividend or distribution,
and (b) the  denominator of which shall be the total number of shares of Class A
Common Stock outstanding immediately after such dividend or distribution and the
number  of Shares  subject  to this  Warrant  Agreement  shall be  appropriately
adjusted.

     3.5 Registration of Shares.  The Company  covenants and agrees that it will
use its best  efforts  to  ensure  that  all  shares  of  Class A  Common  Stock
deliverable  upon  exercise in full of the purchase  right  represented  by this
Warrant  Agreement are  registered  under the Securities Act of 1933, as amended
(the "Act") at the same time as Registrable Shares issuable on the conversion of
the Series A Convertible Preferred Stock issued to the Holder.

                                        3

<PAGE>

     3.6 No  Impairment.  The Company  will not, by  amendment of its Charter or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution,  issue or sale of securities or any other voluntary action,
avoid or seek to avoid the  observance or  performance of any of the terms to be
observed or performed  hereunder  by the Company,  but will at all times in good
faith assist in the carrying out of all the provisions of this Warrant Agreement
and in the taking of all such action as may be necessary or appropriate in order
to  protect  the  rights  of  the  Holder  of  this  Warrant  Agreement  against
impairment.

     3.7 Notices of Record Date.  In the event of any taking by the Company of a
record of its shareholders  for the purpose of determining  shareholders who are
entitled to receive  payment of any dividend or other  distribution,  or for the
purpose of determining  shareholders who are entitled to vote in connection with
any  proposed  merger or  consolidation  of the  Company  with or into any other
corporation,  or any proposed sale,  lease or conveyance of all or substantially
all of the assets of the Company,  or any proposed  liquidation,  dissolution or
winding up of the Company,  the Company shall mail to the holder of this Warrant
Agreement,  at least fifteen (15) days prior to the date  specified  therein,  a
notice  specifying  the date on which  any such  record  is to be taken  for the
purpose of such dividend,  distribution or vote, and the amount and character of
such dividend, distribution or vote.

                                   ARTICLE IV

                HOLDER REPRESENTATIONS, WARRANTIES AND COVENANTS

     The Holder  represents  and warrants to and  covenants  with the Company as
follows:

     Section 4.1  Representations.  It understands the risks of investing in the
Company  and can afford a loss of its entire  investment.  It is  acquiring  the
Warrant  for  investment  for its own  account  and not with the view to, or for
resale in connection  with any  distribution  thereof.  It understands  that the
Warrant and the shares of Class A Common Stock  issuable upon  exercise  thereof
have not been registered under the Act, or any state blue sky laws, by reason of
specified exemptions from the registration  provisions of the Act and such laws.
It  acknowledges  that the Warrant and the shares of Common Stock  issuable upon
exercise  thereof  must  be  held  indefinitely  unless  they  are  subsequently
registered under the Act or an exemption from such registration is available. It
has been advised or is aware of the provisions of Rule 144 promulgated under the
Act, which permits the resale of shares purchased in a private placement subject
to the  satisfaction  of  certain  conditions  and  that  such  Rule  may not be
available for resale of the shares issuable upon the exercise of the Warrant. It
has had an  opportunity to (i) discuss  the Company's  business,  management and
financial  affairs with its  management  (ii) review  the  financial  statements
relating to the Company's last two fiscal years and  (iii) review  the Company's
facilities.

                                        4

<PAGE>


     Section 4.2 Restrictions on Transferability.  Neither the Warrant,  nor the
shares  of  Class A  Common  Stock  received  upon  exercise  thereof,  shall be
transferable, except upon the conditions specified in and in accordance with the
terms  of this  Article  IV or  until  such  time as an  effective  registration
statement  covering  the shares  issuable  upon the exercise of this Warrant has
been filed with the Securities and Exchange Commission (the "Commission").

     Section 4.3 Restrictive Legend. Each certificate representing shares of the
Company's  Class A Common Stock  issuable upon  exercise of the Warrant,  or any
other  securities  issued in respect  of the Class A Common  Stock  issued  upon
exercise of the Warrant, upon any stock split, stock dividend, recapitalization,
merger,  consolidation or similar event, shall be stamped or otherwise imprinted
with a legend in  substantially  the  following  form (in addition to any legend
required under  applicable  state  securities laws) unless and until such shares
have been registered under the Act.:

                   THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
                 REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
                     AMENDED, AND MAY NOT BE TRANSFERRED IN
                      VIOLATION OF SUCH ACT, THE RULES AND
                   REGULATIONS THEREUNDER OR THE PROVISIONS OF
                                  THIS WARRANT.

     Section 4.4 Restrictions on, and Notice of, Proposed Transfers.  The Holder
agrees that prior to any proposed  transfer of this Warrant or any of the shares
of Class A Common Stock  issuable upon  exercise of this Warrant  (collectively,
the  "Restricted  Securities"),  in the  absence  of an  effective  registration
statement filed with the Commission  covering the shares of Class A Common Stock
issuable upon exercise of the Warrant,  the Holder shall give written  notice to
the Company of its  intention  to effect such  transfer.  Each such notice shall
describe the manner and  circumstances  of the proposed  transfer in  sufficient
detail, and shall be accompanied by a written opinion of legal counsel who shall
be  reasonably  satisfactory  to  the  Company,  addressed  to the  Company  and
reasonably  satisfactory in form and substance to the Company's counsel,  to the
effect that the proposed  transfer of the Restricted  Securities may be effected
without  registration  under  the Act or  under  any  applicable  state or other
securities laws.



                                    ARTICLE V

                                  MISCELLANEOUS

     Section 5.1 Notices.  Notices or demands relating to this Warrant Agreement
shall  be  sufficiently  given  or made if sent  by  first-class  mail,  postage
prepaid,    addressed   as   follows,    or   telecopied,    or   delivered   by
nationally-recognized overnight or other courier:

                                        5

<PAGE>


If to the Holder:                   ProFutures Special Equities Fund, L.P.
                                    1310 Highway 620 South
                                    Suite 200
                                    Austin, TX 77734

If to the Company:                  PHC, Inc.
                                    200 Lake Street
                                    Peabody, MA 01960
                                    Attention:  Bruce A. Shear
                                    Fax (508) 536-2677

copy to:                            Roslyn G. Daum, Esq.
                                    Choate, Hall & Stewart
                                    Exchange Place
                                    Boston, MA  02109
                                    Fax:  (617) 248-4000

     Section 5.2  Successors.  All the covenants and  provisions of this Warrant
Agreement  by or for the  benefit of the  Company  or the Holder  shall bind and
inure to the  benefit of their  respective  successors  and  assigns  hereunder;
provided that this Warrant Agreement may be assigned by the Holder only with the
prior  written  consent of the Company,  and without such consent any  attempted
transfer shall be null and void.

     Section 5.3 MASSACHUSETTS CONTRACT. THIS WARRANT AGREEMENT AND THE WARRANT,
AND  ALL   QUESTIONS   RELATING   TO  THE   INTERPRETATION,   CONSTRUCTION   AND
ENFORCEABILITY OF THIS WARRANT  AGREEMENT AND THE WARRANT,  SHALL BE GOVERNED IN
ALL RESPECTS BY THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.

     Section 5.4 Amendments and Waivers.  Except as otherwise  provided  herein,
the  provisions  of this  Warrant  Agreement  may not be  amended,  modified  or
supplemented, other than by a written instrument executed by the Company and the
Holder.

     Section  5.5  Severability.  In the  event  that  any  one or  more  of the
provisions contained herein, or the application thereof in any circumstances, is
held  invalid,  illegal or  unenforceable  in any respect  for any  reason,  the
validity,  legality  and  enforceability  of any such  provision  in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby, it being intended that all of the rights and privileges of the
Company the Holder shall be enforceable to the fullest extent permitted by law.


                                        6

<PAGE>


     IN WITNESS WHEREOF,  the parties hereto have caused this Warrant  Agreement
to be duly  executed  and  delivered,  all as of the date and year  first  above
written.

                                          PHC, INC.


                                          By:                                  
                                              Name:  Bruce A. Shear
                                              Title:  President


                                          PROFUTURES SPECIAL EQUITIES
                                          FUND, L.P.
                                          By ProFutures Fund Management, Inc.,
                                          a General Partner



                                          By:                                  
                                              Name:  Gary D. Halbert
                                              Title:  President



DS1.363748.1


                                        7

<PAGE>

                                    EXHIBIT A

                                Form of Election



To:      PHC, Inc.
         200 Lake Street
         Peabody, MA  01960
         Attention:  Bruce A. Shear


     1. The undersigned hereby elects to purchase shares of Class A Common Stock
PHC, Inc. pursuant to the terms of the attached Warrant  Agreement,  and tenders
herewith payment of the Exercise Price of such shares in full.

     2. Please  issue a  certificate  or  certificates  representing  the shares
deliverable  upon  the  exercise  set  forth in  paragraph  1 in the name of the
undersigned  or,  subject to compliance  with the  restrictions  on transfer set
forth in Article IV of the Warrant Agreement, in such other name or names as are
specified below:


                                                                          
                                                      (Name)

                                                                          

                                                                          

                                                                          
                                                     (Address)

     3. The undersigned  represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present  intention of  distributing or reselling such shares until and unless
such shares are registered under the Securities Act of 1933.


                                                                             
                                                 Signature


                    
Date
0584401-0000
DS1.363748.1

                                        8
<PAGE>
Exhibit 99.1

                      CAUTIONARY STATEMENT FOR PURPOSES
                    OF THE "SAFE HARBOR" PROVISIONS OF THE
                    PRIVATE LITIGATION REFORM ACT OF 1995

      PHC, Inc.  (the  "Company")  desires to take  advantage of the new "safe
harbor"  provisions of the Private  Securities  Litigation  Reform Act of 1995
and is including this Exhibit 99.1 in its Form 10-KSB in order to do so.

      The  Company  wishes to caution  readers  that the  following  important
factors,  among others,  in some cases have affected,  and in the future could
affect,  the Company's  actual  results and could cause the  Company's  actual
consolidated  results for the Company's  current quarter and beyond, to differ
materially from those expressed in any forward-looking  statements made by, or
on behalf of, the Company.

      During its last fiscal  year and in certain  other  fiscal  years of its
operation,  the Company  has  generated  losses and there can be no  assurance
that future losses will not occur.

      The  Company  has   experienced  a  significant   increase  in  accounts
receivable in recent years and there can be no assurance  that this trend will
not continue,  and that if it does,  that it will not have a material  adverse
effect on the Company's cash flow and financial performance.

      The  Company  historically   experiences  and  expects  to  continue  to
experience a decline in revenue in its fiscal  quarters ending December 31 due
to a  seasonality  decline  in  revenue  from the  Company's  substance  abuse
facilities during such period.

      Payment  for the  company's  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 Medicaid  programs;  payment
for psychiatric  services is provided by private insurance  carriers,  managed
care  organizations  and the  Medicare  and  Medicaid  programs.  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  connection  with  the  substance  abuse
treatment  provided by the Company and changes in the sources of the Company's
revenues   could    significantly    alter   the   Company's    profitability.
Additionally,  the Company  experiences  greater  delays in the  collection of
amounts  reimbursable  by the  Medicare  and  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 to long-term  care could have a materially  adverse effect on
the Company as would an increase in the  percentage of the Company's  patients
who are insured by Medicare or Medicaid.

      Cost  containment  pressures  from private  insurers in the Medicare and
Medicaid  programs  may begin to  restrict  the amount  that the  Company  can
charge for its services.

      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 government payors.

      The Company has  substantial  receivables  from  Medicare  and  Medicaid
which  constitute a  concentration  of credit risk should these agencies defer
or be unable to make reimbursement payments as due.

      The Company often  experiences  significant  delays in the collection of
amounts  reimbursable by third-party payors.  Although the Company believes it
maintains  an  adequate  allowance  for  doubtful  accounts,  if the amount of
receivables  which eventually  becomes  uncollectible  exceeds such allowance,
the Company could be materially adversely affected.

      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.

      There  can  be no  assurance  that  occupancy  rates  at  the  Company's
facilities  will  continue  at  present  levels.  Similarly,  there  can be no
assurance that the patient census will not decrease in the future.

      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 such acquired
facilities  will be  profitable.  The failure of the company to implement  its
acquisition  strategy could have a materially  adverse effect an the Company's
financial  performance.  Moreover,  the inherent risks of expansion could also
have a material adverse effect on the Company's business.

      Additionally,  the company's acquisition program will be directed by the
President and Chief Executive  officer of the Company and the Company does not
intend to seek stockholder  approval or 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.  Furthermore,  the company's acquisition strategy is highly
dependent on access to capital, of which there can be no assurance.

      The  Company  and the  healthcare  industry  in general  are  subject to
extensive  federal, state and local regulation  with respect to liicensure and
conduct of  operations.  There can be no  assurance  that the Company  will be
able to obtain new  licenses  to affect 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 healthcare  industry.  In
addition,  both the Medicare  and  Medicaid  programs are subject to statutory
and  regulatory  changes and there can be no assurances  that  payments  under
those  programs  to  the  Company  will,  in the  future,  remain  at a  level
comparable to the present  level or be sufficient to cover the cost  allocable
to such patients.

      Bruce A. Shear the President and Chief Executive  officer of the Company
together  with  his  affiliates  is  able to  control  all  matters  requiring
approval  of the  stockholders,  including  the  election of a majority of the
directors, as a result of his ownership of the Company's stock.

      There can be no assurance  that the Company will be successful in hiring
or  retaining  the  personnel it requires for  continued  growth,  or that the
Company  will be able to  continue  to  attract  and retain  highly  qualified
personnel, particularly skilled healthcare personnel.

      The  healthcare  business  is highly  competitive  and subject to excess
capacity.

      The  Company  has  entered  into  relationships  with  large  employers,
healthcare  institutions,  labor  unions  and other  key  clients  to  provide
treatment  for  chemical  dependency  and  substance  abuse  as well as  other
services  and 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.

      Existing  environmental   contamination  at  certain  of  the  Company's
facilities  and potential  future  environmental  contamination  at facilities
acquired  by  the  company  could  have a  materially  adverse  effect  on the
Company's operations.



<PAGE>

      On October 31,  1994,  the Company was served with a summons for a Civil
Action  in  the  Superior   Court   Department  of  the  Trial  Court  of  the
Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"),  an entity which
contracted  with the  Company in 1992 to provide  rehabilitation  therapy  and
related administrative  services to the Company's long-term care facility (the
"Action").  The complaint  alleged that the Company owed NovaCare  contractual
damages in the  amount of  approximately  $587,000,  plus  interest,  attorney
fees,  costs of  collection,  and  double  or  triple  damages  pursuant  to a
Massachusetts  statute  prohibiting unfair and deceptive trade practices.  The
Company filed a counterclaim  alleging that NovaCare  breached the contract in
question  and that the  Company  may be owed  damages  in excess of the amount
sought by NovaCare.

     On February  13,  1996,  the company  settled the Action by agreeing to pay
NovaCare  an amount  less than its claim.  The  Company  is not paying  NovaCare
accrued interest,  attorney's fees, costs of collection,  or multiple damages. A
portion of the  settlement  amount has  already  been paid.  The  balance of the
settlement amount is payable over twelve (12) months with interest on the unpaid
balance at 9.5%. In the event that the Company defaults an its obligation to pay
the  settlement  amount,  it has agreed to entry of  judgment  against it in the
amount of $457, 637.46 (the "Judgment"). The Judgment represents the full unpaid
balance of NovaCare's claim against the Company, including interest,  attorney's
fees, and costs of collection. Any amounts paid by the Company to NovaCare after
February  9, 1996 shall be  deducted  from the  Judgment.  Until the  settlement
amount is paid, NovaCare will continue to hold a mortgage on a day care property
owned by the Company in Saugus, Massachusetts.  As of Fiscal Year Ended June 30,
1997, this obligation has been paid in full.

      Interruption by fire,  earthquakes or other catastrophic  events,  power
failures,  work  stoppages,  regulatory  actions or other causes to any of the
Company's operations could have a materially adverse impact on the Company.

      The company has and in the future may enter into  transactions  in which
it acquires  businesses or obtains financing for a consideration that includes
the issuance of stock,  warrants,  options or convertible debt at a price less
than the value at which the Company's  stock may then be trading in the public
markets or which are  convertible  into or  exercisable  for Common Stock at a
conversion  rate or  exercise  price less than such value.  Such  transactions
may result in  significant  dilution to the existing  holders of the Company's
stock.

      The Company  has  authorized  1,000,000 shares of  Preferred  Stock, the
terms of which may be fixed and which may be issued by the Company's  Board of
Directors, without  stockholder approval.  The issuance of the Preferred Stock
could  have the  affect  of  making  it more  difficult  for a third  party to
acquire the Company and may result in the  issuance of stock that  dilutes the
existing  stockholders  and has  liquidation,  redemption,  dividend and other
preferences superior to the Company's outstanding Class A Common Stock.


NOTE:
     THIS DOES NOT DISCUSS PREFERRED STOCK,  REDEMPTION OF WARRANTS, THE EFFECTS
OF DE-LISTING FROM NASDAQ,  PENNY STOCK RULES OR THIN FLOAT. THOSE SUBJECTS ARE,
HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3.



<PAGE>

EXHIBIT 10.123                                                    FC-127
                                                                 (Sealed)
                                 MASTER CONTRACT
                                    AGREEMENT


This Agreement,  effective the lst day of January, 1997, is by and between the
FAMILY INDEPENDENCE  AGENCY,  having a mailing address of 235 S. Grand Avenue,
P.O. Box 30037, Lansing,  Michigan 48909, Lansing, Michigan 48926 (hereinafter
referred  to as the  "Agency'),  and Harbor  Oaks  Hospital,  having a mailing
address  of 200  Lake  Street,  Suite  102,  Peabody,  MA  01960  (hereinafter
referred to as the "Contractor").

The purpose of this  Agreement  is to specify the rights and  responsibilities
of the Agency and of the  Contractor  in the  provision of services to clients
and to assure  that those  services  are  provided in a manner and to a degree
which will serve the best  interests of each client.  The Agency has the legal
authority to purchase services from private agencies.

WHEREAS,  the  Agency  has been  designated  to  cooperate  with  the  Federal
government  and with all other  departments  or  agencies  of the State in any
plans  established  in  cooperation  with  the  Federal  government,   and  is
authorized  to contract  with State or local units of  government  and private
agencies under the provisions of MCLA 400.14 through 400.122; and,

WHEREAS,  the Agency has the authority to purchase  services  under Title IV B
and Title IV E of the Social  Security Act and under  provisions of MCL 400.14
through 400.122; and,

WHEREAS,  Bruce A. Shear has lawful  authority to bind the  Contractor  to the
terms set forth in this Agreement.

In  consideration  of the  promises  and mutual  covenants  contained  in this
Agreement, the Agency and the Contractor agree as follows:



<PAGE>

      SECTION I. PURCHASE OF SERVICES AND PAYMENT

A.   Incorporation of Service Contracts:  The attached Service Contract(s) are
     incorporated  into this  Agreement  and are made part of this  Agreement.
     The Contractor  agrees to provide the services  described in the attached
     Service  Contract(s) and the Agency agrees to make the payments described
     in those Service Contract(s).

B.   Appropriation  of Funds:  The parties  acknowledge  that  funding for the
     services to be provided is  dependent on annual  appropriations  from the
     Michigan  Legislature.  Because the Contractor provides services to court
     and state wards under Agency supervision,  reduced  appropriations impair
     the  Agency's   ability  to  purchase  the  entire  range  of  contracted
     services.  If  appropriations  are less than  requested  for the  Agency,
     reduced  legislatively or by executive order, the parties shall develop a
     written  modification  of this Agreement  within thirty days and prior to
     any  reduction  in  payments  to  the  Contractor.  Concurrent  with  the
     development of written modifications to this agreement,  the Agency shall
     formally  request of the Agency of Management and Budget,  a supplemental
     appropriation  sufficient to fund the projected  shortfall.  The modified
     Agreement  shall  provide  for  reductions  in  services  required  to be
     provided commensurate with the funds which are made available.

This  amendment  must  permit  the  Contractor  to remain in  compliance  with
licensing  standards  and  statutory  requirements,  and may not  threaten the
physical  health or safety of youth  served  under  this  Agreement.  Specific
funding  and  service  reductions  shall  be  defined  in  amendments  to  the
individual service contracts which are part of this Agreement.

If the  Contractor  and the Agency  cannot reach  agreement  within the 30 day
period, the Agency or the Contractor may terminate this Agreement  immediately
upon  written  notice to the other party,  notwithstanding  Section 11. C., of
this Agreement.

C.  Fees and  Other  Sources  of  Funding:  The  Contractor  shall not seek or
    obtain  funding  through fees or charges to any client for services  which
    the Agency reimburses the Contractor under this Agreement.

If  other  governmental  funding  is  obtained  for  the  same  services,  the
Contractor  shall  immediately  return  to  the  Agency  its  portion  of  the
duplicate  amount.  However,  the Contractor may seek gifts,  grants and other
sources  of  funding  in order to  supplement  services  provided  under  this
Agreement.




                                       -2-
<PAGE>
D.   Payment  Reconciliation:  When the  Agency  determines  through  audit or
     reconciliation  of days  of care  that an  under  or  overpayment  to the
     Contractor  has occurred,  the Agency shall remit to the  Contractor  the
     amount of underpayment  within 30 days, or the Contractor  shall remit to
     the Agency the amount of  overpayment  within 30 days. If the  Contractor
     disagrees  with  the  Agency's  finding  of over or  under  payment,  the
     Contractor   may  within  30  days  of   notification   of  the  over  or
     underpayment,  prepare a written justification for revision of the amount
     and shall be afforded an opportunity  for a conference  with the Agency's
     designee.   The  amount   owed  must  be  paid  within  30  days  of  the
     Contractor's  written notification from the Agency of its decision on the
     reconciliation.  The  Contractor  shall make good faith efforts to notify
     the Agency of overpayments.

E.   Increased  Cost of Service:  In the event of a  substantial  change in the
     cost  of  services  (defined  as 5% or  more of the  rate  or  total  cost
     established  in  a  service  contract)  resulting  from  changes  in  law,
     regulation  or  Agency  policies,  the  parties  shall,  within  30  days,
     negotiate  a change in  payments  to the  Contractor  to cover the changed
     cost of providing services.


     SECTION II.  TERMINATION, CANCELLATION, DISPUTE RESOLUTION

  A. Licensure:  If  applicable  law  requires the  licensing of  Contractor's
     facilities or services,  this  Agreement  shall be in effect only so long
     as the Contractors  facilities and services  covered by the Agreement are
     licensed  as  required  by 1973  P.A.  116,  as  amended  and  applicable
     administrative  rules for child  caring  institutions  and child  placing
     agencies.  If the  Contractors  license is revoked  pursuant to the Child
     Care  Organizations  Act,  MCL  722.111  et seq.  and the  Administrative
     Procedures  Act, MCL 24.271 et seq.,  this Agreement shall be immediately
     terminated by the Agency.

B.   Cancellation  of  Contract by the Agency may be for (a) default of the
     Contractor,  or (b) lack of further need for the  service.  Default is
     defined as the failure of the Contractor to fulfill the obligations of
     the contract. In case of default by the Contractor, or lack of further
     need for the service  specified in the contact due to program changes,
     changes in laws, rules or regulations,  relocation of offices, or lack
     of  funding,  the  Agency  may cancel  the  contract  without  further
     liability  to the Agency or its  employees,  by giving the  Contractor
     written  notice of such  cancellation  sixty days prior to the date of
     cancellation.  The notice  shall be by  certified  mail or  personally
     delivered,  setting  forth the  particular  reasons  for the  proposed
     action and fixing a date,  not less than  thirty days from the date of
     service, on which the Contractor shall be afforded the opportunity for

                                      -3-
     


<PAGE>

     a conference  with the  Director or his/her  designee.  The  Agreement
     shall  not be  terminated  until  the  Agency  director  notifies  the
     Contractor  in  writing of his/her  findings  of fact and  conclusions
     following the conference.  The Contractor may terminate this Agreement
     upon sixty days written  notice to the Agency at any time prior to the
     completion  of the  Agreement  period.  In  addition,  the  Agency may
     immediately  cancel the  contract  without  further  liability  to the
     Agency,  or  its  employees  if  the  Contractor,  an  officer  of the
     Contractor, or an owner is convicted of a criminal offense incident to
     application for or performance of a State,  public or private contract
     or subcontract,  or convicted of a criminal offense  including but not
     limited  to  any  of  the  following:  embezzlement,  theft,  forgery,
     bribery,  falsification  or destruction of records,  receiving  stolen
     property,  attempting  to  influence  a public  employee to breach the
     ethical conduct standards for State of Michigan  employees;  convicted
     under state or federal antitrust  statutes;  or convicted of any other
     criminal offense which in the sole discretion of the Agency,  reflects
     on the Contractor's business integrity.

C.   Termination  of  Service  Contracts:  When  any  of  the  conditions  for
     termination  listed  in  this  section  apply  only to  specific  service
     contracts and not to the Contractor's entire operation,  then termination
     shall be  limited  to the  specific  service  contract(s)  affected.  Any
     individual  service contract which is incorporated into this Agreement by
     Section I. A., may be terminated  with no effect on the remainder of this
     Agreement or other service contracts.

D.   Closeout: When this Agreement is concluded or terminated,  the Contractor
     shall   provide  the  Agency,   within  90  days  after   conclusion   or
     termination,  all required financial,  performance and other reports. The
     Agency shall make payments to the Contractor  for allowable  reimbursable
     costs not covered by previous  payments.  The Contractor  shall refund to
     the Agency any payments or funds  advanced to the Contractor in excess of
     allowable reimbursable expenditures.

Payment  shall  be  made  by the  responsible  party  within  150  days of the
conclusion or  termination of the  Agreement,  except for additional  payments
resulting  from  reconciliation  of  days  of  care  or  audit  findings,   in
accordance with Section I. D., of this Agreement.

E.   Dispute  Resolution:  Except as otherwise provided in this Agreement,  the
     parties to this Agreement  shall notify each other in writing of any claim
     against  the  other  party,  for  breach  of  any  of the  terms  of  this
     Agreement.  No suit may be  commenced  by either  party for breach of this
     Agreement  prior  to the  expiration  of 30  days  from  the  date of such
     notification.  During this 30-day  period,  the  Contractor and the Agency
     shall meet at  reasonable  times and places as often as necessary  for the
     purpose of seeking a resolution of the dispute.


                                       -4-
<PAGE>

     SECTION III. RECORDS, REPORTING AND MONITORING

A.   Reports.  The Agency shall  establish,  publish and make available to the
     Contractor  reasonable program and fiscal review reporting  requirements,
     procedures,  and forms  prior to the  effective  date of this  Agreement.
     Except  to  comply   with   federal  or  state   laws,   or   promulgated
     administrative  rules or court orders,  or to maximize federal funding or
     other funding  sources,  those  reporting  requirements,  procedures  and
     forms may not be  changed  during the term of this  Agreement  unless the
     Contractor  consents in writing and unless the Agency,  if so  requested,
     provides  technical  assistance in the use of such forms,  procedures and
     reports.  The  Contractor's  consent shall not be unreasonably  withheld.
     The   requirement   for  written  consent  may  be  waived  by  voluntary
     compliance by the Contractor.

B.   Maintenance of Records:  The Contractor shall retain all records relevant
     to this  Agreement  for six years  from the end of the  contract  year to
     which records  relate.  The  Contractor  shall assure,  as a condition of
     any  change  of  management,  that new  management  shall  maintain  such
     records for any unexpired portion of the six-year period.

C.  Reporting  Requirement  Pertaining to Former State of Michigan  Employees:
    The  Contractor  shall report within two days after the end of each month,
    the name(s) and social security  number(s) of any former State of Michigan
    employees who:

    a.  Retired under the provisions of Acts 2 and 3, PA 1984 (between June
        2, 1984 and September 30, 1984); and

    b.   Performed services purchased by this Agency through this Agreement.
         These reports shall be submitted by memo to:

         Office of Contract Management
         235 S. Grand Avenue
         P.O. Box 30037
         Lansing, Michigan 48909

    and must include the Contractor's  name,  contract  number,  and the month
    and year to which the report pertains.

  D.  Financial  Accounting.  The Contractor shall maintain  financial records
      in accordance with generally accepted  accounting  principles applied in
      a consistent manner.



                                     -5-
<PAGE>

E.   Access to Programs.  The  Contractor  shall permit the Agency or its duly
     authorized  agents  reasonable  access to facilities  to conduct  program
     review.  Such access  shall not  interfere  with program  operations,  in
     that they shall be preceded by 48 hours prior  notice of visit unless the
     Agency  believes  the  health  or  welfare  of  children  is  in  danger.
     Otherwise, such visits shall be within normal working hours.


     SECTION IV. INSURANCE, INDEMNIFICATION AND LITIGATION

A.   Insurance  Coverage.  The  Contractor  shall provide and maintain  public
     liability  insurance  in such  amounts as are  reasonable  and prudent to
     insure against claims which may arise out of the Contractor's  operations
     under the terms of this  Agreement  and provide  proof of such  insurance
     coverage to the Agency  prior to the  effective  date of this  Agreement.
     Unemployment  compensation  coverage, and worker's compensation insurance
     shall be maintained in accordance with  applicable  federal and state law
     and regulations.

B.   Liability.  The Contractor  shall  indemnify,  save and hold harmless the
     Agency  against any  liability  of any kind which the Agency may sustain,
     incur or be  required to pay  arising  out of this  Agreement;  provided,
     however,  that  the  provisions  of the  paragraph  shall  not  apply  to
     liabilities  or  expenses  caused by or  resulting  from the  willful  or
     negligent  acts or  omissions  of the  Agency or any of its  officers  or
     employees.

C.   Notification  Regarding  Litigation.  If either party becomes involved in
     or is  threatened  with  litigation  related to the provision of services
     under this Agreement,  that party shall immediately notify the other, and
     the other may enter the litigation to protect its interests.


     SECTION V. COMPLIANCE WITH APPLICABLE LAWS

  A. Compliance  with Applicable Laws and  Regulations.  The Contractor  shall
     comply   with  all   applicable   federal,   state  and  local  laws  and
     regulations, as they may apply to the performance of this Agreement.

  B. Compliance   with  Civil   Rights   Laws.   The   Contractor   shall  not
     discriminate  against  any  employee or  applicant  for  employment  with
     respect to hire, tenure, terms, conditions,  or privileges of employment,
     or a matter  directly or  indirectly  related to  employment,  because of
     race,  color,  religion,  national origin,  age, sex, height,  weight, or
     marital status as provided under MCLA 37.2209.  The Contractor shall also
     comply with the Michigan  Handicappers  Civil Rights Act, MCLA 37.1101 et
     seq.  and  Section 504 of the Federal  Rehabilitation  Act of 1973,  P.L.
     93-112,  87 Stat.  394.  Further,  the  Contractor  shall comply with the
     Americans with Disabilities Act of 1990 (ADA),  P.L.  101-336,  104 Stat.
     328,   which   prohibits    discrimination   against   individuals   with
     disabilities and provides enforcement standards.

                                       -6-
<PAGE>

     SECTION VI. CONFIDENTIALITY

A.   Confidentiality.  Records  regarding  children and facts  compiled  about
     children and their  parents and relatives  are  confidential.  The use or
     disclosure  of  identifying  information  concerning  children  and their
     families  obtained in connection  with the  performance of this Agreement
     shall  be   restricted   to   purposes   directly   connected   with  the
     administration   of  the   programs   implemented   by  this   Agreement.
     Furthermore,  the  Contractor  may not publish or distribute any material
     identifying  any child  receiving  services under this Agreement  without
     prior  written  permission  from the  child  (age 14 or  older),  his/her
     parents or guardians, and the Agency.


     SECTION VII. MISCELLANEOUS

A.   Subcontracts.  The  Contractor  shall not assign this  Agreement or enter
     into  subcontracts  for direct client  services with  additional  parties
     without  obtaining  prior written  approval of the Agency which shall not
     be  unreasonably  withheld.  The Agency,  as a condition of granting such
     approval,  shall require that such assignees or  subcontractors  shall be
     subject  to  all  conditions  and  provisions  of  this  Agreement.   The
     Contractor  shall be responsible  for the performance of all assignees or
     subcontractors.

B.  Agreement   Inclusiveness.   This  Agreement  and  the  attached   Service
    Contract(s)  contain  all of the  terms  and  conditions  agreed to by the
    parties.  No  other  understanding,  oral  or  otherwise,  regarding  this
    Agreement shall be deemed to exist or to bind the parties.

C.  Waiver,   Modifications.   No  modification  of  the  provisions  of  this
    Agreement  shall  be  binding  upon  the  parties  unless  signed  by both
    parties,  and in  writing.  The  Contractor  shall,  upon  request  by the
    Agency and within 15 days of receipt of a proposed  amendment required due
    to revision of Federal or State law or  regulations,  sign and return such
    amendment.  If the  Contractor  refuses  to sign and  return an  amendment
    which requires compliance with Federal or State law, or regulations,  this
    Agreement shall terminate upon such refusal.

D.   Severability.  Each  paragraph  of this  Agreement  shall be  treated  as
     severable.   If  any   paragraph   is   adjudged   illegal,   invalid  or
     unenforceable,  this Agreement shall remain in full force and effect,  as
     though such paragraph had never been contained in this Agreement.

E.   Notices.  Any notice  required under this Agreement  shall be sent to the
     parties and addresses identified on page 1 of this Agreement.


                                       -7-

<PAGE>

IN WITNESS  WHEREOF,  the Agency and the Contractor have caused this Agreement
to be executed by their respective officers duly authorized to do so.



Dated at Peabody, Massachusetts                   HARBOR OAKS HOSPITAL
                                                  (Contractor)

this 2nd day of June,  1997                       By:  /s/ Bruce A.Shear
                                                  Bruce A. Shear, President
 

Witness:  /s/ Stuart A. Kaufman,
             Dir. of Corp. Svc.


Dated At Lansing  Michigan                      FAMILY INDEPENDENCE AGENCY

this 25th day of June, 1997                     By:  /s/ Stephen Hilh
                                                  Director Designee
Witness:  /s/ Jeffrie L. Herts
 









                                     -8-
<PAGE>

Exhibit 10.124


                               DEED OF TRUST NOTE

$540,000.00
Roanoke, Virginia
                                                      April 30, 1997

      FOR VALUE RECEIVED,  the undersigned (jointly and severally if more than
one)  promise(s)  to pay to the  order of  DILLON  AND  DILLON  ASSOCIATES,  a
Virginia  General  Partnership,  (or the parties as  indicated  below) at such
place as the holder  hereof may  designate,  the principal sum of Five Hundred
Forty  Thousand  and 00/100  Dollars  ($540,000.00),  together  with  interest
thereon at the rate of Nine and  one-quarter  percent  (9.25%)  per annum from
the date hereof until paid.

      Payments on the principal sum and the interest  thereon shall be due and
payable in monthly  installments of Five Thousand Five Hundred Fifty-seven and
64/100  Dollars  ($5,557.64),  each on the 1st day of  each  and  every  month
commencing  June,  1997, and continuing  until May 1, 2012, when the remaining
unpaid  balance of this  indebtedness  and interest  thereon  shall be due and
payable.  Each monthly  installment  paid hereunder  shall be applied first to
interest then due on the unpaid principal and the remainder,  if any, shall be
applied to the unpaid balance of this indebtedness

      The makers have the  privilege at any time of  prepaying  all or part of
the principal  balance and interest due and unpaid without  penalty or premium
of any kind.

      The  makers  shall  pay a late  charge  of Five  percent  (5.0%)  of any
monthly   installment   not  received  within  fifteen  (I5)  days  after  the
installment is due.

      In the event the maker shall be in default  hereof,  holder will provide
notification  of  default  and  maker  will  have  thirty  (30) days from said
notification  to cure said  default.  Maker shall not be entitled to more than
one (1) such notification in any twelve (12) month period.

      It is expressly  agreed that upon failure of the  undersigned to perform
or comply with any of the terms and conditions  hereof or any of the covenants
and conditions  contained in the deed of trust securing this note, then and in
any or all of such events,  the holder  hereof shall have the right to declare
the entire  unpaid  balance of this  indebtedness,  together  with all accrued
interest charges,  expenses,  advances,  and reasonable  attorneys fees in the
amount of 25% of the outstanding  balance,  immediately  due and payable,  and
failure to exercise  such right shall not  constitute a waiver of the right to
exercise the same upon any subsequent failure.

<PAGE>

      We, the  undersigned,  and any guarantors or endorsers  hereof,  jointly
and  severally,  waive  the  benefit  of our  Homestead  exemption  as to this
obligation,  notice of maturity,  demand,  presentment for payment,  notice of
non-payment  and  protest,  and  hereby  waive  notice of and  consent  to any
extensions of this note;  and further agree to pay all  reasonable  attorney's
fees and other related  collection  costs and expenses  incurred by it, should
it  become  necessary  to place  this  note in the  hands of an  attorney  for
collection  or to protect the interest of the holder hereof as provided in the
deed of trust securing this note.

NOTICE:  THE DEBT  SECURED  HEREBY  IS  SUBJECT  TO CALL IN FULL OR THE  TERMS
THEREOF  BEING  MODIFIED IN THE EVENT OF SALE OR  CONVEYANCE  OF THE  PROPERTY
CONVEYED.

                              PIONEER COUNSELING OF VIRGINIA, INC.
                              a Massachusetts Corporation


                                 By.    Bruce A. Shear, President




COMMONWEALTH OF MASSACHUSETTS
County of Essex, to-wit


      I,  the  undersigned,  a  Notary  Public,  in and for  the  jurisdiction
aforesaid  in  the  Commonwealth  of  Virginia  Massachusetts  whose  notarial
commission  expires on the 30th day of April,  1997,  certify that this is the
note  described in a Deed of Trust this day  executed by the  maker(s)  hereof
in my presence  whereby  property  known as 400 East  Burwell  Street,  Salem,
Virginia  24153,  located in the City of Salem,  Commonwealth  of Virginia was
conveyed to Douglas D. Wilson and Charles F. Barnett, Jr., Trustees.



     STUART A. KAUFMAN, NOTARY PUBLIC                     Stuart Kaufman
                                                          --------------
     MY COMMISSION EXPIRES FEBRUARY 26, 2004              Notary Public
                                                          





                                       -2-


<PAGE>
                                                I CERTIFY THAT THIS
                                                IS A TRUE COPY


                                  DEED OF TRUST

      THIS DEED OF TRUST,  made this 30th day of April  1997,  by and  between
PIONEER   COUNSELING  OF  VIRGINIA,   INC.  ,  a  Massachusetts   Corporation,
hereinafter  referred to as Grantor,  and  DOUGLAS D.  WILSON,  of the City of
Roanoke,  Virginia,  and CHARLES F. BARNETT,  JR., of the County of Botetourt,
Virginia.  Grantees,  hereinafter  referred to as Trustees,  to secure DILLON 
AND DILLON ASSOCIATES,  a Virginia General  Partnership,  hereinafter referred
to as beneficiary.

                                   WITNESSETH:

      For  and  in  consideration  of  $10.00  and  other  good  and  valuable
consideration,  the receipt of which is hereby  acknowledged  by the  Grantor,
the Grantor  does  hereby  grant and convey unto the  Trustees,  with  General
Warranty  and  English  Covenants  of title,  the  following  described  land,
situated in the City of Salem,  Commonwealth  of Virginia,  together  with all
improvements  now or  hereafter  erected on the  property  and all  easements,
rights and appurtenances thereto belonging:

            BEGINNING  at a point of  intersection  on the South line of
            Burwell  Street with the Easterly line of Strawberry  Alley,
            thence with the South side of Burwell  Street,  N.  77 degree
            24' 00" E. 139.25 feet to a point;  thence  leaving  Burwell
            Street  and  with a new line  through  the  property  of the
            Grantors,  S.  13 degree 00' 00" E. 210.37 feet to a point on
            the North side of an unnamed  alley (16 feet  wide);  thence
            with the North side of said  alley,  S  77 degree  24' 00" W.
            139.25 feet to a point on the East side of Strawberry  Alley
            (16.5 feet wide);  thence  with the East side of  Strawberry
            Alley N.  13 degree  00' 00" W.  210.37  feet to the point of
            Beginning,  and containing 0.673 acre, as more  particularly
            shown on survey for Pioneer Counseling of Virginia,  Inc., a
            Massachusetts Corporation,  dated April 7, 1997, prepared by
            T. P.  Parker &, Son,  Engineers-Surveyors-Planners,  a copy
            of which plat is attached to deed dated April 8, 1997,  said
            deed being attached immediately hereto; and

            BEING the same  Property  conveyed to Pioneer  Counseling of
            Virginia,  Inc.,  by deed dated April 8, 1997,  of record in
            the  Clerk's  Office  of the  Circuit  Court for the City of
            Salem.


<PAGE>

      IN TRUST,  HOWEVER,  to secure the  beneficiary  hereof the payment of a
certain  indebtedness  evidenced by a note, dated April 30, 1997, made payable
by Pioneer  Counseling  of Virginia,  Inc., a  Massachusetts  Corporation,  to
Dillon and Dillon Associates,  a Virginia General Partnership in the principal
amount  of Five  Hundred  Forty  Thousand  and  00/100  DOLLARS  ($540,000.00)
together with interest thereon as therein provided;  and further to secure all
other obligations contained in said note and all obligations contained herein.

      THIS DEED OF TRUST  shall be  construed  to impose and  confer  upon the
parties  hereto all duties,  rights,  and  obligations  prescribed in Sections
55-59  through  55-60 of the Code of Virginia of 1950,  as amended to date, in
like manner as if the same were  expressly set forth herein,  except so far as
may be  herein  otherwise  provided;  and  the  following  provisions  of said
sections are hereby  incorporated  in and made a part of this Deed of Trust in
their  respective  short forms,  with the full meaning and intent as expressed
and set forth therein, namely:

         (a)  "Exemptions waived."

         (b)  "Subject to all upon default."

         (c)  "Renewal, extension or reinstatement permitted."

         (d)  "Right of anticipation reserved."

         (e)  "Advertisement   required":  Once  a  week  for  two  successive
              weeks in The Roanoke  Times or some other  newspaper  published,
              or  having  a  general  circulation,  in the  county  or city in
              which the above property lies.

         (f)  "Substitution of trustee permitted."

         (g)  "Any trustee may act."

         (i)  "Insurance  required: $487.000.00  with loss payable clause to
               Beneficiary."

         (j)  "Trustee's commission of 5 percent of gross proceeds of sale."

      Any  forbearance by the  beneficiary  hereof as to any rights or options
the  beneficiary  may have  under the  terms of this Deed of Trust,  under the
aforementioned  note,  or under  applicable  law,  shall not be construed as a
waiver of, or preclude the exercise of, the same or any other right or option.




                                        3
<PAGE>

NOTICE - THE DEBT  SECURED  HEREBY  IS  SUBJECT  TO CALL IN FULL OR THE  TERMS
THEREOF  BEING  MODIFIED IN THE EVENT OF SALE OR  CONVEYANCE  OF THE  PROPERTY
CONVEYED.

        WITNESS the following signature:

                                PIONEER COUNSELING OF VIRGINIA, INC.,
                                a Massachusetts Corporation


                                BY   Bruce A. Shear, President



COMMONWEALTH OF VIRGINIA MASSACHUSETTS

County of Essex, to-wit:

      The foregoing  instrument  was  acknowledged  before me this 30th day of
April,  1997, by Bruce A. Shear,  President of Pioneer Counseling of Virginia,
Inc., a Massachusetts Corporation, on behalf of the  corporation.

My Commission expires:        STUART A. KAUFMAN, NOTARY PUBLIC
                              MY COMMISSION EXPIRES FEBRUARY 26, 2004



                                                ________________________
                                                      Notary Public



                                        4
<PAGE>

                                                  I CERTIFY THAT THIS IS A
                                                  TRUE COPY

      THIS DEED,  made and entered  into this the 8th day of April,  1997,  by
and  between  DILLON AND DILLON  ASSOCIATES,  a Virginia  General  Partnership
comprised  of  Ronald  W.  Dillon  and  Wayne  E.  Dillon,  Grantor,  PIONEER 
COUNSELING OF VIRGINIA, INC., a Massachusetts Corporation, Grantee.

                                  :WITNESSETH:

      THAT, FOR AND IN CONSIDERATION of the sum of TEN DOLLARS ($10.00),  cash
in hand,  paid by the Grantee  unto the  Grantor,  and other good and valuable
consideration,  the receipt of which is hereby acknowledged,  the Grantor does
hereby  bargain,  sell,  grant and convey with  General  Warranty  and English
Covenants  of Title  unto  Grantee,  all that  certain  lot or parcel of land,
lying and  being in the City of  Salem,  Commonwealth  of  Virginia,  and more
particularly described as follows, to-wit:

            BEGINNING  at a point of  intersection  on the South line of
            Burwell  Street with the Easterly line of Strawberry  Alley,
            thence with the South side of Burwell  Street,  N.  77degree
            24' 00" E. 139.25 feet to a point;  thence  leaving  Burwell
            Street  and  with a new line  through  the  property  of the
            Grantors,  S.  13 degree 00' 00" E. 210.37 feet to a point on
            the North side of an unnamed  alley (16 feet  wide);  thence
            with the North side of said alley,  S.  77degree  24' 00" W.
            139.25 feet to a point on the East side of Strawberry  Alley
            (16.5 feet wide),  thence  with the East side of  Strawberry
            Alley N.  13degree  00' 00" W.  210.37  feet to the point of
            Beginning,  and containing 0.673 acre, as more  particularly
            shown on survey for Pioneer Counseling of Virginia,  Inc., a
            Massachusetts Corporation,  dated April 7. 1997, prepared by
            T. P. Parker & Son, Engineers-Surveyors-Planners,  a copy of
            which plat is attached hereto and made a part hereof; and

            BEING  the same  property  conveyed  to  Dillon  and  Dillon
            Associates,  a Partnership comprised of Ronald W. Dillon and
            Wayne E. Dillon,  by deed dated April 21, 1977, of record in
            the aforesaid Clerk's Office in Deed Book 47, page 727.

      This deed is made subject to all easements, reservations,  restrictions,
and conditions of record affecting the hereinabove described property.


<PAGE>

      WITNESS the following signatures:

                              DILLON AND DILLON ASSOCIATES,
                              a Virginia General Partnership


                              ___________________________________
                               Ronald W. Dillon, Partner


                              ____________________________________
                               Wayne E. Dillon, Partner

COMMONWEALTH OF VIRGINIA
CITY OF ROANOKE, to-wit:

            The foregoing  instrument was  acknowledged  before me this 29 day
of 1997,  by Ronald W.  Dillon,  Partner of Dillon and  Dillon  Associates,  a
Virginia General Partnership, on behalf of the partnership.

My commission expires:  03/31/98                Cynthia Stafford
                                                Notary Public

COMMONWEALTH OF VIRGINIA
CITY OF ROANOKE, to-wit:

            The foregoing  instrument was  acknowledged  before me this 29 day
of April,  1997,.by Wayne E. Dillon,  Partner of Dillon and Dillon Associates,
a Virginia General Partnership, on behalf of the partnership.

      .
My commission expires:  03/31/98                Cynthia Stafford
                                                Notary Public




<PAGE>

Exhibit 10.125




                                  BREAN MURRAY





                          FINANCIAL ADVISORY AGREEMENT




                                  June 1, 1997





PHC, Inc.
200 Lake Street, Suite 102
Peabody, MA 01960

Attention:  Bruce Shear
            Chief Executive Officer

Gentlemen:

This will  confirm  that Brean Murray & Co.,  Inc.  ("Brean  Murray") has been
retained as a financial  advisor to PHC, Inc. (the  "Company") to perform such
financial  consulting  services  as the Company may  reasonably  request.  The
term of this agreement (the  "Agreement")  shall extend through June 30, 1998,
provided,  however, that either the Company or Brean Murray may terminate this
Agreement  prior to such date and as of the end of any month upon no less that
30 days' prior written notice.

The Company agrees to reimburse Brean Murray for all reasonable  out-of-pocket
expenses  incurred  in  carrying  out the terms of this  Agreement,  including
travel, telephone,  facsimile, courier, computer time charges, attorneys' fees
and disbursements,  and any sales, use or similar taxes.  These  out-of-pocket
expenses will be payable from time to time  promptly  upon  invoicing by Brean
Murray therefor.

As further  consideration  to Brean Murray for entering  into this  Agreement,
the  Company  will issue (for a nominal  consideration  of  $150.00)  to Brean
Murray  or its  designees  upon  execution  of this  Agreement  a  warrant  or
warrants to purchase  150,000  shares of the  Company's  common stock at $2.50
per share,  the terms and  conditions  governing  such issue of warrants to be
substantially in the form of Appendix B hereto annexed.


      BREAN MURRAY & CO., INC. - 570 LEXINGTON AVENUE - NEW YORK, NEW YORK
                                   10022-6822
        TELEPHONE: (212) 702-6500 - FACSIMILE: (212) 702-6649 - INTERNET:
                               HTTP://WWW.BMUR.COM
                      MEMBER NEW YORK STOCK EXCHANGE, INC.


<PAGE>

Page 2
June 1, 1997

It is  contemplated  that  from time to time the  Company  may  request  Brean
Murray  to  perform   investment   banking  services  (as  distinguished  from
financial  consulting  services)  in  connection  with matters  involving  the
Company, such as the private placement of securities;  mergers;  acquisitions;
divestitures;  valuations, or corporate reorganizations.  Any fees which Brean
Murray shall become  entitled to receive from the Company in  connection  with
the performance of any such investment  banking services shall be set forth in
a separate  agreement  between the  Company  and Brean  Murray and shall be in
addition to the compensation  provided  herein.  Neither the Company nor Brean
Murray,  however,  will  have  any  obligation  to  enter  into  any  separate
agreement,  the terms and conditions of which must be negotiated between Brean
Murray and the Company.  Nothing  contained in the  Agreement  shall  preclude
the Company from  engaging any other person to provide  financial  advisory or
investment banking services to the Company;  provided however, that during the
term of this Agreement and for a period of six months thereafter,  the Company
shall  give  Brean  Murray the  irrevocable  right of first  refusal to act as
placement  agent or underwriter  with respect to its securities in any private
or public sale,  provided  that Brean Murray  offers such services on terms no
less favorable than the Company can obtain  elsewhere.  The Company shall give
Brean  Murray five  business  days to notify them of their  intention to match
the terms or such right of first refusal will expire.

In order to enable Brean Murray to render its services hereunder,  the Company
agrees  to  provide  Brean  Murray,   among  other  things,   all   reasonable
information  requested or required by Brean Murray including,  but not limited
to,  information  concerning  historical and projected  financial  results and
possible   and   known   litigious,   environmental   and   other   contingent
liabilities.  The Company  also agrees to make  available to Brean Murray such
representatives of the Company, including, among others, directors,  officers,
employees,  outside counsel and independent  certified public accountants,  as
Brean Murray may reasonably  request.  The Company will promptly  advise Brean
Murray of any material  changes in its business or finances during the term of
this Agreement.  The Company  represents  that all information  made available
to Brean  Murray by the Company  will be complete  and correct in all material
respects  and will not contain  any untrue  statements  of a material  fact or
omit to state a  material  fact  necessary  in  order  to make the  statements
therein  not  misleading  in  light  of the  circumstances  under  which  such
statements  are made. In rendering its services  hereunder,  Brean Murray will
be  using  and  relying  primarily  on such  information  without  independent
verification  thereof  or  independent  appraisal  of  any  of  the  Company's
assets.  Brean  Murray  does not assume  responsibility  for the  accuracy  or
completeness of the information to which reference is made hereto.

The services herein  provided are to be rendered  solely to the Company.  They
are not being  rendered by Brean  Murray as an agent or as a fiduciary  of the
shareholders  of the Company and Brean Murray shall not have any  liability or
obligation with respect to its services  hereunder to such shareholders or any
other person, firm or corporation.

The Company and Brean Murray hereby agrees to the terms and  conditions of the
Indemnification  Agreement  attached  hereto as Appendix A with the same force
and effect as if such terms and conditions were set forth at length herein.



<PAGE>


Page 3
June 1, 1997


Brean  Murray  intends  to  maintain  its  position  as a market  maker in the
Company's  stock  and will  cover the  Company  from a  research  perspective;
provided however,  that Brean Murray reserves the right in its sole discretion
to cease  acting as a market  maker or covering  the  Company  from a research
perspective  based upon market factors in general or the business or condition
of (financial or otherwise) or market factor affecting the Company.

This Agreement sets forth the entire  understanding of the parties relating to
the   subject   matter   hereof  and   supersedes   and   cancels   any  prior
communications,  understandings  and  agreements  between  the  parties.  This
Agreement  cannot be terminated or changed,  nor can any of its  provisions be
waived,  except by written agreement signed by all parties hereto or except as
otherwise  provided herein.  This Agreement shall be binding upon and inure to
the benefit of any successors and assigns of the Company and Brean Murray.

This  Agreement  shall be governed by and construed to be in  accordance  with
the laws of the  State  of New York  applicable  to  contracts  made and to be
performed  solely in such State by citizens  thereof.  Any dispute arising out
of this Agreement  shall be adjudicated in the courts of the State of New York
or in the federal courts sitting in the Southern  District of New York and the
Company  hereby  agrees  that  service of  process  upon it by  registered  or
certified  mail at its address set forth  above shall be deemed  adequate  and
lawful.  The parties  hereto shall  deliver  notices to each other by personal
delivery or by registered or certified mail (return receipt  requested) at the
addresses set forth above.

Please confirm that the foregoing is in accordance with your  understanding by
signing  on behalf of the  Company  and  returning  an  executed  copy of this
Agreement,  together with the warrant or warrants described herein,  whereupon
this  Agreement  shall become  binding  between the Company and Brean Murray &
Co., Inc.

                                    Very truly yours,

                                    BREAN MURRAY & CO., INC.



                                    By:  _________________________________
                                         Joan M. Finsilver
                                         Managing Director

ACCEPTED AND AGREED TO:

PHC, INC.


By:   ____________________________
      Bruce A. Shear, President

Date:  07/31/97



<PAGE>


                                                                    APPENDIX A
                            INDEMNIFICATION AGREEMENT


Appendix A to Letter  Engagement  Agreement (the  "Agreement"),  dated June 1,
1997 by and between PHC,  Inc.  (the  "Company")  and Brean Murray & Co., Inc.
("Brean Murray").

The Company  agrees to  indemnify  and hold Brean  Murray and its  affiliates,
control  persons,   directors,   officers,   employees  and  agents  (each  an
"Indemnified Person") harmless from and against all losses,  claims,  damages,
liabilities,  costs or expenses, including those resulting from any threatened
or pending investigation,  action,  proceeding or dispute whether or not Brean
Murray or any such other Indemnified Person is a party to such  investigation,
action,  proceeding or dispute, arising out of Brean Murray's entering into or
performing  services  under  this  Agreement,  or  arising  out of any  matter
referred  to in this  Agreement.  This  indemnity  shall  also  include  Brean
Murray's and/or any such other Indemnified Person's reasonable  attorneys' and
accountants'  fees and  out-of-pocket  expenses  incurred  in, and the cost of
Brean  Murray's  personnel  whose  time is  spent  in  connection  with,  such
investigations,  actions,  proceedings  or disputes  which fees,  expenses and
costs shall be  periodically  reimbursed  to Brean  Murray  and/or to any such
other  Indemnified  person  by the  Company  as they are  incurred;  provided,
however,  that the indemnity herein set forth shall not apply where a court of
competent  jurisdiction has made a final determination that Brean Murray acted
in a  grossly  negligent  manner  or  engaged  in  willful  misconduct  in the
performance  of its  services  hereunder  which gave rise to the loss,  claim,
damage,  liability,  cost or expense  sought to be  recovered  hereunder  (but
pending any such final  determination  the  indemnification  and reimbursement
provisions  hereinabove  set forth shall apply and the Company  shall  perform
its  obligations  hereunder to reimburse  Brean Murray  and/or each such other
Indemnified  Person  periodically  for its,  his or their fees,  expenses  and
costs as they are  incurred).  Brean Murray  agrees  promptly to reimburse the
Company  for any such  amounts  advanced  as to which it is  determined  Brean
Murray was not entitled to  indemnification  in accordance  with the foregoing
provision.  The  Company  also  agrees  that  neither  Brean  Murray  nor  any
Indemnified  Person shall have any liability  (whether direct or indirect,  in
contract or tort or otherwise)  to the Company for or in  connection  with any
act or omission  to act by Brean  Murray as a result of its  engagement  under
this  Agreement  except for any such  liability for losses,  claims,  damages,
liabilities  or  expenses  incurred  by the  Company  that is found in a final
determination  by a court of  competent  jurisdiction  to have  resulted  from
Brean Murray's gross negligence or willful misconduct.



<PAGE>

Page 2
Indemnification Agreement
June 1, 1997




If for any reason,  the  foregoing  indemnification  is  unavailable  to Brean
Murray  or any  such  other  Indemnified  Person  or  insufficient  to hold it
harmless,  then the Company shall  contribute to the amount paid or payable by
Brean  Murray or any such other  Indemnified  Person as a result of such loss,
claim,  damage or liability in such  proportion as is  appropriate  to reflect
not only the relative  benefits  received by the Company and its  shareholders
on the one hand and Brean Murray or any such other  Indemnified  Person on the
other hand,  but also the  relative  fault of the Company and Brean  Murray or
any  such  other  Indemnified  Person,  as  well  as  any  relevant  equitable
considerations;  provided that in no event will the aggregate  contribution by
Brean  Murray  and any such  other  Indemnified  Person  hereunder  exceed the
amount of fees actually  received by Brean Murray  pursuant to this Agreement.
The  reimbursement,  indemnity  and  contribution  obligations  of the Company
hereinabove  set forth shall be in addition to any liability which the Company
may otherwise have and these obligations and the other provisions  hereinabove
set forth shall be binding  upon and inure to the  benefit of any  successors,
assigns,  heirs and personal  representatives of the Company, Brean Murray and
any other Indemnified Person.

The terms  and  conditions  hereinabove  set  forth in this  Appendix  A shall
survive the  termination  and  expiration of this Agreement and shall continue
indefinitely thereafter.

                              PHC, INC.


                              By:  _______________________
                              Bruce A. Shear, President


                              BREAN MURRAY & CO., INC.

                              By: ________________________
                              Joan M. Finsilver, Managing Director


<PAGE>
Exhibit 10.126


                              EMPLOYMENT AGREEMENT

    THIS  EMPLOYMENT  AGREEMENT is entered into this 1st day of August,  1997,
and is  effective  July 1, 1997  ("Effective  Date"),  by and  between  PHC of
Michigan,  Inc., a  Massachusetts  corporation,  doing business as Harbor Oaks
Hospital   (hereinafter   the   "Hospital")   and  Sudhir   Lingnurkar,   M.D.
(hereinafter "Psychiatrist").

                                   WITNESSETH

WHEREAS,  Hospital operates a licensed  psychiatric  hospital at 35031 23 Mile
Road in the City of New Baltimore, Michigan; and

WHEREAS,  Hospital under its current ownership,  needs and desires to position
itself for future growth in today's evolving medical marketplace,  e.g., as it
relates to inpatient  full and partial  hospitalization  programs,  outpatient
programs,  efficiencies in delivery of services,  and affiliations,  including
teaching affiliations; and

WHEREAS,  Hospital desires to employ a psychiatrist with extensive  experience
in the field of behavioral  health services,  to serve as Program  Development
and Projects Coordinator, and

WHEREAS,  Psychiatrist  is  experienced  in the  field  of  behavioral  health
services,  as well as in the  administration  and management of hospital-based
behavioral health programs, and wishes to accept such employment by Hospital,

NOW,  THEREFORE,  in consideration  of the mutual covenants  contained in this
Agreement, the parties agree as follows:

                                    ARTICLE I
                       EMPLOYMENT AND PROVISION OF SERVICE

1.1   Employment.   Hospital  hereby  employs   Psychiatrist  as  its  Program
      Development and Projects  Coordinator,  or such other reasonably related
      position as it may  designate,  to perform such duties as are reasonably
      required  by  such  position  (including,   without  limitation,   those
      summarized on the job description  attached hereto as Exhibit A and made
      part of this  Agreement)  and such other duties as may be assigned  from
      time to time by Hospital.

1.2  Services  to be  Provided.  Psychiatrist  will  devote  at least ten (10)
     hours per week to rendering  administrative services on-site at Hospital,
     by  telephone,   or  at  such  other  locations  selected  by  Hospital's
     President and Chief Executive Officer,  or his  administrative  designee,
     in  his  capacity  as  Program  Development  and  Projects   Coordinator,
     according  to a  schedule  agreed  upon by  Psychiatrist  and  Hospital's
     President and Chief Executive Officer,  or his  administrative  designee.
     Psychiatrist shall be available for telephone  consultation and emergency
     on-site   assistance   during  all  other  hours.   In  addition  to  his
     responsibilities  as  Program   Development  and  Projects   Coordinator,
     Psychiatrist  shall  fulfill his  obligations  as a member of  Hospital's
     Medical  Staff,  including  attendance  at  Medical  Staff and  committee
     meetings.

1.3  Representations/Covenants.  Psychiatrist represents and covenants the
     following:

     (a)  Psychiatrist  has and will during the term  hereof  maintain a valid
          and  unrestricted  license  to  practice  medicine  in the  State of
          Michigan,  and that there is not  presently  pending nor  threatened
          against  Psychiatrist any action, claim or proceeding the outcome of
          which could result in revocation  or  suspension  of  Psychiatrist's
          license to practice medicine in Michigan;

     (b)  Psychiatrist  has and will during the term hereof  maintain full and
          unrestricted Medical Staff privileges at Hospital;

     (c)  Psychiatrist  shall  abide at all times by the  bylaws and rules and
          regulations of Hospital and of the Medical Staff,

     (d)  Psychiatrist is qualified to provide the leadership  required for an
          intensive treatment program; and

     (e)  Psychiatrist's  performance  hereunder  shall not conflict  with any
          other agreements to which Psychiatrist was or is a party; and

     (f)  Psychiatrist  meets the training  and  experience  requirements  for
          examination  by the American  Board of  Psychiatry  and Neurology or
          the American Osteopathic Board of Neurology and Psychiatry.

1.4   Practice  Standards.  Psychiatrist agrees that his practice shall at all
      times be consistent  with the policies and procedures of Hospital and of
      a  quality  commensurate  with the  applicable  standards  of  practice.
      Psychiatrist  shall comply with and execute a copy of Hospital's Code of
      Conduct,   and  shall  conform  to  any  compliance   plans  adopted  by
      Hospital.  Psychiatrist  shall  comply  with  all  applicable  laws  and
      regulations in performing his duties hereunder.

1.5   Reporting   Relationship.   Psychiatrist   shall  report  to  Hospital's
      President and Chief Executive Officer or his administrative designee.

                                   ARTICLE II
                                SUPPORT SERVICES

2.1   Equipment   Supplies  and   Facilities.   Hospital   shall  provide  the
      equipment,   supplies,  facilities  and  personnel  which  Hospital  and
      Psychiatrist  mutually  agree to be  necessary  to perform the  services
      contemplated   herein.   Psychiatrist   agrees   promptly  to  bring  to
      Hospital's attention,  in writing, any deficiencies known or believed by
      Psychiatrist to exist in the equipment,  supplies or facilities provided
      by Hospital.  Any and all equipment,  supplies and facilities  furnished
      to  Psychiatrist  by Hospital  pursuant to this  Agreement  shall be and
      remain the property of Hospital.

                                   ARTICLE III
                         COMPENSATION, BILLING, EXPENSES

3.1   Salary.  Hospital  shall  pay  Psychiatrist,  as a salary  for  services
      rendered  pursuant  to  this  Agreement,  the  amount  of  Seventy  Five
      Thousand Dollars  ($75,000.00) per year,  payable in equal  semi-monthly
      installments.  Psychiatrist's  salary and  performance  will be reviewed
      by Hospital's President and Chief Executive Officer on a yearly basis.

3.2   Employment  Taxes.  Hospital shall withhold,  on behalf of Psychiatrist,
      appropriate employment taxes.

3.3   Patient  Referrals.  Hospital and  Psychiatrist  agree that the benefits
      to Psychiatrist  hereunder do not require,  are not payment for, and are
      not in any way contingent  upon, the referral,  admission,  or any other
      arrangement  for  the  provision  of any  item  or  service  offered  by
      Hospital of any patients of  Psychiatrist to any facility or health care
      operation controlled, managed, or operated by Hospital.

3.4   No Entitlement to Benefits.  As a part-time  employee,  the Psychiatrist
      will  not  automatically  be  eligible  to  participate  in any  benefit
      program  offered by the Hospital to its full-time  employees,  except as
      delineated in the Hospital's  Employee  Handbook.  Psychiatrist shall be
      responsible  for all  personal  and  professional  expenses  relative to
      professional  society  membership  fees,  dues and expenses of attending
      educational   meetings  or  seminars,   except  as   otherwise   may  be
      specifically agreed upon by Hospital in its sole discretion.

3.5   Vacation,   Professional  Meetings  and  Coverage.   Psychiatrist  shall
      schedule  vacation times and  professional  meetings at times convenient
      for Hospital and shall comply with the Hospital's  policies in regard to
      maintenance of Psychiatrist coverage.

3.6   Fees for Professional and Hospital Services.  The position  contemplated
      by  this  Agreement  is  an  administrative  position  only.  Therefore,
      Psychiatrist  shall  have  the  exclusive  right  to  bill  his  private
      practice  patients,  their medical insurers,  governmental  agencies and
      other third parties or individuals  responsible for such charges for all
      professional  services  rendered  by  Psychiatrist  at  Hospital  or  in
      Psychiatrist's  private office  practice.  Further,  Hospital shall have
      the exclusive  right to bill patients or  responsible  third parties for
      the use of its Facilities,  equipment and supplies, and for the services
      of other employees of Hospital.

3.7   Expenses.  Hospital shall reimburse  Psychiatrist for all reasonable and
      necessary  business  expenses  incurred by him in the performance of his
      duties  hereunder,  in accordance with its policies and  procedures,  as
      they may be amended from time to time.

                                   ARTICLE IV
                              TERM AND TERMINATION

4.1   Term. This Agreement  shall become  effective on the Effective Date, and
      thereafter  remain in full force and effect for a period of one (1) year
      unless earlier terminated as provided herein.

4.2   Termination With Cause.

      (a)   By Hospital.  Hospital may terminate  this  Agreement  immediately
            upon written notice to  Psychiatrist,  which notice shall describe
            the  reason  for  such  termination,  for  any  of  the  following
            reasons, each of which shall be deemed to be "cause":

            (i)   The  death  or   disability   of   Psychiatrist.   The  term
                  "disability"  as  used  herein  shall  mean   Psychiatrist's
                  inability   to  perform   the   essential   duties  of  this
                  Agreement,  with or without  accommodation,  that  continues
                  for a period of ninety (90) consecutive days;

            (ii)  Psychiatrist   is   convicted   in  a  court  of   competent
                  jurisdiction  of  any  felony  offense  or  any  misdemeanor
                  offense involving moral turpitude;

            (iii) Dishonesty  or  disloyalty  by  the   Psychiatrist   in  the
                  performance of his duties hereunder,

            (iv)  Insubordination by Psychiatrist;

            (v)   Conduct by Psychiatrist  which jeopardizes  Hospital's right
                  or ability to operate its programs and business;

            (vi)  Failure or inability of  Psychiatrist  to perform his duties
                  in a manner which is reasonably acceptable to Hospital;

            (vii) Gross neglect of duty;

            (viii)      In the  event  that  any of  the  representations  and
                  covenants  set forth in Section  1.3  ceases to be true.  If
                  Psychiatrist's  license to practice medicine in the State of
                  Michigan is  suspended,  revoked or  canceled,  the point in
                  which "the  representation  and covenant  ceases to be true"
                  shall be the respective date of such suspension,  revocation
                  or cancellation of Psychiatrist's license; or

            (ix)      Psychiatrist's material breach of any provision of this
            Agreement.

     (b) By Psychiatrist.  Psychiatrist may terminate this Agreement immediately
         upon written notice to Hospital, which notice shall describe the reason
         for such termination,  for any of the following reasons, each of which
         shall be deemed to be "cause":

            (i)   The  death  or   disability   of   Psychiatrist.   The  term
                  "disability"  as  used  herein  shall  mean   Psychiatrist's
                  inability   to  perform   the   essential   duties  of  this
                  Agreement,  with or without  accommodation,  that  continues
                  for a period of ninety (90) consecutive days; or

            (ii)  Hospital breaches a material provision of this Agreement.

4.3   Termination  Without  Cause.  This Agreement may be terminated by either
      party without cause upon thirty (30) days prior written  notice.  In the
      event  of  such  notice,   Hospital,   at  its  election,   may  relieve
      Psychiatrist of his duties and  responsibilities at any time thereafter,
      prior to Psychiatrist's  last day of employment (as so designated on the
      notice),  and  provide him with pay during the  remainder  of the notice
      period.

4.4   Legislative,  Regulatory or  Administrative  Change.  In the event there
      shall be a change  in state or  federal  law,  regulations,  or  general
      instructions  (or in  the  Application  thereof),  the  adoption  of new
      legislation,  or a change in any third-party reimbursement system any of
      which is  reasonably  likely to  materially  and  adversely  affect  the
      manner in which  Psychiatrist  may  perform  or is  compensated  for his
      services  under  this  Agreement,  or which  shall  make this  Agreement
      unlawful the parties shall  immediately  use their best efforts to enter
      into  a new  agreement  or  basis  for  compensation  for  the  services
      furnished  pursuant  to this  Agreement  that  complies  with  the  law,
      regulation,  or  policy.  If the  parties  are  unable  to  reach  a new
      agreement within a reasonable time, then either party may terminatee this
      Agreement  by  thirty  (30)  days  notice to the other on any future dat
      specified in that notice.

4.5   Effects of Termination.  Upon  termination of this Agreement,  as herein
      above  provided,  neither  party  shall have any  obligation  under this
      Agreement,   except  (i)   obligations   accruing  before  the  date  of
      termination,  and  (ii)  obligations,  promises  or  covenants  in  this
      Agreement  that are  expressly  made to extend  beyond  the term of this
      Agreement.

4.6   Renewal.  Hospital and  Psychiatrist  may renew this Agreement after the
      term of the Agreement has expired.

                                    ARTICLE V
                               GENERAL PROVISIONS

5.1   Professional  Activities.  Consistent  with  Psychiatrist's  obligations
      under this  Agreement,  Psychiatrist  may  maintain a private  practice.
      Psychiatrist  may provide  professional  services to entities other than
      Hospital  with the  approval of  Hospital.  Psychiatrist  shall  provide
      Hospital,  on an annual basis,  a declaration  of possible  conflicts of
      interest  and  file  the  same  with  Hospital's   President  and  Chief
      Executive Officer, or his administrative  designee,  upon the renewal or
      extension of this Agreement.

5.2   Hospital Insurance  Coverage.  Hospital will maintain coverage on behalf
      of  Psychiatrist  for  liability  that he may incur in carrying  out his
      administrative  duties  under this  Agreement.  Since the  rendering  of
      patient care  services is beyond the scope of  Psychiatrist's  duties as
      described in this  Agreement,  such  coverage  does not extend to claims
      arising out of professional  services  Psychiatrist  renders or fails to
      render,   including   professional  services  Psychiatrist  provides  to
      patients at Hospital or elsewhere for which  Psychiatrist may generate a
      bill in  accordance  with  Section 3.6 of this  Agreement.  Psychiatrist
      agrees to maintain insurance coverage for patient care services,  as are
      required of the Medical  Staff of  Hospital.  Psychiatrist  shall notify
      Hospital  within  one (1)  business  day after he  becomes  aware of any
      malpractice  action  against  him  or  any   investigation,   action  or
      proceeding,   the  outcome  of  which  could  result  in  revocation  or
      suspension of his license to practice medicine.

5.3   Access to  Records.  Psychiatrist  agrees that until the  expiration  of
      four (4) years after the furnishing of the services  provided under this
      Agreement,  Psychiatrist  will make  available  to the  Secretary,  U.S.
      Department  of  Health  and  Human  Services,  and the U.S.  Comptroller
      General,  and  their  representatives,  this  Agreement  and all  books,
      documents,  and  records  necessary  to certify the nature and extent of
      those  services.   If  Psychiatrist  carries  out  the  duties  of  this
      Agreement  through a  subcontract  worth  $10,000 or more over a twelve-
      month  period with a related  organization,  the  subcontract  will also
      contain an access clause to permit access by the Secretary,  Comptroller
      General, and their representatives,  to the related organization's books
      and records.

5.4   Ownership.  The ownership and right of control of all reports,  records,
      and supporting  .documents  prepared in connection with the operation of
      Hospital shall vest  exclusively in Hospital;  provided,  however,  that
      Psychiatrist  shall  have the right of access to the  reports,  records,
      and  supporting  documentation  that shall be  provided by state law and
      Hospital's policies.

5.5   Confidentiality.  Psychiatrist  agrees  to keep the  provisions  of this
      Agreement  confidential subject to the terms of this Section 5.5. Except
      for disclosure to legal  counsel,  accountants,  or financial  advisors,
      Psychiatrist  shall  not  disclose  during  or  after  any  term of this
      Agreement  the terms of this  Agreement to any person who is not a party
      or signatory to this Agreement,  unless disclosure is required by law or
      otherwise  authorized  by this  Agreement or in writing by both parties.
      To protect  the  confidentiality  of patient  information  and  records,
      Psychiatrist  shall comply with all regulatory,  statutory,  and ethical
      requirements  of  confidentiality  and  Psychiatrist-patient  privilege.
      This provision shall survive termination of this Agreement.

5.6   Allocation of Time.  Psychiatrist  agrees to execute whatever  documents
      are  reasonably  requested  by Hospital  for  submission  to third party
      payors with regard to the allocation of  Psychiatrist's  time under this
      Agreement.  Psychiatrist agrees to record the amount of time      and
      the number of days he spends  working on each service  listed on Exhibit
      A and shall maintain time records in a form containing such  information
      as Hospital requests.  Psychiatrist  agrees to render a bi-weekly report
      to Hospital that  documents the  Psychiatrist's  efforts and  activities
      with respect to services  provided  under this  Agreement.  Psychiatrist
      shall also  render any other  written  reports as  required  by Hospital
      pursuant to any compliance  plan adopted by the Hospital.  These records
      shall  be  maintained  by  Psychiatrist  at  Hospital  and  shall,  upon
      Hospital's request, be made available for inspection.

5.7   Indemnity.  Psychiatrist  shall  exonerate,  indemnify and hold Hospital
      harmless from and against all loss,  damage,  injury,  claim demand,  or
      expense,  including reasonable  attorney's fees, based upon, arising out
      of,  or in  any  way  related  to  any  negligent  act,  misfeasance  or
      nonfeasance  of   Psychiatrist  in  connection  with  his  provision  of
      professional   services   to  patients   of   Psychiatrist.   The  above
      obligations shall survive the termination of this Agreement.

5.8   Entire  Agreement.  This  Agreement  constitutes  the  entire  agreement
      between  the parties  with  respect to the subject  matter  hereof,  and
      supersedes  any and all other  agreements,  either  oral or in  writing,
      between the parties with respect to this subject matter.

5.9   Assignment.  This  Agreement  shall not be  assigned  or  assignable  by
      either  party  hereto  without  the prior  written  consent of the other
      party, not to be unreasonably withheld.



<PAGE>


5.10  Notices.  Any and all  notices  provided  for  herein  shall be given in
      writing by  registered  or certified  mail,  return  receipt  requested,
      directed  to the  address  shown  below,  unless  notice  of a change of
      address is furnished.

      If to Hospital:                           If to Psychiatrist:
      Harbor Oaks Hospital
      35031 23 Mile Road                        Sudhir Lingnurkar, M.D.
      New Baltimore, MI 48047
                                              ________________________________
      Attn:   Administrator
                                              ________________________________


      With a copy to:

      Bruce A. Shear, President
      PHC of Michigan, Inc.
      200 Lake Street; Suite 102
      Peabody, MA 01960

5.11  Governing  Law. This  Agreement  shall be  interpreted  and construed in
      accordance with the laws of the State of Michigan.



<PAGE>


5.12  Waiver.  A waiver by  either  party of a breach or  failure  to  perform
      under this  Agreement  shall not  constitute a waiver of any  subsequent
      breach or failure.

5.13  Severability.  Should any  provision of this  Agreement be held invalid,
      unenforceable,  or unconstitutional by any governmental body or court of
      competent jurisdiction,  such holdings shall not dismiss the validity or
      enforceability of any other provision hereof.

5.14  Headings.  The headings in this Agreement are for  convenience  only and
      shall  not  affect  in any way the  meaning  or  interpretation  of this
      Agreement.

5.15  No Third Party Rights.  This Agreement is intended solely for the benefit
      of the  parties  hereto, and shall not be deemed to create any  rights in
      any other person or entity, including patients.

5.16  Dispute  Resolution.  The parties agree to use good faith negotiation to
      resolve any dispute  that arises  under this  Agreement.  If the parties
      are not able to resolve the  dispute by  negotiation,  either  party may
      submit the dispute to a mediator,  mutually agreeable to the parties, to
      resolve the dispute.  Mediation  shall be  conducted  in New  Baltimore,
      Michigan in  accordance  with the rules of the National  Health  Lawyers
      Association  ("NHLA")  Alternative Dispute Resolution  Services.  If the
      parties are unable to reach an agreement through mediation,  the parties
      shall  submit the  underlying  dispute  to  arbitration  which  shall be
      conducted in New  Baltimore,  Michigan in  accordance  with the Rules of
      Procedure of the NHLA Alternative  Dispute  Resolution  Service.  In the
      event  of  binding  arbitration,  judgment  on  the  award  or  decision
      rendered  by  the   arbitrator  may  be  entered  in  any  court  having
      jurisdiction.


IN WITNESS WHEREOF, Hospital has caused this Agreement to be executed by its
duly authorized officer and Psychiatrist has executed this Agreement as of
the day and year first above written.


WITNESS                                   "PSYCHIATRIST"

______________________________            ____________________________
                                          Sudhir Lingnurkar, M.D.


WITNESS                                   "HOSPITAL"

Teresa A. Bates                           _______________________________
                                          By:   Bruce A. Shear
                                          Its:  President

<PAGE>

                                  EXHIBIT A

            POSITION DESCRIPTION FOR PROGRAM DEVELOPMENT AND PROJECTS
                                 COORDINATOR


Summary of Basic Employment Functions:

Actively  coordinates and manages the Hospital's  inpatient (full and partial)
hospitalization   program,  the  Hospital's  outpatient  programs,   and  such
initiatives  designed to enhance the  efficiencies in delivery of patient care
services,  the quality of care rendered, and the reputation of the Hospital in
the medical  community,  Hospital  Administration,  Hospital Medical Staff and
Hospital   Professional   Staff.   The  Program   Development   and   Projects
Coordinator  serves  as  a  resource  person  for  issues  concerning  program
development and projects within the field of behavioral health medicine.


Responsibilities:

Advise  Harbor  Oaks  Hospital  regarding  program   development  and  develop
initiatives to enhance the  efficiencies in delivery of patient care services,
the  quality  of  care  rendered,  and the  reputation  of the  Hospital.  The
majority of the Program Development and Project  Coordinator's work will occur
off-site, or by telephone,  or at such other site as selected by the President
and Chief Executive Officer of the Hospital,  or his administrative  designee,
including,  but not limited to, at Corporate Offices in Peabody, MA, or at any
of  Hospital's  affiliated  sites  throughout  the USA.  Some  travel for this
position may be necessary.

Actively review current  patient care programs and  efficiencies of service in
light of (1) patient mix,  (2) payor  source and (3) the current  standards of
practice in the field of behavioral health.

Draft and advise on policies and procedure,  provide medical and  professional
staff continuing  education  concerning  program  development/enhancement  and
practice efficiencies within the practice of behavioral health.

Serve as Harbor Oaks Hospital's primary liaison on issues program  development
and projects with the health care community.

Regularly  chair/attend  the management  meetings to discuss issues related to
program development and projects.

Regularly attend Professional/Medical Staff Meetings.



<PAGE>


                              EMPLOYMENT AGREEMENT

THIS  EMPLOYMENT  AGREEMENT is entered into this 1st day of August,  1997, and
is effective  July 1, 1997  ("Effective  Date"),  by and between North Point -
Pioneer,  Inc.,  a  Massachusetts  corporation,   doing  business  as  Pioneer
Counseling   Center   (hereinafter   "PCC")   and  Sudhir   Lingnurkar,   M.D.
(hereinafter "Psychiatrist").

                                   WITNESSETH

WHEREAS,  PCC operates  licensed  outpatient  behavioral health clinics in the
greater metropolitan Detroit area; and

WHEREAS,  PCC,  under its  current  ownership,  needs and  desires to position
itself for future growth in today's evolving medical marketplace,  e.g., as it
relates to  outpatient  programs,  efficiencies  in delivery of services,  and
affiliations, including teaching affiliations, patient mix and payor mix; and

WHEREAS,  PCC desires to employ a psychiatrist  with  extensive  experience in
the administration  and management of the practice of clinic-based  behavioral
health services, to serve as Corporate Assistant Medical Director, and

WHEREAS,  Psychiatrist is experienced in the  administration and management of
the practice of clinic-based  behavioral  health services and wishes to accept
such employment by PCC;

NOW,  THEREFORE,  in consideration  of the mutual covenants  contained in this
Agreement, the parties agree as follows:

                                    ARTICLE I
                       EMPLOYMENT AND PROVISION OF SERVICE

1.1   Employment.  PCC hereby employs  Psychiatrist as its Corporate Assistant
      Medical  Director,  or such other reasonably  related position as it may
      designate,  to perform  such duties as are  reasonably  required by such
      position  (including,  without  limitations  those summarized on the job
      description  attached  hereto  as  Exhibit  A  and  made  part  of  this
      Agreement)  and such other  duties as may be assigned  from time to time
      by PCC.

1.2   Services  to be  Provided.  Psychiatrist  will  devote at least ten (10)
      hours per week to rendering  administrative  services on-site at PCC, by
      telephone,  or at such other  locations  selected by PCC's President and
      Chief  Executive  Officer,  or  his  administrative   designee,  in  his
      capacity  as  Corporate  Assistant  Medical  Director,  according  to  a
      schedule  agreed  upon by  Psychiatrist  and PCC's  President  and Chief
      Executive Officer,  or his administrative  designee.  Psychiatrist shall
      be  available  for   telephone   consultation   and  emergency   on-site
      assistance  during all other hours. In addition to his  responsibilities
      as Corporate Assistant Medical Director,  Psychiatrist shall fulfill his
      obligations as a member of PCC's Medical Staff,  including attendance at
      Medical Staff and committee meetings.



<PAGE>
1.3  Representations/Covenants.  Psychiatrist represents and covenants the
     following:

     (a)  Psychiatrist  has and will during the term  hereof  maintain a valid
          and  unrestricted  license  to  practice  medicine  in the  State of
          Michigan,  and that there is not  presently  pending nor  threatened
          against  Psychiatrist any action, claim or proceeding the outcome of
          which could result in revocation  or  suspension  of  Psychiatrist's
          license to practice medicine in Michigan;

     (b)  Psychiatrist  has and will during the term hereof  maintain full and
          unrestricted Medical Staff privileges at PCC;

     (c)  Psychiatrist  shall  abide at all times by the  bylaws and rules and
          regulations of PCC and of the Medical Staff,

     (d)  Psychiatrist is qualified to provide the leadership  required for an
          intensive treatment program; and

     (e)  Psychiatrist's  performance  hereunder  shall not conflict  with any
          other agreements to which Psychiatrist was or is a party; and

     (f)  Psychiatrist  meets the training  and  experience  requirements  for
          examination  by  the American  Board of Psychiatry  and Neurology or
          the American Osteopathic Board of Neurology and Psychiatry.

1.4  Practice  Standards.  Psychiatrist  agrees that his practice shall at all
     times be  consistent  with the  policies and  procedures  of PCC and of a
     quality   commensurate  with  the   applicable   standards  of  practice.
     Psychiatrist  shall  comply  with and  execute  a copy of  PCC's  Code of
     Conduct,  and shall  conform  to any  compliance  plans  adopted  by PCC.
     Psychiatrist  shall comply with all  applicable  laws and  regulations in
     performing his duties hereunder.

1.5  Reporting  Relationship.  Psychiatrist  shall  report to PCC's  President
     and Chief Executive Officer or his administrative designee.

                                   ARTICLE II
                                SUPPORT SERVICES

2.1   Equipment  Supplies and  Facilities.  PCC shall  provide the  equipment,
      supplies,  facilities and personnel which PCC and Psychiatrist  mutually
      agree to be  necessary  to perform  the  services  contemplated  herein.
      Psychiatrist  agrees promptly to bring to PCC's  attention,  in writing,
      any  deficiencies  known or  believed  by  Psychiatrist  to exist in the
      equipment,   supplies  or  facilities  provided  by  PCC.  Any  and  all
      equipment,  supplies and  facilities  furnished to  Psychiatrist  by PCC
      pursuant to this Agreement shall be and remain the property of PCC.

<PAGE>
                                   ARTICLE III
                         COMPENSATION, BILLING, EXPENSES

3.1   Salary.  PCC shall pay  Psychiatrist,  as a salary for services rendered
      pursuant to this Agreement,  the amount of Seventy Five Thousand Dollars
      ($75,000.00)  per  year,  payable  in equal  semi-monthly  installments.
      Psychiatrist's   salary  and  performance  will  be  reviewed  by  PCC's
      President and Chief Executive Officer on a yearly basis.

3.2   Employment  Taxes.  PCC  shall  withhold,  on  behalf  of  Psychiatrist,
      appropriate employment taxes.

3.3   Patient  Referrals.  PCC and  Psychiatrist  agree that the  benefits  to
      Psychiatrist  hereunder do not require, are not payment for, and are not
      in any way  contingent  upon,  the  referral,  admission,  or any  other
      arrangement  for the provision of any item or service offered by PCC, of
      any patients of  Psychiatrist  to any facility or health care  operation
      controlled, managed, or operated by PCC.

3.4   No Entitlement to Benefits.  As a part-time  employee,  the Psychiatrist
      will  not  automatically  be  eligible  to  participate  in any  benefit
      program  offered  by the  PCC  to its  full-time  employees,  except  as
      delineated   in  PCC's   Employee   Handbook.   Psychiatrist   shall  be
      responsible  for all  personal  and  professional  expenses  relative to
      professional  society  membership  fees,  dues and expenses of attending
      educational   meetings  or  seminars,   except  as   otherwise   may  be
      specifically agreed upon by PCC in its sole discretion.

3.5   Vacation,   Professional  Meetings  and  Coverage.   Psychiatrist  shall
      schedule  vacation times and  professional  meetings at times convenient
      for PCC and shall  comply with PCC's  policies in regard to  maintenance
      of Psychiatrist coverage.

3.6   Fees for  Professional  and PCC Services.  The position  contemplated by
      this  Agreement  is  an   administrative   position   only.   Therefore,
      Psychiatrist  shall  have  the  exclusive  right  to  bill  his  private
      practice  patients,  their medical insurers,  governmental  agencies and
      other third parties or individuals  responsible for such charges for all
      professional   services   rendered   by   Psychiatrist   at  PCC  or  in
      Psychiatrist's  private  office  practice.  Further,  PCC shall have the
      exclusive  right to bill patients or  responsible  third parties for the
      use of its facilities,  equipment and supplies,  and for the services of
      other employees of PCC.

3.7   Expenses.  PCC  shall  reimburse  Psychiatrist  for all  reasonable  and
      necessary  business  expenses  incurred by him in the performance of his
      duties  hereunder,  in accordance with its policies and  procedures,  as
      they may be amended from time to time.

<PAGE>
                                   ARTICLE IV
                              TERM AND TERMINATION

4.1   Term. This Agreement  shall become  effective on the Effective Date, and
      thereafter  remain in full force and effect for a period of one (1) year
      unless earlier terminated as provided herein.

4.2   Termination With Cause.

      (a)   By  PCC.  PCC  may  terminate  this  Agreement   immediately  upon
      written notice to  Psychiatrist,  which notice shall describe the reason
      for such termination,  for any of the following  reasons,  each of which
      shall be deemed to be "cause":

            (i)   The  death  or   disability   of   Psychiatrist.   The  term
                  "disability"  as  used  herein  shall  mean   Psychiatrist's
                  inability   to  perform   the   essential   duties  of  this
                  Agreement,  with or without  accommodation,  that  continues
                  for a period of ninety (90) consecutive days;

            (ii)  Psychiatrist   is   convicted   in  a  court  of   competent
                  jurisdiction  of  any  felony  offense  or  any  misdemeanor
                  offense involving moral turpitude;

            (iii) Dishonesty  or  disloyalty  by  the   Psychiatrist   in  the
                  performance of his duties hereunder;

            (iv)  Insubordination by Psychiatrist;

            (v)   Conduct by  Psychiatrist  which  jeopardizes  PCC's right or
                  ability to operate its programs and business;

            (vi)  Failure or inability of  Psychiatrist  to perform his duties
                  in a manner which is reasonably acceptable to PCC,

            (vii) Gross neglect of duty;

            (viii)      In the  event  that  any of  the  representations  and
                  covenants  set forth in Section  1.3  ceases to be true.  If
                  Psychiatrist's  license to practice medicine in the State of
                  Michigan is  suspended,  revoked or  canceled,  the point in
                  which "the  representation  and covenant  ceases to be true"
                  shall be the respective date of such suspension,  revocation
                  or cancellation of Psychiatrist's license; or

           (ix)  Psychiatrist's   material  breach  of  any  provision  of this 
                 Agreement.
<PAGE>

      (b)   By   Psychiatrist.   Psychiatrist  may  terminate  this  Agreement
            immediately  upon  written  notice  to  PCC,  which  notice  shall
            describe  the  reason  for  such  termination,   for  any  of  the
            following reasons, each of which shall be deemed to be "cause":

            (i)   The  death  or   disability   of   Psychiatrist.   The  term
                  "disability"  as  used  herein  shall  mean   Psychiatrist's
                  inability   to  perform   the   essential   duties  of  this
                  Agreement,  with or without  accommodation,  that  continues
                  for a period of ninety (90) consecutive days; or

            (ii)  PCC breaches a material provision of this Agreement.

4.3   Termination  Without  Cause.  This Agreement may be terminated by either
      party without cause upon thirty (30) days prior written  notice.  In the
      event of such notice, PCC, at its election,  may relieve Psychiatrist of
      his  duties  and  responsibilities  at any  time  thereafter,  prior  to
      Psychiatrist's  last day of employment (as so designated on the notice),
      and provide him with pay during the remainder of the notice period.

4.4   Legislative,  Regulatory or  Administrative  Change.  In the event there
      shall be a change  in state or  federal  law,  regulations,  or  general
      instructions  (or in  the  application  thereof),  the  adoption  of new
      legislation,  or a change in any third-party  reimbursement  system, any
      of which is  reasonably  likely to materially  and adversely  affect the
      manner in which  Psychiatrist  may  perform  or is  compensated  for his
      services  under  this  Agreement,  or which  shall  make this  Agreement
      unlawful,  the parties shall immediately use their best efforts to enter
      into  a new  agreement  or  basis  for  compensation  for  the  services
      furnished  pursuant  to this  Agreement  that  complies  with  the  law,
      regulation,  or  policy.  If the  parties  are  unable  to  reach  a new
      agreement  within a reasonable  time,  then either  party may  terminate
      this  Agreement  by thirty  (30) days  notice to the other on any future
      date specified in that notice.

4.5   Effects of Termination.  Upon  termination of this Agreement,  as herein
      above  provided,  neither  party  shall have any  obligation  under this
      Agreement,   except  (i)   obligations   accruing  before  the  date  of
      termination,  and  (ii)  obligations,  promises,  or  covenants  in this
      Agreement  that are  expressly  made to extend  beyond  the term of this
      Agreement.

4.6   Renewal.  PCC and  Psychiatrist  may renew this Agreement after the term
      of the Agreement has expired.

                                    ARTICLE V
                               GENERAL PROVISIONS

5.1   Professional  Activities.  Consistent  with  Psychiatrist's  obligations
      under this  Agreement,  Psychiatrist  may  maintain a private  practice.
      Psychiatrist  may provide  professional  services to entities other than
      PCC with the  approval of PCC.  Psychiatrist  shall  provide  PCC, on an
      annual basis, a declaration  of possible  conflicts of interest and file
      the same with  PCC's  President  and  Chief  Executive  Officer,  or his
      administrative   designee,   upon  the  renewal  or  extension  of  this
      Agreement.

5.2   PCC  Insurance  Coverage.  PCC  will  maintain  coverage  on  behalf  of
      Psychiatrist  for  liability  that  he may  incur  in  carrying  out his
      administrative  duties  under this  Agreement.  Since the  rendering  of
      patient care  services is beyond the scope of  Psychiatrist's  duties as
      described in this  Agreement,  such  coverage  does not extend to claims
      arising out of professional  services  Psychiatrist  renders or fails to
      render,   including   professional  services  Psychiatrist  provides  to
      patients at PCC or elsewhere for which  Psychiatrist may generate a bill
      in accordance  with Section 3.6 of this Agreement.  Psychiatrist  agrees
      to  maintain  insurance  coverage  for  patient  care  services,  as are
      required  of the Medical  Staff of PCC.  Psychiatrist  shall  notify PCC
      within one (1)  business day after he becomes  aware of any  malpractice
      action  against  him or any  investigation,  action or  proceeding,  the
      outcome  of which  could  result  in  revocation  or  suspension  of his
      license to practice medicine.

5.3   Access to  Records.  Psychiatrist  agrees that until the  expiration  of
      four (4) years after the furnishing of the services  provided under this
      Agreement,  Psychiatrist  will make  available  to the  Secretary,  U.S.
      Department  of  Health  and  Human  Services,  and the U.S.  Comptroller
      General  and  their  representatives,  this  Agreement  and  all  books,
      documents,  and  records  necessary  to certify the nature and extent of
      those  services.   If  Psychiatrist  carries  out  the  duties  of  this
      Agreement   through   a  subcontract  worth   $10,000  or  more  over  a
      twelve-month  period with a related  organization,  the subcontract will
      also  contain  an  access  clause to  permit  access  by the  Secretary,
      Comptroller   General   and  their   representatives,   to  the  related
      organization's books and records.

5.4   Ownership.  The ownership and right of control of all reports,  records,
      and supporting  documents  prepared in connection  with the operation of
      PCC shall vest exclusively in PCC; provided,  however, that Psychiatrist
      shall have the right of access to the reports,  records,  and supporting
      documentation that shall be provided by state law and PCC's policies.

5.5   Confidentiality.  Psychiatrist  agrees  to keep the  provisions  of this
      Agreement  confidential subject to the terms of this Section 5.5. Except
      for  disclosure to legal  counsel  accountants,  or financial  advisors,
      Psychiatrist  shall  not  disclose  during  or  after  any  term of this
      Agreement  the terms of this  Agreement to any person who is not a party
      or signatory to this Agreement,  unless disclosure is required by law or
      otherwise  authorized  by this  Agreement or in writing by both parties.
      To protect  the  confidentiality  of patient  information  and  records,
      Psychiatrist  shall comply with all regulatory,  statutory,  and ethical
      requirements  of  confidentiality  and  Psychiatrist-patient  privilege.
      This provision shall survive termination of this Agreement.

5.6   Allocation of Time.  Psychiatrist  agrees to execute whatever  documents
      are  reasonably  requested by PCC for  submission  to third party payors
      with  regard  to  the  allocation  of  Psychiatrist's  time  under  this
      Agreement.  Psychiatrist  agrees  to record  the  amount of time and the
      number of days he spends  working  on each  service  listed on Exhibit A
      and shall   maintain time records in a form containing such  information
      as PCC  requests.  Psychiatrist  agrees to render a bi-weekly  report to
      PCC that  documents  the  Psychiatrist's  efforts  and  activities  with
      respect to services  provided under this Agreement.  Psychiatrist  shall
      also render any other  written  reports as  required by PCC  pursuant to
      any  compliance  plan  adopted  by  the  PCC.  These  records  shall  be
      maintained by  Psychiatrist  at PCC and shall,  upon PCC's  request,  be
      made available for inspection.

5.7   Indemnity.   Psychiatrist  shall  exonerate,   indemnify  and  hold  PCC
      harmless from and against all loss, damage,  injury,  claim,  demand, or
      expense,  including reasonable  attorney's fees, based upon, arising out
      of,  or in  any  way  related  to  any  negligent  act,  misfeasance  or
      nonfeasance  of   Psychiatrist  in  connection  with  his  provision  of
      professional   services   to  patients   of   Psychiatrist.   The  above
      obligations shall survive  the termination of this Agreement.

5.8   Entire  Agreement.  This  Agreement  constitutes  the  entire  agreement
      between  the parties  with  respect to the subject  matter  hereof,  and
      supersedes  any and all other  agreements,  either  oral or in  writing,
      between the parties with respect to this subject matter.

5.9   Assignment.  This  Agreement  shall not be  assigned  or  assignable  by
      either  party  hereto  without  the prior  written  consent of the other
      party, not to be unreasonably withheld.



<PAGE>

5.10  Notices.  Any and all  notices  provided  for  herein  shall be given in
      writing by  registered  or certified  mail,  return  receipt  requested,
      directed  to the  address  shown  below,  unless  notice  of a change of
      address is furnished.

      If to PCC:                                If to Psychiatrist:
      Pioneer Counseling Center
      28511 Orchard Lake Road                   Sudhir Lingnurkar, M.D.
      Farmington Hills, MI 48334
                                                __________________________
      Attn: Chief Operating Officer             __________________________

      With a copy to:

      Bruce A. Shear, President
      PHC of Michigan, Inc.
      200 Lake Street; Suite 102
      Peabody, MA 0 1960



5.11  Governing  Law. This  Agreement  shaft be  interpreted  and construed in
      accordance with the laws of the State of Michigan.

5.12  Waiver.  A waiver by  either  party of a breach or  failure  to  perform
      under this  Agreement  shall not  constitute a waiver of any  subsequent
      breach or failure.



<PAGE>


5.13  Severability.  Should any  provision of this  Agreement be held invalid,
      unenforceable,  or unconstitutional by any governmental body or court of
      competent jurisdiction,  such holdings shall not dismiss the validity or
      enforceability of any other provision hereof.

5.14  Readings.  The headings in this Agreement are for  convenience  only and
      shall  not  affect  in any way the  meaning  or  interpretation  of this
      Agreement.

5.15  No Third  Party  Rights.  This  Agreement  is  intended  solely  for the
      benefit  of the  parties  hereto,  and shall not be deemed to create any
      rights in any other person or entity, including patients.

5.16  Dispute  Resolution.  The parties agree to use good faith negotiation to
      resolve any dispute  that arises  under this  Agreement.  If the parties
      are not able to resolve the  dispute by  negotiation,  either  party may
      submit the dispute to a mediator,  mutually agreeable to the parties, to
      resolve the dispute.  Mediation shall be conducted in Farmington  Hills,
      Michigan in  accordance  with the rules of the National  Health  Lawyers
      Association  ("NHLA")  Alternative Dispute Resolution  Services.  If the
      parties are unable to reach an agreement through mediation,  the parties
      shall  submit the  underlying  dispute  to  arbitration  which  shall be
      conducted in Farmington Hills,  Michigan in accordance with the Rules of
      Procedure of the NHLA Alternative  Dispute  Resolution  Service.  In the
      event  of  binding  arbitration,  judgment  on  the  award  or  decision
      rendered  by  the   arbitrator  may  be  entered  in  any  court  having
      jurisdiction.



IN WITNESS  WHEREOF,  PCC has caused this Agreement to be executed by its duly
authorized  officer and Psychiatrist has executed this Agreement as of the day
and year first above written.

WITNESS                                   "PSYCHIATRIST"
___________________________________       ____________________________
                                          Sudhir Lingnurkar, M.D.

WITNESS                                   "PCC"

  Teresa R. Bates                         _____________________________
                                          By: Bruce A. Shear
                                          Its:  President

<PAGE>

                                    EXHIBIT A

          POSITION DESCRIPTION FOR CORPORATE ASSISTANT MEDICAL DIRECTOR


Summary of Basic Employment Functions:

Actively  coordinate  and manage  PCC's  outpatient  programs and services and
develop  initiatives  designed to enhance the  efficiencies in the delivery of
patient care  services,  the quality of care  rendered,  and the reputation of
PCC in the medical  community,  in conjunction  with PCC  Administration,  PCC
Medical Staff and PCC  Professional  Staff.  The Corporate  Assistant  Medical
Director  serves as a resource  person for  issues  concerning  corporate-wide
DELIVERY of patient care services,  management issues,  corporate philosophies
and focus,  program  development  and projects  within the field of behavioral
health medicine.

Responsibility:

Review and advise PCC regarding  outpatient  programs and services and develop
initiatives  to enhance  the  efficiencies  in the  delivery  of patient  care
services,  the  quality of care  rendered,  and the  reputation  of PCC in the
medical   community.   The  majority  of  the  Corporate   Assistant   Medical
Director's  work will  occur  on-site  at one,  or more,  of the PCC  clinics,
currently  owned or hereafter  commenced or acquired,  or by telephone,  or at
such other site as selected by the  President and Chief  Executive  Officer of
PCC, or his  administrative  designee,  including,  but not limited to, at the
corporate  offices  in  Peabody,  MA or  at  any  of  PCC's  affiliated  sites
throughout the USA.  Some travel for this position may be necessary.

Actively review current patient care programs and  efficiencies of services in
light of (1) patient mix,  (2.) payor source and (3) the current  standards of
practice in the field of behavioral health.

Draft and advise on policies and procedure,  provide medical and  professional
staff continuing  education  concerning  program  development/enhancement  and
practice efficiencies within the practice of behavioral health.

Serve as PCC's primary/ liaison on issues concerning  outpatient  programs and
services and undertake such projects  designed to enhance the  efficiencies in
the delivery of patient care  services,  the quality of care  rendered and the
reputation of PCC in the medical community.

Regularly  chair/attend  the management  meetings to discuss issues related to
outpatient  programs and  services and  undertake  such  projects  designed to
enhance  the  efficiencies  in the  delivery  of patient  care  services,  the
quality of care rendered and the reputation of PCC in the medical community.

Regularly attend Professional/Medical Staff Meetings.

<PAGE>
   the delivery of patient care  services, the quality of care rendered and the
reputation of PCC in the medical community.

Regularly  chair/attend  the management  meetings to discuss issues related to
outpatient  programs and  services and  undertake  such  projects  designed to
enhance  the  efficiencies  in the  delivery  of patient  care  services,  the
quality of care rendered and the reputation of PCC in the medical community.

Regularly attend Professional/Medical Staff Meetings.
<PAGE>
Exhibit 10.127













                           Asset Purchase Agreement

                                  as between

                           COUNSELING ASSOCIATES OF
                           SOUTHWEST VIRGINIA, INC.
                                   (Seller)

                                     and

                              PIONEER COUNSELING
                               OF VIRGINIA INC.
                                 (Purchaser)



<PAGE>


                              Table of Contents

1. Assets to be Conveyed.....................................       2
    1.1. Tangible Personal Property..........................       2
    1.2. Leases & ContractRights.............................       2
    1.3. Patient Lists.......................................       2
    1.4. Telephone Numbers...................................       3
    1.5. Books, Records & Promotional Materials..............       3
    1.6. General Intangibles.................................       3
    1.7. Goodwill & Claims...................................       3

2. Excluded Assets...........................................       3

3. Purchase Price and Allocation of Purchase Price...........       3
    3.1. Purchase Price......................................       3
         3.1.1. Cash Payment.................................       3
         3.1.2. PHC, Inc. Class A Common Stock...............       4
         3.1.3. Additional Consideration.....................       4
                3.1.3.1 FuturePayments.......................       4
                3.1.3.2.1 PaymentDate........................       4
                3.1.3.1.2 Pre-tax Profit Defined.............       4
         3.1.3.2 Tail Coverage...............................       4
    3.2. Prorations..........................................       4
    3.3. Allocation of Purchas Price.........................       5

4. Closing...................................................       5

5. Representations and Warranties o Seller...................       5
    5.1. Organization & Standing.............................       5
    5.2. Authority...........................................       5
    5.3. Financial Statements................................       5
    5.4. No Violation of Agreement...........................       6
    5.5. Regulatory Compliance...............................       6
    5.6. Restrictive Covenant................................       6
    5.7. Leases and Contracts for Personal Property..........       6
    5.8. Indebtedness........................................       6
    5.9. Contracts and Commitments...........................       6
         5.9.1. Purchase Commitments.........................       6
         5.9.2. Collective Bargaining/EmploymentAgreements...       6
         5.9.3. Compensation Arrangements....................       7
         5.9.4. Employees....................................       7
         5.9.5. Benefits.....................................       7
         5.9.6. Independent Contractors......................       7






                                      ii
<PAGE>



         5.10. Tax Returns and Payments.......................       7
         5.11. Litigation and Other Proceedings...............       7
         5.12. Broker.........................................       8
         5.13. Insurance......................................       8
         5.14. Notices........................................       8
         5.15. Employees......................................       8
         5.16. Employment Laws................................       9
         5.17. CostReports....................................       9
         5.18. Third Party Billing............................       9
         5.19. Bankruptcy & Insolvency........................       9
         5.20. Information Not Misleading.....................       10
         5.21. Audits.........................................       10
         5.22. Trade Name.....................................       10
         5.23. Leaseholds.....................................       10
         5.24. Patient Payments & Third Party Payor Contracts.       10
         5.25. Seller Responsibilities........................       10
         5.26. Consultants....................................       11
6. Covenants of Seller........................................       11
         6.1. Condition of Personal Property..................       11
         6.2. Access and Preparation of License Application...       11
         6.3. Ordinary Course of Business.....................       11
         6.4. Compensation....................................       11
         6.5. Insurance.......................................       11
         6.6. Review of Staff.................................       12
         6.7. Right o Inspection..............................       12
         6.8  Publicity.......................................       12
         6.9. Termination Notices, Liabilities................       12

7. Representation and Warranties of Purchaser.................       12
      7.1. Organization of Purchaser..........................       13
      7.2. Corporate Action by Purchaser......................       13

8. Purchaser's Due Diligence & Conditions Precedent to            
       Closing................................................       13
      8.1. Representation, Warranties and Covenants...........       13
      8.2. Leases for Real Property...........................       13
      8.3. Third Party Payors.................................       13
      8.4. Licenses and Approvals.............................       13
      8.5. Sale of Assets.....................................       14
      8.6. Insurance..........................................       14
      8.7. No Materia Change..................................       14
      8.8. RestrictiveCovenant................................       14
      8.9. Payroll............................................       14






                                     iii


<PAGE>

      8.10. Consents..........................................       14
      8.11. Financial Due Diligence...........................       14
      8.12. Corporate Authority...............................       14
      8.13. Opinion of Counsel for Seller.....................       14
      8.14. Certificate of Release............................       15
      8.15. Employment Agreements.............................       16
      8.16. Title to Assets...................................       16
      8.17. List of Creditors.................................       16
      8.18. Notice to Creditors, Indemnity....................       16
      8.19. Compliance with Bulk Sales Law....................       16
      8.20. Payment of Creditors..............................       16
      8.21. Failure of Conditions Precedent...................       17

9. No Assumption of Liabilities...............................       17

10.Indemnification............................................       17
      10.1. Indemnification of Purchaser by Seller............       17
      10.2. Indemnification of Seller by Purchaser............       17

11. Rights of Termination and Remedies for Default............       18
      11.1. Default by Seller.................................       18
      11.2. Purchaser's Right to Terminate....................       18
      11.3. Seller's Right to Terminate.......................       18 

12. Miscellaneous.............................................       19
      12.1.Survival...........................................       19
      12.2. Disclaimer of Intent to become Partners...........       19
      12.3. Additional Documents..............................       19
      12.4. Notices...........................................       19
      12.5. Non-Assignment....................................       20
      12.6. Sole Agreement....................................       20
      12.7. Governing Law.....................................       20
      12.8. Successors........................................       20
      12.9. Captions..........................................       20
      12.10.Severability......................................       20
      12.11.Counterparts......................................       20
      12.12.No Waiver.........................................       21
      12.13.Attorney's Fees an Costs..........................       21
      12.14.Confidentiality...................................       21








                                      iv


<PAGE>


 
SCHEDULE   1.1   TANGIBLE PERSONAL PROPERTY............................     23
SCHEDULE   1.2   LEASES and CONTRACT RIGHTS............................     24
SCHEDULE   2     EXCLUDED  ASSETS......................................     25
SCHEDULE   5.6   RESTRICTIVE COVENANT..................................     26
SCHEDULE   5.8   INDEBTEDNESS..........................................     27
SCHEDULE   5.9.4 PAYROLL RECORD........................................     28
SCHEDULE   5.9.5 EMPLOYEE FRINGE BENEFITS SCHEDULE.....................     29  
SCHEDULE   5.9.6 INDEPENDENT CONTRACTOR  AGREEMENTS....................     30
SCHEDULE   5.15  EMPLOYEES.............................................     31
SCHEDULE   8.2   REAL PROPERTY LEASE...................................     32
SCHEDULE   8.5.1 BILL OF SALE..........................................     33
SCHEDULE   8.5.2 ASSIGNMENT OF INTANGIBLE RIGHTS.......................     34
SCHEDULE   8.5.3 ASSIGNMENT and ASSUMPTION AGREEMENT...................     35
SCHEDULE   8.15  JONES-FREEMAN EMPLOYMENT AGREEMENT....................     36
               
 






                                      v



<PAGE>


                           ASSET PURCHASE AGREEMENT

     This Asset Purchase  Agreement  (hereinafter  the  "Agreement") is made and
entered  into as of this 1st day of October,  1997,  by and  between  Counseling
Associates  of Southwest  Virginia,  Inc., a Virginia  corporation  (hereinafter
"Seller") with its registered  office located at 2807 S. Main Street,  Unit 110,
Blacksburg,  Virginia,  24060,  and Pioneer  Counseling  of  Virginia,  Inc.,  a
Massachusetts  corporation (hereinafter  "Purchaser") with its registered office
located at 200 Lake Street, Suite 102, Peabody, Massachusetts 01960.

      WHEREAS,  Seller  owns and  operates a  behavioral  health  care  clinic
located in Blacksburg, Virginia (hereinafter the "Business"); and,

      WHEREAS,  Purchaser,  a  subsidiary  of PHC,  Inc.,  who is an owner and
operator of health care facilities in several states,  including Virginia, and
who provides health care and management  services for inpatient and outpatient
mental health services for its facilities and for facilities  owned by others;
and,

      WHEREAS,  Seller is the owner of and wishes to sell substantially all of
the assets  utilized in the  operation of the  Business,  and the Purchaser is
desirous of purchasing such assets upon the terms and conditions  contained in
this Agreement; and,

      WHEREAS,  Purchaser desires to employ and/or cause Dianne  Jones-Freeman
(hereafter  "Jones-Freeman")  to be employed as the Chief Operating Officer of
the  behavioral  health  clinic to be operated by Purchaser  in the Salem,  VA
area, and Jones-Freeman desires to be so employed, and

      WHEREAS,  Purchaser  desires  to enter  into a lease  agreement  for the
premises  currently  occupied  by the  Seller,  said  premises  being owned by
Jones-Freeman and James Garrison,  equally, for the purposes of establishing a
behavioral health clinic in Blacksburg, Virginia; and

      WHEREAS,  the Seller and Purchaser  desire to memorialize  their various
understandings  and  agreements  in  connection  with  the  foregoing  matters
pursuant to this Agreement;

      NOW,  THEREFORE,  for and in  consideration  of the mutual covenants and
promises herein contained, and for other good and valuable consideration,  the
sufficiency and receipt of which is hereby severally acknowledged,  the Seller
and Purchaser agree as follows:



                                      1



<PAGE>


1.    Assets to be Conveyed.  On the terms and  conditions  set forth  herein,
Seller  shall sell,  assign,  convey,  transfer  and deliver to  Purchaser  by
instruments  of transfer in a form  reasonably  satisfactory  to Purchaser and
its counsel,  all right, title and interest in and to all of the assets of the
Business  (whether  personal,  mixed,  tangible  and  intangible,  absolute or
contingent)  owned by Seller or in which the Seller  has any  right,  title or
interest,  wheresoever  situated,  whether or not the same are carried  and/or
reflected  on  the  books  and  records  of  Seller,  free  and  clear  of all
mortgages,  liens,  charges,  claims,  pledges,  security  interests  or other
encumbrances,   unless  specifically   identified  as  an  excluded  asset  in
Paragraph 2, below,  including the  following  (hereinafter  collectively  the
"Assets"):

      1.1   Tangible  Personal   Property.   All  office   equipment,   goods,
furniture,   furnishings,   trade  fixtures,   tools,  machinery,   materials,
supplies,  signs, vehicles,  computers,  telephones and telephone systems, all
third  party  billing  manuals and related  materials,  all patient  files and
records,  all marketing  materials,  leasehold  improvements  and all tangible
personal  property  owned by Seller and used in the  operation of the Business
including,  but not limited to,  those items  listed in Schedule  1.1 attached
hereto  and  incorporated   herein  by  this  reference,   together  with  any
replacements  thereof or  additions  thereto  made between the date hereof and
the date of closing,  less any  retirements  of the assets  listed made in the
ordinary and usual course of business in connection  with the  acquisition  of
similar property or assets;

      1.2.   Leases & Contract  Rights.  All of the Seller's  rights under all
of the various  leases,  licenses,  permits,  approvals,  purchase  orders and
commitments,  contracts,  prepaid  expenses,  patient deposits or co-payments,
agreements  and all similar  items of the Seller as well as all  agreements or
instruments that pertain to the Business,  the Assets (as hereafter  defined),
including,  but not  limited  to,  all  purchase  orders,  sales and  purchase
contracts,  machinery and equipment leases, other leases, subleases,  permits,
certificates of occupancy and any and all other  agreements  with  independent
contractors,  suppliers,  vendors,  distributors,  dealers, patients and other
parties,  including,  but not  limited  to,  the  contract  rights  listed and
identified  on Schedule 1.2 attached  hereto and  incorporated  herein by this
reference.  Notwithstanding  the  foregoing,  Seller and Purchaser  agree that
Purchaser shall not be required to assume any leases or contracts  whatsoever,
if Purchaser,  in its sole,  uncontrolled and absolute discretion,  determines
that such leases  and/or  contracts  are not  necessary or desirable to it and
which  are  identified  by  Purchaser  prior to  closing;  excepting  any that
Purchaser was not provided notice of by its inclusion on said Schedule 1.2;

      1.3.        Patient  Lists.  All  of  Seller's  patient  lists,  mailing
lists,  lists of referral sources,  claim  submissions and collections  lists,
and all such  patient  files and other  records as shall be  necessary  to the
operation of the Business or which Purchaser shall reasonably require;






                                      2



<PAGE>


      1.4.        Telephone  Numbers.  All of Seller's rights in and to all of
the  current  telephone  numbers  utilized  by Seller in  connection  with the
Business;

      1.5.  Books,  Records & Promotional  Materials.  All of Seller's  books,
records,   files  and  correspondence,   display  and  promotional  materials,
brochures,   mailers,  circulars  and  all  other  documents  and  promotional
materials used in connection with the operation of the Business;

      1.6.        General  Intangibles.  All of  Seller's  marketing  know-how
and trade secrets of the Seller  related to the Business,  if any,  including,
but not limited to, all of Seller's confidential information,  operation data,
routines,  developments,  enhancements,  price  lists,  patient  and  employee
documentation  (including,   but  not  limited  to,  all  purchasing  records,
property  records,  employment  records,   environmental  compliance  records,
purchasing and billing  records,  insurance and claim  records,  personnel and
payroll  records and accounting  records),  supplier  lists,  manuals,  files,
operating  instructions and any similar items related to the Assets and/or the
Business;

      1.7.        Goodwill & Claims.  All of Seller's goodwill  throughout the
world,  including,  without limitation,  the right to use the name "Counseling
Associates"  and any  and  all  derivations  thereof  and all of the  Seller's
right,  title  and  interest  in  and to all  patents,  trademarks,  trademark
applications and trade names,  logos,  service marks and any  registrations or
derivations thereof and any other tangible or intangible  property,  rights or
claims  relating to the Business  and/or the Assets,  currently  owned,  held,
leased,  relied upon,  licensed or asserted by the Seller,  including  but not
limited  to, all  rights,  claims  and choses in action of the Seller  against
third  parties   related  to  the  Business   and/or  Assets  arising  out  of
transactions  or events  occurring prior to the date of closing and all rights
in, to and under all  warranties  and  representations  related  to the Assets
which were acquired by the Seller from the  manufacturers,  previous owners or
holders of the Assets.

2.    Excluded  Assets.  It is  understood  and agreed  that the assets  being
sold to  Purchaser  do not include  cash and those other items  identified  on
Schedule 2 attached hereto.

3.    Purchase Price and Allocation of Purchase Price

      3.1.        Purchase  Price.  The purchase price payable by Purchaser to
Seller for the Assets shall be:

      3.1.1.      Cash Payment.  Payment to Seller, at closing,  in the amount
of Fifty Thousand ($50,000.00) Dollars.

                                      3



<PAGE>


      3.1.2.      PHC. Inc.  Class A Common  Stock.  Payment,  at closing,  in
the  form of PHC,  Inc.  Class A Common  Stock,  with a fair  market  value of
Seventy  Five  Thousand  ($75,000.00)  Dollars,  based  upon an average of the
NASDAQ  closing  bid and ask  price  per  share,  for the  five  trading  days
proceeding  the  Closing  date,  (hereinafter  the  "Stock"),  subject  to the
restrictions  of Rule 144 of the Securities Act of 1933,  which Stock shall be
evidenced  by  appropriate  certificates  issued in the name of the Seller and
delivered at the closing.

      3.1.3.         Additional Consideration.

            3.1.3.1.    Future  Payment.  Payment to Seller in an amount equal
to ten (10%) percent of the pre-tax profit of the Business,  as defined above,
for the three (3) years following the effective date of this Agreement.

                  3.1.3.1.1.  Payment  Date.  Payment  of any amount due under
this  paragraph  shall be made no sooner  than one hundred  twenty  (120) days
after the  anniversary of the effective date of this  Agreement.  For example,
payment for the first year is due no earlier than  December  29, 1998;  second
year, December 29, 1999; and, third year, December 29, 2000.

                  3.1.3.1.2.  Pre-tax  Profit  Defined.  The  phrase  "pre-tax
profit" as used in this  provision  shall be defined as the total of collected
revenue less total expenses,  other than  applicable  state and federal income
taxes, for an applicable twelve (12) month period.

                  3.1.3.2.    Tail Coverage  Purchaser agrees to purchase,  on
behalf of  Seller,  professional  liability  "tail"  insurance  coverage,  for
Seller's   Business,   with  policy  limits  of  $1,000,000.00   per  claim  /
$3,000,000.00 aggregate.

      3.2   Prorations.  Expenses, including but not limited to, such items as
rent and  other  occupancy  expenses,  power  and  utility  charges,  personal
property  taxes upon a due-date  basis,  based on the most  recent  assessment
available,  insurance  premiums if policies  are  assigned to  Purchaser,  and
prepaid and deferred  items shall be prorated  between Seller and Purchaser as
of the date of  closing,  the  prorations  to be made  and  paid,  insofar  as
feasible,  on the date of closing.  If the net result of the  prorations is to
increase  the  amount  payable by  Purchaser,  the  increase  shall be paid to
Seller at closing.  All  arrearages,  if any, shall be paid from Seller's cash
proceeds at closing or deducted  from the Purchase  Price payable by Purchaser
hereunder.





                                      4



<PAGE>
     3.3. Allocation of Purchase Price It is agreed that the purchase price
         shall be allocated as follows:

            (a)   The  sum  of  ____________   and  00/100   ($___________.00)
                  Dollars for Assets  identified in Subsections 1.1, 1.2, 1.3,
                  1.4 and 1.5, inclusive, described above;

            (b)   The sum of  _________________  and 00/100  ($___________.00)
                  Dollars for the  General  Intangibles,  Goodwill  and Claims
                  identified in Subsections 1.6 and 1.7, inclusive, above; and

            (c)   The sum of Fifty  Thousand and 00/100  ($50,000.00)  Dollars
                  for the  Restrictive  Covenant  Agreement  to be executed by
                  the  Seller(s) at the closing of this  transaction  pursuant
                  to Section 5.6 below.

4.    Closing.   The   consummation   of  this  Agreement   (hereinafter   the
"Closing")  shall be held at such place as the parties may mutually agree upon
or through the use of escrow  agents,  as the  parties may agree.  The Closing
shall take place on or before  September  1, 1997  (hereinafter  the  "Closing
Date").  The Parties may agree in writing to extend the Closing  Date  without
prejudice to either party.  The closing of this  transaction may occur through
the use and exchange of facsimile signatures on the relevant documents.

5.    Representations  and Warranties of Seller. As an inducement to Purchaser
to enter into and consummate  this  Agreement,  Seller warrants and represents
that:

      5.1.        Organization  & Standing.  Seller is now, and on the date of
Closing will be a  corporation  duly  organized  and existing in good standing
under the laws of the  Commonwealth  of Virginia.  Seller  represents  that it
has the requisite  power,  authority,  licensure and  certification to own the
Assets and to operate the Business as now conducted.

      5.2.        Authority.  Seller is the sole owner of the Assets,  and has
the full power and  authority  to enter into and to  perform  this  Agreement.
All  corporate  proceedings  necessary to duly  authorize  the  execution  and
delivery  of this  Agreement  by the  officer  executing  the same on Seller's
behalf,  have been duly taken in accordance  with all applicable laws and this
Agreement  is the legal and  binding  obligation  of  Seller,  enforceable  in
accordance with its terms and conditions against the Seller.

      5.3.        Financial  Statements.  Seller has  delivered  to  Purchaser
relevant tax returns,  income  statements  and balance sheets for the Business
for the fiscal years ending 1995 through 1997 and monthly from January,  1997,
through  August,   1997,   (hereinafter  the  "Financial   Statements").   The
Financial  Statements  have been prepared on a consistent  basis in accordance
with  generally  accepted  accounting  principals  and practices  consistently
applied  and  fairly  represent  the  financial  condition  of  Seller  at the
relevant  dates and the results of  operations  and the  changes in  financial
position  of the  Seller  for such  periods.  Three (3) days  prior to Closing
Seller shall  deliver to Purchaser an income  statement  and balance sheet for
the period  ending July 31, 1997.  If the Closing Date is extended,  financial
statements  will be provided  for the period of August 1, 1997,  to the end of
the calendar month immediately preceding the Closing.







                                      5



<PAGE>




      5.4.        No  Violation  of  Agreement.   Neither  the  execution  and
delivery  of  this  Agreement  nor  the   consummation  of  the   transactions
contemplated  herein will  violate or result in a breach of any  condition  of
the  Articles  of  Incorporation,  Bylaws,  or  any  amendments,  renewals  or
modifications  thereof,  or violate or result in a breach of any  condition of
any agreement, lease, contract,  judgment, decree, statute, rule or regulation
applicable to Seller,  or result in the creation or imposition of any security
interest,  lien,  charge or  encumbrance  upon the Assets,  except as provided
herein, if any.

      5.5.  Regulatory  Compliance.  The Business and the Assets are, and will
be at the Closing Date, in compliance with all applicable  federal,  state and
local laws, ordinances, codes, regulations and requirements.

      5.6.  Restrictive   Covenant.   Seller,   it's   owners,   managers  and
shareholders  shall  each  execute  Restrictive  Covenants  in  the  form  and
substance  collectively  attached  hereto as Schedule  5.6,  and  incorporated
herein by this reference and agrees to be bound thereby.

      5.7.        Leases and  Contracts  for  Personal  Property.  Seller owns
all  assets  necessary  to operate  the  Business.  Seller  does not lease any
personal property,  equipment or used in the conduct of the Business which are
not identified on Schedule 1.2 attached hereto.

      5.8.  Indebtedness.  Seller has no  indebtedness,  either  contingent or
otherwise,  other than as  identified  on  Schedule  5.8  attached  hereto and
incorporated herein by this reference.

      5.9.        Contracts and Commitments.

            5.9.1.      Purchase   Commitments.   Seller   has   no   purchase
commitments  extending  beyond  the  Closing  Date  which are in excess of the
normal,  ordinary,  and usual requirements of the operation of the Business or
at any excessive price;









                                      6



<PAGE>


            5.9.2.      Collective  Bargaining/Employment  Agreements.  Seller
has no  collective  bargaining or employment  agreements,  nor any  agreements
that contain any severance or termination pay liabilities or obligations;

            5.9.3.      Compensation   Arrangements.   Seller  has  no  bonus,
deferred  compensation,  profit sharing,  or retirement  arrangement,  whether
legally  binding  or not,  nor does it  presently  pay any  pension,  deferred
compensation, or retirement allowance to anyone;

            5.9.4.      Employees.   Seller   has  no   employees   except  as
identified in Seller's most recent payroll record  attached hereto as Schedule
5.9.4 and incorporated  herein by this reference to whom it pays  compensation
or renumeration in any other form or nature;

            5.9.5.      Benefits,   Seller  does  not  pay  any  compensation,
vacation,  sick  day  allowances  or  other  benefit  programs  to  any of its
employees which is not disclosed in Schedule 5.9.5 attached hereto; and

            5.9.6.      Independent  Contractors.  Seller  has  disclosed  the
identity  of  all  independent   contractors  and  all  pertinent  information
relating to their  respective  engagements  or  retention  on  Schedule  5.9.6
attached hereto and  incorporated  herein by this reference and has heretofore
fully  disclosed to Purchaser all written  agreements  between Seller and such
independent contractors.

            5.10.       Tax  Returns  and  Payments.  All  federal,  state and
local tax  payments,  reports and returns  required to have been paid or filed
by  Seller  have  been so paid or  filed.  Seller  has  paid or  withheld  all
federal  state and local  taxes  which were due and payable or required by law
to have been withheld,  respectively,  to the date hereof,  except those which
are being contested in good faith by an appropriate  proceeding.  There are no
unpaid  assessments of federal or state income taxes or other  federal,  state
or local  taxes,  including,  but not limited  to,  personal  property  taxes,
pending or assessed  against Seller.  Seller has made adequate  provisions for
all taxes, assessments,  fees, penalties, interest, and all other governmental
charges which were,  or may become,  payable with respect to it at any time as
a result of events  occurring on or before the Closing Date, which will in any
way affect the  licensure  or  operation  of the  Business or ownership of the
Assets by Purchaser.

            5.11.       Litigation and Other Proceedings.  Except as otherwise
described  herein,  there  is  no  litigation,  arbitration,  or  other  legal
proceeding or  administrative  proceeding  pending or  threatened  against the
Business or the Assets,  which might  affect the  operation of the Business or
the Assets, or its  authorization to operate  behavioral health programs under
the  applicable  provisions  of Virginia or federal  law, and Seller is not in
default  in any  respect  of any  order or any  decree or rule of any court or
governmental  authority  which  may  have  jurisdiction  over  Seller  or  the
Assets.   Seller  possesses  all  permits  and  licenses   necessary  for  the
operation of the  Business,  and  otherwise  operates the Business in material
compliance with all applicable laws, regulations, and ordinances.

                                      7



<PAGE>


 
            5.12.       Broker.  No broker,  finder or agent has been  engaged
by Seller or  Purchaser  in regard to the sale of the  Assets  and  Seller and
Purchaser  hereby  agree to indemnify  each other,  defend each other and hold
each other free and  harmless  from and against any and all  liability,  loss,
costs,   damage,   and  expense  including  without   limitation,   reasonable
attorneys'  fees and costs of litigation  any party shall ever suffer or incur
because  of any claim by any  broker,  or any agent  thereof,  whether  or not
meritorious,  for any fee,  commission,  or other compensation with respect to
this Agreement or to the sale of the Assets.

            5.13.       Insurance.    Seller   has   continuously   maintained
insurance  for  professional  liability,  general  liability,  casualties  and
hazards relative to the Business and the Assets, since _________, 19_____.

            5.14.       Notices.  Seller is not aware of and has not  received
any  communications  from  any  insurance   companies,   third  party  payors,
governmental agencies or from any other parties of any conditions,  defects or
inadequacies  with respect to the  leaseholds  utilized by the Business or the
Assets,  (including health hazards,  state or local notices relating to health
care  licensing,  certificate of need status,  or dangers,  nuisance or waste,
which, if not corrected,  would result in termination of insurance coverage or
increase  its cost) or from  governmental  agencies or any other  parties with
respect to any violations of building codes and/or zoning  ordinances or other
governmental  laws,  regulations  or orders with respect to the  leaseholds or
the Assets,  pending or threatened  condemnation  proceedings  with respect to
any of the leaseholds  utilized by the Business,  or any other modification of
the  zoning   classification,   or  of  any  building  or  environmental  code
requirements  applicable to such leaseholds or any part thereof.  Seller shall
immediately  notify  Purchaser of any violations or conditions of which Seller
receives notice (whether written or oral).

            5.15.       Employees.  There  are no  employees  of  Seller or of
any  affiliate  of  Seller   currently   employed  in  the  operation   and/or
maintenance  of the  Business  Assets,  other than as shown on  Schedule  5.15
attached  hereto.  Schedule  5.15  attached  hereto  also sets forth as of the
date  of  this  Agreement  a  complete  list  and  description  of all  fringe
benefits, including hospitalization insurance,  accident and health insurance,
disability insurance,  death insurance,  vacation policies,  meals and lodging
policies and parking policies along with true,  correct and complete copies of
all  contracts  and  disclosures  related  thereto.  As of the  date  of  this
Agreement,  there  are no  pension,  retirement,  incentive  or other  similar
arrangements or plans to which Seller is bound.







                                      8



<PAGE>


            5.16.       Employment  Laws.  Seller has complied in all material
respects with all  applicable  state,  federal and local laws and  regulations
respecting  employment  and  employment  practices,  terms and  conditions  of
employment,  wages  and  hours  and  other  laws and  regulations  related  to
employment of employees of the Seller,  the Assets or of agents of Seller, and
there are no arrears in the payment of wages,  withholding or social  security
taxes,  unemployment  insurance  premiums or other similar  obligations  other
than in the ordinary  course of business and no impediment to  termination  of
service of any such employees.

            5.17.       Cost  Reports All rate  setting  forms or cost reports
which  Seller has been  required to file as of the Closing Date with any state
or federal  authority or other third party  payor,  have been timely filed and
accurately reflect the costs of the operation of the Business.

            5.18.        Third  Party  Billing.   All  billings  submitted  to
third party payors,  including but not limited to Medicare and Medicaid,  have
been within payment guidelines,  for services actually provided, and not false
or fraudulent in any fashion.

            5.19.       Bankruptcy & Insolvency,  No  bankruptcy,  insolvency,
petition  for  dissolution,   rearrangement,  surrender,  assignment  for  the
benefit of  creditors,  private  or public  sale,  auction  or similar  action
involving the Business or the Assets,  whether  voluntary or  involuntary,  is
pending or threatened, and Seller has not:

            (a)   filed a voluntary petition in bankruptcy;

            (b) been  adjudicated  as  bankrupt  or  insolvent  and is not the
               subject of any petition or action  seeking any  reorganization,
               arrangement,   recapitalization,   readjustment,   liquidation,
               dissolution or similar relief under any Federal  bankruptcy act
               or any other laws;

            (c)  sought  or  acquiesced  in the  appointment  of any  trustee,
               receiver or  liquidator of all or any  substantial  part of its
               properties,  the  Business  Assets,  personal  property  or any
               portion thereof; or

            (d) made an assignment  for the benefit of creditors,  surrendered
               or abandoned  any of the Assets,  agreed to sell or auction any
               of the  Assets for the  benefit of  creditors  or  admitted  in
               writing its  inability  to pay its debts  generally as the same
               become due.

            (e)  Seller  is  not  anticipating  or  contemplating  any  of the
               actions set forth in (a) through (d) of this subsection.



                                      9



<PAGE>


            5.20        Information  Not   Misleading.   All  the  information
concerning  Seller,  the Assets and all  reports,  contracts,  or other  items
obtained  by  Purchaser  pursuant to this  Agreement  are true,  complete  and
correct in all  respects  and fairly  present the  information  set forth in a
manner  that is not  misleading  and Seller has not  omitted  any  information
required  to be  included  in  order  to make the  information  furnished  not
misleading.

             5.21.      Audits.  There  have been no  Medicare,  Medicaid,  or
private  insurance  audits within the thirty-six  (36) month period  preceding
the date of this  Agreement and Seller has not been informed of any recoupment
claims.

             5.22.      Trade   Name.   Seller   represents,   warrants,   and
covenants  that  Seller  has  the  exclusive  right  to  use  the  trade  name
"Counseling  Associates"  and  any  other  names  used  now or in the  past in
association  with the Business,  and Seller has not granted and will not grant
to any other person, firm, or corporation the right to use such trade names.

             5.23.      Leaseholds.   Seller  leases  the  following  improved
commercial  premises under the terms of certain lease  agreements,  and Seller
has  heretofore   delivered  true  and  accurate  copies  of  all  such  lease
agreements   and  any   amendments,   renewals,   extensions,   riders  and/or
modifications thereof to Purchaser:

             (a)  Counseling Associates of Southwest Virginia, Inc.
                  2807 S. Main St., Unit 110
                  Blacksburg, VA 24060

            5.24.       Patient   Payments  &  Third  Party  Payor  Contracts.
There are no  advances  or  pre-payments  made by  clients  for  services  not
rendered,  or to be  rendered,  prior to the  Closing  Date,  other than those
accounted for to Purchaser,  and transferred to Purchaser as an item listed in
Schedule 1.2. There are no third party payor managed care agreements  existing
between  Seller and any third  party  payor,  other  than  those  specifically
approved by Purchaser,  which obligate Seller to provide professional services
beyond the Closing Date.

            5.25.       Seller's   Responsibilities.   Seller   shall   remain
responsible for all liabilities,  including but not limited to, the payment of
compensation  of the  employees of the Business  including any and all accrued
benefits and the amounts  payable,  for the period prior to the Closing  Date.
The accounts  receivable for the period prior to the Closing Date shall remain
the  assets of  Seller.  After the  Closing  Date,  any  monies  collected  by
Purchaser  for the  period  prior to the  Closing  Date will be  forwarded  to
Seller upon receipt.



                                      10



<PAGE>

            5.26.       Consultants.   There  are  no  consultants  of  Seller
currently  employed in the operation and/or maintenance of the Business or the
Assets.

6.    Covenants of Seller,

      6.1.  Condition of Personal  Property.  Seller  represents  and warrants
that,  subject to ordinary wear and tear,  all Tangible  Personal  Property as
identified in Subsection 1.1 above shall be in good working  order,  condition
and repair through the Closing Date.

      6.2.        Access  and  Preparation  of  License  Application.   Seller
agrees to use best efforts to assist  Purchaser in making  application for all
necessary  licenses and permits  required for the operation of the Business by
Purchaser.  Seller will provide  whatever  access,  materials,  expertise  and
information   reasonably   requested  in  connection  with  any  licensing  or
permitting  authority  review,   including,  but  not  limited  to,  Medicare,
Medicaid and other third party  payors.  Seller will likewise  cooperate  with
any efforts of  Purchaser to obtain  contracts  with or  certification  by any
third party payor or insurer.  Until this  transition is complete,  and Seller
has obtained all  necessary  licenses,  contracts and  certifications,  Seller
will allow Purchaser to operate under Seller's license and  certifications  to
the extent allowable by law.

      6.3.        Ordinary  Course of  Business.  From the date  hereof to the
Closing  Date,  Seller shall conduct its operation of the Business only in the
ordinary  course  thereof,  will take all  necessary  action to  preserve  the
goodwill and operation of such Business,  and will make no material  change in
the operation of such Business nor enter into any material  contract  creating
an  obligation  extending  after the  Closing  in excess of Five  Hundred  and
00/100 ($500.00)  Dollars or incur any material  liability without the written
consent of Purchaser, which consent shall not be unreasonably withheld.

      6.4.  Compensation.  From the date  hereof  through  the  Closing  Date,
except upon the prior written  consent of Purchaser,  Seller will not increase
any salary or other form of compensation  payable,  or to become  payable,  to
any of its employees or independent  contractors  or make any other  severance
or retirement arrangement with any such employees or independent contractors.

      6.5.        Insurance.  From the date hereof  through the Closing  Date,
Seller  shall  maintain  insurance  on the  Business  at the same levels as is
maintained on the date hereof






                                      11



<PAGE>

     6.6.        Review  of  Staff.   Seller   shall   allow   Purchaser   an
opportunity to review the credentials and employment  histories of all current
staff, inclusive of all employees and independent  contractors of the Business
upon   execution  of  this   Agreement.   Seller  further  agrees  to  provide
Purchaser,  prior  to the  time of  closing  of this  transaction,  copies  of
credentials  and  licenses  for all  employees  and/or  contractors  providing
patient care services at the Clinic.

      6.7.   Right of  Inspection.  Prior to the  Closing,  Purchaser  and its
officers,  employees,  attorneys  and agents shall be entitled  during  normal
business hours, to inspect the leasehold  identified in Subsection 5.23 above,
the books,  documents and records  relating to the Assets,  and to make copies
of the same, and Seller agrees to furnish such information  relating to Seller
and the Assets as  Purchaser  reasonably  may request and to permit  Purchaser
and such  persons to  consult  with the  officers,  employees,  attorneys  and
agents  of  Seller  for  the  purpose  of  determining  the  accuracy  of  the
covenants,   representations   and  warranties   made  herein.   Seller  shall
cooperate with Purchaser,  and cause its employees and independent contractors
to cooperate  with  Purchaser,  as necessary and reasonable to insure a smooth
transition of ownership of the Business.

      6.8.        Publicity.  All press releases,  filings and other publicity
concerning the transactions  contemplated  hereby will be jointly  coordinated
and will be subject to review and approval by both Seller and Purchaser,  such
approval not to be unreasonably withheld or delayed.

      6.9.  Termination   Notices,    Liabilities.    Seller   shall   deliver
appropriate  notices of termination  to all Seller's  personnel on the Closing
Date,  to be  immediately  effective.  Seller  shall  be  responsible  for all
unpaid wages,  fringe benefits  (including any unpaid or unfunded  liabilities
under any employee  benefit plan as that term is defined under Section 3(3) of
ERISA),  income tax withholdings,  social security taxes,  unpaid sick pay and
vacation pay,  unemployment  taxes and other such expenses and/or  liabilities
with  respect  to  all  such  personnel   accruing  or  arising  or  otherwise
attributable  to the period prior to closing.  Seller  further  represents and
warrants  to  Purchaser  that no  liability  under  Title IV of ERISA has been
incurred by Seller since the effective  date of ERISA which has not been fully
satisfied  and paid in full.  Moreover,  the  Seller  has not  engaged  in any
transaction  which could be subject to liability  under Section 4069 of ERISA.
In addition,  Seller shall serve all necessary  notices  and/or reports to the
Virginia  employment  authorities  and/or as  otherwise  required  by state or
federal  law  prior  to  closing  and  provide  Purchaser  with  the  required
disclosure  form(s)  on  or  before  the  Closing  Date.  In  no  event  shall
Purchaser be  responsible,  as a successor  employer or otherwise,  for any of
such liabilities, all of which shall be discharged by Seller.

7.   Representation and Warranties of Purchaser.


                                      12



<PAGE>


      7.1.  Organization  of  Purchaser.   Purchaser  is  a  corporation  duly
organized,  existing and in good standing  under the laws of the  Commonwealth
of Massachusetts.

      7.2.        Corporate  Action by  Purchaser.  Purchaser  has full  power
and  authority  to enter  into  and  perform  this  Agreement,  all  corporate
proceedings  necessary to duly  authorize  the  execution  and delivery of the
Agreement by the officer or officers  executing the same on Purchaser's behalf
have been taken and this  Agreement  is the legal and  binding  obligation  of
Purchaser,  enforceable in accordance with its terms and conditions applicable
to Purchaser.


8.    Purchaser's Due Diligence & Conditions  Precedent to Closing.  Purchaser
shall not be  obligated  to purchase  the Assets nor is it bound by any of the
terms of this  Agreement  until all of the following  conditions  are met, any
one or all of which may be waived by Purchaser in writing:

      8.1.  Representation  Warranties and Covenants.  The representations and
warranties of Seller  contained in this  Agreement  shall be true and accurate
in  all  material   respects  at  and  through  the  Closing  as  though  such
representations  and  warranties  were made on that date and Seller shall have
performed all  covenants  and  agreements on its part required to be performed
on  or  before  the  Closing  Date  which  are   specifically   authorized  or
contemplated by this Agreement.

      8.2.        Leases for Real  Property.  Purchaser  shall have executed a
valid,  legally  enforceable lease for the leasehold  identified in Subsection
5.23,  above upon terms  acceptable to Purchaser.  Such Lease  Agreement shall
provide  occupancy rights to Purchaser  effective  coincident with the Closing
Date on terms and  conditions  acceptable  to Purchaser.  If Purchaser  leases
the leasehold from Seller, or it's owner, manager or shareholder,  then a copy
of said lease shall be attached hereto as Schedule 8.2.

      8.3.        Third Party Payors.  Purchaser  shall have satisfied  itself
that there will be adequate  insurance  and third  party  payor  reimbursement
available for patients who will be treated for behavioral  health  services by
the Business as intended to be operated by Purchaser.

      8.4.        Licenses and  Approvals.  Purchaser  shall have obtained all
necessary licenses,  permits and approvals to occupy the leasehold  identified
in  Subsection  5.23  above  or  suitable  alternative  premises  and has made
application for all necessary licenses,  permits and approvals to operate said
premises for the provision of behavioral health services.



                                      13



<PAGE>


      8.5.        Sale of Assets.  Seller  shall sell,  convey and transfer to
Purchaser  the Assets by  delivering to Purchaser the Bill of Sale in the form
attached hereto as Schedule  8.5.1, an Assignment of Intangible  Rights in the
form  attached  hereto as Schedule  8.5.2,  and an Assignment  and  Assumption
Agreement in the form attached hereto as Schedule  8.5.3,  and any other forms
of documentation requested by Purchaser.

      8.6.        Insurance.   Purchaser  shall  have  obtained   general  and
professional   liability   insurance   coverage  in  amounts  Purchaser  deems
necessary to operate the Business.

      8.7.        No Material  Change.  The  business  affairs  and  financial
condition  of the Business  and/or any of the Assets  shall not have been,  or
shall not be  threatened to be,  adversely  affected in any way as a result of
fire, explosion,  earthquake,  disaster,  accident,  labor trouble or dispute,
any action by the United  States or any other  governmental  authority,  civil
disturbances,  uprising,  activity  of armed  forces,  or Act of God or public
enemy which has not been disclosed or provided for in this Agreement.

      8.8.        Restrictive   Covenant.   Seller,   including   its  owners,
managers and shareholders,  shall have each executed a Restrictive Covenant in
the form and  substance  collectively  attached  hereto  as  Schedule  5.6 and
incorporated herein by this reference.

      8.9.        Payroll.  Purchaser  shall have  received from Seller a copy
of the most recent  payroll  register for the Business  with evidence that all
employees and  independent  contractors of Seller have been  compensated up to
the Closing Date.

      8.10.   Consents.  At the  Closing,  Seller  will  furnish to  Purchaser
written  consents from third parties to Purchaser's  assumption and use of any
and all  tradenames,  trademarks,  goodwill and other Business Assets referred
to in Section 1.

      8.11.       Financial  Due  Diligence.   Purchaser  shall  have  had  an
opportunity  to conduct  financial  due  diligence  with  respect to  Seller's
detailed  business  records for the thirty six (36) month  period prior to the
execution date of this Agreement.

      8.12.       Corporate  Authority.  Seller shall have complied fully with
the  laws  of the  Commonwealth  of  Virginia  relevant  to  the  transactions
contemplated  herein.  Seller  shall  provide  to  Purchaser  a  copy  of  the
necessary  corporate  resolutions to duly approve the execution,  delivery and
performance of this Agreement by Seller.

      8.13.       Opinion  of  Counsel  for  Seller.   Purchaser   shall  have
received  from counsel to Seller,  ten (10) days prior to the Closing  Date, a
written  opinion  letter  (which  shall be  limited  to the laws of  Virginia)
addressed to Purchaser in form and substance to the effect that:


                                      14



<PAGE>


      (a)   Seller has the full power and  authority  to execute  and  deliver
            this Agreement and such other documents contemplated hereby.

      (b)   The  execution,  delivery and  performance  of this  Agreement and
            such  other   documents   contemplated   hereby   have  been  duly
            authorized by all requisite  corporate  actions of Seller and this
            Agreement and such other documents  contemplated hereby, have been
            duly executed and delivered by Seller.

      (c)   This  Agreement and such other  documents as  contemplated  hereby
            are  legal,  valid  and  binding  obligations  of  Seller  and are
            enforceable  against  them in  accordance  with  their  respective
            terms,  except as limited by general  equity  principles  (whether
            considered   in  a  proceeding   at  law  or  at  equity)  and  by
            bankruptcy, insolvency, reorganization,  moratorium and other laws
            affecting the enforcement of creditors' rights generally.

      (d)   To the knowledge of counsel  after due inquiry,  the execution and
            delivery  by  Seller of this  Agreement  and the  consummation  by
            Seller  of the  transactions  contemplated  hereby  will not be or
            result  in a  violation  of  any  statute  or  regulation  of  any
            governmental  authority or of any decree,  order,  or judgment and
            will not be or result in a violation  or  constitute  a default or
            ground for revocation  under any contract,  agreement,  indenture,
            license or  instrument  known to such counsel to which Seller is a
            party or by which Seller is bound.

      (e)   The  shareholders  of Seller  have  approved  the  transfer of the
            Business  and  Assets  by  Seller to  Purchaser  pursuant  to this
            Agreement.

      (f)   To the  knowledge of counsel  after due  inquiry,  Seller is not a
            party to any  pending  litigation  or any  proceeding  before  any
            court or  government  department  or agency which might affect the
            subject  transaction,  and such  counsel does not know of any such
            threatened litigation or proceeding against Seller.

      8.14. Certificate  of  Release,  Purchaser  shall  have  received  a Tax
Clearance  Certificate from the Commonwealth of Virginia stating that, as of a
date not more than five (5) days before the Closing  Date,  no  contributions,
interest,  or  penalties  are due to the  Commonwealth  of  Virginia  from the
Seller.



                                      15



<PAGE>


      8.15.       Employment   Agreements,   Purchaser  shall  enter  into  an
employment  agreement with  Jones-Freeman  in the form and substance  attached
hereto  as  Schedule   8.15,  and   incorporated   herein  by  this  reference
(hereinafter the "Employment Agreement").

      8.16.       Title  to  Assets,   Seller  shall  order,  and  provide  to
Purchaser,  a Uniform Commercial Code Search Report relative to the Assets and
Business  from  the  Commonwealth  of  Virginia  and  conduct  any  additional
examinations and  investigations  which are deemed necessary or desirable with
respect to the condition of title in and to the Assets and Business.

      8.17.       List of  Creditors.  Seller,  not less than thirty (30) days
prior  to  closing,  will  furnish  to  Purchaser,   in  accordance  with  the
requirements  of Article Six of the  Uniform  Commercial  Code,  a list of its
existing  creditors,  signed and sworn by Seller, and containing the names and
business addresses of all existing  creditors of Seller,  with the amounts due
to each  creditor,  and also the names of all  persons who are known to Seller
to assert claims against  Seller even though such claims are disputed.  Seller
and  Purchaser  will  prepare   schedules  of  property  to  be   transferred,
sufficient to identify such  property,  in accordance  with the Bulk Sales and
other requirements of the Uniform Commercial Code.

      8.18.       Notice to Creditors,  Indemnity.  Seller  acknowledges that,
in accordance with the provisions of the Uniform  Commercial  Code,  Purchaser
intends to deliver or send  appropriate  notices to all  persons  shown on the
list of creditors  furnished by Seller and to other  persons,  if any, who are
known to  Purchaser  to hold or assert  claims  against  Seller.  Seller  will
cooperate  with  Purchaser  in all  matters  relating  to such notice and will
furnish  any  additional  information  that may be required  by  Purchaser  to
satisfy the statutory  provisions in this regard. Such additional  information
shall  include,  but not be limited to, the names and  business  addresses  of
persons who become  creditors  of Seller  before the  Closing  Date as well as
persons who assert claims against Seller even though disputed.

      8.19.       Compliance  with Bulk Sales Law.  Seller  shall  comply with
all applicable  requirements  of the Uniform  Commercial Code and Virginia law
relative  to the sale of the  Assets and Seller  hereby  agrees to  indemnify,
defend and hold  Purchaser  harmless from any and all damages which may result
from the actions  and/or  omissions of Seller in connection  with the sale and
transfer of the Assets.

      8.20.       Payment of Creditors.  Except as otherwise  provided herein,
Seller  shall pay in full all of its  creditors  as of the Closing Date to the
extent  their  claims are  undisputed,  or to  effectuate  a plan of  payment,
giving  priority  to  tax  authorities,   and  shall  provide  Purchaser  with
certificates  of  tax  liability  or  tax  clearance   certificates  from  the
Commonwealth of Virginia as soon as possible.  If such certificates  reflect a
tax  liability  on the  part  of  Seller  to  the  Commonwealth  of  Virginia,
Purchaser  shall be entitled  to pay such  amounts as may be shown as owing on
the  certificates  of tax  liability  from the cash proceeds due at closing or
deduct same from the purchase price.


                                      16



<PAGE>


      8.21.       Failure of Conditions Precedent.  In the event the foregoing
conditions  precedent,  contained  in Sections  8.1 through  8.20,  inclusive,
cannot  be  satisfied  prior  to the  Closing  Date  and  are  not  waived  by
Purchaser,  this  Agreement  shall be null and void.  Purchaser  shall use its
best efforts in good faith to bring about the  fulfillment  of all  conditions
within its control  set forth in this  Section 8.  Without  waiving any rights
with respect to  representation,  warranties  and covenants  made by Seller in
this  agreement,  Purchaser  agrees that by proceeding  with the Closing,  all
conditions  precedent  to  the  obligations  of  Purchaser  have  been  met to
Purchaser's satisfaction.

9.    No Assumption of  Liabilities.  Purchaser shall assume no liabilities of
any kind or nature of Seller or any  liabilities of any kind or nature arising
out of the Business  conducted  with respect to the Assets through the Closing
Date.  Seller shall assume no  liabilities  of any kind or nature of Purchaser
or any liability of any kind or nature  arising out of the business  conducted
by Purchaser after the Closing Date.

10.   Indemnification.

      10.1.       Indemnification  of  Purchaser  by  Seller.   Seller  hereby
indemnifies  and holds  Purchaser,  its  directors,  officers,  employees  and
agents  harmless from: (a) any and all  liabilities  and obligations or claims
against  Seller,  and from all  liabilities  and obligations or claims arising
out of the  operation  of the  Business  through the Closing  Date,  or claims
arising out of the winding up,  dissolution,  or conduct of other  business of
Seller,  if any,  including,  but not  limited  to,  any and all  liabilities,
obligations,  claims,  fines,  penalties  or similar  charges  levied upon the
Business  due to the  non-compliance  of Seller with any  applicable  federal,
state and local laws,  ordinances,  codes,  regulations and requirements;  (b)
any damage or  deficiency  due to breach of  warranty,  misrepresentation,  or
nonfulfillment  of  any  agreement  on  the  part  of the  Seller  under  this
Agreement;  (c) with  respect to all  actions,  suits,  proceedings,  demands,
assessments,  judgments,  costs  and  expenses  connected  with the  foregoing
including  without  limitation  reasonable  attorney's fees and expenses.  For
purposes  of  satisfying  any  claim  under  this  indemnification  provision,
Purchaser  shall  have  all  remedies  available  under  this  indemnification
provision and applicable law.

      10.2.       Indemnification  of Seller  by  Purchaser.  Purchaser  shall
indemnify  and hold Seller,  its  directors,  officers,  employees  and agents
harmless from (a) any and all liabilities,  claims,  actual damage, loss, cost
or expense  arising out of the conduct of the business  after the Closing Date
by the  Purchaser,  if  any;  including,  but  not  limited  to,  any  and all
liabilities,  obligations,  claims, fines, penalties or similar charges levied
upon the Business due to the  non-compliance  of Purchaser with any applicable
federal,   state  and  local  laws,   ordinances,   codes,   regulations   and
requirements;  (b) any actual damage, loss, cost or expense arising out of the
breach of any warranty, misrepresentation,  or nonfulfillment of any agreement
on the part of Purchaser  under this  Agreement;  and, (c) with respect to all
actions,  suits,  proceedings,  demands,  assessments,  judgments,  costs  and
expenses   connected  with  the  foregoing,   including   without   limitation
reasonable attorney's fees and expenses.

                                      17



<PAGE>


11.   Rights of Termination and Remedies for Default.

      11.1.       Default by Seller.  In the event that all of the  conditions
precedent  set forth in Section 8 of this  Agreement  have been  satisfied  or
waived by Purchaser  on or prior to the Closing  Date and  Purchaser is ready,
willing and able to proceed with the Closing, but Seller is unable,  unwilling
or  refuses  to  consummate  the  Closing  in  accordance  with the  terms and
conditions  of this  Agreement,  or in the event that Seller is  otherwise  in
breach of this  Agreement,  Purchaser shall have the right to pursue all other
remedies available at law or equity.

      11.2.       Purchaser's   Right  to  Terminate.   If  any  one  or  more
conditions set forth in Section 8 has not been fulfilled or satisfied  through
no fault of  Purchaser  and not waived in writing by  Purchaser on or prior to
the  Closing  Date,  then  Purchaser,   at  its  option,  may  terminate  this
Agreement,  effective  upon the  receipt by Seller of  written  notice of such
termination.  In the event of any such  termination of this Agreement,  all of
Seller's and Purchasers  obligations hereunder shall terminate without further
loss, cost, damage,  claim, right or remedy in favor of any Party, and none of
the Parties hereto shall have any further  liability or  responsibility to the
other  without the need to  exchange  releases  to confirm  same,  except that
Seller shall be  responsible  for all costs and fees  incurred by Purchaser on
account of this transaction.

      11.3.  Seller's  Right to  Terminate.  In the event  that  Purchaser  is
unable to close by  _______________,  1997,  and the Parties have not mutually
agreed to an  extension  and this  inability  to close is not due to  Seller's
default,   then  Seller  shall  be  entitled  to  terminate  the  transaction;
provided,  however,  if non-satisfaction of the condition set forth in Section
8.2 is the sole cause of  Purchaser's  inability to close by  _______________,
1997,  Seller hereby agrees not to terminate the transaction.  In the event of
a termination of this transaction  under this Section 11.3, all of Purchaser's
obligations  hereunder shall terminate  without  further loss,  cost,  damage,
claim,  right or remedy in favor of any Party,  and none of the Parties hereto
shall have any further  liability or  responsibility  to the other without the
need to exchange releases to confirm same.

      11.4.       Default by  Purchaser.  In the event  that  Seller is ready,
willing and able to proceed with the Closing and  Purchaser  fails to complete
the  transactions  contemplated  in  this  Agreement,  which  failure  is  due
exclusively  to the  unwillingness,  inability  or  refusal  of  Purchaser  to
fulfill its  obligations  at such Closing,  other than pursuant to Purchaser's
right to  terminate  under any  provision  of Section  11.2,  then  Seller may
terminate  this  Agreement.  Seller  shall  also have the right to pursue  all
other remedies available at law or equity.

                                      18



<PAGE>


12.   Miscellaneous.

      12.1.       Survival.  All representations,  warranties and covenants of
Seller and Purchaser contained herein shall survive the Closing.

      12.2.       Disclaimer  of Intent to become  Partners.  The Parties,  by
the  execution of this  Agreement,  do not intend to become  partners or joint
venturers.

      12.3.       Additional  Documents.  Purchaser  and Seller  will,  at any
time before,  at or after the Closing  Date,  sign,  execute and  deliver,  or
cause others to do so, all such  documents and  instruments to do, or cause to
be done,  all such other acts and things as may be reasonable and necessary to
carry out the provisions of this Agreement.

      12.4        Notices.  Any notice,  request or other  communication to be
given  by any  party  hereunder  shall  be in  writing  and  shall  be sent by
registered  or  certified  mail,  or  overnight  delivery,   postage  prepaid,
addressed as follows:

      (a)    If to Seller, to:                         Dianne Jones-Freeman

                                    _____________________________

                                    _____________________________




         With a copy to:            Bruce Stockburger, Esq.
                                    Gentry, Locke, Rakes & Moore
                                    10 Franklin Rd. S.E. Ste. 800
                                    Roanoke, VA. 24038-0013

            or to such other person or place as Seller shall furnish to
            Purchaser in writing, or

      (b)    If to Purchaser, to:   Bruce A. Shear, President
                                    Pioneer Counseling of Virginia, Inc.
                                    200 Lake Street, Suite 102
                                    Peabody, MA 01960





                                      19



<PAGE>


      With a copy to:               Philip Cwagenberg, Esq.
                                    Ishbia & Gagleard, P.C.
                                    251 Merrill Street, 2nd Floor
                                    Birmingham, Michigan 48009

            or to such other  person or place as  Purchaser  shall  furnish to
            Seller in writing.

      12.5.       Non-Assignment.  Except as otherwise  provided  herein,  the
rights under this Agreement may not be assigned,  nor  obligations  delegated,
by either party hereto without the prior written  consent of the other,  which
shall  not  be  unreasonably  withheld,   except  that  without  such  consent
Purchaser  may assign its rights  herein to any  corporation,  partnership  or
other  entity  or  individual   affiliated  with  Purchaser.   In  such  case,
Purchaser's  assignee shall be substituted for Purchaser in all respects as if
such assignee were the original Purchaser hereunder.

      12.6. Sole  Agreement.  This Agreement may not be amended or modified in
any respect  whatsoever  except by  instrument  in writing  signed by both the
Purchaser and the Seller.  This  Agreement,  including its schedules and those
documents  specifically  incorporated  by  reference,  constitutes  the entire
agreement  between the Parties with respect to the subject  matter  hereof and
supersedes  all  prior  negotiations,   discussions,  writing  and  agreements
between them.

      12.7.       Governing  Law.  This   Agreement   shall  be  governed  and
construed in accordance with the law of the Commonwealth of Virginia.

      12.8.       Successors.  All  the  terms  of  this  Agreement  shall  be
binding upon and inure to the benefit of and be  enforceable by the Seller and
Purchaser  and  their  respective  successors  and  assigns,  subject  to  the
provisions of Section 12.5 hereof.

      12.9.       Captions.   The   captions   of  this   Agreement   are  for
convenience  of reference  only and shall not define or limit any of the terms
or provisions hereof.

      12.10.      Severability.  Should any one or more of the  provisions  of
this agreement be determined to be invalid,  unlawful or  unenforceable in any
respect,   the  validity,   legality  and   enforceability  of  the  remaining
provisions  thereof  shall not in any way be  affected  or  impaired  thereby,
unless the absence of such invalid,  unlawful or unenforceable  provision will
frustrate the purpose of this Agreement.

      12.11.      Counterparts.  This  Agreement may be executed in any number
of  counterparts,  each of which shall be an original,  but such  counterparts
shall together constitute but one and the same instrument.


                                      20



<PAGE>


      12.12.      No  Waiver.   Except  as  provided  herein,  no  failure  to
exercise and no delay in exercising,  on the part of the Purchaser, any right,
power or privilege hereunder shall operate as a waiver thereof;  nor shall any
single  or  partial  exercise  of any  right,  power  or  privilege  hereunder
preclude  any other right,  power or  privilege.  The rights  provided in this
Agreement shall be cumulative and not exclusive of any rights provided by law.

      12.13.       Attorney's  Fees and Costs.  Each  party to this  Agreement
shall pay its' own  out-of-pocket  charges  and  expenses  (including  without
limitation  attorneys'  fees)  incurred in  connection  with the  negotiation,
preparation  and  execution  of  this   Agreement.   In  connection  with  any
litigation  with respect to this  Agreement,  the  prevailing  party,  whether
Purchaser  or  Seller,  shall be  entitled  to  recover  all  costs  incurred,
including reasonable  attorneys' fees for services rendered in connection with
such   litigation,   including   appellate   proceedings   and   post-judgment
proceedings.

      12.14.      Confidentiality.    Seller   and   Purchaser,    and   their
respective principals,  partners,  directors,  shareholders and officers agree
that they will maintain in confidence:  (1) the terms of this  Agreement;  (2)
the identity of the parties hereto and their respective partners,  principals,
shareholders,  officers and  directors;  (3) the pendency of the  transaction;
and (4) all confidential  information  obtained  relative to this transaction;
and such  persons  and  entities  shall  not  disclose  the same  prior to the
Closing  Date,  to any person or entity,  other  than their  respective  legal
counsel,  accountants  and  other  agents  and  representatives,  to  Seller's
landlords as necessary to obtain their consent to the  assignment of leases to
Purchaser,  and to appropriate regulatory commissions,  as may be necessary to
permit the  consummation  of this  transaction.  In  addition,  Seller and its
principals  agree that they will not  disclose,  at any time after the Closing
Date,  the identity of the  principals of Purchaser  without the prior written
consent  of  Purchaser  and its  principals.  This  confidentiality  provision
shall be  binding  upon and inure to the  benefit  of the  parties  hereto and
their   respective   principals   and  shall   survive  the  closing  of  this
transaction.  For purposes of this Agreement,  confidential  information shall
be  defined  as  proprietary  information,   or  information  from  which  the
circumstances,   in  good   faith  and   conscience,   should  be  treated  as
confidential,  which includes,  but is not limited to,  information  regarding
trade  secrets,  price lists,  patient  lists,  assets,  liabilities  or other
information  regarding  the  business  of  Seller  or  Purchaser  which may be
acquired in connection with,  incident to or as a result of the performance of
the terms and conditions contained in this Agreement.







                                      21



<PAGE>


      IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.


WITNESSES                           "PURCHASER"

___________________________________ Pioneer Counseling of Virginia, Inc.,
                                    a Massachusetts corporation

                                    By:  ______________________________
__________________________________            Bruce A. Shear
                                              Its: President

                                    "SELLER"

__________________________________  Counseling Associates of Southwest
                                    Virginia, Inc.,
                                    a Virginia corporation

                                    By:    _____________________________
__________________________________              Diane Jones-Freeman
                                                Its: President

                                     and

__________________________________  By:    _____________________________
                                               James Garrison
__________________________________             Its: Vice President






F:\DATA\PIONEER\CASV\APA.5








                                      22



<PAGE>




                       RESTRICTIVE COVENANTS AGREEMENT

      THIS  RESTRICTIVE  COVENANT  AGREEMENT  (hereafter  referred  to as  the
"Agreement"),   made   and   entered   into  as  of  the   _________   day  of
___________________,  1997, by and among Pioneer Counseling of Virginia, Inc.,
a  Massachusetts  corporation  (hereinafter  "Purchaser")  with its registered
office located at 200 Lake Street,  Suite 102, Peabody,  Massachusetts  01960,
and Counseling Associates of Southwest Virginia,  Inc., a Virginia corporation
(hereinafter  "Seller")  with its  registered  office  located at 2807 S. Main
Street, Unit 110, Blacksburg, Virginia, 24060.

                                 WITNESSETH:

     WHEREAS,  on  ___________,  1997,  Seller and  Purchaser  entered into an
Asset  Purchase  Agreement  (hereafter  the "APA"),  wherein  Seller agreed to
sell,  and Purchaser  agreed to Purchase,  substantially  all of the assets of
Seller's behavioral health clinic in Blacksburg, Virginia; and,

     WHEREAS, in addition to the APA described above, Dianne Jones-Freeman,  a
principal  of Seller,  is to be  employed by  Purchaser  under the terms of an
Employment  Agreement  (hereafter  the  "EA")  between  the  parties  executed
contemporaneously with the APA and this Agreement; and

     WHEREAS,,  in light of the  purposes and  particulars  of the APA and the
EA,  Purchaser has required from Seller that it provide this Agreement as part
of the consideration for the complete transaction between the parties; and,

     WHEREAS,  Purchaser has  represented  to Seller that without the promises
and  representations  contained in this  Agreement  that it would not agree to
enter into either the APA or the EA;

     WHEREAS,  the parties hereto acknowledge and agree that the consideration
recited  in the APA,  the  receipt  and  adequacy  of which is  confessed  and
acknowledged,  shall be, and is,  sufficient  consideration  to  support  this
agreement, and all other contemporaneous agreements, between the parties;

     NOW,  THEREFORE,  in consideration of the mutual covenants and conditions
contained in the APA and EA and as hereinafter  contained,  the parties hereto
do hereby agree as follows:

1.   Covenant  Not To  Compete.  Seller  agrees  that for a period of five (5)
     years from date of  execution of this  Agreement,  that it shall not, for
     itself or as a representative,  employee,  agent,  partner,  stockholder,
     independent contractor, joint venturer or otherwise:



<PAGE>


      a. Engage,  directly or  indirectly,  in the same or similar  behavioral
         health business as Purchaser or any of its affiliated  companies,  at
         any  location  within  the  state  of  Virginia  (referred  to as the
         "Prohibited Area"); and,

      b. Provide  professional  behavioral  health services of any kind to any
         patients of the Seller (either active  patients  existing at the time
         of the closing of the underlying  transaction,  or inactive  patients
         who had received any treatment  within the eighteen (18) month period
         preceding closing of the underlying transaction); and,

      c. Solicit,  directly or indirectly,  any patients of the Seller (either
         active  patients   existing  at  the  time  of  the  closing  of  the
         underlying  transaction,  or inactive  patient who had  received  any
         treatment within the eighteen (18) month period preceding  closing of
         the underlying  transaction)  for services  similar to or of the same
         nature as that  provided by Purchaser or any facility or clinic owned
         and/or operated by Purchaser, or any affiliated organization; and,

      d. Solicit,   counsel,  or  induce  any  employee,  or  contractor,   of
         Purchaser,  or any facility  and/or  clinic owned and/or  operated by
         Purchaser,  or  any  affiliated  organization,   to  terminate  their
         relationship  and/or  position  with  Purchaser,  or any  facility or
         clinic  owned  and/or  operated  by  Purchaser,   or  any  affiliated
         organization; and,

      e. Request,  counsel or otherwise  advise any patients of Purchaser,  or
         any  facility or clinic owned and/or  operated by  Purchaser,  or any
         affiliated  organization,  to curtail withdraw or cancel any of their
         business  with the  Purchaser,  or any facility  and/or  clinic owned
         and/or operated by Purchaser, or any affiliated organization.

            For  purposes  of this  Agreement,  patients  shall be  defined as
            individuals  for whom  Purchaser,  or any facility  and/or  clinic
            owned   and/or   operated   by   Purchaser,   or  any   affiliated
            organization,  has,  in the  past,  presently  or at the  time  of
            termination of this Agreement,  provided  professional services in
            the ordinary course of its business.

            Any notice  provided for by this Agreement shall be in writing and
            may be given by personal  delivery,  or by mailing it by certified
            mail,  return  receipt  requested,  or by overnight  delivery,  to
            Purchaser or to Seller at the  respective  addresses  set forth in
            the APA,  or such  other  address  as  Purchaser  or Seller  shall
            specify  by  written  notice to the  other  parties  delivered  in
            accordance with this Section

                                      2



<PAGE>


2.    Non-Solicitation  of Referral Sources.  Seller further agrees that for a
      period of five (5) years from date of  execution  of this  Agreement  it
      will not,  directly  or  indirectly,  whether as an  officer,  director,
      shareholder,   partner,   proprietor,   associate,   manager,  employee,
      representative  or consultant,  become or be interested in or associated
      with,  within the  Prohibited  Area (except on behalf of the  Purchaser,
      its  successors  or  assigns,  except  as  provided  herein),  or in any
      capacity,   solicit,  directly  or  indirectly,   any  business  in  the
      Prohibited  Area  from  any  person,  corporation,   firm,  partnership,
      referral source or other entity  whatsoever  which  conducted  business,
      was  employed,  served as an  independent  contractor,  or was otherwise
      similarly engaged, with Seller prior to the date hereof; and,

3.    Non-Disclosure of Confidential  Information.  Seller further agrees that
      for a  period  of  five  (5)  years  from  date  of  execution  of  this
      Agreement, it shall not, directly or indirectly,  whether as an officer,
      director,   shareholder,   partner,  proprietor,   associate,   manager,
      employee,  representative  or consultant,  become or be interested in or
      associated with,  advise or disclose to any person,  corporation,  firm,
      partnership  or  other  entity  whatsoever  (except  Purchaser),  or any
      officer, director,  stockholder,  partner, associate, employee, agent or
      representative  of  any  such  partnership,  firm  or  corporation,  any
      information,   including  without  Imitation,   information   concerning
      Purchaser's   past  or  present   customers  or  patients,   prospective
      customers or patients, staff, contemplated acquisitions,  trade secrets,
      discoveries,  ideas, methods, market investigation,  surveys,  research,
      know-how or any other  non-public  information  relating to the business
      and  objectives of Purchaser  unless the same has become public by means
      other than that prohibited  hereunder and then only to the extent it has
      become public.

4     Non-Recruitment.  Seller  further  that for a period  of five (5)  years
      from date of execution of this Agreement  that it will not,  directly or
      indirectly,  whether  as an  officer,  director,  shareholder,  partner,
      proprietor,  associate, manager, employee, representative or consultant,
      become or be  interested  in or  associated  with,  induce or attempt to
      influence any employee, agent, servant, referral source,  contractor, or
      independent  contractor  of Purchaser,  or an  affiliate,  or any former
      employee,  agent,  servant,  referral source,  contractor or independent
      contractor  of any of  Seller  to  terminate  his or her  employment  or
      contracted  relationship with Purchaser,  or the affiliate, or to accept
      employment,  or otherwise  become  contractually  engaged,  with another
      entity in the mental health industry.








                                      3



<PAGE>


            The term "former employee,  agent, servant, referral source,
            contractor  or  independent  contractor"  is  defined as any
            person who has provided  services to, or for,  Seller within
            the  eighteen  (18)  months   preceding  the  date  of  this
            Agreement,  who is not engaged or employed by Purchaser,  or
            an  affiliate,  to provide  those  services,  within six (6)
            months from the date of execution of this Agreement.

5.    Specific  Enforcement.  The parties hereto agree that a violation of the
      covenants  contained in this Agreement shall cause irreparable injury to
      Purchaser,  its affiliates,  successors and assigns,  for which monetary
      damage cannot be readily calculated,  and that,  accordingly,  Purchaser
      and its  affiliates,  successors  and  assigns  shall  be  entitled,  in
      addition  to any other  rights and  remedies  they may have at law or in
      equity, to an injunction  enjoining and restraining Seller from doing or
      continuing  to  do  any  such  act  or  other  violation  or  threatened
      violation of this Agreement.

6.    Consideration.  The  parties  hereto  acknowledge  and  agree  that  the
      consideration  recited  in the APA and  EA,  executed  contemporaneously
      with this Agreement,  is sufficient and adequate  consideration for this
      Agreement.  Part and parcel of the  agreement  between the parties,  the
      parties  acknowledge  and agree that  without this  Agreement  Purchaser
      would not consummate this transaction.

7.    Benefit.  This Agreement  shall be binding upon and inure to the benefit
      of the  parties  hereto,  and their  respective  heirs,  administrators,
      executors  and  successors.  This  Agreement  is personal to each of the
      parties  hereto and neither party may assign or delegate it's rights and
      obligations  hereunder without first having obtained the written consent
      of the other party, said consent not to be unreasonably withheld.

8.    Notices.  Any notice,  request or other communication to be given by any
      party  hereunder  shall be in  writing  and  shall be sent by  overnight
      delivery,  or by certified mail, return receipt requested,  addressed as
      provided in the APA.

9.    Governing  Law.  This  Agreement  shall be  governed  and  construed  in
      accordance with the law of the Commonwealth of Virginia.

10.   Captions.  The  captions  of  this  Agreement  are  for  convenience  of
      reference  only  and  shall  not  define  or limit  any of the  terms or
      provisions hereof.

11.   Severability.  Should  any  one  or  more  of  the  provisions  of  this
      agreement be determined to be invalid,  unlawful or unenforceable in any
      respect,  the  validity,  legality and  enforceability  of the remaining
      provisions  thereof  shall  not  in  any  way be  affected  or  impaired
      thereby,  unless the absence of such invalid,  unlawful or unenforceable
      provision will frustrate the purpose of this Agreement

                                      4



<PAGE>


12.  Counterparts.  This Agreement may be executed in any number of
     counterparts, each of which shall be an original, but such counterparts
     shall together constitute but one and the same instrument.

13.  Authority.  By affixing their signatures hereto, the undersigned  warrant
     and  represent  that they are  authorized,  in law and in fact,  to enter
     into this agreement, and do so, knowingly and voluntarily.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date
                                    first above written.


WITNESSES                           "Purchaser"

________________________________    Pioneer Counseling of Virginia, Inc.
                                    a Massachusetts corporation

                                    By:  ______________________________
________________________________             Bruce A. Shear
                                             Its:  President

                                    "Seller"

                                    Counseling Associates of Southwestern
                                    Virginia, Inc.,
                                    a Virginia corporation


                                    By:  _________________________
________________________________            Diane Jones-Freeman
                                            Its:  President


F.\DATA\PIONEER\RESTRICT.4








                                      5



<PAGE>


                          LEASE WITH OPTION TO PURCHASE

      THIS LEASE AGREEMENT is made as of August  ________1997,  by and between
DIANNE JONES-FREEMAN and JAMES E. GARRISON, JR. (hereinafter  collectively the
"Lessor"),   and  PIONEER  COUNSELING  OF  VIRGINIA,   INC.,  a  Massachusetts
corporation  registered to conduct  business in the  Commonwealth  of Virginia
(hereinafter the "Lessee").

      1.          Leased   Premises.   In   consideration  of  the  rents  and
covenants  herein set forth,  Lessor hereby leases to Lessee and Lessee hereby
leases  from  Lessor,   for  the  term  and  upon  the  terms  and  conditions
hereinafter  set forth,  the property  known as Unit 110,  South Main Commons,
2807 South Main Street,  Blacksburg,  Virginia,  located in Montgomery County,
Virginia,  (hereinafter  the "Leased  Premises"),  including  all common areas
associated therewith,  all parking associated  therewith,  and all ingress and
egress  associated  therewith,  as demonstrated  on the site diagram  attached
hereto as Exhibit l.

      2.    Term.  The  initial  term of this  Lease  shall be for a period of
five (5) years,  commencing on, September 1, 1997, and terminating at midnight
on August 31, 2002.

      3.          Renewal  This  Lease  shall  automatically  renew  under the
terms and  conditions of this  Agreement for  successive  one (1) year periods
immediately  subsequent  to the  original  term of the Lease.  This  automatic
renewal  is  subject  to the  right of the  Lessee to  terminate  the Lease by
providing  written  notice to the Lessor in accordance  with the terms of this
Agreement  no less than ninety (90) days prior to the  expiration  of the then
current lease term.  Lessor has the same right to terminate  this Lease,  upon
ninety (90) days written  notice prior to the  expiration  of the then current
lease term, commencing the eighth (8th) year, and beyond, of this Lease.


<PAGE>


      4.    Rental.

            (a)   Base Rent.  Lessee  covenants  and agrees to pay Lessor,  as
rental for the Leased Premises,  base annual rent of Sixty-Six  Thousand Seven
Hundred  and 00/100  Dollars  ($66,700.00),  which shall be payable in monthly
installments  of Five  Thousand  Five Hundred  Fifty Eight and 33/100  Dollars
($5,558.33)  without  deduction,  offset,  notice or demand in  advance on the
first day of each  calendar  month  during the initial or any renewal  term of
this  Agreement.  Payments  shall be made by check  payable  to the  Lessor or
their  assigns  and  delivered  to the  Lessor's  address  then in effect  for
receipt of notices hereunder.

            (b)   Additional  Rent. As additional  rent,  Lessee shall pay all
utility charges, related to the Leased Premises as required by this Agreement.
    
  5.    Use of  Leased  Premises.  The  Lessee  shall use and  occupy  the
Leased  Premises,  subject  to  the  terms  and  conditions  hereof,  for  the
operation of its mental health  counseling  practice and for any other uses as
may be customary and incidental thereto and for any legally permitted purpose

      6.    Maintenance and Repairs.  The Lessee,  at its sole expense,  shall
make all minor and/or maintenance repairs to improvements,  if any, comprising
a portion of the Leased Premises,  including, but not limited to, minor and/or
maintenance  repairs  and  replacements  to  any  interior  finishes,  routine
maintenance  of  heating  and  air  conditioning  systems,  and  plumbing  and
electrical  fixtures,  necessary to keep the Leased Premises in good order and
repair.  Lessee  will,  at the  expiration  of the  term of this  Lease or any
renewal hereof,  deliver up the Leased Premises in as good order and condition
as received,  reasonable wear and tear and damage by fire or other casualty of
the kind insured against in standard  policies of fire insurance with extended
coverage excepted.


                                        2


<PAGE>

      Lessor  shall  maintain  the roof,  walls,  floor  and other  structural
elements  of any  buildings  constituting  a portion of the  Leased  Premises.
Additionally,  Lessor shall be responsible  for repairs to and  replacement of
the plumbing, electrical, heating and air conditioning systems.

      In the absence of any act,  omission or commission by the Lessor, or any
agent,  servant  or  employee  of the  Lessor,  and as  otherwise  imposed  by
operation of law,  Lessor shall not be liable for any damages ( whether caused
by the use of the Leased Premises, water,  electricity,  heating equipment, or
by theft or otherwise) to personal  property that the Lessee or assigns or any
other person may sustain on or about the Leased Premises.

      7.    Hazard  Insurance.  The Lessee shall insure at its own expense its
personal  property,  improvements,  inventory  and  contents  against  loss or
damage by fire or other hazards.

      8.    Condemnation.

            (a)   Total.  If the Leased  Premises are wholly  condemned by any
public authority under the power of eminent domain, or any voluntary  transfer
by Lessor to any  condemning  authority  under  threat  of  condemnation,  the
Lessee's  leasehold  interest  in the  Leased  Premises  shall  be  deemed  to
terminate  as of the date on which title to the Leased  Premises  vests in the
condemning  authority.  Lessee  shall  at  that  time  pay to the  Lessor  all
accrued but unpaid rent, prorated through such date of termination.


                                        3
<PAGE>


      Further,  in the event of a total taking of the  premises,  Lessee shall
be entitled to  immediate  payment,  from  Lessor,  of any and all rental sums
paid by  Lessee,  to Lessor,  that were to be  applied to the option  purchase
price of the building,  under terms of Paragraph ____ of this Lease.  Further,
in the event of a total taking,  Lessee retains the right to seek compensation
from  the  taking  authority  for the  value  of its  interest  in the  Leased
Premises,  and such other  recoveries  that it may be  entitled  to under law,
such as, moving expenses,  business interruption expenses, value of leasehold,
etc.

            (b)   Partial.  If a  portion  of the  Leased  Premises  shall  be
partially  condemned by public  authorities under the power of eminent domain,
or  voluntary   transfer  to  any   condemning   authority   under  threat  of
condemnation,  and if as a direct  result of such  occurrence a portion of the
Leased Premises shall be rendered partially untenantable,  the base rent shall
thereafter be reduced to reflect any  resulting  decrease in the usable square
footage of the Leased Premises.

      Notwithstanding the foregoing,  if a partial  condemnation of the Leased
Premises occurs which renders the Leased Premises  untenantable then Lessee in
it's sole and  absolute  discretion  may  immediately  terminate  this  Lease,
paying to Lessor any and all sums  outstanding,  and receiving from Lessor any
and all rental sums paid by Lessee, to Lessor,  that were to be applied to the
option purchase price of the building,  under terms of Paragraph  _______,  of
this Lease.





                                       4


<PAGE>


      Further,  in the  event of a  partial  taking  of the  premises,  Lessee
retains  the right to seek  compensation  from the  taking  authority  for the
value of its interest in the Leased  Premises,  and such other recoveries that
it  may  be  entitled  to  under  law,  such  as,  moving  expenses,  business
interruption expenses, value of leasehold, etc.

            (c)   No   Entitlement  to   Compensation.   Except  as  otherwise
provided  for  herein,  the  compensation  awarded  or paid upon such total or
partial  taking  of the  Leased  Premises  shall  belong  to  and be the  sole
property  of the Lessor  except  that  Lessee  shall have a lien  against  the
proceeds  of the  condemnation  and/or  against the real  property,  which may
foreclose  upon in an action in equity  or in law,  equal to all  rental  sums
paid by  Lessee,  to Lessor,  that were to be  applied to the option  purchase
price  of the  building,  under  terms  of  Paragraph  ____,  of  this  Lease.
Further,  the Lessee  shall be entitled  to  participate  in the  condemnation
proceedings and shall be entitled to compensation  for the taking or impairing
of its  unamortized  portion of leasehold  improvements  made by to the Leased
Premises,  and  shall be  entitled  to  recover  any and all sums  paid by the
condemning  authority for moving  expenses,  business  interruption,  revenues
loss, etc.

      9.    Environmental   Matters   -   Lessee's   Obligations   Except   as
otherwise provided in and subject to the terms of paragraph 11 hereof,  Lessee
agrees as follows:

            (a)         Legal  Requirements.  During  the term of this  Lease,
Lessee shall,  at Lessee's sole cost and expense,  comply with and observe all
state and federal  environmental  laws, and any and all rules and  regulations
relating thereto  ("Environmental  Laws") pertaining to the Leased Premises or
Lessee's use and  occupancy  of the Leased  Premises.  Lessee  shall  promptly
deliver  to  Lessor  copies  of  all  notices   which  Lessee   receives  from
governmental  authorities  alleging  any  violation of  Environmental  Laws or
requesting  compliance  with  any  Environmental  Laws.  For  purposes  of the
foregoing,  Lessee  shall be deemed the "owner" of any  fixtures or  equipment
owned by lessee and located on the Leased  Premises,  by Lessee,  and shall be
deemed  the  "Operator"  of  the  Leased  Premises  and of  all  fixtures  and
equipment located thereon, whether  or not  owned  by  Lessee.  To the  extent
such  Environmental  Laws require  that any  insurance  be  maintained,  bonds
posted  or  periodic  information  be  provided  to any  governmental  agency.
Lessee shall provide the same.

                                           5


<PAGE>


            (b)   Lessor's Right to Correct  Environmental  laws  Violations..
If Lessee  fails to  comply  with any  applicable  Environmental  Laws,  or if
Lessor  reasonably   believes  a  violation  of  the  Environmental   Laws  is
threatened,  Lessor  shall have the right (but not the  obligation)  to act in
place of Lessee and to take such action as it may deem  necessary or desirable
to ensure  compliance  or to  mitigate,  abate or  correct  the  violation  or
threatened  violation.  No less than fourteen (14) days prior to any action by
Lessor,  Lessor will give written notice to Lessee of the proposed action, and
permit  Lessee to ensure  compliance  or to  mitigate,  abate or  correct  the
violation or threatened  violation,  before Lessor takes any action. All costs
of any kind whatsoever incurred by Lessor in connection  therewith,  including
consultant's  and  attorneys'  fees,  shall be payable  on demand,  shall bear
interest at the rate of twelve  percent (12%) per annum until paid,  and shall
constitute additional rent.

            (c)   Indemnification.  For any and all  claims  that arise out of
acts,  omission and  commissions  that pre-date  Lessee's  tenancy of the real
property,  Lessor shall  indemnify,  defend and hold Lessee  harmless from and
against any and all claims, losses, damages, liabilities,  costs and expenses,
including  attorneys'  fees,  arising from Lessor's failure to comply with its
obligations  under paragraph 9, or the failure of Lessor's  agents,  servants,
employees,   predecessors  in  interest,   and/or  assignors.   The  foregoing
provision shall survive the expiration or earlier termination of this Lease.
 





                                      6


<PAGE>


            For any and all claims  that arise out of the acts,  omission  and
commissions of , subsequent to the effective date of this Lease,  Lessee shall
indemnify,  defend  and hold  Lessor  harmless  from and  against  any and all
claims,  losses,   damages,   liabilities,   costs  and  expenses,   including
attorneys'   fees,   a-rising  from  Lessee's   failure  to  comply  with  its
obligations  under  paragraph 9. The  foregoing  provision  shall  survive the
expiration or earlier termination of this Lease.

      10.         Indemnity  to Lessor and  Liability  Insurance.  Lessee will
indemnify  and save  harmless  the Lessor  from and  against any and all loss,
liability,  damage  and  expense  of any and all loss,  liability,  damage and
expense of any kind or nature  whatsoever  incurred  to or  expended by Lessor
caused by,  relating to or arising out of Lessee's  negligent  or unlawful use
of, or activities in, upon or around, the Leased Premises.

            For so long as this Lease  remains in effect,  Lessee will keep in
force at its own expense  comprehensive  general  liability  insurance with an
insurer  reasonably  satisfactory  to Lessor in the amount of $500,000.00  for
injury  (fatal or  nonfatal)  to or death of any one person and  $1,000,000.00
for  injury to or death of more  than one  person  in any one  occurrence  and
$500,000.00 fo   damage to or  destruction of property in   or upon the Leased



                                       7



<PAGE>


Premises.  The Lessor shall be a named  additional  insured  under the policy or
policies evidencing the foregoing  insurance coverage,  and each such policy (if
available)  shall require at least thirty (30) days' prior written notice to the
Lessor before lapse or  discontinuance  of coverage  (whether due to nonpayment,
nonrenewable  or passage of time) for any reason or before any  modification  or
other change in the terms of coverage.  Promptly  upon the request of the Lessor
at any time and from time to time,  the Lessee shall provide  Lessor with copies
of each such  policy  as well as a  certificate  of  insurance  evidencing  such
coverage, or provide Lessor with adequate information to permit Lessor to obtain
its own copies.

      11.   Indemnity  to  Lessee  and   Liability   Insurance.   Lessor  will
indemnify and save harmless the from and against any and all loss,  liability,
damage and  expense of any kind or nature  whatsoever  incurred to or expended
by Lessee  caused by,  relating  to or arising out of  Lessor's  negligent  or
unlawful use of, or activities in, upon or around, the Leased Premises.

      For so long as this Lease  remains in effect,  Lessor will keep in force
at its own expense  comprehensive  general liability insurance with an insurer
reasonably  satisfactory  to Lessee in the  amount of  $500,000.00  for injury
(fatal  or  nonfatal)  to or death of any one  person  and  $1,000,000.00  for
injury  to or  death  of  more  than  one  person  in any one  occurrence  and
$500,000.00  for damage to or  destruction  of  property in or upon the Leased
Premises.  The Lessee shall be a named additional  insured under the policy or
policies  evidencing  the  foregoing  coverage,   and  each  such  policy  (if
available)  shall require at least thirty (30) days' prior  written  notice to
the  Lessee  before  lapse  or  discontinuance  of  coverage  (whether  due to
nonpayment,  nonrenewable  or  passage  of time) for any  reason or before any
modification  or other  change in the  terms of  coverage.  Promptly  upon the
request  of the  Lessee at any time and from time to time,  the  Lessor  shall
provide  Lessee with copies of each such  policy as well as a  certificate  of
insurance   evidencing   such  coverage,   or  provide  Lessee  with  adequate
information to permit Lessee to obtain its own copies.

                                      8



<PAGE>
      12.         Assignment  and  Subletting.   The  Lessee  shall  not  have
the right to assign  this  Lease or  sublet,  or  permit  any other  person to
occupy,  the Leased Premised,  or any part thereof,  except upon obtaining the
prior written  consent of the Lessor,  which consent shall not be unreasonably
withheld,  conditioned or delayed,  other than to an affiliated (parent, child
or sibling) organization,  or its agents,  servants and/or employees.  No such
assignment  or  subletting   shall  relieve  the  Lessee  of  its  obligations
hereunder.  Lessee  shall pay all of Lessor's  reasonable  costs and  expenses
(including,  but not  limited  to,  attorneys'  fees)  incurred or expended in
connection  with any such sublease or  assignment  which shall not exceed Five
Hundred ($500.00) Dollars.

      13.   Default,  All items of  indebtedness,  sums,  or damages which may
become owing by Lessee to Lessor under the terms of this  Agreement,  shall be
considered  items of rent,  and the Lessor  shall have the liens and  remedies
for the collection of rent as are provided  herein and by law or in equity for
the collection of rent.

      Upon the breach of any  covenant,  term,  condition or provision  herein
contained,  or any  covenant,  term,  condition or provision  contained in any
other  Agreement  between Lessee and Lessor,  or the repudiation of this Lease
by the Lessee,  or the failure of the to move into the Leased  Premises at the
beginning of the term, or the  abandonment or vacation of the Leased  Premises
by the Lessee, or the adjudication  of Lessee as bankrupt,  or the  insolvency 


                                      9


<PAGE>


of Lessee,  or the failure or  inability  of Lessee to pay its debts as the same
become  due,  or the  appointment  of a  receiver  or  trustee  of the  Lessee's
property,   or  upon  the  business  conducted  on  the  Leased  Premises  being
substantially  terminated at any time, or upon the failure of performance of any
of the covenants and conditions  contained in this Lease, or upon the failure to
pay any amount  considered  "rent" under the terms and conditions of this Lease,
an "Event of Default" shall be deemed to have  occurred.  If an Event of Default
is not cured by Lessee within thirty (30) days after Lessor gives written notice
to Lessee of such Event of Default,  then Lessor shall have the right to, at its
option,  immediately  terminate this Lease and assume  possession and control of
the Leased Premises,  in the procedure  established,  and as provided for by the
laws of the  Commonwealth  of  Virginia,  in which event  Lessee  shall quit and
surrender the Leased Premises to the Lessor;  provided that neither  terminating
this Lease under this clause or  recovering  possession  of the Leased  Premises
shall  deprive the Lessor of any other  action or remedy  against the Lessee for
possession,  for rent,  or for damages;  nor deprive  Lessee of its claim to all
rental  sums paid by Lessee,  to  Lessor,  that were to be applied to the option
purchase  price of the  building,  under terms of Paragraph  ___, of this Lease.
Lessor  acknowledges that Lessee may assert a lien against the real property for
any and all sums due and owing to it, which  represents  all rental sums paid by
Lessee,  to Lessor,  that were to be applied to the option purchase price of the
building, under terms of Paragraph _____, of this Lease.







                                      10


<PAGE>


      All of Lessor's and Lessee's  rights and  remedies  shall be  cumulative
and shall not preclude the Lessor and Lessee from  exercising  at any time and
from time to time all other rights and remedies provided by law or in equity.

      Lessor further  acknowledges  and agrees that should the  certificate of
occupancy  for the  real  property  be  withdrawn,  or that  the  building  is
non-tenantable due to the acts,  omissions or commission of the Lessor, or its
agents,  servants and/or employees,  then in it's sole and absolute discretion
may  immediately  terminate  this  Lease,  paying to  Lessor  any and all sums
outstanding,  and receiving from Lessor and all rental sums paid by Lessee, to
Lessor,  that were to be applied to the option purchase price of the building,
under terms of Paragraph ____, of this Lease.

      In the alternative,  Lessee may continue with this lease,  however,  all
obligations  for rent are waived during the period of time that no certificate
of occupancy exists and/or the build in non-tenantable.

      14.         Waiver   of   Subrogation.    Notwithstanding    any   other
provisions  of this  Agreement,  but subject to the  consent of  Lessor's  and
Lessee's insurance carriers,  it is understood and agreed that in the event of
any  loss or  damage  to the  Leased  Premises  by fire  or any  other  perils
customarily  under  extended  coverage  portions  of fire or  other  insurance
policies,  regardless  of the cause  thereof,  and  whether or not the same be
caused by the  carelessness  or  negligence  of the  Lessor or  Lessee,  their
servants,  employees,  agents,  visitors, or licenses,  neither the Lessee nor
Lessor  nor their  insurance  carriers  shall  have any  right of  subrogation
against the Lessee or Lessor, their servants,  employees,  agents, visitors or
licenses  for any such damage or loss  sustained.  Lessor and Lessee  agree to
apply to their respective  insurance carriers for a policy rider consenting to
the foregoing waiver of subrogation provisions.





                                         11


<PAGE>


      15.   Improvements and  Alterations,  Any improvements or changes to the
Leased  Premises,  other than maintenance and repairs which are the obligation
of the Lessor,  shall be made at the expense of the Lessee.  Before making any
alterations or improvements,  the written consent of the Lessor shall be first
obtained,  which shall  provide,  in good faith,  whether Lessor would require
Lessee to remove the  improvements  at the  termination  of the  Lease,  which
consent shall not be unreasonably  withheld,  conditioned or delayed. All such
improvements  or  alterations to the Leased  Premises  which become  fixtures,
including,   without  Imitation,   all  electric  wiring,  electric  fixtures,
plumbing,  and heating  and air  conditioning  systems,  shall be deemed to be
part of the  realty  and  shall  become  the  property  of the  Lessor  at the
termination  of this  Lease and  shall not be  removed  at the  expiration  or
earlier  termination of this Lease,  unless so requested by Lessor at the time
that Lessor  approves such  improvements in which event Lessee agrees to so do
and to repair  promptly any damage caused by such removal.  No improvements or
changes shall be made without obtaining all necessary building permits.

      16.   Removal Upon  Termination.  Lessee shall at the end of the initial
term of this Lease or any renewal,  extension,  or sooner termination  thereof
as permitted by this  Agreement,  remove from the Leased  Premises  rubbish or
any refuse matter and leave the Leased  Premises broom clean.  Provided Lessee
is not in  default  thereunder,  Lessee  shall have the right to remove any of
its trade fixtures from the Leased Premises,  provided that it repairs any and
all  damage  caused by such  removal.  All goods and  property  on the  Leased
Premises  left after  Lessee's  removal shall be liable to distress and may be
distrained and sold for any rent in arrears,  in accordance with Virginia law,
cost or repairs to the Leased  Premises or fixtures  thereof made necessary by
misuse or neglect on the part of the Lessee.





                                      12


<PAGE>


        17. Covenant and  Agreement  of Lessor.  Lessor  covenants  and agrees
  that  Lessee,   upon  paying  the  rental  herein   reserved  and  upon  the
  performance of the covenants,  conditions and agreements  herein provided to
  be observed and  performed by Lessee,  shall  peaceably and quietly hold and
  enjoy  the  Leased  Premises  for and  during  the  term  hereof  and  every
  extension  or  renewal  thereof,  without  interference  from any  person or
  entity  claiming  any right,  title or interest in said real  property,  by,
  through or under the Lessor.

      Lessor  further  covenants and agrees that the real property that is the
subject of this Lease,  meets and/or exceeds all applicable  construction  and
safety codes and ordinances;  that the real property complies with all current
zoning  ordinances  for its location,  or that variances have been applied for
and  obtained;  that  adequate  designated  parking is provided  with the real
property to permit its use as a medical or professional  office building,- and
that  at the  time  of  the  effective  date  of  this  Lease  that a  current
certificate  of  occupancy  exists,  permitting  immediate  occupancy  of  the
Premises as of the effective date of this Lease.

      18.   Expenses and Attorney's  Fees. Upon the successful  enforcement of
any amount  claimed due and owing  hereunder,  the Lessor and Lessee  agree to
pay all  reasonable  expenses and cost incurred or expended by the other party
by reason of any  breach by Lessor or Lessee of their  respective  obligations
hereunder  (including but not limited to, reasonable  attorney's fees), in the
event such non-breaching  party employs the service of any attorney to enforce
the performance of the covenants hereof by such breaching party.














                                           13
<PAGE>


        19. Subordination.   Lessee  hereby  covenants  and  agrees  that  its
leasehold  interest under the terms of this Agreement  shall be subordinate to
any deed of trust,  mortgage  and other  security  interest  granted by Lessor
against the Leased  Premises  provided  that Lessee's use and enjoyment of the
Leased   Premises   is   not   disturbed.    This   subordination   shall   be
self-operative;   however,   Lessee   agrees   to   execute   any   reasonable
documentation  consistent with the Lease as required by Lessor to evidence any
such  subordination.  However,  Lessor acknowledges and agrees that the option
to purchase the real property that is part of Lease shall not be  subordinated
to any  after-created  interest  in the  property,  and that this Lease may be
properly recorded as evidence of the Lessee's interest in the property.

     20.    Miscellaneous  Covenants  of Lessor and Lessee.  Lessor and Lessee
each  covenant  that  (a) it  will  comply  with  all  Federal,  State  and/or
municipal laws,  ordinances,  and regulations relating to its ownership of the
real  property  and the business  conducted in the Leased  Premises and to its
use of the Leased  Premises,  (b) it will not use,  or permit to be used,  the
Leased  Premises  for any  illegal or immoral  purpose,  (c) it will allow the
Lessor to show the  Leased  Premises  both  during and after  Lessee's  normal
business hours to prospective tenants or purchasers,  provide Lessor access to
the Leased  Premises after normal business hours for said purpose and to place
signs on the Leased Premises  advertising its  availability for sale or lease,
all only upon the event that Lessee gives Lessor  written notice of the intent
to terminate the Lease and not exercise its option to Purchase.  [too vague]



                                       14


<PAGE>


 

      21.    Notices.  If either  party  desires  to give  notice to the other
in  connection  with and  according  to the terms of this  Lease,  such notice
shall be given by: (a) registered or certified mail,  return receipt requested
(and it shall be deemed  received  three (3) days after being  deposited in an
United States mail with Postage  prepaid);  or, (b) by a recognized  overnight
carrier with return  receipt,  and it shall be deemed  received the  following
business day, and such notices shall be addressed as follows:

      To the Lessor:                Dianne Jones-Freeman
                                    1521 Jefferson Forest Lane
                                    Blacksburg, VA 24060

      To the Lessee:                Bruce A. Shear, President
                                    PHC, Inc.
                                    200 Lake Street, Suite 200
                                    Peabody, MA 01960

  Nothing  contained  herein  shall be construed  as  prohibiting  the parties
  respectively  from changing the place at which notice is to be given, but no
  such  change  shall  be  effective  unless  and  until it  shall  have  been
  accomplished  by  written  notice  given  in the  manner  set  forth in this
  section.

      22.   Keys.  Lessee  will  surrender  any  and all  keys  to the  Leased
  Premises at the  termination  of this Lease or pay the cost of replacing all
  locks for the Leased Premises.








                                       15


<PAGE>


      23.   Miscellaneous.

            (a)   This Lease  Agreement  may be executed by the Lessor and the
  Lessee in any number of  counterparts  (each of which  shall be deemed to be
  an original,  and all of which shall be deemed to represent one and the same
  agreement),  and  merges  all prior or  contemporaneous  understandings  and
  agreements between the parties hereto with respect to the Leased Premises.

            (b)   The  failure of either  party to insist,  in any one or more
instances,  upon strict performance of any of the covenants of this Agreement,
or to  exercise  any option  herein  contained,  shall not be  construed  as a
waiver or a relinquishment  for the future of such covenant or option, but the
same shall  continue  and remain in full force and effect.  The receipt by the
Lessor of rent with  knowledge of the breach of any  covenant  hereof shall be
deemed a waiver of such  breach,  but no other  waiver by the  parties  of any
provision  hereof  shall be  deemed  to have been  made  unless  expressed  in
writing and signed by the parties so charged with the waiver.

            (c)   This  Lease  and  the   covenants  and   conditions   herein
contained  shall  bind and inure to the  benefit  of the Lessor and the Lessee
and their respective heirs, successors and their permitted assigns.

            (d)   This Lease shall be construed in  accordance  with,  and the
respective  rights,  obligations and remedies of the parties shall be governed
in all respects by, the laws of the Commonwealth of Virginia.

            (e)   The headings and  subheadings of the  provisions  herein are
inserted for  convenience  only and shall not control or affect the meaning or
construction of any of the provisions of this Agreement.

                                       16


<PAGE>


            .(f)  Both Lessor and Lessee  represent and warrant that there are
  no claims for brokerage  commissions or finders' fees in connection with the
  execution of this Agreement.

            (g)   No amendment  to this Lease may be made,  unless in writing,
  and signed by both parties.

      24.   Option to Purchase  Property.  Lessor  hereby  grants to Lessee an
  option to purchase the Leased  Premises  which shall not be  severable  from
  the remaining  terms and  conditions of this Lease and shall not survive the
  expiration or earlier  termination of this Lease.  The legal  description of
  the property is as follows:



  The terms and conditions of the option hereby granted are as follows:

            (a)         Exercise  of  Options;  The  Lessee may  exercise  the
option to purchase the  Property at any time from and after  execution of this
Lease by  delivering  written  notice to the  Lessor  at any time  thereafter,
provided, however, that the Lessee is not then in default hereunder.

            (b)   Purchase  Price;  The purchase  price for the Property shall
be the sum of Four Hundred Forty Five Thousand  ($445,000.00)  Dollars payable
check, in cash, certified funds or by wire transfer.










                                       17



<PAGE>

            (c)   Credit  Against  Purchase  Price;  Lessor  acknowledges  and
  agrees that Lessee,  upon  exercise of it's  option,  shall be entitled to a
  credit  against the purchase price equal to One Thousand Five Hundred Thirty
  Three and 33/100 Dollars  ($1,533.33) per month for each month that rent has
  been paid under the terms of this  Lease.  For those  months  that there has
  been  any  pro-ration  of the  rent,  then  Lessee  shall be  entitled  to a
  corresponding credit against the option purchase price.

            (d)   Closing  &  Documentation;  At  closing,  the  Lessor  shall
convey to Lessee fee simple  absolute title to the Leased Premises by Warranty
Deed, free and clear of all liens and encumbrances  created and/or suffered by
the Lessor,  subject only to such easements and restrictions as were of record
on the date hereof,  laws,  ordinances and zoning regulations,  and the rights
of any tenants or  occupants  of the Leased  Premises,  if any. As evidence of
title,  the Lessor  shall,  at its sole cost and expense,  provide to Lessee a
commitment  for and an  Owner's  Policy of Title  Insurance  without  standard
exceptions,  in an amount not less than the purchase price,  issued by a title
insurer licensed to conduct  business in the Commonwealth of Virginia.  At the
closing,  the Lessor shall execute and deliver the following  documents to the
Lessee:  (a)  Warranty  Deed  for the  Property,  (b) a Bill of Sale  (without
warranty of title) conveying all of the Lessee's right,  title and interest in
and  to the  Improvements  and  any  improvements  upon  the  Property  as may
hereafter be made pursuant to this Lease;  (c) the title insurance  commitment
and premium for the issuance of the Owner's Policy of Title  Insurance;  (d) a
Certified  Resolution  of Authority to engage in the subject  transaction  (if
necessary);  (e) a Closing Statement  reflecting the transaction;  and (f) any
other  documentation which the title insurer or Lessee's lender may reasonably
request.  At the closing,  the Lessee  shall:  (a) pay the purchase  price for
the  Property  to the Lessor;  (b)  execute  and deliver to the Lessor:  (i) a
Certified  Resolution  of Authority to engage in the subject  transaction  (if
necessary);  (ii) a Closing  Statement  reflecting the transaction;  and (iii)
any other  documentation  which the  title  insurer  or  Lessee's  lender  may
reasonably request.
                                       18


<PAGE>



            (e)   Payment  Obligations;  Lessor shall pay all applicable  real
estate  transfer  taxes as well as the title  insurance  premium.  The  lessee
shall pay all recording fees and its other closing costs.

            (f)   Possession;  Lessee  shall have  possession  of the Property
at the closing.

            (g)   Discharge  of  Liens;  The  Lessor  shall,  at or  prior  to
closing,  discharge all mortgages,  liens or encumbrances upon the Property to
the extent that same were not created or suffered by the Lessee.

      25.   Right of First  Refusal.  In the event that the Lessor shall elect
to  sell  the  Property  which  is the  subject  of  the  Lease  prior  to the
expiration  of the term of the  Lease or any  extension  thereof,  the  Lessor
hereby  grants to the Lessee a right of first refusal to purchase the Property
upon the same terms and  conditions,  if more favorable than the option terms,
or at the  option  terms if they  are more  favorable  to the  Lessee.  In the
event that the Lessor has  elected  to sell the  Property  and has  received a
bona fide offer to purchase the same  ("Offer"),  the Lessor  shall  deliver a
copy of such offer to the Lessee and the Lessee  shall have a period of thirty
(30) days  following  its  receipt  thereof  within  which to,  pursuant  to a
written notice delivered to the Lessor,  either:  (a) waive its right of first
refusal and option;  (b) agree to purchase  the  Property  upon the same terms
and  conditions  set  forth in the  Offer;  or (c)  exercise  it's  option  to
purchase contained in this lease.



                                         19


<PAGE>


      If the  Lessee  waives  its right of first  refusal  and  option and the
Lessor  accepts  the third party offer to  purchase  the real  property,  then
Lessor may  terminate  this  Lease on ninety  (90) day  written  notice to the
Lessee.  In the event of termination of the lease under this  paragraph,  then
Lessor shall pay to Lessee all sums  previously paid by Lessee that would have
applied  to the  purchase  price,  had the  Lessee  exercised  its  option  to
purchase the real property.

      WITNESS the following signatures and seals.

                                    LESSOR:

                                    _________________________________
                                    Dianne Jones-Freeman




                                    _________________________________
                                    James E. Garrison, Jr.


                                    LESSEE:
                                    PIONEER COUNSELING OF VIRGINIA INC.



                                    _________________________________
                                    By:
                                    Its: President







                                      20


<PAGE>

COMMONWEALTH OF VIRGINIA )
                                    )     to-wit
           City OF Roanoke                     )


     This day personally  appeared before me Dianne  Jones-Freeman and made oath
that  the  foregoing  Lease is true and  correct  to the best of her  knowledge,
information and belief.

Subscribed and sworn before this 29th day of  August 1997.

 
_______________________________
                                    Notary Public
My commission expires: May 31, 2001



COMMONWEALTH OF VIRGINIA )
                                    )     to-wit
           City OF Roanoke                     )

      This day personally appeared before me James E. Garrison, Jr. and made
oath that the foregoing Lease is true and correct to the best of his
knowledge, information and belief.

Subscribed and sworn before this 29th day of August 1997.

 
_______________________________
                                    Notary Public
My commission expires: May 31, 2001


                                      21


<PAGE>


COMMONWEALTH OF VIRGINIA )
                                   )     to-wit
__________ OF ______________     )

      This day personally appeared before me  ______________________ on behalf
of Pioneer  Counseling  of  Virginia,  Inc.  and made oath that the  foregoing
Lease is true and correct to the best of his/her  knowledge,  information  and
belief.

Subscribed and sworn before this _______ day of  ______________, 1997.

 
_______________________________
                                    Notary Public

My commission expires: _____________________


F-.\DATA\PIONEER\CASV\LEASE\AGT.4




                                      22


<PAGE>


Exhibit 10.128


                             EMPLOYMENT AGREEMENT

      THIS  EMPLOYMENT  AGREEMENT is made and entered into as of this ________
day of ________,  1997,  with an  effective  date of  ________,  1997,  by and
between  PIONEER  COUNSELING  OF VIRGINIA  INC., a  Massachusetts  corporation
(hereinafter  referred  to  as  "Employer"),   and  DIANNE  JONES-FREEMAN,   a
behavioral  health  professional,  licensed to practice in the Commonwealth of
Virginia (hereinafter referred to as "Employee").

                                 WITNESSETH;

      WHEREAS,   Employer  is  a  Massachusetts   corporation   which  renders
professional  psychiatric  counseling  services through employees who are duly
licensed to practice  in the  Commonwealth  of  Virginia,  including,  but not
limited to the  operation  of an  outpatient  clinic in Salem,  Virginia  (the
'Clinic"); and,

      WHEREAS  Employee  is a  behavioral  health  professional,  licensed  to
practice in the Commonwealth of Virginia,  is experienced in the operation and
management  of  behavioral  health  clinics,  and  desires to be  employed  by
Employer  so that  she may  devote  her best  efforts  on a  concentrated  and
continuous  basis to the rendering of behavioral  health  services to patients
and to the management and operation of the Clinic on behalf of Employer; and

      WHEREAS,  Employer desires to employ  Employee,  and Employee desires to
be employed by Employer, on the terms and conditions provided herein.

      NOW THEREFORE,  in  consideration  of the mutual  promises and covenants
herein contained the parties agree as follows:

1     Employment

      A.    Engagement and Acceptance.  Employer hereby employs,  engages, and
            hires  Employee,  and Employee  hereby  accepts and agrees to such
            hiring,   engagement,   and  employment,  to  render  professional
            behavioral   health  services   exclusively  for  the  benefit  of
            Employer to patients  of  Employer  and to provide  administrative
            services at the Clinic,  or at other facilities  located within 50
            miles of the Clinic's  Blacksburg location and its' Salem location
            designated by Employer.  Employee agrees to perform All duties and
            services  in   accordance   with  all  policies   and   procedures
            established by Employer  (both existing and future),  all federal,
            state and local laws and  ordinances  (both  existing and future),
            and all applicable  rules of  professional  conduct (both existing
            and future).

      B.    Duties.  During  the  term  of  this  Agreement,   Employee  shall
            perform  as the Chief  Operating  Officer  of the  Clinic and as a
            behavioral health professional as provided herein.

            1. Clinical and Administrative  Duties.  Employee shall as part of
               her duties,  provide  clinical and  administrative  services at
               the Offices of Employer,  including, but not limited to service
               as the Chief  Operating  Officer of the Clinic,  in accord with
               the rules and  regulations  of the clinic  and the  corporation
               (both existing and future),  or at such other  locations as may
               be  designated  from time to time by  Employer,  at  reasonable
               times to be set by Employer, exclusively.

               a. Duties  Varied.  The duties of  Employee  will be varied and
                  may range from direct patient care,  including  treatment of
                  patients  at  the  clinic,   or  at  a  site  designated  by
                  Employer, to providing  administrative,  marketing services,
                  and other duties as assigned.

               b. Coverage.  Employee's  duties shall include the provision of
                  administrative  on  call  coverage  at all  times.  Employee
                  shall  perform  such  duties  under  the   supervision   and
                  direction  of the Vice  President  of  Operations,  or other
                  person as designated by the Employer.

               c. Conditions.  The  performance  of such  duties  may  require
                  travel  and  may  also  require   Employee  to  be  directly
                  involved  in  the  development  of  marketing  and  business
                  development   strategies   in   conjunction   with   certain
                  administrative  employees of the  Employer,  PHC,  Inc. it's
                  corporate   parent,   and/or  other  affiliated   companies.
                  Except  with  regard to  duties  assigned  by PHC,  Employee
                  shall  perform  all such  administrative  duties  under  the
                  supervision   and   direction  of  the  Vice   President  of
                  Operations,  or other person as  designated by the Employer.
                  All  professional  decisions  relative to patient care shall
                  be  made  by  Employee  and  shall  be  in  accordance  with
                  appropriate   standards  of   professional   and   corporate
                  practice.

               d. Clinical  Practice.  Employee shall have the  opportunity to
                  provide  treatment  of patients at the  Clinic's  Blacksburg
                  location one (1) day per week, or its  equivalent  number of
                  hours in reasonable blocks.

      C.    Licensure.  Employee  shall as of the date of this  Agreement,  be
            licensed to render professional  behavioral health services,  as a
            licensed professional  counselor,  in the Commonwealth of Virginia
            and  shall  be  certified  by  the   ________________  and  shall,
            throughout  the term of this  Agreement,  maintain her license and
            privileges to render  professional  behavioral  health services in
            the   Commonwealth  of  Virginia,   as  a  licensed   professional
            counselor.

                                      2



<PAGE>


      D.    Equipment  and  Material.  Employer  shall  supply to Employee all
            equipment and materials  which  Employer  customarily  provides to
            similarly   situated  employees  for  performance  of  her  duties
            hereunder   and  which  are   customary   in  the   clinical   and
            administrative   practice  of   professional   behavioral   health
            services.  All  equipment and materials  provided  Employee  shall
            remain the sole  property of the Employer,  and, upon  termination
            of  the  relationship  between  Employer  and  Employee  are to be
            immediately  returned to Employer without any further demand being
            necessary.

      E.    Exclusive   Employment.   Employee,   during   the  term  of  this
            agreement will not,  without the express prior written  consent of
            Employer,  accept  employment  or practice as a behavioral  health
            professional,  for the benefit of anyone other than Employer, at a
            health care  facility or in a health  care  setting  other than at
            the  offices of  Employer,  or at such other  locations  as may be
            designated from time to time by Employer.

      F.    Practice  Standards.  During the term of this  agreement  Employee
            shall use her best efforts in the  performance of her duties under
            this  Agreement in accordance  with the rules and  regulations  of
            Employer  and of the  professional  staff  of the  clinic  and the
            applicable  standards for the behavioral  health  profession,  and
            all  such  service  shall  be  performed  in  compliance  with All
            corporate policies,  federal, state and local laws, ordinances and
            regulations.

      G.    Good  Standing.  Employee  Shall at All times  during  the term of
      this Agreement:

            1. Be a member in good standing on the  professional  staff of the
               Clinic       with        appropriate        privileges       in
               ___________________________________.

            2. Be, and remain,  a  participating  provider in the Medicare and
               Medicaid  programs (Titles XVIII and XIX of the Social Security
               Act,  respectively)  if  applicable,  and with any managed care
               program  with  which  Employer  and/or  the  Clinic  is  now or
               hereafter becomes affiliated.

            3. Maintain her  licensure in good  standing  with the  regulatory
               agencies of the government of the Commonwealth of Virginia.

      H.    Staff  Privileges.  This  Agreement  is  not  and  should  not  be
            construed  as any form of guarantee  or  assurance  that  Employee
            will  receive   necessary   professional   staff   membership   or
            privileges  at  the  Clinic  for  purposes  of   discharging   her
            responsibilities  hereunder,  and  the  application,  appointment,
            reappointment  and granting of such  privileges  shall be governed
            solely by the  Professional  Staff  Bylaws of the  Clinic  then in
            effect.  Employee represents and warrants,  that she possesses the
            professional   skills  and  training   necessary  to  perform  the
            services which she is to perform hereunder.

      I.    Applicable   Rules  and   Regulations.   Employee   shall  provide
            services  under this  Agreement  in  accordance  with all  quality
            standards  established,  from time to time by the  Employer and by
            the Clinic for its  professional  staff and in compliance with all
            applicable  statutes,   regulations,   rules,  and  directives  of
            federal,  state  and  other  governmental  and  regulatory  bodies
            having  jurisdiction  over the  Employer  and/or the  Clinic;  the
            Bylaws,  rules and regulations of the Clinic and its  professional
            staff,   applicable   standards   of  the  Joint   Commission   on
            Accreditation of Healthcare Organizations;  the rules, regulations
            and  requirements of third party payors;  and current accepted and
            approved  methods  and  practices  applicable  to the  practice of
            professional counseling.


                                         3


<PAGE>


      J.    Loss of Privileges or Licensure.

            1. Should   Employee's   license   to   practice   as  a  licensed
               professional  counselor in the  Commonwealth  of  Virginia,  be
               suspended,  revoked or canceled, then, effective as of the date
               of the suspension,  revocation or cancellation of such license,
               Employer may terminate this Agreement,  effective  immediately.
               Employer's  failure  to act  immediately  upon the  suspension,
               revocation or  cancellation of such license does not constitute
               a waiver of any of the rights established under this paragraph.

               a. Employee   warrants  and  represents  that  her  license  to
                  practice   psychology  in  Virginia  is  currently  in  good
                  standing,  and that there is not presently  pending  against
                  her any  action,  claim  or  proceeding,  or any  threatened
                  action,  claim or  proceeding,  the  outcome of which  could
                  result in the  revocation,  suspension or restriction on her
                  license, or her ability to practice psychology.

            2. Should   Employee's   professional   staff  privileges  on  the
               professional  staff of the Clinic be restricted or made subject
               to supervision in accordance  with the applicable  professional
               staff  bylaws,  rules  and  regulations  or  comparable  rules,
               regulations,   or  policies   applicable  to  the  practice  of
               professional  counseling,  then Employee may continue to render
               services  hereunder only in accordance with such restriction or
               supervision  as approved by Employer.  If Employer  determines,
               in its sole  discretion,  that  imposition of such  restriction
               or   supervision   of   Employee's   privileges    unreasonably
               interferes  with the  performance  of  Employee's  duties under
               this   Agreement,   Employer  may  terminate  this   Agreement,
               effective  immediately.  Employees  failure to act  immediately
               upon  the  suspension,   revocation  or  cancellation  of  such
               license  does  not  constitute  a waiver  of any of the  rights
               established under this paragraph.

      K.   Peer  Review.   Employee  Shall   participate  in  such  department
           meetings,  quality  management and other peer review  activities as
           required by Employer and/or the Clinic.

      L.   Maintenance  of  Skills.  Throughout  the  term of this  agreement,
           Employee  agrees to maintain her  professional  skills as evidenced
           by participation in appropriate  continuing  professional education
           activities   and  will  maintain  good  standing  in   professional
           associations.

      M.   Professional   Liability   Insurance.   Employee   is  to   provide
           professional  liability  insurance  coverage,  with minimum  policy
           limits of $1,000,000 per  occurrence,  $3,000,000 in the aggregate,
           for the  professional  services  being  rendered under the terms of
           this  Agreement.  Employee  shall cause  Employer to be endorsed on
           said policy as an  additional  named  insured.  Employee  agrees to
           provide  to  Employer  proof  of the  existence  of said  insurance
           coverage upon the request of the Employer.

           In the event that the professional  liability insurance  maintained
           by Employee is a "claims  made"  policy,  Employee  shall  continue
           such policy in effect,  or obtain  comparable  "tail  coverage"  to
           complement/supplement  the claims made policy, to be maintained for
           a period of three (3) years following the   termination   of   this
           Agreement,  regardless  of the  circumstances  giving  rise to such
           termination.  Employee  agrees  to  have  Employer  endorsed  as an
           additional  insured under the terms of said insurance  policy,  and
           to provide to  Employer  proof of the  existence  of the  insurance
           coverage upon the request of Employer.  Employee  acknowledges that
           Employer is under no obligation to provide  professional  liability
           coverage for Employee.



                                      4


<PAGE>



      2.   Billings and Collections.

           A. Assignment  of Right to Bill and  Collect.  Employer  shall,  in
              the name of and on behalf of Employee, bill patients,  insurance
              companies   and  other   third-party   payers  and  collect  the
              professional   fees  for  professional   services   rendered  by
              Employee  under the  terms of this  Agreement.  Employee  hereby
              appoints  Employer for the term of this Agreement to be her true
              and lawful attorney-in-fact for the following purposes.

            1.  To bill patients,  insurance  companies and other  third-party
                  payers in Employee's name and on her behalf; and,

            2   To collect accounts receivable  resulting from such billing in
                Employee's name and on her behalf; and,

            3.  To  receive  on behalf of  Employee  payments  from  insurance
                companies,  prepayments from health care plans, reimbursements
                from  Medicare  and  Medicaid,   and  all  other   third-party
                payments from insurance companies; and,

            4.  To take  possession of and endorse in the name of Employee any
                notes,  checks,  money orders,  insurance payments,  and other
                instruments received in payment of accounts receivable; and,

            5.  To initiate the  institution of legal  proceedings in the name
                of  Employee  to  collect  any  accounts  and  monies  owed to
                Employee,  to enforce the rights of Employee as creditor under
                any  contract  or m  connection  with  the  rendering  of  any
                service; and,

            6.  To contest  adjustments and denials by  governmental  agencies
                (or their fiscal intermediaries) and other third-party payors.

      All  monies  shall  be  accounted  for by  Employer  as  being  directly
      attributable  to  Employee.   Employee  may  perform  the  functions  or
      exercise  the rights set forth in this  section only with the consent of
      Employer.  Employee  shall  execute  a Power  of  Attorney  in form  and
      substance  acceptable  to the  parties  hereto  in  connection  with the
      rights and powers  granted to Employer  pursuant to Section 2,  Employee
      shall  cooperate  with and at the  request  of  Employer  shall  provide
      reasonable  assistance  to Employer with the functions set forth herein.
      In  the  performance  of the  services  described  in  this  Section  2,
      Employer shall use reasonable  efforts to collect such professional fees
      and shall  comply with all managed  care  contracts  and all  applicable
      laws, rules and regulations.

      B.    Records and Reports.  Employee shall complete  medical  records in
            a timely and  legible  fashion as  required  by  applicable  laws,
            corporate  policies and procedures,  and in keeping with generally
            accepted  standards of record  keeping and  documentation,  and as
            required  by  third  party  payors  to  permit   billing  for  and
            collection of revenues for  professional  services  rendered,  and
            shall  maintain and furnish  Employer with such  records,  reports
            and documentation  evidencing the performance of Employee's duties
            hereunder  as may be  requested  by  Employer in  accordance  with
            applicable law.  Employee  acknowledges  that All medical records,
            reports  and  documentation  created  hereunder  are the  sole and
            exclusive  property of the  Employer,  and may not be removed from
            Employees  premises without the express prior approval of the Vice
            President of  Operations,  or such other person  designated by the
            Employer.


                                      5

<PAGE>



3     Obligations of Employer.

      A.    Overall  Function.  Employer  shall  provide or  arrange  for such
            services and  amenities as are  necessary or  appropriate  for the
            efficient    professional    practice   and   the   administrative
            responsibilities   of  Employee   pursuant   to  this   Agreement.
            Employer  shall  comply,  and shall use its best  efforts to cause
            its employees to comply, with all corporate  policies,  applicable
            federal,  state  and local  laws,  rules  and  regulations  in its
            provision or services hereunder.

      B.    General Administrative Services.

            1.    Employer  shall provide  management  and  administration  of
                  nonprofessional   services   relating  to  the  professional
                  practice of Employee.

            2.    Employer  shall supply to Employee the ordinary,  necessary,
                  and  appropriate  services  for the  efficient  operation of
                  Employee's clinical practice,  including without limitation,
                  necessary clerical, accounting,  purchasing, payroll, legal,
                  bookkeeping and computer services,  information  management,
                  printing,  postage and duplication and medical services,  as
                  provided by Employer to other similarly situated employees.

            3.    Employer  shall  maintain all files and records  relating to
                  the  professional  practice of Employee,  including  but not
                  limited to, accounting,  billing,  collection, and financial
                  records  and  patient   files  and  medical   records.   The
                  management  of all files and records  shall  comply with all
                  applicable   federal,   state   and   local   statutes   and
                  regulations,  and all  patient  files  and  medical  records
                  shall be located  so that they are  readily  accessible  for
                  patient care,  consistent with ordinary  records  management
                  practices.  Employee shall supervise the preparation of, and
                  direct the  contents of,  patient  medical  records,  all of
                  which  shall  remain   confidential   in   accordance   with
                  applicable  laws  and  regulations.   All  original  patient
                  records  shall  be and  remain  the  property  of  Employer,
                  subject to applicable Virginia law.

            4.    Employer  shall take such legal and  appropriate  actions in
                  the name of and on behalf of  Employee  as are  required  to
                  collect  professional  fees and pay in a timely  manner  all
                  expenses associated with Employee's medical practice,  which
                  are  the  responsibility  of  Employer,   pursuant  to  this
                  Agreement,  except as  otherwise  agreed in writing  between
                  Employer and Employee.

            5.    Employer  shall  distribute  to  Employee  compensation  and
                  other  amounts due to her  pursuant to this  Agreement  upon
                  such  terms and at such times as are  provided  in Section 4
                  hereof.

            6.    Employer  shall not refer a patient  for  Designated  Health
                  Services,  as  defined  in  42  U.S.C.   (sub-section)  1395
                  "Stark")  to, or provide  Designated  Health  Services to, a
                  patient upon a referral  from an entity or person with which
                  the physician or an immediate  family member has a financial
                  relationship  other  than as  permitted  by  exceptions  set
                  forth in Stark.


                                      6



<PAGE>


                  It  is  not  a  purpose  of  this  Agreement  to  induce  or
                  encourage  the  referral  of  patients,   and  there  is  no
                  requirement  under  this  Agreement,   or  under  any  other
                  agreement  between  the  Employer  and  Employee,  that  the
                  Employee  refer any patient to the  Employer or to any other
                  entity  for  the  delivery  of  health  care  services.  The
                  compensation  paid to the Employee  under this  Agreement is
                  made  for  professional  services  to be  rendered,  and  no
                  payment to be made under  this  Agreement  will be in return
                  for the  referral of  patients or in return for  purchasing,
                  leasing,  ordering or arranging for any good facility,  item
                  or service from the Employer or any other entity.

      C.    Professional  Practice of Employee.  Employee  acknowledges that a
            purpose of this Agreement is to relieve  Employee,  to the maximum
            extent possible, of the accounting,  purchasing,  non-professional
            personnel,   and  other  aspects   associated  with  her  clinical
            practice.   Employer   shall  have  no   authority   directly   or
            indirectly,  to  perform  or  supervise  and shall not  perform or
            supervise  any  professional   function   performed  by  Employee.
            Employer  may,  however,  advise  Employee as to the  relationship
            between her  performance  of her  professional  functions  and the
            overall a and business  functions of her  practice,  to the extent
            permitted by applicable law.

      D.    Facilities/Premises.  Employer  shall make  available  to Employee
            within the Clinic,  an office in which to provide  those  services
            contemplated by this Agreement.  Provided,  that in the event that
            Employer's  rights  to use  any  such  premises  shall  terminate,
            Employer  shall use its best  efforts  to provide  other  suitable
            premises  to be used by  Employee.  Employer  shall  maintain  the
            premises and make all necessary  repairs  thereto.  Employee shall
            use  and  occupy  the   premises   provided  to  her  by  Employer
            exclusively  for the provision of those services  contemplated  by
            this Agreement.

      E.    Personal  Property.  Employer shall provide  Employee with the use
            of equipment,  furniture,  fixtures, furnishing and other personal
            property  acquired by Employer for the use of Employee pursuant to
            the terms hereof (the "Personal Property").

      F.    Inventory  and  Supplies.   Employer   shall  order  and  purchase
            inventory  and  supplies,  and such other  ordinary,  necessary or
            appropriate  materials  which are  necessary  to the  practice  of
            Employee,   in  accord  with  what  Employer   provides  to  other
            similarly situated employees.

      G.    Advertising and Public  Relations.  As Employer deems  appropriate
            in its sole and absolute  discretion,  with the  consultation  and
            prior  consent of  Employee,  Employer  may  implement  (and where
            requested) any appropriate  local public  relations or advertising
            program on behalf of Employee with appropriate  emphasis on public
            awareness of the  availability  of Employee's  services.  Employer
            may also design and implement  national or other non-local  public
            relations  or  advertising  programs  on  behalf of  Employee,  as
            Employer  with   Employee's   consultation   and  consent,   deems
            appropriate.  The parties  hereto agree that all public  relations
            and  advertising  programs  shall be conducted in compliance  with
            applicable  standards of professional  ethics,  laws,  regulations
            and Employer's corporate policies.







                                         7

<PAGE>



      H.    Personnel.  Employer,  as Employer  deems  appropriate in its sole
            and absolute  discretion,  shall provide  professional support and
            administrative,  clerical,  secretarial bookkeeping and collection
            personnel as reasonably  necessary  for the  efficient  conduct of
            Employee's   practice.   Such  personnel  shall  be  employees  of
            Employer,  and Employer  shall  determine and cause to be paid the
            salaries  and  benefits  of all such  personnel.  If  Employee  is
            dissatisfied  with the services of any such  personnel who provide
            services  primarily for Employee,  Employee shall consult with the
            appropriate  administrator of Employer, and Employer shall in good
            faith determine  whether the performance of that employee could be
            brought to acceptable  levels through counsel and  assistance,  or
            whether  such  employee   should  be  re-assigned  or  terminated.
            Employer  shall   maintain   established   working   relationships
            whenever  possible and Employer shall make every effort consistent
            with sound  business  practices to honor the specific  requests of
            Employee with regard to the assignment of Employer's employees.


      I.    Quality  Assurance.  Employer shall assist Employee as required in
            fulfilling her  professional  obligation to patients to maintain a
            high quality of  professional  services.  Employer  recognizes and
            respects   the   professional   capabilities   of   Employee   and
            acknowledges  that  nothing  in  this  Agreement  is  intended  to
            interfere   with   the   exercise   of   Employee's    independent
            professional judgment.

4     Compensation.

      A.    Annual Remuneration

            1.    Base Salary.  For services  rendered during the term of this
                  Agreement and any renewals thereof,  unless otherwise agreed
                  to by the parties,  Employee  shall be paid an annual salary
                  which shall be payable in semi-monthly  installments  during
                  each  calendar  month,  in accord with  Employer's  standard
                  payroll  practice,  a base  salary  in the  amount  of Sixty
                  Thousand ($60,000.00) Dollars.

            2.    Collections   Sharing.   In  addition  to  the  Base  Salary
                  described  above,  in accordance  with it's payroll  policy,
                  Employer shall pay to Employee the following-

                  a.    One Hundred  (100%)  Percent of the amounts  collected
                        by Employer,  from patients,  insurers and other third
                        party payors,  of the first Ten Thousand  ($10,000.00)
                        Dollars   in   net    collections,    from    clinical
                        professional    services   rendered    personally   by
                        Employee,  under  the  terms  and  condition  of  this
                        Agreement.

                  b.    Fifty  (50%)  Percent  of  the  amounts  collected  by
                        Employer,  from  patients,  insurers  and other  third
                        party  payors,  of all  amounts in excess of the first
                        Ten Thousand  ($10,000.00) Dollars in net collections,
                        from   clinical    professional    services   rendered
                        personally  by Employee  under the terms and condition
                        of this Agreement.

                  c.    Employer's  obligation  to any and all sums  described
                        in these  Subsections  2(a)  through  (b),  inclusive,
                        requires that Employer  actually  receive the funds to
                        be shared with Employee.



                                      8

<PAGE>



                        (1)   Should  Employer be required to reimburse or pay
                              back  any or all of  the  collections  that  are
                              subject of this Collections  Sharing  provision,
                              and,  in  exercise  of  good  business  judgment
                              Employer makes that  reimbursement or repayment,
                              then Employee  agrees to  immediately  return to
                              Employer  Employee's  portion  of any and all of
                              the  collections  reimbursed  or  paid  back  by
                              Employer.  Employee  further  agrees that in the
                              event   that  it   does   not   make   immediate
                              reimbursement  to  Employer,  that,  without any
                              prior  notice,  the  requirement  for  which  is
                              specifically  waived,  Employer  may  offset any
                              and  all  amounts  that  must be  reimbursed  to
                              Employer  against  any and all sums that may, at
                              that  time,  be due and owing from  Employer  to
                              Employee,  including,  but not  limited  to Base
                              Salary or Collections Sharing.

      B     Fringe  Benefits.  Employer  shall  provide  Employee  with  those
            benefit  which  are  customarily   provided  by  Employer  to  its
            employees.  For  calculation  of  reimbursable  mileage  expenses,
            Employer  recognizes  that  Employee's  office is agreed to be the
            Blacksburg, VA facility.

5.    Term and Termination.

            A.    Term.  This  Agreement  shall commence on the date set forth
                  hereinabove  and  shall  be  and  remain  in  effect  for an
                  initial  term of one (1)  year.  Thereafter  this  Agreement
                  shall  automatically renew for successive one (1) year terms
                  upon the same terms and  conditions  hereof  unless  written
                  notice  of intent  not to renew is given by either  party in
                  accordance with the provisions of this Agreement.

            B.    Voluntary  Termination.  Either  party  may  terminate  this
                  Agreement  or any  renewals  thereof,  by  giving  at  least
                  thirty (30) days prior  written  notice to the other  party,
                  which  notice  shall  specify  the  effective  date for such
                  termination.

            C.    Termination  for Cause.  Either  party  shall have the right
                  to  terminate  this  Agreement  for cause by giving at least
                  fifteen (15) days prior  written  notice to the other party,
                  unless  otherwise  provided  for herein,  which notice shall
                  state the  cause  and  specify  the  effective  date of such
                  termination.

                  1.    Employer.   For   Employer,   "cause"   shall  include
                        without  limitation (i) a material  breach by Employee
                        of any of her  obligations  hereunder  or  (ii)  other
                        good   cause    determined    after   a   good   faith
                        investigation  relating  solely  to  patient  care  or
                        Employee's  ability to render,  the existence of which
                        shall be a matter for the final judgment of Employer.








                                      9


<PAGE>


                        a.    Immediate  Termination  by  Employer.   Employer
                              may terminate  this  Agreement  for cause,  such
                              termination  to be  effective  immediately  upon
                              provision of notice thereof to Employee, if:

                              (1)    Employee's     license    to     practice
                                     psychology   in   the   Commonwealth   of
                                     Virginia    is    revoked,     suspended,
                                     terminated or restricted; or,

                              (2)    if Employee's credentials at the Clinic
                                     are revoked, suspended, terminated or
                                     restricted.

                              (3)    in good faith  Employer  determines  that
                                     Employee  has been  involved  in improper
                                     business  activities,  which  affect  the
                                     operation,  maintenance,  revenues and/or
                                     profitability  of the Clinic,  including,
                                     but not limited to:

                                     (a) Gross   misconduct  with  respect  to
                                         clinical    and/or     administrative
                                         responsibilities;

                                     (b)    Fraud

                                     (c) A failure  to  perform  her duties in
                                         all respects  not remedied  within 30
                                         days  of  the   receipt   of  written
                                         notice from the Employer.

                              (4)    Death of the Employee

                              (5)    Permanent Disability of the Employee

                                     (a) The  Employee  shall be  deemed to be
                                         "permanently    disabled"   when   by
                                         reason  of  a   physical   or  mental
                                         illness,    infirmity,     condition,
                                         disability  or  incapacity  she shall
                                         have failed to perform,  or is unable
                                         to perform,  her customary duties and
                                         activities,    on   behalf   of   the
                                         Employer,  for a period  of three (3)
                                         consecutive  months,  or for  any six
                                         (6)  months   within  a  twelve  (12)
                                         month period.

                        Any failure to  immediately  terminate  Employee under
                        the terms of this  provision  of the  Agreement  shall
                        not be  considered to be a waiver of any of Employer's
                        rights to immediately  terminate Employee, as provided
                        for in this Agreement.





                                            10


<PAGE>


            2.    Employee.   For  Employee   "cause"  Shall  include  without
                  limitation  a  material  breach  by  Employer  of any of its
                  obligations  hereunder.  However, as Employer's  obligations
                  to Employee are economic in nature,  Employee  shall provide
                  Employer  written notice of any claimed  material  breach of
                  Employer's  obligations  to  Employee,  and  Employee  shall
                  provide   Employer  an  opportunity  to  cure  said  claimed
                  material  breach  within  fifteen  (15)  days of  Employer's
                  receipt  of  the  notice.  Should  Employer  be  unable,  or
                  unwilling,  to cure said claimed  material breach within the
                  cure period  provided,  then  Employee  may  terminate  this
                  Agreement for Cause upon fifteen (15) day written  notice to
                  the Employer.


6     Non-Compete.  During  the term of this  Agreement  and for a  period  of
      three (3) years after the  termination of this Agreement  Employee shall
      not, for herself or as a representative,  agent,  partner,  stockholder,
      independent contractor, joint venture or otherwise:

      A.    Engage,  directly or indirectly,  in the same or similar  business
            as Employer or any of its affiliated  companies,  which relates to
            providing   professional   behavioral   health  services   through
            employees  who are duly  licensed to practice in the  Commonwealth
            of Virginia  within a fifty (50) mile radius of any of the offices
            of  Employer  or the  Clinic,  or any other  facility  acquired or
            started by  Employer or an  affiliate,  or known by Employee to be
            contemplated  by  Employer,  during the term of this  Agreement or
            any renewals thereof;

            1.    It is specifically  acknowledged  and agreed that subsequent
                  to the termination of this Agreement  Employee may establish
                  and  operate a local  practice  as a  licensed  professional
                  counselor,  individually,  or in  conjunction or association
                  with  no  more  than  two  (2)   additional   mental  health
                  professionals,   without   violation   of  the   Non-Compete
                  provisions of this Agreement.

      B.    Solicit, directly or indirectly,  any patients receiving treatment
            from  employees of Employer  during the term of this Agreement who
            are considered to be active  patients of Employer at the time, for
            services  similar to or of the same  nature as those  provided  by
            Employer,  or any facility acquired or started by Employer,  or an
            affiliate, during the term of this Agreement;

      C.    Solicit or induce any  employee of  Employer,  Clinic or affiliate
            to terminate  his or her  position  with the  Employer,  Clinic or
            affiliate; or

      D.    Request,  counsel  or  otherwise  advise any  patient of  Employer
            and/or the Clinic to curtail,  cancel or withdraw  from  treatment
            with the Employer and/or the Clinic,  or any facility  acquired or
            started by Employer, or an affiliate.

      E.    Solicit, directly or indirectly,  correspond with, or contact, any
            referral  source,   individual,  or  entity  with  which  Employer
            currently does business,  or with which the Employee knows, or can
            be   reasonably   expected   to  know,   that  the   Employer   is
            contemplating doing business with.

      For  purposes  of  this  Agreement,   "patients"  shall  be  defined  as
individuals for whom Employer and/or the Clinic,  or any facility  acquired or
started by Employer,  or any affiliates  presently existing or which may exist
upon the termination of this Agreement provided  professional  services in the
ordinary course of its business.  In addition,  the term "affiliate"  shall be
defined as any entity  possessing  a  controlling  interest in  Employer,  any
entity  owned by Employer or any other  entities  in which  Employer's  parent
corporation may have a controlling interest.


                                            11


<PAGE>


7     Miscellaneous Provisions.

      A.    Notices.  Any notice  permitted or required to be given  hereunder
            shall  be  deemed  properly  given  when  sent  by  registered  or
            certified  mail,  postage  pre-paid,   return  receipt  requested,
            and/or overnight delivery, as follows:

                        If to Employer, to: Bruce Shear
                                            President
                                            Pioneer Counseling of Virginia, Inc.
                                            200 Lake Street, Suite 102
                                            Peabody, MA 0 1960

                        With a copy to:     Philip Cwagenberg, Esq.
                                            Ishbia & Gagleard, P.C.
                                            251 Merrill, Second Floor
                                            Birmingham, MI 48009

                        If to Employee:     Dianne Jones-Freeman
                                            2807 South Main Street
                                            Blacksburg, VA 24060


                        With a copy to:     Bruce Stockburger, Esq.
                                            Gentry Locke Rakes & Moore
                                            10 Franklin Road, SE, Suite
                                            800 P.O. Box 40013
                                            Roanoke, VA 24038-0013

or such other person or address as either party may designate by notice duly
given.

      B.    Compliance  with  Applicable  Law. It is the parties  intention to
            comply in all respects with provisions of applicable  laws,  rules
            and   regulations   governing   the  health   services   industry.
            Accordingly,  Employee  agrees  that she shall not,  and she shall
            not permit any and all health care providers  supervised by her to
            refer  patients  of Employee to  Employer  for the  furnishing  of
            Designated  Health  Services,   except  as  may  be  permitted  by
            applicable  exemptions  or safe harbors or as otherwise  permitted
            under Stark. In such cases of prohibited  referrals,  Employee and
            Employer  shall  cooperate  to  cause  any   prescription   for  a
            Designated   Health   Service  to  bear  a  legend   stating  such
            prescription  shall not be filled by Employer and Employee  shall,
            and shall cause any and all health care  providers  supervised  by
            her to, instruct the patient not to have such prescription  filled
            by Employer or any wholly owned subsidiary of Employer.





                                      12


<PAGE>


      C.    Indemnification.

            1.   Employer  shall  indemnify and hold harmless  Employee to the
                 maximum  extent  permitted  by Virginia  law during and after
                 termination  of Employees  employment  hereunder  against all
                 judgments,    settlement   payments,   costs,   and   expense
                 (including  reasonable  attorney's fees) and other reasonable
                 expenses  incurred by Employee in connection with the defense
                 of any action,  suit or proceeding arising from events during
                 or subsequent  to the term of Employee's  employment to which
                 Employee has been made a party because of the  performance of
                 Employee's duties under this Agreement.

            2.   Employee  shall  indemnify and hold harmless  Employer to the
                 maximum  extent  permitted  by Virginia  law during and after
                 termination of Employee's  employment  hereunder  against all
                 judgments,    settlement   payments,   costs   and   expenses
                 (including  reasonable  attorney  fees) and other  reasonable
                 expenses  incurred by Employer in connection with the defense
                 of any action,  suit or proceeding  arising from events prior
                 to the term of Employee's  employment  to which  Employer has
                 been made a party  because of the  performance  of Employer's
                 duties  under  this  Agreement,   or  because  of  Employer's
                 relationship with, or status with Employee.

                 The  foregoing  notwithstanding,  nothing  contained  in this
                 Subsections  C(l) and (2) shall impair any party's  rights to
                 indemnification   under  any   collateral   or   pre-existing
                 agreement among them.

      D.    Assignment.   Assignment   by  either   party  of  any  rights  or
            obligations under this Agreement is expressly  prohibited  without
            the prior written  consent,  not to be unreasonably  withheld,  of
            the party whose rights and obligations are to be assigned,  except
            that  Employer  may assign its rights and  responsibilities  under
            this  Agreement  to  it's  corporate  parent,  or  any  affiliated
            entity,  owned or operated by it's corporate  parent, or which the
            parent has a controlling interest.

      E.    Severability.   Should  any   provision   of  this   Agreement  or
            application   thereof  be  held  invalid  or  unenforceable,   the
            remainder  of this  Agreement  shall  not be  affected  and  shall
            continue  to be  valid  and  enforceable  to  the  fullest  extent
            permitted  by law unless to do so would defeat the purpose of this
            Agreement.

      F.    Waiver.   The   failure   by  a  party  at  any  time  to  require
            performance  of  any  provision  of  this   Agreement   shall  not
            constitute  a waiver of such  provision  and shall not  affect the
            right of such party to require performance at a later time.

      G.    Confidentiality.  It is the  intention  of Employer  and  Employee
            that the  confidential  information  of Employer,  as  hereinafter
            defined,   shall  remain  the  sole  and  exclusive   property  of
            Employer.  Employee  agrees that during the term of this Agreement
            and upon the  termination  of this  Agreement for any reason,  she
            shall   keep  in   strict   confidence   all   such   confidential
            information.  Employee  agrees  that she shall  not,  directly  or
            indirectly, use, publish, communicate,  divulge or disclose to any
            person of business entity any  confidential  information or assist
            any third parties in doing so,  without the prior written  consent
            of Employer.





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<PAGE>


            For purposes of this Agreement,  "confidential  information" shall
            be  defined  as  the   Employer's   proprietary   information   or
            information  which,  from the  circumstances,  in good  faith  and
            conscience,  should be treated as  confidential,  which  includes,
            but is not  limited to,  information  regarding  Employer's  trade
            secrets,   prices,  costs,   charges,   patient  lists,  or  other
            information   regarding  the  Employer's  business  affairs  which
            Employee  may acquire in  connection  with,  incident  to, or as a
            result of the performance of her duties under this Agreement.

            Confidential  information shall not include  information which (i)
            becomes  generally  available to the public other than as a result
            of disclosure by Employee;  and/or,  (ii) was legally available to
            Employee on a  non-confidential  basis prior to its  disclosure by
            Employer;  and/or,  (iii) becomes legally available to Employee on
            a  non-confidential  basis  from a  source  other  than  Employer,
            provided  that such  source is not bound by a  confidentiality  or
            similar agreement.

            In the event that  Employee  shall  become  legally  compelled  to
            disclose all or part of the confidential  information of Employer,
            Employee agrees to promptly notify Employer,  in writing,  of such
            situation so that  Employer  may seek a protective  order or other
            appropriate  remedy and/or waive compliance with the provisions of
            this Agreement.  In such instance,  Employee agrees that she shall
            only reveal that  portion of the  confidential  information  which
            she is legally required to reveal and obtain reasonable  assurance
            that  the   confidential   information  will  be  treated  by  the
            recipient thereof as confidential.

            Employee agrees,  upon demand by Employer,  to promptly return all
            confidential  information  which has been  furnished to her and an
            copies  thereof.  Employee  further  agrees  that she shall,  upon
            request from Employer,  destroy all material, notes and other work
            product related in any way to the confidential information.

      H.    Amendment.   This   Agreement,   along  with  the  Asset  Purchase
            Agreement  of  ________   1997,   its   exhibits   and   documents
            incorporated  therein by reference  represent the entire agreement
            and understanding  between the parties with respect to the subject
            matter  hereof  and  may  not be  amended  except  by the  written
            agreement of the parties,  executed with the same  formalities  as
            this Agreement.

      I.    Governing Law. This  Agreement  shall be governed by and construed
            in accordance with the laws of the Commonwealth of Virginia.

      J.    Counterparts.  This  Agreement  may be  executed  in  two or  more
            counterparts,  each of which shall be deemed an  original  but all
            of which shall constitute one and the same instrument

      K.    Attorney's  Fees and  Costs.  In  connection  with any  litigation
            with  respect to this  Agreement,  the  prevailing  party,  to the
            greatest  quantifiable  extent,  shall be  entitled to recover its
            expenses,  including  reasonable  attorneys'  fees and  costs,  in
            connection with such litigation,  including appellate  proceedings
            and post-judgment proceedings.





                                         14

<PAGE>


      L.    Post-Employment  Responsibilities.  Upon Employee's termination of
            employment with Employer,  and notwithstanding  anything contained
            in this  Agreement to the  contrary,  the parties agree as follows
            relative to the post-employment responsibilities of the parties.

            1.  Upon  termination of this  Agreement for any reason,  Employee
                shall promptly surrender to Employer all assets,  belonging to
                Employer,  together with All goods,  monies,  receipts,  keys,
                documents,  credit cards and other written  documents owned by
                or  pertaining  to Employer,  presently  existing or which may
                exist upon the termination of this Agreement.

            2.  Employee  Shall be  entitled  to  remove  all of her  personal
                belongings,  effects and property  which may be located at the
                offices  of  Employer  or at the  Clinic  or which  are in the
                possession of Employer and/or the Clinic,  presently  existing
                or which may exist upon the termination of this Agreement.

            3.  Consistent with Paragraph  l(M),  infra. in the event that the
                professional   liability  insurance   maintained  by  Employee
                during  the term of  employment  was a "claims  made"  policy,
                Employee  shall  continue  such  policy in  effect,  or obtain
                comparable  "tail  coverage"  to   complement/supplement   the
                claims made  policy,  to be  maintained  for a period of three
                (3)  years   following  the  termination  of  this  Agreement,
                regardless  of the stances  giving  rise to such  termination.
                Employee  agrees to have  Employer  endorsed as an  additional
                insured  under  the  terms of said  insurance  policy,  and to
                provide to Employer  proof of the  existence  of the  coverage
                upon the request of Employer.


                        [signatures on following page]













15


<PAGE>


      IN WITNESS WHEREOF, the parties hereunto set their hands to this
Agreement as of the day and year first written above.

                                         "Employer"

                                         Pioneer Counseling of Virginia, Inc.,
 _________________________________       a Massachusetts corporation


                                          By: ____________________________
                                               Bruce A. Shear
 __________________________________            Its:  President



                                        "Employee"


                                         ____________________________
__________________________________       Dianne Jones- Freeman

__________________________________


F:\DATA\PIONEZR\CASV\EMPL.OY4.AGT


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