UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 for the fiscal year ended June 30, 2006

[ ]  Transition report under section 13 or 15(d) of the  Securities Exchange Act
     of 1934 for the transition period from to

Commission file number: 0-22916
                                    PHC, INC.
             (Exact Name of Registrant as Specified 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)

Registrant's telephone number, including area code:  (978) 536-2777

              Securities registered under Section 12(b) of the Act:
                                      NONE

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

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

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.                        Yes ___ No X

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.               Yes X   No ___

Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.                                  Yes X No ___

Indicate by check mark if disclosure  of  delinquent  filers in response to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.                                                           ________

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one)

Large Accelerated Filer ___   Accelerated Filer ___   Non-Accelerated Filer X

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).                                   Yes ___ No X

As of December 31, 2005 the aggregate market value of the shares of common stock
of the registrant  held by  non-affiliates  of the registrant was  approximately
$34.5 million

As of August 5, 2006, 17,754,365 shares of the registrant's Class A Common Stock
and 775,760 shares of the issuer's Class B Common Stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE


                                    -- 1 --
<PAGE>
Table of Contents

                          Index                                            Page
PART I
Item 1.  Description of Business                                             2
Item 1A. Risk Factors                                                       16
Item 2.  Description of Property                                            20
Item 3.  Legal Proceedings                                                  20
Item 4.  Submission of Matters to a Vote of Security Holders                21
PART II
Item 5.  Market for Registrant's Common Equity and Related
           Stockholder Matters                                              22
Item 6.  Selected Financial Data                                            23
Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                        25
Item 7A.  Quantitative and Qualitative Discolosures About Market Risk       36
Item 8.  Financial Statements and Supplementary Data                        37
            Index to financial statements                                   F-1
Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure                                        70
Item 9A.  Controls and Procedures                                           70
PART III
Item 10.  Directors, Executive Officers, Promoters and Control
            Persons                                                         71
Item 11.  Executive Compensation                                            74
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters                      79
Item 13.  Certain Relationships and Related Party Transactions              81
Item 14.  Principal Accountant Fees and Services                            81
PART IV
Item 15.  Exhibits and Financial Statement Schedules                        83
Signatures                                                                  87


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<PAGE>
PART I

     All references in this Annual Report on Form 10-K to "Pioneer," "PHC," "the
Company," "we," "us," or "our" mean, unless the context otherwise requires, PHC,
Inc and its consolidated subsidiaries.


Item 1.           DESCRIPTION OF BUSINESS

INTRODUCTION

     Our Company is a national healthcare company,  which,  through wholly owned
subsidiaries,  provides  psychiatric services to individuals who have behavioral
health disorders including alcohol and drug dependency and to individuals in the
gaming and transportation  industries.  Our subsidiaries operate substance abuse
treatment  facilities  in  Utah  and  Virginia,   four  outpatient   psychiatric
facilities in Michigan,  two outpatient psychiatric facilities in Nevada and two
inpatient   psychiatric   facilities   in  Michigan.   We  provide   management,
administrative and help line services through contracts with major railroads,  a
call  center  contract  with  Wayne  County,  Michigan  and a smoking  cessation
contract with a major government contractor. Through another subsidiary, at four
sites,  we conduct  studies on the effects of psychiatric  pharmaceuticals  on a
controlled   population  through  contracts  with  the  manufacturers  of  these
pharmaceuticals.  These four sites  include  two sites in  Arizona  acquired  in
fiscal 2004 through the membership purchase of Pivotal Research Centers, LLC. We
also operate a website, Wellplace.com, which provides education and training for
the behavioral  health  professional and internet support services to all of our
subsidiaries.

     Our Company  provides  behavioral  health  services  through  inpatient and
outpatient  facilities.  Our  substance  abuse  facilities  provide  specialized
treatment  services to patients who typically  have poor recovery  prognosis and
who are prone to relapse.  These  services are offered in small  specialty  care
facilities, which permit us to provide our clients with efficient and customized
treatment  without the  significant  costs  associated  with the  management and
operation of general acute care hospitals. We tailor these programs and services
to  "safety-sensitive"  industries and concentrate our marketing  efforts on the
transportation,  oil and gas exploration,  heavy equipment,  manufacturing,  law
enforcement,  gaming and health services industries.  Our psychiatric facilities
provide inpatient  psychiatric care,  intensive outpatient treatment and partial
hospitalization  programs to children,  adolescents  and adults.  Our outpatient
mental health clinics provide services to employees of major employers,  as well
as to managed care companies and Medicare and Medicaid clients.  The psychiatric
services are offered in a larger,  more traditional setting than PHC's substance
abuse  facilities,  enabling  PHC to take  advantage  of  economies  of scale to
provide cost-effective treatment alternatives.

     The Company  treats  employees  who have been  referred for  treatment as a
result  of  compliance  with  Subchapter  D of the  Anti-Drug  Abuse Act of 1988
(commonly  known as the Drug Free Workplace Act),  which requires  employers who
are Federal  contractors  or Federal  grant  recipients  to establish  drug-free
awareness programs which,  among other things,  inform employees about available
drug  counseling,  rehabilitation  and  employee  assistance  programs.  We also
provide   treatment   under  the   Department  of   Transportation   implemented
regulations,  which  broaden the  coverage and scope of alcohol and drug testing
for employees in "safety sensitive" positions in the transportation industry.

     The Company was  incorporated in 1976 and is a  Massachusetts  corporation.
Our corporate  offices are located at 200 Lake Street,  Suite 102,  Peabody,  MA
01960 and our telephone number is (978) 536-2777.

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<PAGE>
PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

         Industry Background

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

     To contain costs  associated  with  behavioral  health issues in the 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 prognosis
who have failed in other  treatment  settings.  These  patients  require  longer
lengths of stay and come from a wide geographic  area. The Company  continues to
develop  alternatives  to  inpatient  care  including  partial  day and  evening
programs in addition to onsite and offsite outpatient programs.

     The Company  believes  that because of the apparent  unmet need for certain
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 two substance abuse  facilities work together to refer patients to the
center that best meets the patient's  clinical and medical needs.  Each facility
caters  to  a  slightly  different  patient  population   including   high-risk,
relapse-prone  chronic  alcoholics,  drug  addicts and dual  diagnosis  patients
(those  suffering  from both substance  abuse and  psychiatric  disorders).  The
programs are sensitive to the special  behavioral  health  problems of children,
women and Native Americans.  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.

     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 any care provided at one of the Company's
facilities,  the case management  program for each patient  includes  aftercare.
Aftercare  may  be  provided  through  the  outpatient  services  provided  by a
facility.  Alternatively,  the Company may arrange for outpatient aftercare,  as
well as family and mental  health  services,  through its numerous  affiliations
with clinicians located across the country once the patient is discharged.

     In general,  the Company  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% of the total patient days.

     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


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<PAGE>
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 as an alternative to termination of employment.

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

     HIGHLAND RIDGE - Highland Ridge is a 41-bed,  freestanding alcohol and drug
treatment  hospital,  which the  Company  has been  operating  since  1984.  The
hospital  increased its bed capacity to 41 from 32 in November 2003 and expanded
medical  staff to include  psychiatric  care in its treatment  plans.  Its focus
remains substance abuse and is the oldest facility  dedicated to substance abuse
in Utah.  Highland Ridge is accredited by the Joint  Commission on Accreditation
of Healthcare  Organizations ("JCAHO") and is licensed by the Utah Department of
Health.  Highland Ridge is recognized  nationally for its excellence in treating
substance abuse disorders.

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

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

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

     Highland Ridge periodically  conducts or participates in research projects.
Highland Ridge was the site of a research project conducted by the University of
Utah Medical School.  The research explored the relationship  between individual
motivation  and treatment  outcomes.  The research was regulated and reviewed by
the Human  Subjects  Review Board of the  University  of Utah and was subject to
federal  standards that  delineated  the nature and scope of research  involving
human  subjects.  Highland  Ridge  benefited from this research by expanding its
professional  relationships  within the medical school community and by applying
the  findings of the  research  to improve  the quality of services  the Company
delivers.  In the past,  Highland Ridge  contracted with a major  pharmaceutical
manufacturer  to participate  in a research  study in  cooperation  with a local
nursing  home.  Current  and future  pharmaceutical  research  will be  provided
through our research subsidiary, Pivotal Research Centers, Inc.

     MOUNT  REGIS - Mount  Regis  is a  25-bed,  freestanding  alcohol  and drug
treatment center located in Salem, Virginia,  near Roanoke. The Company acquired
the center in 1987.  It 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,  an outpatient clinic, at
its Salem,  Virginia location.  The Changes clinic provides structured intensive
outpatient  treatment for patients who have been discharged from Mount Regis and


                                    -- 5 --
<PAGE>
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.

     Similar to Highland Ridge, the programs at Mount Regis Center are sensitive
to the 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 also been able to attract a growing  number of clients  through
the  Internet.  Mount Regis has  established  programs that 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 key to the
prevention of relapse.

General Psychiatric Facilities

Introduction

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

     The  Company  offers  inpatient  and  partial  hospitalization   psychiatry
services and residential  treatment to adjudicated juveniles through Harbor Oaks
Hospital.  The  Company  also  provides  residential  treatment  to  adjudicated
juveniles through Detroit Behavioral Institute,  Inc. The Company also currently
operates six 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. An
attending physician, a case manager and a clinical team, work together to manage
the care plan. The integrated delivery system allows for better patient tracking
and follow-up and fewer repeat procedures and therapeutic or diagnostic  errors.
Qualified,  dedicated staff members take a full history on each new patient, and
through  test and  evaluation  procedures,  they  provide a thorough  diagnostic
write-up of the  patient's  condition.  In addition a physician  does a complete
physical  examination  for  each  new  patient.   This  information  allows  the
caregivers  to  determine  which  treatment  alternative  is best suited for the
patient and to design an individualized recovery program for the patient.

     Managed health care organizations,  state agencies, physicians and patients
themselves  refer patients to our  facilities.  These  facilities have a patient
population  ranging  from  children  as  young as five  years  of age to  senior
citizens. Compared to the substance abuse facilities, the psychiatric facilities
treat a larger percentage of female patients.

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

     Harbor Oaks has become a primary provider for Medicaid patients from Wayne,
Macomb and St. Clair  counties.  Utilization of a short-term  crisis  management
model in  conjunction  with strong case  management  has allowed  Harbor Oaks to
successfully enter this segment of the market.  Reimbursement for these services
is comparable to traditional  managed care payors.  Given the current climate of
public sector treatment  availability,  Harbor Oaks anticipates continued growth
in this sector of the business.

     Harbor  Oaks  Hospital  also  operates a 20-bed  residential  unit  serving
adolescents  with substance abuse problems and co-existing  mental disorders who
have been adjudicated to have committed criminal acts and who have been referred


                                    -- 6 --
<PAGE>
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 an initial  period of 30 days to six  months.  A case  review is
done  for  any  patient  still  in the  program  at six  months,  and  regularly
thereafter,  to determine  if  additional  treatment is required.  In the fourth
quarter of fiscal 2005,  Harbor Oaks began operating an outpatient site near New
Baltimore,  Michigan. Its close proximity to the hospital allows for a continuum
of care for patients after discharge.

     DETROIT  BEHAVIORAL  INSTITUTE - Detroit  Behavioral  Institute  operates a
50-bed residential  facility,  located in downtown Detroit,  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 facility  includes two Units, a thirty bed male unit that opened in November
2004 and a twenty bed female unit that opened in October  2005.  The patients in
the  program  range  from 12 to 18 years of age,  with a minimum  IQ of 70.  The
program  provides  individual,  group and family therapy sessions for medication
orientation,   anger  management,   impulse  control,  grief  and  loss,  family
interactions,  coping skills, stress management,  substance abuse, discharge and
aftercare  planning  (home  visits  and  community  reintegration),   education,
recreation therapy and sexual/physical abuse counseling as required.  Typically,
a  patient  is  admitted  to the unit for an  initial  period  of 30 days to six
months.  A case  review  is done for any  patient  still in the  program  at six
months,  and each  subsequent  six-month  period  thereafter,  to  determine  if
additional treatment is required.

     HARMONY HEALTHCARE - Harmony Healthcare,  which consists of two psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for  railroads,  health  care  companies  and  several  large  gaming  companies
including Boyd Gaming  Corporation,  the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day and seven days a
week.   Harmony  also  provides   outpatient   psychiatric  care  and  inpatient
psychiatric case management through a capitated rate behavioral health carve-out
with PacifiCare Insurance.

     NORTH  POINT-PIONEER,  INC.  - North  Point  consists  of three  outpatient
psychiatric clinics in Michigan.  The clinics provide outpatient psychiatric and
substance  abuse treatment to children,  adolescents and adults  operating under
the name  Pioneer  Counseling  Center.  The three  clinics  are located in close
proximity  to  the  Harbor  Oaks  facility,  which  allows  for  more  efficient
integration  of  inpatient  and  outpatient  services  and provides for a larger
coverage area and the ability to share  personnel which results in cost savings.
In the first  fiscal  quarter of 2005 North  Point was  awarded a contract  with
Macomb County Office of Substance  Abuse  (MCOSA) to provide  behavioral  health
outpatient and intensive  outpatient  services for indigent and Medicaid clients
residing in Macomb County.  The contract is renewable annually with an estimated
value of $55,000 annually.

Call Center Operations

     WELLPLACE,  INC. - In the spring of 1994,  the  Company  began to operate a
crisis hotline service under contract with a major  transportation  client.  The
hotline,  Wellplace,  formerly known as Pioneer Development Support Services, or
PDS2,  shown as contract  support  services  on the  accompanying  statement  of
operations,  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. Three
major transportation companies subscribed to these services as of June 30, 2006.
This  operation is physically  located in Highland Ridge  Hospital,  but a staff
dedicated to Wellplace provides the services from a separate  designated area of
the Hospital. Wellplace also contracts with Wayne County Michigan to operate its
call center. This call center is located in downtown Detroit,  Michigan.  In the
second   fiscal   quarter  of  2005  this   contract  was  expanded  to  provide
credentialing services to Detroit Wayne County Community Mental Health Carve-out
providers and Agency  staff.  Wellplace  also signed a contract with  Behavioral
Health Providers Incorporated to provide credentialing  services.  During fiscal
2006,  Wellplace  signed an  agreement  with a major  government  contractor  to
operate a smoking  cessation quit line with internet access.  Wellplace has been
providing  services  under this  agreement  since November 2005 and was recently
notified that the contract would be renewed for an additional year.  Wellplace's
primary  focus is now on growing its  operations  to take  advantage  of current
opportunities  and  capitalize  on the  economies of scale in providing  similar
services to other companies and government units.



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<PAGE>
Research Operations

PIVOTAL RESEARCH CENTERS, INC. - (formerly PIONEER PHARMACEUTICAL RESEARCH, INC.
-  PPR)  -  Pivotal   Research   Centers  works  with  major   manufacturers  of
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the treatment of specific illnesses. In April 2004, the Company acquired 100%
of the membership interest in Pivotal Research Centers,  LLC., thereby expanding
the  Company's  research  operations.  Pivotal  performs  all phases of clinical
research for Phase I-IV drugs under development  through four dedicated research
sites,  including one of the largest  single  psychiatric  research sites in the
country.  Pivotal  currently  has  approximately  46  enrolling  studies  and an
additional  93 ongoing  studies with  approximately  75-80  percent of Pivotal's
research  activity in central  nervous  system  (CNS)  research.  With a current
client base including Alza, AstraZeneca, Bristol Myers Squibb, Cephalon, Forest,
GlaxoSmithKline, Hisamitsu, Lilly, Merck, Mylan, Novartis, Organon, Sepracor and
Wyeth,  the Company  currently  has  protocols  in  Alzheimer's  disease,  ADHD,
Diabetes  Type  II,   Fibromyalgia,   Generalized   Anxiety  Disorder,   Healthy
Volunteers,  Insomnia, Major Depressive Disorder, Obesity,  Parkinson's Disease,
Restless leg syndrome and Shift Work Sleep Disorder.  Pivotal currently operates
at four sites,  two in Arizona and one each in Utah and  Michigan.  Although the
Company's  other  facilities may still provide study  patients,  all studies are
supervised by the Company's research arm, Pivotal Research Centers, Inc.

Internet Operations

BEHAVIORAL HEALTH ONLINE, INC. - Behavioral Health Online designs,  develops and
maintains  the  Company's  web site,  Wellplace.com  in  addition  to  providing
Internet  support  services  and  maintaining  the web sites of all of the other
subsidiaries of the Company.  The Company's web sites provide  behavioral health
professionals  with the  educational  tools  required  to keep them  abreast  of
behavioral health breakthroughs and keeps individuals informed of current issues
in behavioral health.

                                    -- 8 --
<PAGE>
Operating Statistics

     The following table reflects selected financial and statistical information
for all services.
<TABLE>
<S>                         <C>           <C>         <C>           <C>            <C>

                                                     Year Ended June 30,
                                                         (unaudited)
                                 2006            2005        2004         2003            2002
                                ________________________________________________________________
   Inpatient
   Net patient service
   revenues                   $18,775,198   $18,469,578   $14,845,163   $14,430,069   $14,130,471
   Net revenues per patient
   day (1)                    $       382   $       436   $       414   $       417   $       413
   Average occupancy rate (2)        77.7%         78.8%         76.7%         77.7%         76.9%
   Total number of licensed
   beds at end of period              180           160           130           122           122
   Source of Revenues:
        Private (3)                 54.30%        61.79%        61.62%         62.20%       76.82%
        Government (4)              45.70%        38.21%        38.38%         37.80%       23.18%
   Partial Hospitalization
   and
   Outpatient
   Net Revenues:
        Individual            $ 6,734,627   $ 5,557,298   $ 5,647,752   $ 4,865,392   $ 4,678,493
        Contract              $ 2,351,876   $ 2,060,212   $ 1,925,440   $ 1,947,716   $ 2,300,140
   Sources of revenues:
        Private                      98.0%         97.2%         97.7%         98.0%         98.1%
        Government                    2.0%          2.8%          2.3%          2.0%          1.9%
   Other  Services:
   Wellplace(5)               $ 4,351,576   $ 3,466,832   $ 2,984,477   $ 1,649,374   $   842,345
      Pharmaceutical
        Studies (6)           $ 5,799,815   $ 4,509,338   $ 1,246,013   $ 940,772     $         0
</TABLE>
(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 and other county programs.
(5)  Wellplace, provides clinical support, referrals management and professional
     services for a number of the Company's  national contracts and operates the
     Wayne County Michigan call center.

                                    -- 9 --
<PAGE>
(6)  Pharmaceutical  Studies  includes  research studies of the Company prior to
     the  acquisition  of 100% of the  membership  interest in Pivotal  Research
     Centers,  LLC on April 30,  2004 and  ongoing  operations  of all  research
     sites.

Business Strategy

     The  Company's  objective  is to become the  leading  national  provider of
behavioral health services.

     The Company focuses its marketing efforts on "safety-sensitive"  industries
such as  transportation  and medical.  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  that it
believes will enhance its selling efforts within these certain industries.

 Marketing and Customers

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

     The Company  employs six  individuals  dedicated to marketing the Company's
facilities,  two of whom are in the research  division.  Each facility  performs
marketing  activities  in its local  region.  The Senior Vice  President  of the
Company  coordinates  the Company's  national  marketing  efforts.  In addition,
employees at certain facilities perform local marketing  activities  independent
of the  Senior  Vice  President.  The  Company,  with the  support  of its owned
integrated outpatient systems and management services,  continues to pursue more
at-risk contracts and outpatient, managed health care fee-for-service contracts.
"At  risk"  contracts  require  that  the  Company  provide  all the  clinically
necessary  behavioral  health  services  for a group of people for a set fee per
person per month.  The Company  currently  has one at risk contract with a large
insurance  carrier,  which  requires  the Company to provide  behavioral  health
services to all of its  insured in the state of Nevada for a fixed fee.  This at
risk contract represents less than 5% of the Company's total gross revenues.  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 integrated systems of comprehensive  outpatient mental health
programs  complement  the  Company's  inpatient  facilities.   These  outpatient
programs are strategically located in Nevada, Virginia, Michigan, and Utah. They
make it possible  for the  Company to offer  wholly  integrated,  comprehensive,
mental health services for  corporations  and managed care  organizations  on an
at-risk or exclusive fee-for-service basis.  Additionally,  the Company operates
Wellplace  located in the Highland Ridge facility in Salt Lake City, Utah and in
Detroit, Michigan.  Wellplace 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  provides  services to employees  of a variety of  corporations
including:  Boyd Gaming Corporation,  CSX Corporation,  Signa Behavioral Health,
MGM Mirage, Union Pacific Railroad,  Union Pacific Railroad Hospital Association
and others.

     In addition to its direct patient care services,  the Company maintains its
web site, Wellplace.com,  which provides articles and information of interest to
the general public as well as the behavioral health professional.  The Company's
internet  company  also  provides  the  added  benefit  of web  availability  of
information for various Employee  Assistance Program contracts held and serviced
by those subsidiaries providing direct treatment services.

Competition

     The Company's substance abuse programs compete nationally with other health
care providers,  including  general and chronic care hospitals,  both non-profit


                                    -- 10 --
<PAGE>
and for-profit,  other substance abuse facilities and short-term  detoxification
centers.  Some competitors have substantially  greater financial  resources than
the Company.  The Company believes,  however,  that it can compete  successfully
with such  institutions  because  of its  success  in  treating  poor  prognosis
patients.  The Company  will  compete  through its focus on such  patients,  its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.

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

     The Company's  pharmaceutical  research operations compete for studies with
other research  companies  located in the same areas as our research  offices in
Arizona, Michigan and Utah.

Revenue Sources and Contracts

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

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

     The Company bills for its behavioral  healthcare  services at its inpatient
and outpatient  facilities using different  software  platforms for each type of
service;  however,  in all cases the charges are  contractually  adjusted at the
time of billing using  adjustment  factors based on agreements or contracts with
the  insurance  carriers  and the  specific  plans  held by the  individuals  as
outlined above.  This method may still require  additional  adjustment  based on
ancillary  services provided and deductibles and copays due from the individuals
which are estimated at the time of admission based on information  received from
the individual.  Adjustments to these estimates are recognized as adjustments to
revenue during the period identified, usually when payment is received.

     The Company's policy is to collect estimated co-payments and deductibles at
the time of admission.  Payments are made by way of cash,  check or credit card.
If  the  patient  does  not  have  sufficient  resources  to pay  the  estimated
co-payment in advance,  the  Company's  policy is to allow payment to be made in
three installments,  one third due upon admission,  one third due upon discharge
and the  balance  due 30 days  after  discharge.  At times  the  patient  is not
physically  or mentally  stable  enough to  comprehend or agree to any financial
arrangement.  In this case the Company will make  arrangements  with the patient
once his or her condition is stabilized.  At times,  this situation will require
the  Company to extend  payment  arrangements  beyond the three  payment  method
previously  outlined.  Whenever  extended  payment  arrangements  are made,  the
patient,  or the individual who is financially  responsible for the patient,  is
required to sign a promissory  note to the Company,  which includes  interest on
the balance due.

     The Company's days sales outstanding  ("DSO") are  significantly  different
for each type of service and each facility based on the payors for each service.


                                    -- 11 --
<PAGE>
Overall,  the DSO for the combined  operations  of the Company was 65, 90 and 84
days for the fiscal years ended June 30, 2006, 2005 and 2004  respectively.  The
decrease  is related  to the new study with rapid turn  around of revenue in the
Pharmaceutical  Services  division and increased  revenue from contract services
which  payment is typically  received  prior to month end or within thirty days.
Contract Services DSO's fluctuate  dramatically by the delay in payment of a few
days for any of our large contracts.  There was such a delay in payments for the
Michigan call center at the end of fiscal 2005, artificially inflating the DSO's
for the period.

     DSO's for each year for each business segment are as follows:

         Fiscal          Treatment       Pharmaceutical           Contract
        Year End         Services           Services              Services

        06/30/2006           91                 93                    51
        06/30/2005           89                114                    62
        06/30/2004           85                161                    34


     Amounts pending approval from Medicare or Medicaid, as with all other third
party payors,  are  maintained on the  receivables  aging based on the discharge
date of the  patient,  while  appeals are made for payment.  If accounts  remain
unpaid, when all levels of appeal have been exhausted, accounts are written off.
Where possible, the Company will turn to the patient or the responsible party to
seek  reimbursement  and send the  account to  collections  before  writing  the
account off.

     Insurance  companies and managed care  organizations are entering into sole
source  contracts with  healthcare  providers,  which could limit our ability to
obtain patients.  Private insurers,  managed care organizations and, to a lesser
extent,  Medicaid and Medicare,  are beginning to carve-out  specific  services,
including  mental  health and substance  abuse  services,  and establish  small,
specialized  networks of  providers  for such  services  at fixed  reimbursement
rates.  We are not  aware  of any  lost  business  as a  result  of sole  source
contracts  to date,  as we have not been  advised by any payor that we have been
eliminated as a provider from their system based on an exclusivity contract with
another  provider.  Continued  growth  in the  use of  carve-out  systems  could
materially  adversely  affect our  business to the extent we are not selected to
participate in such smaller specialized networks or if the reimbursement rate is
not adequate to cover the cost of providing the service.

Quality Assurance and Utilization Review

     The Company has established comprehensive quality assurance programs at all
of its  facilities.  These  programs are  designed to ensure that each  facility
maintains  standards that meet or exceed  requirements  imposed upon the Company
with the objective of providing  high-quality  specialized treatment services to
its  patients.  To this end,  the JCAHO  surveys  and  accredits  the  Company's
inpatient  facilities,  except Detroit Behavioral  Institute,  and the Company's
outpatient  facilities  comply  with the  standards  of National  Commission  on
Quality Assurance  ("NCQA") although the facilities are not NCQA certified.  The
Company's  outpatient  facilities  in Michigan  are  certified  by the  American
Osteopathic Association ("AOA"), which is nationally recognized by all payors as
the  measure of quality in  outpatient  treatment.  The  Company's  professional
staff, including physicians, social workers, psychologists,  nurses, dietitians,
therapists  and  counselors,  must meet the minimum  requirements  of  licensure
related  to their  specific  discipline,  in  addition  to each  facility's  own
internal quality assurance criteria.  The Company is currently in the process of
providing data for  accreditation  through the Council on Accreditation  ("COA")
for  the  Detroit  Behavioral  Institute  residential   facility.   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.

                                    -- 12 --
<PAGE>
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 affect 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
likely 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.

     Control of the healthcare  industry  exercised by federal,  state and local
regulatory agencies can increase costs,  establish maximum  reimbursement levels
and limit  expansion.  Our Company and the health care  industry  are subject to
rapid  regulatory  change with respect to licensure and conduct of operations at
existing  facilities,  construction of new  facilities,  acquisition of existing
facilities, the addition of new services,  compliance with physical plant safety
and land use  requirements,  implementation  of  certain  capital  expenditures,
reimbursement  for  services  rendered  and  periodic  government   inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in  the  healthcare  industry  including  our  Company.  As a  result  of  these
restrictions,  we cannot be certain that payments under government programs will
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 State
of  Michigan,  where the  majority of our  Medicaid  Revenue is  generated,  are
considering reductions in state Medicaid budgets.

Health Planning Requirements

     Most of the  states in which the  Company  operates  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
determinations  of need or certificate of need ("DoN")  programs are designed to
enable  states to  participate  in  certain  federal  and state  health  related
programs and to avoid duplication of health services. DoN's typically are issued
for a specified maximum expenditure, must be implemented within a specified time
frame and  often  include  elaborate  compliance  procedures  for  amendment  or
modification, if needed.

                                    -- 13 --
<PAGE>
Licensure and Certification

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

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

Medicare Reimbursement

     Currently,  the  only  facility  of  the  Company  that  receives  Medicare
reimbursement  is Harbor Oaks. For the fiscal year ended June 30, 2006, 12.0% of
revenues  for Harbor Oaks were  derived  from  Medicare  programs.  Revenue from
Harbor  Oaks  accounted  for  33.0% of the  Company's  total  net  patient  care
revenues.

     Effective for fiscal years beginning after January 1, 2005, the prospective
payment system ("PPS") was brought into effect for all Psychiatric services paid
through the Medicare program.  For the fiscal year ended June 30, 2006, Medicare
reimbursements  rates were  based 75% on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports  filed by the Company with  Medicare
and 25% on the new prospective  payment rates. The Company will continue to file
cost reports to Medicare to determine  the new TEFRA portion of the rate for the
following  year.  These cost reports are  routinely  audited on an annual basis.
Activity and cost report  expense  differences  are reviewed on an interim basis
and adjustments are made to the net expected  collectable  revenue  accordingly.
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. Approximately 23%, 21% and 22% of the Company's total revenue is derived
from  Medicare and Medicaid  payors for the years ended June 30, 2006,  2005 and
2004,  respectively.  Differences  between the amounts  provided and  subsequent
settlements are recorded in operations in the year of the  settlement.  To date,
settlement adjustments have not been material.

     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.  The Company
currently  meets all of these  conditions  and  requirements  and has systems in
place to assure compliance in the future.

Medicaid Reimbursement

     Currently,  the only  facilities of the Company that receive  reimbursement
under  any  state  Medicaid  program  are  Harbor  Oaks and  Detroit  Behavioral
Institute.  A portion of  Medicaid  costs is 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.  For
the period  ended June 30,  2006,  15.07% of total net  patient  revenues of the
Company were derived from Medicaid programs.

     Harbor Oaks and Detroit  Behavioral  Institute are both participants in the
Medicaid  programs  administered by the State of Michigan.  The Company receives
reimbursement  on a per diem basis,  inclusive  of  ancillary  costs.  The state
determines  the rate and adjusts it annually  based on cost reports filed by the
Company.

                                    -- 14 --
<PAGE>
Fraud and Abuse Laws

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

     The  Company  has an active  compliance  program in place with a  corporate
compliance  officer and  compliance  liaisons at each  facility  and a toll free
compliance  hotline.  Compliance  in-services  and  trainings are conducted on a
regular basis.

Employees

     As of July 31,  2006,  the  Company  had 510  employees  of which  six were
dedicated to marketing, 189 (47 part time) to finance and administration and 315
(74 part time and 36 contingent) to patient care.

     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.  On July 31, 2003,  the Company's
largest facility,  Harbor Oaks Hospital,  with  approximately 125 union eligible
nursing and administrative employees,  voted for union (UAW) representation.  In
December  2004,  the  Company  and the  Union  reached a  collective  bargaining
agreement, which was ratified by the employees on December 8, 2004 and signed by
the Union and the Company in January 2005. The collective  bargaining  agreement
expires in December 2006. The Company will begin  negotiations with the Union in
the next quarter but does not anticipate  significant legal costs related to the
negotiations.

     The limited  number of healthcare  professionals  in the areas in which the
Company operates may create staffing  shortages.  The Company's success depends,
in large part, on its ability to attract and retain highly qualified  personnel,
particularly  skilled  health care  personnel,  which are in short  supply.  The
Company faces competition for such personnel from governmental agencies,  health
care  providers and other  companies and is constantly  increasing  its employee
benefit  programs,  and related costs,  to maintain  required  levels of skilled
professionals.  As a result of staffing shortages, the Company uses professional
placement  services  to supply  it with a pool of  professionals  from  which to
choose. These individuals generally are higher skilled, seasoned individuals who
require higher salaries,  richer benefit plans,  and in some instances,  require
relocation. The Company has also entered into contracts with agencies to provide
short-term interim staffing in addition to placement services.  These additional
costs impact the Company's profitability.

Insurance

     Each  of  the  Company's   subsidiaries   maintains  separate  professional
liability insurance policies.  Harbor Oaks, Highland Ridge Hospital, Mount Regis
Center,  North Point,  Detroit  Behavioral  Institute,  Harmony  Healthcare  and
Pivotal,  Inc. each have coverage of $1,000,000  per claim and $3,000,000 in the
aggregate. In addition, the Company has maintained the insurance coverage, which
was  in  place  for  Pivotal  Research  Centers,  LLC by its  former  owners  of


                                    -- 15 --
<PAGE>
$3,000,000  per claim and  $3,000,000  in the  aggregate.  In  addition  to this
coverage,  Wellplace and Highland Ridge maintain a $1,000,000  umbrella  policy,
Harbor Oaks and Detroit Behavioral institute each maintain a $5,000,000 umbrella
policy,  Harmony and Mount Regis Center maintains a $2,000,000  umbrella policy.
In  addition,  each of these  entities  maintains  general  liability  insurance
coverage in similar amounts.

     The Company  maintains  $1,000,000  of directors'  and officers'  liability
insurance  coverage,  general  liability  coverage of  $1,000,000  per claim and
$2,000,000  in  aggregate  and an  umbrella  policy of  $1,000,000.  The Company
believes,  based on its experience,  that its insurance coverage is adequate for
its business and,  although  cost has  escalated in recent  years,  that it will
continue to be able to obtain adequate coverage.

Acquisition and Expansion

     If we acquire new businesses or expand our businesses,  the operating costs
may be far greater than revenues for a significant period of time. The operating
losses  and  negative  cash  flow   associated   with  start-up   operations  or
acquisitions  could  have a material  adverse  effect on our  profitability  and
liquidity  unless and until such facilities are fully  integrated with our other
operations  and become self  sufficient.  Until such time, we may be required to
borrow at  higher  rates  and less  favorable  terms to  supplement  short  term
operating cash flow shortages.

Item 1A. RISK FACTORS

OPERATING RISKS

AGING  OF  ACCOUNTS  RECEIVABLES  COULD  RESULT  IN  OUR  INABILITY  TO  COLLECT
RECEIVABLES  REQUIRING US TO INCREASE OUR DOUBTFUL  ACCOUNTS RESERVE WHICH WOULD
DECREASE OUR NET INCOME AND WORKING CAPITAL

     As our accounts  receivable age and become  uncollectable  our cash flow is
negatively  impacted.  Our accounts  receivable  from patient  accounts  (net of
allowance  for bad  debts)  were  $6,995,475  at June  30,  2006  compared  with
$6,330,381 at June 30, 2005.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  Because  the  behavioral  health  industry  is  typically a difficult
collection environment, we have focused on better accounts receivable management
through,  increased  staff,  standardization  of some  procedures for collecting
receivables and a more aggressive  collection policy in order to keep the change
in receivables consistent with the change in revenue. We have also established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected. The following chart represents our Accounts Receivable,  Allowance for
Doubtful  Accounts at June 30, 2006,  2005 and 2004,  respectively  and Bad Debt
Expense for the fiscal years ended June 30, 2006, 2005 and 2004:

                            Accounts        Allowance for         Bad Debt
                           Receivable     doubtful accounts       Expense

   June 30, 2006          $ 10,096,061       $3,100,586          $ 1,912,516
   June 30, 2005             8,287,365        1,956,984            1,272,037
   June 30, 2004             7,287,090        2,025,888            1,355,770

NEGATIVE  CASH FLOW COULD ARISE AS A RESULT OF SLOW  GOVERNMENT  PAYMENTS  WHICH
COULD REQUIRE THE COMPANY TO BORROW  ADDITIONAL  FUNDS AT UNFAVORABLE  RATES AND
AFFECT OUR NET INCOME, WORKING CAPITAL AND LIQUIDITY

     The  concentration of accounts  receivable due from government payors could
create a severe cash flow  problem  should  these  agencies  fail to make timely
payment.   We  had  substantial   receivables  from  Medicaid  and  Medicare  of
approximately $1,786,000 at June 30, 2006 and $1,584,000 at June 30, 2005, which
would create a cash flow problem  should  these  agencies  defer or fail to make
reimbursement  payments as due,  which would require us to borrow at unfavorable
rates or pay additional  interest as overline fees on current debt  instruments.
This would result in lower net income for the same  services  provided and lower
earnings per share.

NEGATIVE CASH FLOW COULD IMPACT OUR ABILITY TO MEET  OBLIGATIONS  WHEN DUE WHICH
COULD REQUIRE THE COMPANY TO BORROW  ADDITIONAL  FUNDS AT UNFAVORABLE  RATES AND
AFFECT OUR NET INCOME



                                    -- 16 --
<PAGE>
     If managed care  organizations  delay  approving  treatment,  or reduce the
patient  length of stay or number of  visits  or  reimbursement,  our  Company's
ability to meet operating  expenses is affected.  As managed care  organizations
and  insurance  companies  adopt  policies  that  limit  the  length of stay for
substance abuse treatment,  our business is materially  adversely affected since
our revenues and cash flow go down and our fixed operating  expenses continue or
increase  based  on  the  additional  resources  required  to  collect  accounts
receivable.

     Reimbursement  for substance abuse and  psychiatric  treatment from private
insurers  is largely  dependent  on our  ability  to  substantiate  the  medical
necessity of treatment.  The process of substantiating a claim often takes up to
four months and sometimes longer; as a result, we experience  significant delays
in the collection of amounts  reimbursable by third-party payors, which requires
us to increase staff to pursue payment and adversely affects our working capital
condition.  This causes amounts borrowed on our accounts  receivable revolver to
remain  outstanding  for longer  periods of time  resulting  in higher  interest
expense in addition to the reduced income  resulting from the shorter lengths of
stay, which combined reduce net income and earnings per share.

POTENTIAL   STAFFING  SHORTAGES  COULD  REQUIRE  US  TO  INCREASE  OUR  EMPLOYEE
COMPENSATION AND REDUCE OUR NET INCOME

     The limited  number of  healthcare  professionals  in the areas in which we
operate may create staffing  shortages.  Our success depends,  in large part, on
our  ability to attract  and retain  highly  qualified  personnel,  particularly
skilled health care personnel,  which are in short supply.  We face  competition
for such personnel from governmental  agencies,  health care providers and other
companies and are  constantly  increasing  our employee  benefit  programs,  and
related costs, to maintain required levels of skilled professionals. As a result
of staffing shortages,  we use professional placement services to supply us with
a pool of professionals  from which to choose.  These individuals  generally are
higher skilled, seasoned individuals who require higher salaries, richer benefit
plans,  and in some  instances,  require  relocation.  We have also entered into
contracts with agencies to provide  short-term  interim  staffing in addition to
placement services. These additional costs impact our profitability.

     In  December   2004,   the  Company's   largest   facility  voted  for  UAW
representation.  Approximately  75% of the staff of the  facility are members of
the Union and could vote to strike  when the  contract  comes up for  renewal in
December  2006. This action would negatively impact  profitability by requiring
the Company to transfer patients to competing  facilities or pay high short term
staffing rates.  This could also negatively  impact the Company's  reputation in
the community.

RELIANCE ON KEY CLIENTS THE LOSS OF ANY OF WHICH WOULD  REDUCE OUR NET  REVENUES
AND OUR NET INCOME

     The  Company  relies on  contracts  with more than ten  clients to maintain
patient  census at its inpatient  facilities  and provide  patients for our out-
patient operations and our employee assistance programs. The loss of any of such
contracts would impact our ability to meet our fixed costs. We have entered into
relationships with large employers, health care institutions and labor unions to
provide treatment for psychiatric  disorders,  chemical dependency and substance
abuse in conjunction with  employer-sponsored  employee assistance programs. The
employees of such institutions may be referred to us for treatment,  the cost of
which is reimbursed on a per diem or per capita basis.  Approximately 30% of our
total revenue is derived from these  clients.  No one of these large  employers,
health care institutions or labor unions  individually  accounts for 10% or more
of our consolidated revenues, but the loss of any of these clients would require
us to expend  considerable  effort to replace patient referrals and would result
in revenue losses and attendant loss in income.

GOVERNMENT REGULATION COULD RESTRICT OUR ABILITY TO EXPAND, REDUCE THE ALLOWABLE
REIMBURSEMENT TO THE COMPANY AND REDUCE OUR NET INCOME

     Control of the healthcare  industry  exercised by federal,  state and local
regulatory agencies can increase costs,  establish maximum  reimbursement levels
and limit  expansion.  Our Company and the health care  industry  are subject to
rapid  regulatory  change with respect to licensure and conduct of operations at


                                    -- 17 --
<PAGE>
existing  facilities,  construction of new  facilities,  acquisition of existing
facilities, the addition of new services,  compliance with physical plant safety
and land use  requirements,  implementation  of  certain  capital  expenditures,
reimbursement  for  services  rendered  and  periodic  government   inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in  the  healthcare  industry  including  our  Company.  As a  result  of  these
restrictions we cannot be certain that payments under  government  programs will
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 State
of  Michigan  where the  majority  of our  Medicaid  Revenue is  generated,  are
considering reductions in state Medicaid budgets, which may be reflected through
more limited access, lower rates, and higher utilization assessments.

SOLE SOURCE  CONTRACTING BY MANAGED CARE  ORGANIZATIONS MAY REDUCE OUR AVAILABLE
PATIENTS BY ELIMINATING OUR ABILITY TO SERVICE THEM

     Insurance  companies and managed care  organizations are entering into sole
source  contracts with  healthcare  providers,  which could limit our ability to
obtain patients.  Private insurers,  managed care organizations and, to a lesser
extent,  Medicaid and Medicare,  are beginning to carve-out  specific  services,
including  mental  health and substance  abuse  services,  and establish  small,
specialized  networks of  providers  for such  services  at fixed  reimbursement
rates.  We are not  aware  of any  lost  business  as a  result  of sole  source
contracts  to date,  as we have not been  advised by any payor that we have been
eliminated as a provider from their system based on an exclusivity contract with
another  provider.  Continued  growth  in the  use of  carve-out  systems  could
materially  adversely  affect our  business to the extent we are not selected to
participate in such smaller specialized networks or if the reimbursement rate is
not adequate to cover the cost of providing the service.

ACQUISITION AND EXPANSION COULD RESULT IN NEGATIVE CASH FLOW WHICH COULD REQUIRE
THE COMPANY TO BORROW  ADDITIONAL FUNDS AT UNFAVORABLE  RATES AND AFFECT OUR NET
INCOME

     If we acquire new businesses or expand our businesses,  the operating costs
may be far greater than revenues for a significant period of time. The operating
losses  and  negative  cash  flow   associated   with  start-up   operations  or
acquisitions  could  have a material  adverse  affect on our  profitability  and
liquidity  unless and until such facilities are fully  integrated with our other
operations  and become  self  sufficient.  Until such time we may be required to
borrow at  higher  rates  and less  favorable  terms to  supplement  short  term
operating cash flow shortages.

RECENT LOSSES RESULTING FROM A LITIGATION  SETTLEMENT AND RELATED LEGAL FEES MAY
LIMIT THE COMPANY'S  ABILITY TO BORROW AT FAVORABLE  RATES WHICH WOULD  INCREASE
OUR EXPENSES AND REDUCE NET INCOME

     Due to the  Company's  losses  from  operations  as a result  of a  medical
malpractice  litigation  settlement  and  related  legal  fees of  approximately
$1,030,000  in fiscal 2004, if the Company needs  additional  financing,  it may
require  borrowing at unfavorable  rates.  We have limited  availability  on our
accounts  receivable funding  facilities,  which bear interest at the prime rate
plus 2.25%, to meet our current cash needs.  Should we require  additional funds
to meet our cash flow requirements or to fund growth or new investments,  we may
be required to meet these needs with more costly financing.

     The  litigation  involved a medical  malpractice  claim that was filed by a
former patient against the Company's subsidiary, North Point-Pioneer, Inc. and a
former  clinician,  alleging  sexual  abuse by a  former  clinician  that  first
manifested itself prior to the Company's  acquisition of the subsidiary in 1996.
At trial in December  2002, a jury  returned a verdict in favor of the plaintiff
in the amount of  approximately  $9 million plus  interest and taxable costs and
attorney's  fee for conduct.  The clinician  declared  bankruptcy  and was not a
party to the  proceeding.  After numerous  successful  motions by the Company to
reduce the amount of the  verdict,  a judgment in the amount of  $3,079,741  was
entered on October 24, 2003.

     The  Company's  subsidiary,  North  Point-Pioneer,  Inc.,  was  covered  by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company,  which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver  acknowledged to the Company,  Frontier's
obligations  under the policy and the Company has  recovered a small  portion of
the legal fees expended to date on this matter.



                                    -- 18 --
<PAGE>
     In April 2004, the Company resolved this medical malpractice  lawsuit.  The
plaintiff  received  $1,100,000  in full and final  settlement  of the matter of
which $462,500 was paid by the Company and the balance was paid by the insurance
company.  In addition to this settlement  amount the Company paid  approximately
$567,000  during the fiscal year ended June 30, 2004 in related legal fees.  The
Company has not released other parties, including an insurance company. Payments
made by insurance and other related parties,  if collected,  could significantly
reduce the Company's financial burden below the $1,030,000 expended.

     As a result of this medical  malpractice  litigation and related legal fees
the Company's  operations  for the fiscal year ended June 30, 2004 resulted in a
net loss and negative  cash flow from  operations.  See  Consolidated  Financial
Statements.

MANAGEMENT RISKS

CONTROL OF THE COMPANY  PROVIDES  THE  PRINCIPAL  SHAREHOLDER  WITH THE POWER TO
APPROVE ALL  TRANSACTIONS  AND CONTROL THE BOARD OF DIRECTORS  WITHOUT  INPUT OF
OTHER SHAREHOLDERS

     Bruce A. Shear is in control of the  Company  since he is entitled to elect
and replace a majority of the board of directors. Bruce Shear and his affiliates
own and control 92.8% of the class B common stock,  which elects four of the six
members of the Board of  Directors.  Bruce  Shear can  establish,  maintain  and
control  business  policy and decisions by virtue of his control of the election
of the majority of the members of the board of directors.

INABILITY  TO RETAIN  KEY  PERSONNEL  THE LOSS OF ANY OF WHOM  COULD  AFFECT OUR
CLIENT RELATIONS AND THUS REDUCE OUR REVENUE AND NET INCOME

     Retention of key personnel  with  knowledge of key contracts and clients is
essential  to  the  success  of the  Company.  PHC is  highly  dependent  on the
principal  members of its management and  professional  staff, who are: Bruce A.
Shear,  PHC's President and Chief Executive  Officer,  Robert H. Boswell,  PHC's
Senior Vice President and other members of PHC's  management and their continued
relationship  with key  clients.

     In April 2004, the Company acquired Pivotal Research Centers, LLC, which is
engaged in clinical drug testing. Dr. Kirby, the founder and medical director of
Pivotal,  has key relationships with the  pharmaceutical  companies that provide
contracts  for the  research  business.  Dr.  Kirby  signed  an  employment  and
non-compete  agreement  at the time of the  acquisition,  which is  scheduled to
expire on December 31, 2006.

     We do not  anticipate  any key member of management  will leave the Company
but do have key man life insurance policies on Mr. Shear and Dr. Kirby.

MARKET RISKS

BULLETIN  BOARD  TRADED  STOCKS  ARE MORE  VOLATILE  AND CAN COST  MORE TO TRADE
THEREFORE AFFECTING THE COST TO SHAREHOLDERS

     The  Company's  failure  to  meet  listing  requirements  resulted  in  the
delisting of the Company's  stock from the Nasdaq Stock Market in December 2000.
Since then, the Company's stock has been a bulletin board traded stock. The cost
of  trading  on the  bulletin  board can be more than the cost of trading on the
SmallCap  market  and since  there  may be an  absence  of market  makers on the
bulletin  board the price may be more  volatile and it may be harder to sell the
securities.  The shares have sold at prices varying  between a low of $.93 and a
high of $2.95  from July 2004  through  June 2006.  If our  common  stock is not
actively  traded,  the small number of  transactions  can result in  significant
swings in the market price,  and it may be difficult for stockholders to dispose
of stock in a timely way at a desirable market price or may result in purchasing
of shares for a higher price.

PREFERRED  STOCK  ISSUANCE  COULD  RESULT IN  DIVIDEND,  VOTING AND  LIQUIDATION
PREFERENCES SUPERIOR TO THE COMMON STOCK



                                    -- 19 --
<PAGE>
     Our right to issue  convertible  preferred  stock may adversely  affect the
rights of the common  stock.  Our Board of Directors  has the right to establish
the preferences for and issue up to 1,000,000  shares of preferred stock without
further  stockholder  action.  The terms of any series of preferred stock, which
may include  priority  claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.

Item 2.           DESCRIPTION OF PROPERTY

Executive Offices

     The Company's executive offices are located in Peabody, Massachusetts.  The
Company's lease agreement in Peabody covers  approximately 4,800 square feet for
a 60-month  term,  which expires  September 16, 2009. The current annual payment
under the lease is $84,000.  The Company  believes  that this  facility  will be
adequate to satisfy its needs for the foreseeable future.

Highland Ridge Hospital

     The Highland Ridge premises consist of approximately  24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental Health and located in Midvale,  Utah.  The lease is for a six-year
term expiring  December 31, 2009,  which provides for monthly rental payments of
approximately  $20,000.  Changes  in  rental  payments  each  year are  based on
increases or decreases in the Consumer  Price Index.  The Company  believes that
these premises are adequate for its current and  anticipated  needs and does not
anticipate any difficulty in renewing or securing  alternate space on expiration
of the lease.

Mount Regis Center

     The Company owns the Mount Regis facility,  which consists of a three-story
building  located  on an  approximately  two-acre  site in Salem  Virginia.  The
building consists of over 14,000 square feet and is subject to a mortgage in the
approximate  amount of $302,000 as of June 30,  2006.  The  facility is used for
both inpatient and outpatient services. The Company believes that these premises
are adequate for its current and anticipated needs.

Psychiatric Facilities

     The Company owns or leases premises for each of its psychiatric facilities.
Detroit Behavioral Institute,  Harmony, North Point Pioneer and Pivotal Research
lease their premises. The Company believes that each of these premises is leased
at fair market value and could be replaced  without  significant time or expense
if necessary.  The Company  believes that all of these premises are adequate for
its current and anticipated needs.

Harbor Oaks Hospital

     The Company  owns the building in which  Harbor Oaks  operates,  which is a
single  story brick and wood frame  structure  comprising  approximately  32,000
square feet  situated  on an  approximately  three acre site.  The Company has a
$662,840  mortgage on this  property as of June 30, 2006.  The Company  believes
that these premises are adequate for its current and anticipated needs.

Item 3.  LEGAL PROCEEDINGS.

     The company is a party in two separate  actions  between a former  employee
who was  terminated and filed a claim for wrongful  termination  and a breach of
contract on an indemnification  claim against the same terminated employee where
the company is the plaintiff.  Both matters are being resolved  through  binding
arbitration  and  awards in either  case will  offset.  The  outcome  of the two
actions  together  cannot be determined at this time,  but  management  does not
expect the outcome to have a material  adverse affect on the financial  position
or results of operations of the Company.

     The Company is subject to various  claims and legal actions  arising in the
normal course of business,  none of which the Company  believes will  materially
affect its financial position or results of operations.



                                    -- 20 --
<PAGE>
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, 2006.

                                    -- 21 --
<PAGE>
PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our Class A Common Stock is quoted on the  Over-the-Counter  Bulletin Board
under the  symbol  "PIHC-BB."  The  following  table sets forth the high and low
sales price of the Company's  Class A Common Stock,  as reported by the National
Quotation Bureau.

                                                                HIGH      LOW
                                                                ____      ___
2005
   First Quarter (July 1, 2004 - September 30, 2004)            $1.21     $ .93
   Second Quarter (October 1, 2004 - December 31, 2004)         $1.73     $1.11
   Third Quarter (January 1, 2005 - March 31, 2005)             $2.10     $1.33
   Fourth Quarter (April 1, 2005 - June 30, 2005)               $2.62     $1.75
2006
   First Quarter (July 1, 2005 - September 30, 2005)            $2.95     $2.26
   Second Quarter (October 1, 2005 - December 31, 2005)         $2.90     $1.90
   Third Quarter (January 1, 2006 - March 31, 2006)             $2.40     $1.75
   Fourth Quarter (April 1, 2006 - June 30, 2006)               $2.39     $1.95

     On August 10, 2006, there were 693 holders of record of the Company's Class
A Common Stock and 301 holders of record of the Company's  Class B Common Stock.
The Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Act during the fourth quarter of fiscal 2006.

DIVIDEND POLICY

     Although  the  Company  has no  current  restrictions  on the  issuance  of
dividends,  the Company has never paid any cash  dividends on its common  stock.
The Company  anticipates that, in the future,  earnings will be retained for use
in the business or for other corporate purposes,  and it is not anticipated that
cash  dividends  in  respect  to 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,  the  financial  position  of the Company and such other
factors, as the Company's board of directors, in its discretion, deems relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     Information  required with respect to  "Securities  Authorized for Issuance
Under Equity Compensation Plans" is included in Part III, Item 12 in this Annual
Report on Form 10-K.

MARKET RISKS

     The  Company's  failure  to  meet  listing  requirements  resulted  in  the
delisting of the Company's  stock from the NASDAQ Stock Market in December 2000.
Since then, the Company's  stock has been a bulletin  board traded stock.  Since
there may be an absence of market makers on the bulletin board, the price may be
more volatile and it may be harder to sell the securities.  The shares have sold
at  prices  varying  between  a low of $.93 and a high of $2.95  from  July 2004
through  August  2006.  If our common stock is not  actively  traded,  the small
number of transactions can result in significant swings in the market price, and
it may be difficult  for  stockholders  to dispose of stock in a timely way at a
desirable market price or may result in purchasing of shares for a higher price.

     Our right to issue  convertible  preferred  stock may adversely  affect the
rights of the common  stock.  Our Board of Directors  has the right to establish
the preferences for and issue up to 1,000,000  shares of preferred stock without

                                    -- 22 --
<PAGE>
further  stockholder  action.  The terms of any series of preferred stock, which
may include  priority  claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.
During the twelve month period ended June 30, 2006, the Company did not make any
sales of unregistered securities.

Item 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated  financial data of our
Company. The selected  consolidated  financial data as of June 30, 2006 and 2005
and for each of the three years in the period ended June 30, 2006 should be read
with the  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations"  and have been derived from our  consolidated  financial
statements  which are included  elsewhere in this annual report on Form 10-K and
were audited by Eisner,  LLP, with respect to the period ended June 30, 2006 and
BDO Seidman, LLP, with respect to June 30, 2005 and each of the years ended June
30,  2005 and 2004.  Each of these  firms is an  independent  registered  public
accounting  firm. The selected  consolidated  financial data for the years ended
June 30, 2004, 2003 and 2002 have been derived from our  consolidated  financial
statements  not  included  herein,  which  were  audited  by BDO  Seidman,  LLP,
independent registered public accounting firm.

     The historical results are not necessarily  indicative of the results to be
expected for any future period.

                                    PHC, Inc.
                             Selected Financial Data
                     As of and for the Years Ended June 30,

                                  2006      2005      2004      2003     2002
                                ________  ________  ________  ________  ________
                                (in thousands, except share and per share data)
  Statements of Operations Data:
Revenues                        $38,013   $34,063   $26,649   $23,833   $22,698
Cost and Expenses:
   Patient care expenses         16,512    14,582    12,422    11,676    10,692
   Contract expenses              2,676     2,198     2,392     1,399       704
   Administrative expenses       13,727    12,424    10,333     8,204     8,821
   Provision for doubtful
     accounts                     1,913     1,272     1,356     1,108       717
   Interest expense                 607       655       532       542       791
   Other (income) expenses
     including interest
     income, net                   (158)     (150)     (140)     (129)     (126)
                                ________  ________  ________  ________  ________
Total expenses                   35,278    30,981    26,895    22,801    21,599
                                ________  ________  ________  ________  ________
Income (loss) before income
  taxes                           2,735     3,082      (246)    1,032     1,099

Provision for (benefit
  from) income taxes              1,310      (74)       11        54        15
                                ________  ________  ________  ________  ________

Net income (loss)                 4,045     3,156      (257)      978     1,084

Dividends                            --        --        --        --       (99)
                                ________  ________  ________  ________  ________

Net income (loss) applicable
  to common shareholders         $4,045    $3,156   $  (257)  $   978   $   985
                                 =======  ========  ========  ========  ========

                                    -- 23 --
<PAGE>
Statements of Operations Data: (continued)
<TABLE>
<S>                     <C>           <C>           <C>             <C>            <C>
                                 (in thousands, except share and per share data)
                                 2006         2005          2004           2003          2002
                            ===========   ===========   ============   ===========   ===========
Basic income (loss) per
  common share              $      0.22   $      0.18   $     (0.02)   $      0.07   $      0.10
                            ===========   ===========   ============   ===========   ===========

Basic weighted average
  number of
  shares outstanding         18,213,901    17,574,678    14,731,395     13,944,047    10,232,286
                            ===========   ===========   ============   ===========   ===========

Diluted income (loss) per
  common share              $      0.21   $      0.17   $     (0.02)   $      0.07   $      0.09
                            ===========   ===========   ============   ===========   ===========

Diluted weighted average
  number of shares
  outstanding                19,105,193    18,364,076    14,731,395     14,564,078    11,012,861
                            ===========   ===========   ============   ===========   ===========

Balance Sheet Data:
Cash and cash equivalents   $     1,820   $       918   $       595    $       495   $       205
Working capital (deficit)         7,477         4,106           241            736          (154)

Long-term debt and obligations
  under capital leases            2,050         2,712         2,285          3,002         3,427
Total stockholders' equity       13,455         9,102         5,367          1,935           616
Total assets                     21,985        17,896        13,312          9,412         9,474
</TABLE>

                                    -- 24 --
<PAGE>
Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

     In addition to  historical  information,  this report  contains  statements
relating  to  future  events  or  our  future  results.   These  statements  are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933,  as  amended,  and Section 21E of the  Securities  Act of 1934,  as
amended  (the  "Exchange  Act") and are  subject to the Safe  Harbor  provisions
created  by the  statute.  Generally  words  such as  "may",  "will",  "should",
"could",  "anticipate",  "expect", "intend", "estimate", "plan", "continue", and
"believe"  or the  negative  of or other  variation  on these and other  similar
expressions   identify   forward-looking   statements.   These   forward-looking
statements  are made only as of the date of this report.  We do not undertake to
update or revise  the  forward-looking  statements,  whether  as a result of new
information, future events or otherwise. Forward-looking statements are based on
current  expectations and involve risks and uncertainties and our future results
could   differ   significantly   from   those   expressed   or  implied  by  our
forward-looking statements.

     The following is a discussion  and analysis of the financial  condition and
results of operations of the Company for the years ended June 30, 2006, 2005 and
2004. It should be read in conjunction  with the operating  statistics  (Part I,
Item 1) and  selected  financial  data  (Part II,  Item 6) and the  accompanying
consolidated  financial  statements  and related notes thereto  included in this
Annual Report on Form 10-K.

Overview

     The Company presently provides  behavioral health care services through two
substance  abuse  treatment  centers,  a  psychiatric  hospital,  a  residential
treatment facility and six outpatient  psychiatric centers  (collectively called
"treatment  facilities").  The Company's revenue for providing behavioral health
services  through these  facilities is derived from  contracts with managed care
companies,  Medicare,  Medicaid,  state  agencies,  railroads,  gaming  industry
corporations and individual clients. The profitability of the Company is largely
dependent  on the level of patient  census and the payer mix at these  treatment
facilities.  Patient  census is measured by the number of days a client  remains
overnight at an inpatient  facility or the number of visits or  encounters  with
clients at outpatient clinics.  Payor mix is determined by the source of payment
to be received for each client being provided billable  services.  The Company's
administrative expenses do not vary greatly as a percentage of total revenue but
the percentage tends to decrease  slightly as revenue  increases.  The Company's
internet  operation,  Behavioral  Health  Online,  Inc.,  continues  to  provide
behavioral  health  information  through its web site at  Wellplace.com  but its
primary function is Internet  technology  support for the subsidiaries and their
contracts.  As such, the expenses related to Behavioral Health Online,  Inc. are
included  as  corporate  expenses.  The  Company's  research  division,  Pivotal
Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to
assist in the study of the effects of certain  pharmaceuticals  in the treatment
of specific illnesses through its clinics in Utah, Michigan and Arizona.

     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 on-going debates and initiatives regarding
the  restructuring of the health care system in its entirety.  The extent of any
regulatory  changes and their impact on the Company's  business is unknown.  The
current  administration  has put forth  proposals  to  mandate  equality  in the
benefits  available  to those  individuals  suffering  from mental  illness.  If
passed, this legislation may improve access to the Company's  programs.  Managed
care has had a  profound  impact  on the  Company's  operations,  in the form of
shorter lengths of stay, extensive  certification of benefits  requirements and,
in some cases, reduced payment for services.

Critical Accounting Policies

     The  preparation of our financial  statements in accordance with accounting
principles  generally  accepted  in  the  United  States  of  America,  requires


                                    -- 25 --
<PAGE>
management to make estimates and judgments  that affect the reported  amounts of
assets, liabilities,  revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and  assumptions,  including but not limited to
those related to revenue recognition,  accounts receivable reserves,  income tax
valuation  allowances,  and the  impairment  of  goodwill  and other  intangible
assets.  We base our  estimates  on  historical  experience  and  various  other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

Revenue recognition and accounts receivable:

     Patient care revenues and accounts  receivable  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 contractual  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
provided and  subsequent  settlements  are recorded in operations in the year of
settlement.  Amounts due as a result of cost report  settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables". The
provision for contractual  allowances is deducted  directly from revenue and the
net  revenue  amount is  recorded  as accounts  receivable.  The  allowance  for
doubtful accounts does not include the contractual allowances.

     The Company  currently has one "at-risk"  contract.  The contract calls for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per
member per month.  Revenues are recorded  monthly  based on this formula and the
expenses  related to providing the services  under this contract are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization  review,  monitors  closely,  and  pre-approves  all  inpatient  and
outpatient services not provided directly.  The contract is considered "at-risk"
because the payments to third-party  providers for services rendered could equal
or exceed the total amount of the revenue recorded.

     All revenues reported by the Company are shown net of estimated contractual
adjustment and charity care provided.  When payment is made, if the  contractual
adjustment  is  found  to  have  been  understated  or  overstated,  appropriate
adjustments  are made in the period the payment is received in  accordance  with
the AICPA  "Audit and  Accounting  Guide for  Health  Care  Organizations."  Net
contractual  adjustments  recorded in fiscal  2006 for  revenue  booked in prior
years  resulted in an increase in net  revenue of  approximately  $343,700.  Net
contractual  adjustments  recorded in fiscal  2005 for  revenue  booked in prior
years resulted in an increase in net revenue of approximately $372,000.

     During  the  fiscal  year  ended June 30,  2006,  a  Medicare  cost  report
settlement  of $158,100 was received and in the fiscal year ended June 30, 2004,
a Medicare cost report  settlement of  approximately  $172,000 was received.  No
cost  report  settlements  were  received  during the fiscal year ended June 30,
2005.  For the fiscal  years ended June 30,  2006,  2005 and 2004 no third party
cost report settlements were expected or recorded.

     Our accounts  receivable systems are capable of providing an aging based on
responsible  party or payor.  This  information  is critical in  estimating  our
required  allowance  for bad debts.  Below is revenue by payor and the  accounts
receivable  aging  information  as of June 30, 2006,  June 30, 2005 and June 30,
2004 for our treatment services segment.

                            Net Revenue by Payor (in thousands)

                                 For the Twelve Months Ended
                     06/30/2006           06/30/2005             06/30/2004
                 Amount   Percent     Amount   Percent      Amount   Percent
                ____________________________________________________________

 Private Pay    $ 1,207     5%       $ 1,212      5%      $ 1,132       5%
 Commercial      17,572    63%        17,608     67%       15,414      69%
 Medicare*          946     3%           999      4%        1,381       6%
 Medicaid         8,137    29%         6,268     24%        4,491      20%
                _______    ___       _______     ___       _______     ___

    Net Revenue $27,862              $26,087              $22,418
                ========             ========             ========

                                    -- 26 --
<PAGE>
     * includes Medicare cost report settlement revenue as noted above

     Accounts Receivable Aging (Net of allowance for bad debts- in thousands)

   Fiscal Year Ended June 30, 2006
   _______________________________
                      Over    Over  Over   Over   Over    Over    Over
  Payor      Current   30      60    90    120    150     270     360    Total
  _____     ________  _____   ____  ____   ____   ______   ____   ____   ______
Private Pay  $  113  $  119   $106  $113   $ 84   $  593  $ 33    $ 23   $1,184
Commercial    1,499     595    364   284    229      836   126      92    4,025
Medicare        133      38      6    17     18       73    --      --      285
Medicaid        971     152     69    32     34      243    --      --    1,501
            ________  _____   ____  ____   ____   ______  ____    ____   ______
  Total      $2,716  $  904   $545  $446   $365   $1,745  $159    $115   $6,995

    Fiscal Year Ended June 30, 2005
    _______________________________
                       Over    Over  Over  Over   Over    Over    Over
  Payor      Current   30      60    90    120    150     270     360    Total
  _____     ________  _____   ____  ____   ____   ______   ____   ____   ______

Private Pay  $  247  $  139   $ 98  $ 64   $ 75   $  154  $127    $ 32   $  936
Commercial    1,708     645    389   239    216      379   208      26    3,810
Medicare        121      16      7    --     --        1    --      --      145
Medicaid        556     277     94    74     96      342    --      --    1,439
            ________  _____   ____  ____   ____     _____  ____    ____   ______
  Total      $2,632  $1,077   $588  $377   $387   $  876  $335    $ 58   $6,330

  Fiscal Year Ended June 30, 2004
    _______________________________
                       Over    Over  Over  Over   Over    Over    Over
  Payor      Current   30      60    90    120    150     270     360    Total
  _____     ________  _____   ____  ____   ____   ______   ____   ____   ______

Private Pay  $  135  $   88   $ 77  $ 69   $ 55   $   36  $137    $105   $  702
Commercial    1,333     604    288   164    187       79   308     376    3,339
Medicare         59      11      6    --      3       --     4      --       83
Medicaid        462     327    109    34     45       24   114      20    1,135
            ________  _____   ____  ____   ____     _____  ____    ____   ______
  Total      $1,989  $1,030   $480  $266   $291   $  140  $562    $503   $5,261


     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study  criteria and  billable  units of service are  provided.  Where a
contract  requires  completion  of the  study  by the  patient,  no  revenue  is
recognized  until the patient  completes  the study  program.  All  revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.

     Contract  support  service  revenue is a result of fixed fee  contracts  to
provide telephone support. Revenue for these services is recognized ratably over
the service  period.  All revenues and  receivables  from our contract  services
division are based on a prorated monthly allocation of the total contract amount
and usually paid within 30 days of the end of the month.

Allowance for doubtful accounts:

     The  provision  for bad debts is  calculated  based on a percentage of each
aged  accounts  receivable  category  beginning at 0-5% on current  accounts and
increasing  incrementally  for  each  additional  30 days  the  account  remains
outstanding  until the account is over 360 days  outstanding,  at which time the
provision  is 80-100% of the  outstanding  balance.  These  percentages  vary by


                                    -- 27 --
<PAGE>
facility based on each facility's  experience in and expectations for collecting
older  receivables.  The Company  compares this required  reserve  amount to the
current  "Allowance  for doubtful  accounts" to determine  the required bad debt
expense for the period.  This method of determining the required  "Allowance for
doubtful  accounts"  has  historically  resulted in an  allowance  for  doubtful
accounts of 20% or greater of the total outstanding receivables balance.

Income Taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax basis of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against  deferred tax assets  unless it is more likely than not that such assets
will be realized  in future  periods.  During the fourth  quarter of fiscal year
ended June 30,  2006,  the Company  recognized  100% of its deferred tax benefit
based on past  profitability  and  future  projections.  The total  tax  benefit
recorded was $1,638,713.

Valuation of Goodwill and Other Intangible Assets

     Goodwill and other intangible  assets are initially  created as a result of
business  combinations  or  acquisitions.  The values the  Company  records  for
goodwill  and other  intangible  assets are  reviewed by the  Company,  at least
annually,  and represent  fair values.  Such  valuations  require the Company to
provide   significant   estimates  and  assumptions,   which  are  derived  from
information  obtained  from the  management of the acquired  businesses  and the
Company's  business plans for the acquired  businesses.  Critical  estimates and
assumptions  used in the  initial  valuation  of goodwill  and other  intangible
assets  include,  but are not  limited to: (i) future  expected  cash flows from
services to be provided,  customer  contracts  and  relationships,  and (ii) the
acquired market  position.  These estimates and assumptions may be incomplete or
inaccurate  because   unanticipated  events  and  circumstances  may  occur.  If
estimates and assumptions used to initially value goodwill and intangible assets
prove to be inaccurate,  ongoing reviews of the carrying values of such goodwill
and intangible assets may indicate  impairment which will require the Company to
record an impairment  charge in the period in which the Company  identifies  the
impairment.

Results of Operations

     The following table illustrates our consolidated results of operations for
the years ended June 30, 2006, 2005 and 2004 (in thousands):

                            2006              2005               2004
                            ____              ____               ____
                                         (in thousands)
Statements of Operations Data:

                           Amount      %     Amount      %      Amount      %
Revenue                    $38,013   100.0%  $34,063   100.0%   $26,649   100.0%
                           _______   ______  _______   ______   _______   ______
Cost and Expenses:
   Patient care expenses    16,512    43.5%   14,582    42.8%    12,422    46.6%
   Contract expenses         2,676     7.0%    2,198     6.5%     2,392     9.0%
   Administrative expenses  13,727    36.1%   12,424    36.5%    10,333    38.8%
   Provision for bad debts   1,913     5.0%    1,272     3.7%     1,356     5.1%
   Interest expense            607     1.6%      655     1.9%       532     2.0%
   Other (income) expenses,
     net                      (158)   -0.4%    (150)   -0.4%      (140)   -0.5%
                           ________  ______  ________   _____   ________  ______


                                    -- 29 --
<PAGE>
Total expenses              35,278    93.4%   30,981    91.0%    26,895   100.9%
                           ________  ______  ________   _____   ________  ______

Income (loss) before income
  taxes                      2,735     7.2%    3,082     9.0%      (246)   -0.9%

Benefit from (provision
  for) income taxes          1,310     7.2%       74     0.2%       (11)   -0.0%
                           ________  ______  ________  ______   ________  ______
Net income (loss)          $ 4,045    10.6%  $ 3,156     9.3%    $ (257)   -1.0%
                           ========  ======  ========  ======   ========  ======

Years ended June 30, 2006 as compared to year ended June 30, 2005

     The Company's income from its operations  decreased 11.2% to $3,184,426 for
the fiscal year ended June 30, 2006 from  $3,587,412  the fiscal year ended June
30, 2005.  Net income,  increased  28.2% to $4,045,482 for the fiscal year ended
June 30,  2006 from  $3,155,900  for the fiscal year ended June 30,  2005.  This
increase is primarily the result of $1,638,713 in income tax benefit recorded in
fiscal  2006 as  compared to  $209,000  tax  benefit  recorded  in fiscal  2005,
start-up costs  experienced in fiscal 2006 for a major contract at our Las Vegas
location,  start-up costs incurred as a result of the addition of 20 beds at the
Detroit  Behavioral  Institute  facility and increased bad debt and professional
fees related to the system crash at our Harbor Oaks facility.

     Total revenues  increased  11.6% to $38,013,092 for the year ended June 30,
2006 from $34,063,258 for the year ended June 30, 2005.

     Total net  patient  care  revenue  from all  facilities  increased  6.8% to
$27,861,701  for the year ended June 30, 2006 as compared to $26,087,088 for the
year ended June 30, 2005.  Patient days increased over 6,861 days for the fiscal
year ending June 30, 2006 over the fiscal year ended June 30, 2005.  In December
2004, the Company opened 30 residential  beds increasing our available beds from
130 to 160 and in October  2005 the  Company  opened 20  additional  residential
beds,  increasing our available beds from 160 to 180. These additional available
beds  accounted  for the increase in patient days for the fiscal year ended June
30, 2006. The contracted rate for these  residential  beds is lower than that of
our other facilities,  which negatively impacts our revenue per patient day. Net
inpatient care revenue from  inpatient  psychiatric  services  increased 1.7% to
$18,775,198  for the year ended June 30, 2006 from  $18,469,578  the fiscal year
ended June 30, 2005.  This increase is due to a change in payor mix resulting in
part from the increased residential treatment beds. Net partial  hospitalization
and  outpatient  care revenue  increased  19.3% to $9,086,503 for the year ended
June 30, 2006 from $7,617,510 for the year ended June 30, 2005. This increase is
partially  due to  increased  outpatient  contracts  and  high  usage  of  these
step-down programs by managed care as a treatment alternative to inpatient care.
Pharmaceutical  study revenue  increased  28.6% to $5,799,815 for the year ended
June 30, 2006 from $4,509,338 for the year ended June 30, 2005. This increase is
due in part to a large study  started in the third  quarter of this fiscal year.
Revenues also increased in our contract  support services  division,  Wellplace.
Wellplace  revenues  increased  25.5% to $4,351,576  for the year ended June 30,
2006 from  $3,466,832 for the year ended June 30, 2005. This increase in revenue
is primarily due to the start of a new smoking  cessation  contract with a major
government   contractor  in  November  2005.   All  revenues   reported  in  the
accompanying  consolidated  statements of operations  are shown net of estimated
contractual  adjustments and charity care provided. When payment is made, if the
contractual  adjustment  is  found  to  have  been  understated  or  overstated,
appropriate  adjustments  are made in the period  the  payment  is  received  in
accordance   with  the  AICPA  Audit  and  Accounting   Guide  for  Health  Care
Organizations.

     Patient care expenses,  excluding  research,  increased by  $1,364,254,  or
10.6%, to $14,269,540 for the year ended June 30, 2006 from  $12,905,286 for the
year ended June 30, 2005 due to the  increase in  available  beds and  resulting
increase  in  patient  census  at our  inpatient  facilities.  Inpatient  census
increased by 6,861 patient days,  16%, for the year ended June 30, 2006 compared
to the year ended June 30, 2005. Direct patient care payroll and payroll related
expenses  increased  9.7% to  $11,764,978  for the year ended June 30, 2006 from
$10,727,317 for the year ended June 30, 2005, food and dietary expense increased
21.4% to $769,367  for the year ended June 30, 2006 from  $633,869  for the year
ended June 30, 2005,  hospital  supplies expense  increased 37.9% to $71,539 for
the year  ended June 30,  2006 from  $51,863  for the year ended June 30,  2005,
laboratory  fees  increased  36.4% to $219,063  for the year ended June 30, 2006
from $160,603 for the year ended June 30, 2005, agency nursing expense increased


                                    -- 29 --
<PAGE>
38.8% to $166,047  for the year ended June 30, 2006 from  $119,672  for the year
ended June 30, 2005 and other patient related expenses  increased to $94,218 for
the year ended June 30, 2006 from $45,481 for the year ended June 30, 2005.  All
of these increases were a result of increased patient census and increased needs
of the patients  based on the severity of their  illness and the start up of the
additional  20 bed  residential  unit in October  2005.  We  continue to closely
monitor the ordering of all hospital supplies,  food and pharmaceutical supplies
but these  expenses  all  relate  directly  to the  number of days of  inpatient
services we provide and are  expected to increase  with higher  patient  census.
(see "Operating Statistics" Part I, Item 1).

     Patient  care  expenses  for  the  research  division  increased  33.8%  to
$2,242,900  for the year ended June 30, 2006 from  $1,676,749 for the year ended
June 30, 2005.  This increase is due to increased  study  activity.  Payroll and
related  direct care expenses  increased  37.0% to $1,763,308 for the year ended
June 30, 2006 from $1,287,038 for the year ended June 30, 2005. Patient supplies
expense increased 68.3% to $38,770 for the year ended June 30, 2006 from $23,040
for the year ended June 30, 2005.  Patient  stipends and other  patient  related
expenses  increased  23.9% to  $453,822  for the year ended  June 30,  2006 from
$366,671  for the year ended June 30,  2005.  These  expenses  are  expected  to
increase in a direct relationship with the increases in related revenue.

     Cost of contract support  services related to Wellplace  increased 21.8% to
$2,676,340  for the year ended June 30, 2006 from  $2,197,518 for the year ended
June 30, 2005. This increase is due to the start up costs related to the smoking
cessation contract with a major government  contractor which started in November
2005.  Expenses are expected to increase as new  contracts  are added.  With the
exception of depreciation  and legal fees, all expenses for Wellplace  increased
as a result of this contract.  Payroll and payroll  related  expenses  increased
27.0% to  $1,274,937  for the year ended June 30, 2006 from  $1,003,988  for the
year ended June 30, 2005.

     Provision  for doubtful  accounts  increased  50.4% to  $1,912,516  for the
fiscal year ended June 30, 2006 from  $1,272,037  for the fiscal year ended June
30, 2005.  This  increase is primarily  the result of the system crash at Harbor
Oaks which  delayed  billing and the  processing  of payments for more than four
months,  creating a delay in payments  and in appeals  processing.  The facility
continues  to  collect  on these old  accounts,  which is  evident  by the lower
expense  for the  facility  in the last half of the fiscal  year;  however,  the
policy of the Company is to provide an allowance for doubtful  accounts based on
the age of  receivables  resulting in higher bad debt expense and a  significant
increase in the allowance for doubtful accounts.

     The  environment  the  Company   operates  in  today  makes  collection  of
receivables,  particularly  older  receivables,  more difficult than in previous
years.   Accordingly,   the  Company  has  increased  staff,  standardized  some
procedures  for  collecting   receivables   and  instituted  a  more  aggressive
collection  policy,  which has for the most part resulted in an overall decrease
in the age of its accounts  receivable.  The Company's  gross  receivables  from
direct patient care has increased  21.8% to $10,096,061  for the year ended June
30, 2006 from $8,287,365 for the year ended June 30, 2005, the Company  believes
its  reserve  of  approximately  31%  is  sufficient  based  on  the  age of the
receivables.  We continue to reserve for bad debt based on managed  care denials
and past  difficulty in  collections.  The growth of managed care has negatively
impacted  reimbursement  for  behavioral  health  services with a higher rate of
denials requiring higher contractual adjustments and higher reserves.

     Total  administrative  expenses,  excluding  research,  increased  16.0% to
$11,210,296  for the year ended June 30, 2006 from $9,667,138 for the year ended
June 30, 2005. Legal expense decreased 39.0% to $156,054 for the year ended June
30, 2006 from  $255,794 for the year ended June 30, 2005,  due to the booking of
some  residual  legal fees last year for the North Point  litigation  settled in
fiscal 2004 and legal fees associated with finalizing the collective  bargaining
agreement for Harbor Oaks Hospital.  Administrative  salaries increased 14.9% to
$3,508,980  for the year ended June 30, 2006 from  $3,054,294 for the year ended
June 30, 2005. Greater  competition for experienced  health care  administrative
staff resulted in these increased salaries.  Insurance expense increased 9.7% to
$644,882 for the year ended June 30, 2006 from  $587,751 for the year ended June
30,  2005  due  to  general  increases  in  property  and  liability  insurance.
Accounting fees, which includes non-audit accounting services, including but not
limited to taxes, cost reports and individual contract audits, provided by firms
other than our principal  audit firm,  increased  45.8% to $336,425 for the year
ended June 30, 2006 from  $230,791  for the year ended June 30,  2005.  Fees and
licenses  expense  increased  19.1% to $294,165 for the year ended June 30, 2006
from  $247,076  for the year ended June 30,  2005.  This  increase is due to the
Michigan quality  assurance  assessment fee, which accounted for the majority of
the increase. Rent expense increased 17.1% to $1,117,098 for the year ended June
30, 2006 from $953,667 for the year ended June 30, 2005. This increase is due to
the opening of the  additional  20  residential  bed unit at Detroit  Behavioral
Institute.


                                    -- 30 --
<PAGE>
     Total  administrative  expenses for the research division decreased 8.7% to
$2,517,074  for the year ended June 30, 2006 from  $2,757,118 for the year ended
June 30, 2005. This decrease is due to a decrease in legal expenses, decrease in
administrative   salaries   and  a   decrease   in  general   insurance   costs.
Administrative payroll and taxes was the most significant of these changes as it
decreased  10.8% to $1,033,160 for the year ended June 30, 2006 from  $1,158,394
for the year ended June 30, 2005 due to the closing of the Las Vegas  office and
a decrease in accrued bonuses.

     Interest  expense  decreased  7.3% to $606,893  for the year ended June 30,
2006 from $654,871 for the year ended June 30, 2005. This decrease is due to the

decrease in  outstanding  debt of the Company.  The prime rate,  which  remained
relatively  stable over the last fiscal year,  dictates the interest rate on the
majority of the Company's long-term debt,  therefore,  the reduction of interest
is only a result of the decrease in outstanding debt.

     The  Company's  provision for income taxes of $328,610 and $135,969 for the
years ended June 30, 2006 and June 30,  2005,  respectively,  are  significantly
below the Federal  statutory rate of 34% primarily due to the utilization of net
operating loss carry-forwards. Total provision for income tax expense for fiscal
2006 and 2005  represents  state income taxes for certain  subsidiaries  with no
available  net  operating  loss  carry-forwards.  In the past,  the  Company has
provided a significant  valuation  allowance  against its deferred tax asset and
recognized  a tax benefit of  $209,392  in the fiscal year ended June 30,  2005,
based on the estimated  taxable  income for the fiscal year ended June 30, 2006.
In the fiscal  year ended June 30,  2006,  the  Company  reduced  the  valuation
allowance due to its evaluation of the future likelihood of realization based on
past profitability and future expectations of profitability, and recognized 100%
of its available tax benefit and eliminated the valuation  allowance against the
deferred tax asset for federal purposes.

Years ended June 30, 2005 as compared to year ended June 30, 2004

     The Company's profitability from its operations,  without the impact of the
litigation and settlement costs of approximately  $1,030,000  recorded in fiscal
2004, excluding research operations, increased 100.55% for the fiscal year ended
June 30, 2005 over the fiscal  year ended June 30,  2004.  Net income,  with the
same adjustments,  increased  253.39%.  This increase is primarily the result of
increased census in our treatment  facilities and the addition of 30 beds in the
second quarter of fiscal 2005. Total revenues increased 27.8% to $34,063,258 for
the year ended June 30, 2005 from  $26,648,845 for the year ended June 30, 2004.
Income from operations  increased to $3,587,412 for the year ended June 30, 2005
from $145,536 for the year ended June 30, 2004.

     Total net patient  care  revenue  from all  facilities  increased  16.4% to
$26,087,088  for the year ended June 30, 2005 as compared to $22,418,355 for the
year ended June 30, 2004.  Patient days increased over 6,500 days for the fiscal
year ending June 30, 2005 over the fiscal year ended June 30, 2004. In addition,
the Company experienced a better payor mix. In December 2004, the Company opened
30  residential  beds  increasing  our  available  beds  from  130 to  160.  The
contracted  rate for  these  residential  beds is lower  than  that of our other
facilities,  which negatively impacts our revenue per patient day. Net inpatient
care revenue from inpatient  psychiatric services increased 24.4% to $18,469,578
for the year ended June 30, 2005 from $14,845,163 for the fiscal year ended June
30, 2004. Net partial hospitalization and outpatient care revenue increased 0.5%
to  $7,617,510  for the year ended June 30,  2005 from  $7,573,192  for the year
ended June 30,  2004.  This  minimal  increase is partially a result of the high
increase last year triggered by the utilization of these  step-down  programs by
managed care as a treatment alternative to inpatient care.  Pharmaceutical study
revenue  increased  261.9% to  $4,509,338  for the year ended June 30, 2005 from
$1,246,013  for the  year  ended  June 30,  2004.  This  increase  is due to the
acquisition  of Pivotal  Research  Centers,  LLC, in April 2004.  Revenues  also
increased in our contract support services division,  Wellplace,  formerly known
as  Pioneer  Development  and  Support  Services  ("PDS2").  Wellplace  revenues
increased  16.2% to $3,466,832 for the year ended June 30, 2005 from  $2,984,477
for the year ended June 30, 2004.  This  increase in revenue is primarily due to


                                    -- 31 --
<PAGE>

the  increase  in the Wayne  County call center  contract in October  2004.  All
revenues reported in the accompanying  consolidated statements of operations are
shown net of estimated contractual  adjustments and charity care provided.  When
payment is made, if the contractual adjustment is found to have been understated
or  overstated,  appropriate  adjustments  are made in the period the payment is
received in accordance with the AICPA Audit and Accounting Guide for Health Care
Organizations.

     Patient care expenses,  excluding  research,  increased by  $1,327,950,  or
11.47%, to $12,905,286 for the year ended June 30, 2005 from $11,577,336 for the
year ended June 30, 2004 due to the  increase in  available  beds and  resulting
increase  in  patient  census  at our  inpatient  facilities.  Inpatient  census
increased by 6,537 patient days,  18%, for the year ended June 30, 2005 compared
to the year ended June 30, 2004. Direct patient care payroll and payroll related
expenses  increased  8.5% to  $10,727,317  for the year ended June 30, 2005 from
$9,890,125 for the year ended June 30, 2004, food and dietary expense  increased
21.0% to $633,869  for the year ended June 30, 2005 from  $524,023  for the year
ended June 30, 2004, hospital supplies expense increased 6.6% to $51,863 for the
year  ended  June 30,  2005  from  $48,667  for the year  ended  June 30,  2004,
laboratory fees increased 5.9% to $160,603 for the year ended June 30, 2005 from
$151,697 for the year ended June 30, 2004,  laundry  expense  increased  7.5% to
$47,416  for the year ended June 30,  2005 from  $44,124 for the year ended June
30, 2004 and agency nursing  expense  increased  233.7% to $119,672 for the year
ended June 30, 2005 from $35,867 for the year ended June 30, 2004.  All of these
increases were a result of increased  patient census and increased  needs of the
patients  based  on the  severity  of  their  illness  and the  start  up of the
additional  30 bed  residential  unit in December  2004.  We continue to closely
monitor the ordering of all hospital supplies,  food and pharmaceutical supplies
but these  expenses  all  relate  directly  to the  number of days of  inpatient
services we provide and are  expected to increase  with higher  patient  census.
(see "Operating Statistics" Part I, Item 1).

     Patient  care  expenses  for  the  research  division  increased  98.4%  to
$1,676,749  for the year ended June 30,  2005 from  $845,291  for the year ended
June 30, 2004.  This increase is due to the  expansion of our research  division
through the acquisition of Pivotal Research Centers,  LLC in April 2004. Payroll
and related  direct care expenses  increased  113.4% to $1,287,038  for the year
ended June 30,  2005 from  $603,179  for the year ended June 30,  2004.  Patient
supplies expense increased 4.9% to $23,040 for the year ended June 30, 2005 from
$21,962 for the year ended June 30, 2004.  Patient  stipends  and other  patient
related  expenses  increased  66.7% to $366,671 for the year ended June 30, 2005
from $219,914 for the year ended June 30, 2004.  These  expenses are expected to
increase in a direct relationship with the increases in related revenue.

     Cost of contract support  services  related to Wellplace  decreased 8.1% to
$2,197,518  for the year ended June 30, 2005 from  $2,391,660 for the year ended
June 30, 2004.  This decrease is due to the expiration of the smoking  cessation
contracts  for Nebraska and Kansas over the last year.  Expenses are expected to
increase as new contracts are added.  With the exception of payroll and employee
related  expenses,  all expenses for  Wellplace  decreased.  Payroll and payroll
related  expenses  increased 6.5% to $1,003,988 for the year ended June 30, 2005
from $942,866 for the year ended June 30, 2004.

     Provision for doubtful accounts decreased 6.2% to $1,272,037 for the fiscal
year  ended June 30,  2005 from  $1,355,770  for the fiscal  year ended June 30,
2004.  This  decrease  is the  result of a  decrease  in the age of  outstanding
accounts receivable which affects the required balance in allowance for doubtful
accounts.

     Although,  through  increased  revenue the Company's gross receivables from
direct  patient care has increased  13.7% to $8,287,365  for the year ended June
30, 2005 from $7,287,090 for the year ended June 30, 2004, the Company  believes
its  reserve  of  approximately  24%  is  sufficient  based  on  the  age of the
receivables.  We continue to reserve for bad debt based on managed  care denials
and past difficulty in collections.

     Total  administrative  expenses,   excluding  research,  decreased  .3%  to
$9,667,138  for the year ended June 30, 2005 from  $9,695,274 for the year ended
June 30, 2004. Legal expense decreased 78.7% to $255,794 for the year ended June
30, 2005 from $1,198,568 for the year ended June 30, 2004.  Unusually high legal
fees were experienced  last year due to the litigation and settlement  involving
one of the Company's  subsidiaries.  Administrative  salaries increased 16.9% to
$3,054,294  for the year ended June 30, 2005 from  $2,612,603 for the year ended
June 30, 2004. Greater  competition for experienced  health care  administrative
staff resulted in these increased salaries. Insurance expense increased 37.9% to
$587,751 for the year ended June 30, 2005 from  $426,148 for the year ended June


                                    -- 31 --
<PAGE>

30,  2004  due  to  general  increases  in  property  and  liability  insurance.
Accounting fees, which includes non-audit accounting services, including but not
limited to taxes, cost reports and individual contract audits, provided by firms
other than our principal  audit firm,  increased  30.6% to $230,791 for the year
ended June 30, 2005 from  $176,746  for the year ended June 30,  2004.  Fees and
licenses  expense  increased 415.1% to $247,076 for the year ended June 30, 2005
from $47,967 for the year ended June 30, 2004. This increase is due to the newly
established  Michigan quality assurance  assessment fee, which accounted for the
majority of the increase.  Rent expense  increased 8.2% to $953,667 for the year
ended  June 30,  2005 from  $881,173  for the year  ended  June 30,  2004.  This
increase is due to the opening of the 30 residential beds at Detroit  Behavioral
Institute.

     Total administrative expenses for the research division increased 332.2% to
$2,757,118  for the year ended June 30,  2005 from  $637,978  for the year ended
June 30, 2004.  This increase is due to the  expansion of our research  division
through  the  acquisition  of  Pivotal  Research  Centers,  LLC in  April  2004.
Administrative  payroll and taxes  increased  524.4% to $1,158,394  for the year
ended June 30, 2005 from  $185,520 for the year ended June 30, 2004.  Comparison
in the operating expenses of the research division are not meaningful because of
the addition of the operations of Pivotal.

     Interest  expense  increased  23.2% to $654,871 for the year ended June 30,
2005 from $531,564 for the year ended June 30, 2004. This increase is due to the
increase in the prime rate,  which dictates the interest rate on the majority of


                                    -- 32 --
<PAGE>
the Company's  long-term debt. It also reflects the  amortization of capitalized
costs associated with the refinancing of the Company's debt, which was completed
in October  2004 and a penalty  associated  with the  extinguishment  of the old
debt.

     The  Company's  income taxes  exclusive of deferred  income tax benefits of
$135,969  and  $11,294  for the years  ended  June 30,  2005 and June 30,  2004,
respectively,  are  significantly  below  the  Federal  statutory  rate  of  34%
primarily due to the  utilization  of net operating loss  carry-forwards.  Total
provision  for income tax  expense  for fiscal  2005 and 2004  represents  state
income taxes for certain  subsidiaries  with no  available  net  operating  loss
carry-forwards.  The  Company has  provided a  significant  valuation  allowance
against its deferred tax asset and recognized a tax benefit of $303,994 based on
the estimated taxable income for the fiscal year ended June 30, 2006.

Liquidity and Capital Resources

     As of June 30,  2006,  the  Company  had  working  capital  of  $7,477,291,
including cash and cash  equivalents of $1,820,105,  compared to working capital
of $4,106,316, including cash and cash equivalents of $917,630 at June 30, 2005.

     Cash provided by operating  activities  was  $3,134,306  for the year ended
June 30,  2006,  compared to  $983,466  for the year ended June 30,  2005.  Cash
provided by operations in fiscal 2006 consists of the net income of  $4,045,482,
offset by an increase in total net accounts receivable of $802,945,  an increase
in prepaid  expenses of $343,667,  an increase in other assets of $186,817 and a
non-cash  increase in net deferred tax asset of  $1,638,713.  These uses of cash
from  operations  were  offset by a $611,046  increase in  accounts  payable,  a
$471,930  increase in accrued expenses and other  liabilities and further offset
by non-cash items including depreciation and amortization of $777,419,  non-cash
interest expense of $65,583 and stock based equity compensation of $134,988.

     Cash used in investing  activities in fiscal 2006  consisted of $710,638 in
capital  expenditures for the acquisition of property and equipment  compared to
$483,462 in capital  expenditures for property and equipment and $62,258 related
to the acquisition of Pivotal Research Centers,  LLC for the year ended June 30,
2005 (See Note K to the consolidated  financial statements included herewith for
additional detail regarding the acquisition of Pivotal Research  Centers,  LLC).
The increase was  primarily  due to the  build-out  for the  additional  beds in
Michigan  and  telephone  and  computer  equipment  upgrades  at  several of our
operations. The Company expects investment amounts to increase with the purchase
and  implementation  of the  Meditech  software  and the  upgrade of hardware to
accommodate the software Company wide.

     Cash used in financing activities in fiscal 2006 consisted of $1,623,379 in
net debt repayments,  $15,000 in deferred financing cost due to the extension of
the Company's debt  arrangement,  $153,799  received from the issuance of common
stock and $36,613 paid in the purchase of treasury stock.

     A  significant  factor in the liquidity and cash flow of the Company is the
timely  collection  of its  accounts  receivable.  As of June 30, 2006  accounts
receivable from patient care, net of allowance for doubtful accounts,  increased
approximately  11% to  $6,995,475  on June 30, 2006 from  $6,330,381 on June 30,
2005.  This  increase  is a result of the delay in  billing  and  collecting  of


                                    -- 33 --
<PAGE>
receivables at our largest  facility,  Harbor Oaks  Hospital,  due to the system
crash previously  mentioned and increased net revenue.  The Company's goal is to
reduce  receivables  or to have any  increases  result from higher  revenues and
timing of receivables  collection.  Better accounts receivable management due to
increased staff,  standardization of some procedures for collecting  receivables
and a more  aggressive  collection  policy has made this  possible in behavioral
health, which is typically a difficult collection  environment.  Increased staff
has  allowed the  Company to  concentrate  on current  accounts  receivable  and
resolve any problem  issues  before they  become  uncollectable.  The  Company's
collection policy calls for early contact with insurance carriers with regard to
payment,  use of fax and  registered  mail to follow-up  or resubmit  claims and
earlier employment of collection  agencies to assist in the collection  process.
The Company's  collectors will also seek  assistance  through every legal means,
including  the State  Insurance  Commissioner's  office,  when  appropriate,  to
collect  claims.  At the same time,  the Company  continues  to closely  monitor
reserves for bad debt based on potential  insurance  denials and past difficulty
in collections.

     In order to  facilitate  the  acquisition  of the  membership  interest  in
Pivotal  Research  Centers,  LLC in April 2004, the Company  determined  that it
would be in the best interest of the shareholders to finance the cash portion of
the purchase price through equity as well as raise  additional  working capital,
since  debt with  favorable  terms was not  available.  Therefore,  the  Company
offered 2,800,000 shares of Class A Common Stock at $1.10 per share in a private
placement.  The private  placement  also  included  25%  warrant  coverage at an
exercise  price  of  $1.10  per  share  with  a  three-year  term  and  standard
anti-dilution  features.  This offering was completed in two stages. As a result
of the first stage of the offering,  in March 2004,  the Company  issued 684,999
shares of Class A Common Stock for  $753,500  and  warrants to purchase  171,248
additional  shares of Class A Common  Stock.  As a result of the second stage of
this offering,  in April 2004, the Company  issued  1,918,196  shares of Class A
Common Stock for $2,110,016 and warrants to purchase 479,549  additional  shares
of Class A Common Stock.  The private  placement  facilitated the closing of the
acquisition  without  incurring any additional  bank debt, and also provided the
necessary working capital for Pivotal to execute its business plan.

     Contractual Obligations

     The Company's future minimum payments under contractual obligations related
to capital  leases,  operating  leases and term notes as of June 30, 2006 are as
follows (in thousands):

YEAR ENDING                                         OPERATING  MEDITECH
 June 30        TERM NOTES         CAPITAL LEASES     LEASES   LEASE*   TOTAL**

           Principal  Interest  Principal   Interest  Payments   Payments
 2007       $  909    $133        $ 58       $ 8       $1,525     $134   $2,767
 2008          451      55          52         7        1,520      191    2,276
 2009          195      24           4        .7        1,496      191    1,911
 2010           53      16           4        .2        1,198      118    1,389
 2011          215      12           2        .1          486      118      833
 2012           51       8          --        --          144       30      233
Thereafter      57       3          --        --           --       --       60
            ______    ____        ____       ___       ______     ____   ______
 Total      $1,931    $251        $120       $16       $6,369     $782   $9,469

*    The  Meditech  Lease - Although  this master  lease for the purchase of the
     Meditech  software was signed in April 2006,  no advances  were made by the
     lender prior to year end. The above table  includes the scheduled  payments
     on the debt to be incurred based on the lease. (See the Company's report on
     form 8K dated April 26, 2006,  for details  regarding the above  referenced
     lease).

**   Total does not  include the amount due under the  revolving  credit note of
     $1,603,368. This amount represents an accounts receivable funding described
     below and is shown as a current note payable in the accompanying  Financial
     Statements.

     In addition to the above,  the Company is also subject to three  contingent
notes with a total face value of $2,500,000 as part of the Pivotal  acquisition.
Of  these  notes,  two  totaling  $1,500,000,  one  for  $1,000,000  and one for
$500,000,  bear interest at 6% per annum.  These notes are subject to additional
adjustment  based on the earnings of the acquired  operations.  Since adjustment


                                    -- 34 --
<PAGE>
can be positive or negative  based on  earnings,  with no ceiling or floor,  the
liability  for only one of these notes was  recorded as of June 30,  2006.  This
treatment is in accordance  with SFAS No. 141,  "Business  Combinations",  which
states that contingent consideration should be recognized only when determinable
beyond a reasonable  doubt.  Payments on the $1,000,000 note began on January 1,
2005. The above table includes the outstanding  balance on this note of $728,218
which represents the earn out for the Pivotal  acquisition  through December 31,
2005 net of  payments  made  through  June 30,  2006.  No  payment is due on the
$500,000 note as earn-out  requirements  have not been attained.  The final note
for $1,000,000  does not bear interest,  is also subject to adjustment  based on
earnings  but has a minimum  value of $200,000 to be paid in PHC,  Inc.  Class A
common stock on March 31, 2009.  This minimum  liability  has been recorded with
imputed interest of 6% and $169,648 is included in the schedule above. (See Note
K  to  the  consolidated  financial  statements  included  in  this  report  for
additional details on the Pivotal acquisition)

     In October 2004, the Company entered into a revolving credit, term loan and
security  agreement  with  CapitalSource  Finance,  LLC to replace the Company's
primary lender and provide additional liquidity.  Each of the Company's material
subsidiaries,  other than Pivotal Research Centers,  Inc, is a co-borrower under
the agreement.  The agreement  includes a term loan in the amount of $1,400,000,
with a balance of $662,840 at June 30, 2006, and an accounts  receivable funding
revolving credit  agreement with a maximum loan amount of $3,500,000,  including
$900,000 available as an overline for growth.

     The term loan note carries  interest at prime plus 3.5%,  but not less than
9%, with twelve monthly principal payments of $25,000,  twelve monthly principal
payments of $37,500,  and eleven monthly principal payments of $50,000 beginning
November  1,  2004 with  balance  due at  maturity,  on  October  1, 2007 and is
included in the above table.

     The  revolving  credit note carries  interest at prime plus 2.25%,  but not
less  than  6.75%  paid  through  lock  box  payments  of third  party  accounts
receivable.  The  revolving  credit  term  is  three  years,  renewable  for two
additional  one-year terms.  The balance on the revolving credit agreement as of
June  30,  2006  was  $1,603,368.  For  additional  information  regarding  this
transaction,  see the  Company's  current  report  on form  8-K  filed  with the
Securities and Exchange  Commission on October 22, 2004. The balance outstanding
as of June 30, 2006 is not included in the above table.

     During the current fiscal year, the Company  amended the above agreement on
two separate  occasions,  first to modify the required covenants to more closely
reflect the  fluctuations  in the Company's  normal  business flow and second to
extend the period of the agreement for an  additional  year through  October 19,
2008.

     The Company has  operated  ongoing  operations  profitably  for  twenty-two
consecutive quarters with the exception of the litigation settlement and related
legal  costs  incurred  in the third  quarter of fiscal  year 2004.  While it is
difficult to project whether the current positive business  environment  towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.

     Off Balance Sheet Arrangements

     The  Company  has  no  off-balance-sheet  arrangements  that  have  or  are
reasonably likely to have a current or future effect on the Company's  financial
condition,  changes in  financial  condition,  revenue or  expenses,  results of
operations,  liquidity,  capital  expenditures  or  capital  resources  that  is
material to the Company.

     Aging of accounts  receivables  could  result in our  inability  to collect
receivables.  As our accounts  receivable age and become  uncollectible our cash
flow is negatively impacted.  Our accounts receivable from patient accounts (net
of  allowance  for bad debts) were  $6,995,475  at June 30, 2006  compared  with
$6,330,381 at June 30, 2005.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  We have  focused on better  accounts  receivable  management  through
increased staff,  standardization of some procedures for collecting  receivables
and a more  aggressive  collection  policy  in  order  to  keep  the  change  in
receivables  consistent with the change in revenue.  We have also  established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected.  The following chart represents our Accounts  Receivable and Allowance
for  Doubtful  Accounts  at June 30, 2006 and 2005,  respectively,  and Bad Debt
Expense for the years ended June 30, 2006 and 2005:



                                    -- 35 --
<PAGE>
                                  Allowance for
                   Accounts Receivable   doubtful accounts  Bad Debt Expense
                   ___________________   _________________  ________________

   June 30, 2006      $10,096,061          $3,100,586         $1,912,516
   June 30, 2005        8,287,365           1,956,984          1,272,037

     The  Company  relies on  contracts  with more than ten  clients to maintain
patient census at its inpatient facilities and the loss of any of such contracts
would  impact  our  ability  to meet  our  fixed  costs.  We have  entered  into
relationships with large employers, health care institutions and labor unions to
provide treatment for psychiatric  disorders,  chemical dependency and substance
abuse in conjunction with  employer-sponsored  employee assistance programs. The
employees of such institutions may be referred to us for treatment,  the cost of
which is reimbursed on a per diem or per capita basis.  Approximately 30% of our
total revenue is derived from these  clients.  No one of these large  employers,
health care institutions or labor unions  individually  accounts for 10% or more
of our consolidated revenues, but the loss of any of these clients would require
us to expend  considerable  effort to replace patient referrals and would result
in revenue losses and attendant loss in income.

Recent accounting pronouncements

     In February 2006, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140," to permit fair value re-measurement for any
hybrid financial  instrument that contains an embedded derivative that otherwise
would require  bifurcation  in accordance  with the  provisions of SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities.".  The Company
does not expect the  adoption  of SFAS No. 155 to have a material  affect on the
company's Consolidated Financial Statements.

     In June 2006 the FASB issued FASB  Interpretation  No. 48,  "Accounting for
Uncertainty in Income Taxes",  an interpretation of FASB Statement No. 109, (FIN
48), which prescribes a recognition  threshold and measurement attribute for the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
de-recognition,  classification,  interest and penalties,  accounting in interim
periods,  disclosure  and  transition.  FIN 48 is  effective  for  fiscal  years
beginning  after  December 15, 2006.  We do not expect the adoption of FIN 48 to
have  a  material  impact  on our  financial  reporting,  and  we are  currently
evaluating  the  impact,  if  any,  the  adoption  of FIN 48  will  have  on our
disclosure requirements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The market  price of our  common  stock  could be  volatile  and  fluctuate
significantly in response to various factors, including:

o    Differences in actual and estimated earnings and cash flows;
o    Operating results differing from analysts' estimates;
o    Changes in analysts' earnings estimates;
o    Quarter-to-quarter variations in operating results;
o    Changes in market conditions in the behavioral health care industry;
o    Changes in market conditions in the research industry;
o    Changes in general economic conditions; and
o    Fluctuations in securities markets in general.

Financial Risk

o    Our  interest  expense is  sensitive  to changes  in the  general  level of
     interest rates. With respect to our  interest-bearing  liabilities,  all of
     our long-term debt  outstanding is subject to rates at prime plus 2.25% and
     prime plus 3.5%,  which makes interest expense increase with changes in the


                                    -- 36 --
<PAGE>
     prime rate.  On this debt,  each 25 basis point  increase in the prime rate
     will affect an annual increase in interest expense of approximately $5,700.
 o   Failure to meet targeted  revenue  projections  could cause us to be out of
     compliance  with covenants in our debt  agreements  requiring a waiver from
     our  lender.  A waiver of the  covenants  may require our lender to perform
     additional audit procedures to assure the stability of their security which
     could require  additional  fees. (For  additional  information see Part II,
     Item  "Management's  Discussion  and  Analysis of Financial  Condition  and
     Results of Operations").

                                    -- 37 --
<PAGE>
Item 8. Financial Statements and Supplementary Data.

Financial  statements and  supplementary  data required  pursuant to this Item 8
begin on page F-1 of this Annual Report on Form 10-K


                                                                PAGE

Index                                                           F-1
Reports of Independent Registered Public Accounting Firm        F2-F-3
Consolidated balance sheets                                     F-4
Consolidated statements of operations                           F-5
Consolidated statements of changes in stockholders' equity      F-6
Consolidated statements of cash flows                           F-7 - F-8
Notes to consolidated financial statements                      F-9 - F-32

                                                                             F-1

                                    -- 38 --
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
PHC, Inc.

     We have audited the  accompanying  consolidated  balance sheet of PHC, Inc.
and subsidiaries as of June 30, 2006, and the related consolidated statements of
operations,  changes in stockholders'  equity,  and cash flows for the year 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 audit.

     We conducted our audit in accordance with auditing  standards of the Public
Company Accounting Oversight Board (United States). 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,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
PHC, Inc. and subsidiaries at June 30, 2006, and the results of their operations
and their  consolidated  cash flows for the year then ended in  conformity  with
accounting principles generally accepted in the United States of America.





/s/ Eisner, LLP


New York, New York
October 12, 2006

                                                                             F-2

                                    -- 39 --
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
PHC, Inc.



We have audited the  accompanying  consolidated  balance  sheet of PHC, Inc. and
subsidiaries  as of June 30, 2005,  and the related  consolidated  statements of
operations,  changes in stockholders' equity, and cash flows for each of the two
years in the period  ended June 30, 2005.  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  auditing  standards of the Public
Company Accounting Oversight Board (United States). 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
consideration  of  internal  control  over  financial  reporting  as a basis for
designing audit procedures that are appropriate in the circumstances but not for
the  purpose of  expressing  an opinion on the  effectiveness  of the  Company's
internal  control  over  financial  reporting.  Accordingly,  we express no such
opinion. An audit also includes examining,  on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   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 referred to above present
fairly, in all material  respects,  the consolidated  financial position of PHC,
Inc. and  subsidiaries at June 30, 2005, and the results of their operations and
their cash flows for each of the two years in the period  ended June 30, 2005 in
conformity with accounting principles generally accepted in the United States of
America.




                                             /s/ BDO Seidman, LLP


Boston, Massachusetts
August 23, 2005

                                                                             F-3

                                    -- 40 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets

                                                               June 30,
                                                          2006          2005
                                                      ___________    ___________
ASSETS (Note A)
 Current assets:
     Cash and cash equivalents (Note A)               $ 1,820,105    $  917,630

    Accounts receivable, net of allowance for
     doubtful accounts of $3,100,586
     and $1,956,984  at June 30, 2006 and 2005,
     respectively  (Note A)                             6,955,475     6,265,381
    Pharmaceutical research receivables (Note A)        1,470,019     1,414,340
    Prepaid expenses                                      490,655       146,988
    Other receivables and advances (Note A)               751,791       638,654
    Deferred tax assets (Note F)                        3,110,000     1,375,800
                                                      ___________    ___________
         Total current assets                          14,598,045    10,758,793
                                                      ___________    ___________

Accounts receivable, non-current (Note A)                  40,000        65,000
Other receivables (Note A)                                 53,457        84,422
Property and equipment, net (Notes A, B, C, D and K)    1,799,888     1,516,114
Deferred financing costs, net of amortization of
  $106,422 and $62,507  at June 30, 2006
  and 2005, respectively                                  117,023       145,938
Customer relationships, net of amortization of
  $260,000 and $140,000 at June 30, 2006 and 2005,
  respectively (Notes A and K)                          2,140,000     2,260,000
Goodwill (Notes A and K)                                2,664,643     2,648,209
Other assets (Note A)                                     571,931       417,172
                                                      ___________    ___________

      Total assets                                    $21,984,987   $17,895,648
                                                      ============  ============

LIABILITIES
Current liabilities:
    Accounts payable                                  $ 1,518,615   $   907,569
    Current maturities of long-term debt
      (Notes C and K)                                     909,057       769,599
    Revolving credit note (Note C)                      1,603,368     2,385,629
    Deferred revenue                                      385,742        85,061
    Current portion of obligations under capital
      leases (Note D)                                      57,881        29,777
    Accrued payroll, payroll taxes and benefits         1,619,672     1,411,653
    Accrued expenses and other liabilities (Note E)     1,026,419     1,063,189
                                                      ___________    ___________

         Total current liabilities                      7,120,754     6,652,477

Long-term debt, less current maturities
   (Notes C and K)                                      1,021,546     1,900,022
Obligations under capital leases (Note D)                  61,912        12,210
Deferred tax liabilities (Note F)                         325,000       229,000
                                                      ___________    ___________
         Total liabilities                              8,529,212     8,793,709

Commitments and contingent liabilities (Notes D, G, H, I and K)

STOCKHOLDERS' EQUITY (Notes A, G, H, I and K)
Preferred stock, 1,000,000 shares authorized,
   none issued or outstanding                                  --            --
Class A common stock, $.01 par value; 30,000,000
   shares authorized, 17,874,966
   and 17,490,818 shares issued at June 30, 2006
   and 2005, respectively                                 178,749       174,908
Class B common stock, $.01 par value; 2,000,000 shares
   authorized, 775,760 and 776,991 issued and
   outstanding at June 30, 2006 and 2005, respectively,
    each convertible into one share of class A common
    stock                                                   7,758         7,770
Additional paid-in capital                             23,718,197    23,377,059
Treasury stock, 199,098 and 181,738 class A common
  shares at cost at June 30, 2006
       and 2005, respectively.                           (191,700)     (155,087)
Accumulated deficit                                   (10,257,229)  (14,302,711)


                                                      ___________    ___________
    Total stockholders' equity                         13,455,775     9,101,939
    Total liabilities and stockholders' equity        $21,984,987   $17,895,648
                                                      ===========   ============


See accompanying notes to consolidated financial statements.
                                                                             F-4
                                    -- 41 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Operations

                                                For the Years Ended June 30,
                                            2006           2005           2004
                                            ____           ____           ____
Revenues: (Note A)
  Patient care, net                      $27,861,701  $26,087,088   $22,418,355
  Pharmaceutical study                     5,799,815    4,509,338     1,246,013
  Contract support services                4,351,576    3,466,832     2,984,477

      Total revenues                      38,013,092   34,063,258    26,648,845
                                         ___________   ___________   ___________
Operating expenses:
  Patient care expenses                   14,269,540   12,905,286    11,577,336
  Patient care expenses, pharmaceutical    2,242,900    1,676,749       845,291
  Cost of contract support services        2,676,340    2,197,518     2,391,660
  Provision for doubtful accounts          1,912,516    1,272,037     1,355,770
  Administrative expenses                 11,210,296    9,667,138     9,695,274
  Administrative expenses, pharmaceutical  2,517,074    2,757,118       637,978
                                         ___________   ___________   ___________

      Total operating expenses            34,828,666   30,475,846    26,503,309
                                         ___________   ___________   ___________
Income from operations                     3,184,426    3,587,412       145,536
                                         ___________   ___________   ___________

Other income (expense):
  Interest income                             68,397       73,176        44,731
  Interest expense                          (606,893)    (654,871)     (531,564)
  Other income, net                           89,449       76,760        95,588
                                         ___________   ___________   ___________
       Total other expense, net             (449,047)    (504,935)     (391,245)
                                         ___________   ___________   ___________
Income (loss) before income taxes          2,735,379    3,082,477      (245,709)
Benefit from (provision for) income
   taxes (Notes A and F)                   1,310,103       73,423       (11,294)
                                         ___________   ___________   ___________
       Net income (loss)                 $ 4,045,482  $ 3,155,900   $  (257,003)
                                         ===========  ===========   ============
Basic net income (loss) per common share
  (Note A)                               $      0.22  $      0.18   $     (0.02)
                                         ===========  ===========   ============
Basic weighted average number of
   shares outstanding (Note A)            18,213,901   17,574,678    14,731,395
                                         ===========  ===========   ============
Fully diluted net income (loss) per
   common share (Note A)                 $      0.21  $      0.17   $     (0.02)
                                         ===========  ===========   ============
Fully diluted weighted average number of
      shares outstanding (Note A)         19,105,193   18,364,076    14,731,395
                                         ===========  ===========   ============


See accompanying notes to consolidated financial statements.
                                                                             F-5

                                    -- 42 --
<PAGE>
PHC, INC. AND SUBSIDIARIES  Consolidated  Statements of Changes In Stockholders'
Equity (Notes A, G, H, I and K)
                                  Class A             Class B        Additional
                                Common Stock        Common Stock      Paid-in
                               Shares    Amount    Shares   Amount    Capital
                            _________   ________   ________  ______   __________

Balance - June 30, 2003     13,437,067  $134,371  $726,991  $7,270  $19,147,604

Costs related to private
  placements                        --        --        --      --      (46,578)
Issuance of shares for
  options exercised             46,165       461        --      --       50,169
Issuance of warrants
  for services                      --        --        --      --       76,664
Shares issued for employee
  bonuses                       11,016       110        --      --       10,279
Issuance of shares for
  warrants exercised           155,000     1,550        --      --       95,050
Issuance of employee stock
   purchase plan shares          8,238        83        --      --        6,383
Purchase of shares from
  former employee                   --        --        --      --           --
Net value of repriced options       --        --        --      --        5,425
Forgiveness of stock purchase
  debt                              --        --        --      --           --
Private placement             2,660,01    26,600        --      --    2,899,414
Shares issued in acquisition   427,350     4,273        --      --      495,727
Conversion of debt into Class
  B common stock                    --        --    50,000     500       51,500
Net loss year ended June
  30, 2004                 ____________________________________________________

Balance - June 30, 2004     16,744,848   167,448   776,991   7,770   22,791,637

Costs related to private
  placements                        --        --        --      --      (30,000)
Issuance of shares for
  options exercised            104,750     1,048        --      --      102,365
Non-cash value of warrant
  issued in connection with
  long term debt                    --        --        --      --      167,185
Non-cash value of shares
  issued for employee
  bonuses                        9,472        95        --      --        9,140
Issuance of shares for
  warrants exercised           626,768     6,267        --      --      302,337
Issuance of employee stock
  purchase plan shares           4,980        50        --      --        7,370
Purchase of shares from former
  employee                          --        --        --      --           --
Value of acceleration of
  certain stock options             --        --        --      --       27,025
Net income year ended June 30,
  2005                              --        --        --      --           --
                            ____________________________________________________

Balance - June 30, 2005     17,490,818   174,908   776,991   7,770   23,377,059

Stock options issued for
  compensation                      --        --        --      --      116,425
Purchase of treasury shares
  from former employee              --        --        --      --           --
Issuance of shares for
  warrants exercised            98,473       984        --      --       51,466
Issuance of shares for
  options exercised            269,827     2,698        --      --       81,379
Common shares issued as
    compensation                 2,000        20        --      --        5,640
Disgorgement                        --        --        --      --          112
Value of acceleration of
  certain stock options             --        --        --      --        9,875
Non-cash value of warrant
  issued in connection with
  an acquisition                    --        --        --      --       56,180
Conversion from Class B to
  Class A                        1,231        12    (1,231)    (12)          --
Issuance of employee stock
   purchase plan shares         12,617       127        --      --       20,061
                            ____________________________________________________
Net income year ended June
  30,2006                           --        --        --      --           --
                            ____________________________________________________

Balance - June 30, 2006     17,874,966  $178,749   775,760  $7,758  $23,718,197
                            ========== =========  ======== =======  ===========

See accompanying notes to consolidated financial statements.

                                    -- 43 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity (Notes A, G, H, I and
K)
<TABLE>
<S>                      <C>           <C>       <C>         <C>            <C>
                                                     Notes
                                  Class A          Receivable
                               Treasury Stock     Common Stock   Accumulated
                              Shares     Amount     Purchase       Deficit      Total
                              ______     ______    _________     __________     _____

Balance - June 30, 2003        97,804  $ (72,380)   (80,000)  $(17,201,608)  $1,935,257

Costs related to private
   placements                      --         --         --             --      (46,578)
Issuance of shares for
  options exercised                --         --         --             --       50,630
Issuance of warrants for
  services                         --         --         --             --       76,664
Shares issued for employee
  bonuses                          --         --         --             --       10,389
Issuance of shares for
  warrants exercised               --         --         --             --       96,600
Issuance of employee stock
   purchase plan shares            --         --         --             --        6,466
Purchase of shares from former
   employee                    70,332    (68,827)        --             --      (68,827)
Net value of repriced options      --         --         --             --        5,425
Forgiveness of stock purchase
  debt                             --         --     80,000             --       80,000
Private placement                  --         --         --             --    2,926,014
Shares issued in acquisition       --         --         --             --      500,000
Conversion of debt into class
  B common stock                   --         --         --             --       52,000
Net loss-year ended June 30, 2004  --         --         --       (257,003)    (257,003)
                               _________________________________________________________

Balance - June 30, 2004       168,136   (141,207)        --    (17,458,611)   5,367,037

Costs related to private
   placements                      --         --         --             --      (30,000)
Issuance of shares for options
   exercised                       --         --         --             --      103,413
Non-cash value of warrant
  issued in connection with
  long term debt                   --         --         --             --      167,185
Non-cash value of shares issued
   for employee bonuses            --         --         --             --        9,235
Issuance of shares for warrants
   exercised                       --         --         --             --      308,604
Issuance of employee stock
   purchase plan shares            --         --         --             --        7,420
Purchase of shares from former
   employee                    13,602    (13,880)        --             --      (13,880)
Value of acceleration of
  certain stock options            --         --         --             --       27,025
Net income-year ended June 30,
  2005                             --         --         --      3,155,900    3,155,900
                               _________________________________________________________
Balance - June 30, 2005       181,738   (155,087)        --    (14,302,711)   9,101,939

Stock options issued as
compensation                       --         --         --             --      116,425
Purchase of treasury shares
  from former employee         17,360    (36,613)        --             --      (36,613)
Issuance of shares for
  warrants exercised               --         --         --             --       52,450
Issuance of shares for
  options exercised                --         --         --             --       84,077
Common shares issued as
    compensation                   --         --         --             --        5,660
Disgorgement                       --         --         --             --          112
Value of acceleration of certain
   stock options                   --         --         --             --        9,875
Non-cash value of warrant issued
   in connection with an
   acquisition                     --         --         --             --       56,180
Conversion from Class B to
  Class A                          --         --         --             --           --
Issuance of employee stock
   purchase plan shares            --         --         --             --       20,188
                               _________________________________________________________
Net income year ended June 30,
   2006                            --         --         --      4,045,482    4,045,482
                               _________________________________________________________


Balance - June 30, 2006       199,098  $(191,700)  $     --   $(10,257,229) $13,455,775
                              =======   =========   =======    ============ ===========

</TABLE>
                                                                             F-6
See accompanying notes to consolidated financial statements.
                                     -- 44 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows

                                               For the Years Ended June 30,
                                            2006          2005          2004
                                        ___________    ___________   __________
Cash flows from operating activities:
  Net income (loss)                      $4,045,482    $3,155,900    $(257,003)
  Adjustments to reconcile net
    income (loss) to net cash
    provided  by (used in) operating
    activities:
      Depreciation and amortization         777,419       511,211      321,835
      Non-cash interest expense              65,583        51,080           --
      Deferred income taxes              (1,638,713)     (303,994)     (34,199)
      Stock based compensation              134,988       105,681       99,498
      Change in allowance for doubtful
        accounts                          1,143,602       (68,904)    (322,557)
      Fair value of warrants issued in
        exchange for services                    --            --       25,356
  Changes in operating assets and
    liabilities:
      Accounts and other receivables     (1,946,547)   (2,183,027)    (408,983)
      Prepaid expenses and other current
        assets                             (343,667)       21,554      (99,001)
      Other assets                         (186,817)      (92,044)    (135,904)
      Accounts payable                      611,046      (754,011)     813,077
      Accrued expenses and other
        liabilities                         471,930       540,020     (126,507)
                                        ___________    ___________   __________
          Net cash provided by
            (used in) operating
             activities                   3,134,306       983,466     (149,744)
                                        ___________    ___________   __________

Cash flows from investing activities:
      Acquisition of property and
        equipment                          (710,638)     (483,462)    (193,185)
      Costs related to business
        acquisition (Note K)                     --       (62,258)  (2,191,697)
                                        ___________    ___________   __________
          Net cash used in investing
             activities                    (710,638)     (545,720)  (2,384,882)
                                        ___________    ___________   __________
Cash flows from financing activities:
      Proceeds from repayment on
        revolving debt, net                (782,261)      671,249      610,819
      Proceeds from borrowings on
        long term debt                       17,551     1,430,154       49,633
       Principal payments on
        long-term debt                     (858,669)   (2,307,709)    (987,832)
       Deferred financing costs             (15,000)     (208,445)       4,000
       Purchase of treasury stock           (36,613)      (13,880)     (68,827)
       Proceeds from issuance of
        common stock, net                   153,799       313,692    3,026,665
                                        ___________    ___________   __________
          Net cash (used in) provided
             by financing activities     (1,521,193)     (114,939)   2,634,458
                                        ___________    ___________   __________

Net increase in cash and cash
  equivalents                               902,475       322,807       99,832
Cash and cash equivalents, beginning
  of year                                   917,630       594,823      494,991
                                        ___________    ___________   __________

Cash and cash equivalents, end of year  $ 1,820,105    $  917,630    $ 594,823
                                        ===========    ===========   ==========

Supplemental cash flow information:
    Cash paid during the period for:
           Interest                     $   606,893    $  652,582    $ 452,454
                                        ===========    ==========    =========
           Income taxes                 $   296,100    $  123,150    $  35,986
                                        ===========    ==========    =========

                                                                            F-7
See accompanying notes to consolidated financial statements.

                                    -- 45 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)


                                               For the Years Ended June 30,
                                            2006          2005          2004
                                        ___________    ___________   __________
  Supplemental disclosures of non-cash
       investing and financing activities:
     Conversion of debt into common
        stock                              $     --    $   14,250    $  52,000
     Issuance of common stock in
        cashless exercise of options            186            --       15,000
     Issuance of common stock in
        cashless exercise of warrants           380         3,229           --
     Pivotal Acquisition Note A earn out
        adjustments recorded (Notes C & K)  (39,746)    1,169,832           --
     Value of warrants issued with debt
        recorded as debt discount                --       167,185           --
     Value of warrants issued in
        connection with the Pivotal
        Acquisition                          56,180            --           --
     Obligations under capital leases       154,069            --           --
                                           ________    __________    __________


See accompanying notes to consolidated financial statements.

                                                                             F-8

                                    -- 46 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

     PHC, Inc. (the "Company") is a national  healthcare  company which operates
subsidiaries  specializing in behavioral health services including the treatment
of substance  abuse,  which  includes  alcohol and drug  dependency  and related
disorders and the provision of psychiatric  services.  The Company also conducts
pharmaceutical  research  studies,  operates help lines for employee  assistance
programs,  call centers for state and local  programs  and provides  management,
administrative  and online  behavioral  health services.  The Company  primarily
operates under four business segments:

     (1)  Behavioral  health treatment  services,  including two substance abuse
          treatment  facilities:  Highland Ridge Hospital,  located in Salt Lake
          City, Utah, which also treats  psychiatric  patients,  and Mount Regis
          Center,  located in Salem,  Virginia,  and eight psychiatric treatment
          locations  which include  Harbor Oaks Hospital,  a 64-bed  psychiatric
          hospital  located  in  New  Baltimore,  Michigan,  Detroit  Behavioral
          Institute, a 50-bed residential facility and six outpatient behavioral
          health  locations  (one  in  New  Baltimore,   Michigan  operating  in
          conjunction  with  Harbor  Oaks  Hospital,  two in Las  Vegas,  Nevada
          operating  as Harmony  Healthcare  and three  locations  operating  as
          Pioneer Counseling Center in the Detroit, Michigan metropolitan area);

     (2)  Pharmaceutical  research study  services,  including four clinic study
          sites:  two in Arizona,  in Peoria and Mesa, one Michigan  location in
          Royal Oak,  Michigan and one in Midvale,  Utah.  These  research sites
          conduct  studies of the  effects  of  specified  pharmaceuticals  on a
          controlled  population  through contracts with major  manufacturers of
          the  pharmaceuticals.  All of the Company's  research sites operate as
          Pivotal Research;

     (3)  Call center and help line services (contract services),  including two
          call  centers,  one  operating  in  Midvale,  Utah and one in Detroit,
          Michigan.  The Company provides help line services  through  contracts
          with major  railroads  and a call center  contract  with Wayne  County
          Michigan.   The  call  centers  both  operate  under  the  brand  name
          Wellplace; and

     (4)  Behavioral  health  administrative  services,  including  delivery  of
          management and administrative and online services.  The parent company
          provides  management  and  administrative  services  for  all  of  its
          subsidiaries  and online services for its behavioral  health treatment
          subsidiaries  and its  call  center  subsidiaries.  It  also  provides
          behavioral health information through its website, Wellplace.com.

 Principles of consolidation:

     The consolidated  financial  statements include the accounts of the Company
and its wholly  owned  subsidiaries.  All  material  intercompany  accounts  and
transactions have been eliminated in consolidation.

Revenues and accounts receivable:

     Patient care revenues and accounts  receivable  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 contractual  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

                                                                             F-9

                                    -- 47 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Revenues and accounts receivable (continued):

period the  related  services  are  rendered.  Differences  between  the amounts
provided and  subsequent  settlements  are recorded in operations in the year of
settlement.  The provision for contractual  allowances is deducted directly from
revenue and the net revenue  amount is  recorded  as  accounts  receivable.  The
allowance for doubtful accounts does not include the contractual allowances.

     Medicaid  reimbursements  are based on established  rates  depending on the
level of care  provided and are  adjusted  prospectively.  Effective  for fiscal
years beginning  after January 1, 2005, the  prospective  payment system ("PPS")
was brought into effect for all  Psychiatric  services paid through the Medicare
program.  The  new  system  changed  the  TEFRA-based  (Tax  Equity  and  Fiscal
Responsibility  Act of 1982) system to the new variable per  diem-based  system.
The new rates are based on a  statistical  model that relates per diem  resource
use for  beneficiaries  to patient and facility  characteristics  available from
"Center for Medicare and Medicaid Services, ("CMS's"),  administrative data base
(cost reports and claims data).  Patient-specific  characteristics  include, but
are not limited to, principal diagnoses,  comorbid conditions, and age. Facility
specific variables include an area wage index, rural setting,  and the extent of
teaching activity. This change is being phased in over three fiscal years with a
percentage  of payments  being made at the old rates and a percentage at the new
rates,  75/25,  50/50, and 25/75,  respectively.

     For the fiscal year ended June 30, 2006, Medicare reimbursements rates were
based 75% on provisional rates that are adjusted  retroactively  based on annual
cost reports filed by the Company with  Medicare and 25% on the new  prospective
payment  rates.  The Company  will  continue to file cost reports to Medicare to
determine the new TEFRA portion of the rate for the following  year.  These cost
reports  are  routinely  audited on an annual  basis.  Activity  and cost report
expense differences are reviewed on an interim basis and adjustments are made to
the net expected  collectable  revenue  accordingly.  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.  Approximately  46%, 21%
and 23% of the  Company's  total  revenue is derived from  Medicare and Medicaid
payors  for the  years  ended  June  30,  2006,  2005  and  2004,  respectively.
Differences between the amounts provided and subsequent settlements are recorded
in operations in the year of the  settlement.  The Company is unable to estimate
any future  adjustment at this time but past  adjustments have not been material
to the financial statement.

     Patient care revenue is recognized as services are rendered, provided there
exists persuasive  evidence of an arrangement,  the fee is fixed or determinable
and  collectability  of  the  related  receivable  is  reasonably  assured.  Pre
-admission  screening of  financial  responsibility  of the  patient,  insurance
carrier or other  contractually  obligated  payor,  provides the Company the net
expected  collectable  patient  revenue  to be  recorded  based  on  contractual
arrangements  with  the  payor or  pre-admission  agreements  with the  patient.
Revenue is not  recognized  for  emergency  provision  of services  for indigent
patients until  authorization  for the services can be obtained.  As of June 30,
2006,  the Company has no  outstanding  balance in other  receivables,  due as a
result of cost report settlements.

     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study criteria and billable  units of service are provided.  Each study
calls for a  participant  to  complete a  specific  number of visits in order to
validate the study.  While some studies require all visits to be complete before
any services can be billed,  most studies will allow billing for each visit once
the  participant is randomized,  or identified as a meeting all study  criteria,


                                                                            F-10

                                    -- 48 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Revenues and accounts receivable (continued):

even if the participant does not complete the study.  Where a contract  requires
completion  of the study by the  patient,  no  revenue is  recognized  until the
patient   completes  the  study  program.   Advance  payment   provided  by  the
pharmaceutical companies is recorded as deferred revenue until study receivables
are produced based on the above  criteria.  The Company  expects to complete the
studies related to the deferred revenue within the next fiscal year.

     Contract  support  service  revenue is a result of fixed fee  contracts  to
provide telephone support. Revenue for these services is recognized ratably over
the service period.

     Long-term assets include accounts receivable non-current, other receivables
and other assets. Accounts receivable,  non-current consists of amounts due from
former  patients  for  service.   This  amount   represents   estimated  amounts
collectable under supplemental  payment  agreements,  arranged by the Company or
its collection agencies,  entered into because of the patients' inability to pay
under normal payment terms.  All of these  receivables have been extended beyond
their original due date.  Reserves are provided for accounts of former  patients
that do not comply with these  supplemental  payment agreements and accounts are
written off when deemed  unrecoverable.  Other receivables included as long-term
assets  include  the  non-current  portion of loans  provided to  employees  and
amounts due on a contractual agreement.

     Charity care amounted to approximately $150,511,  $242,385 and $147,096 for
the years ended June 30, 2006, 2005 and 2004, respectively. Patient care revenue
is presented net of charity care in the accompanying  consolidated statements of
operations.

     The  Company  had  accounts   receivable  from  Medicaid  and  Medicare  of
approximately $1,786,000 at June 30, 2006 and $1,257,000 at June 30, 2005.

Estimates and assumptions:

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  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.  Such estimates include patient care billing rates,  realizability of
receivables  from  third-party  payors,  rates for Medicare and Medicaid and the
realization  of deferred tax  benefits  represent a  significant  portion of the
estimates made by management.

Reliance on key clients:

     The  Company  relies on  contracts  with more than ten  clients to maintain
patient census at its inpatient facilities and the loss of any of such contracts
would  impact the  Company's  ability to meet its fixed  costs.  The Company has
entered into  relationships  with large employers,  health care institutions and
labor unions to provide treatment for psychiatric disorders, chemical dependency
and substance abuse in conjunction with  employer-sponsored  employee assistance
programs.  The employees of such institutions may be referred to the Company for
treatment,  the cost of which is  reimbursed  on a per diem or per capita basis.
Approximately  30% of the Company's  total revenue is derived from these clients
for  all  periods  presented.  No one of  these  large  employers,  health  care
institutions  or  labor  unions  individually  accounts  for  10% or more of the
Company's  consolidated  revenues,  but the loss of any of these  clients  would
require the Company to expend  considerable  effort to replace patient referrals
and would result in revenue and attendant losses.

                                                                            F-11
                                    -- 49 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Cash equivalents:

     Cash  equivalents   include   short-term  highly  liquid  investments  with
maturities of less than three months when purchased.

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
        Assets                       Useful Life
        ______                       ___________
    Buildings                         39 years
    Furniture and equipment           3 through 10 years
    Motor vehicles                    5 years
    Leasehold improvements            Lesser of useful life or term of lease
                                        (2 to 10 years)

Other assets:

     Other assets consists of deposits,  deferred  expenses,  licensure fees and
advances.

Long-lived assets:

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144,  "Accounting  for the  Impairment  or Disposal of Long-Lived  Assets",  the
Company  reviews  the  carrying  values of its  long-lived  assets for  possible
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amounts of the assets may not be  recoverable.  Any long-lived  assets
held for disposal are  reported at the lower of their  carrying  amounts or fair
value less costs to sell.  The Company  believes that the carrying  value of its
long-lived assets is fully realizable at June 30, 2006.

Goodwill and other intangible assets:

     Goodwill and other intangible  assets are initially  created as a result of
business  combinations  or  acquisitions.  The values the  Company  records  for
goodwill and other intangible assets represent fair values determined by Company
analysis.  Such valuations require the Company to make significant estimates and
assumptions  which are derived from information  obtained from the management of
the  acquired  businesses  and the  Company's  business  plans for the  acquired
businesses.  Critical estimates and assumptions used in the initial valuation of
goodwill and other intangible assets include, but are not limited to: (i) future
expected  cash  flows from  services  to be  provided,  customer  contracts  and
relationships,  and (ii) the  acquired  market  position.  These  estimates  and
assumptions  may be incomplete or inaccurate  because  unanticipated  events and
circumstances  may occur. If estimates and  assumptions  used to initially value
goodwill and intangible  assets prove to be inaccurate,  ongoing  reviews of the
carrying values of such goodwill and intangible  assets may indicate  impairment
which will require the Company to record an  impairment  charge in the period in
which the Company identifies the impairment.


                                                                            F-12

                                    -- 50 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Goodwill and other intangible assets (continued):

     Customer  relationships,  acquired as a part of the assets  acquired in the
membership interest purchase of Pivotal Research Centers, LLC, (Note K) are used
to acquire new studies on an ongoing basis. Since there is no true "consumption"
of the relationship that can be defined the asset is being amortized,  using the
straight-line   method,   over  an  estimated   useful  life  of  twenty  years.
Amortization  expense of  intangible  assets,  which  amounted to  $120,000  and
$20,000 for the fiscal years ended June 30, 2006,  2005, and 2004  respectively,
is  included  in  administrative  expenses  in  the  accompanying   consolidated
statement of  operations.  The  following is a summary of expected  amortization
expense of intangible  assets for the succeeding  fiscal years and thereafter as
of June 30, 2006:

                      Year Ending
                      June 30,              Amount
                      ___________           ______

                       2007               $  120,000
                       2008                  120,000
                       2009                  120,000
                       2010                  120,000
                       2011                  120,000
                       thereafter          1,540,000
                                           _________
                                          $2,140,000
Goodwill:

     SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other
things,  that companies no longer amortize  goodwill,  but instead test goodwill
for  impairment  at least  annually.  In addition,  SFAS 142  required  that the
Company identify  reporting units for the purpose of assessing  potential future
impairments of goodwill,  reassess the useful lives of other existing recognized
intangible   assets,  and  cease  amortization  of  intangible  assets  with  an
indefinite useful life.

     The  Company's  goodwill of $969,099  relating  to the  treatment  services
reporting  unit of the  Company and  $1,695,544  related to the  research  study
services  reporting unit of the Company were evaluated  under SFAS No. 142 as of
June 30, 2006. As a result of the  evaluation,  the Company  determined  that no
impairment  exists. The Company will continue to test goodwill for impairment at
least annually in accordance with the guidelines of SFAS No. 142.

Fair value of financial instruments:

     The carrying  amounts of cash,  trade  receivables,  other current  assets,
accounts payable, notes payable, accrued expenses and long term dabt approximate
fair value based on their  short-term  maturity and prevailing  market  variable
interest rates.

Basic and diluted income (loss) per share:

     Income  (loss) per share is computed by dividing the income  applicable  to
common shareholders,  net of dividends charged directly to retained earnings, by
the  weighted  average  number of shares of common  stock  outstanding  for each


                                                                            F-13
                                    -- 51 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Basic and diluted income (loss) per share: (Continued)

fiscal year.  All dilutive  common stock  equivalents  have been included in the
calculation  of diluted  earnings  per share for the fiscal years ended June 30,
2006 and 2005. Any increase in number of shares of common stock  equivalents for
the year ended June 30, 2004 would be  anti-dilutive  based on the loss for that
year and therefore not included.

     The  weighted  average  number of  common  shares  outstanding  used in the
computation of earnings per share is summarized as follows:

                                                   Years Ended June 30,
                                             2006          2005         2004
                                             ____          ____         ____
     Weighted average shares
       outstanding - basic                18,213,901    17,574,678   14,731,395

     Employee stock options                  510,731       530,896           --
     Warrants                                380,561       258,502           --
                                          __________    __________   ___________
     Weighted  average  shares
       outstanding  - fully
       diluted                            19,105,193    18,364,076   14,731,395
                                          ==========    ==========   ==========

     The following table summarizes securities  outstanding as of June 30, 2006,
2005 and 2004,  but not included in the  calculation of diluted net earnings per
share because such shares are antidilutive:

                                                    Years Ended June 30,
                                             2006          2005         2004
                                             ____          ____         ____

     Employee stock options                  253,500        32,500      945,000
     Warrants                                     --       471,360    1,415,357
     Convertible debentures                       --            --     125,000
                                          __________    __________   ___________
          Total                              253,500       503,860    2,485,357
                                          ==========    ==========   ==========
Income taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax bases of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against  deferred tax assets.  The Company  considers  estimated  future taxable
income or loss and other  available  evidence  when  assessing  the need for its
deferred tax valuation  allowance.  As a result of this assesment, during fiscal
2006,  the  Company, eliminated  100%  of the  Federal  deferred  tax  valuation
allowance.

                                                                            F-14
                                    -- 52 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Comprehensive income (loss):

     SFAS No. 130,  "Reporting  Comprehensive  Income",  requires  companies  to
classify items of other  comprehensive  income (loss) in a financial  statement.
Comprehensive  income  (loss) is  defined  as the change in equity of a business
enterprise  during a period from transactions and other events and circumstances
from non-owner sources.  The Company's  comprehensive net income (loss) is equal
to its net income (loss) for all periods presented.

Stock-based compensation:

     The  Company  issues  stock  options to its  employees  and  directors  and
provides employees the right to purchase stock pursuant to stockholder  approved
stock  option and stock  purchase  plans.  Effective  July 1, 2005,  the Company
adopted the  provisions of SFAS No. 123 (revised  2004),  "Share-Based  Payment"
(SFAS No. 123R), using the Statement's modified prospective  application method.
Prior to July 1, 2005, the Company followed Accounting  Principles Board ("APB")
Opinion  25,   "Accounting   for  Stock  Issued  to   Employees,"   and  related
interpretations in accounting for its stock compensation.

     Under the  provisions  of SFAS No. 123R,  the Company  recognizes  the fair
value of stock compensation in net income,  over the requisite service period of
the individual  grantees,  which generally equals the vesting period. All of the
Company's stock  compensation  is accounted for as equity  instruments and there
have been no liability awards granted.

     At June 30, 2005,  the Company  accelerated  the vesting on all  previously
granted options.  Therefore, as of the date of adoption there is no unrecognized
expense of these  options  and the  expense  recorded in the year ended June 30,
2006 is for options  issued and vested  during  that  period.  The  unrecognized
expense of awards not yet vested will be recognized in net income in the periods
in which they vest.  Under the  provisions  of SFAS 123R,  the Company  recorded
$126,300 of stock-based compensation on its consolidated statement of operations
for the year ended June 30, 2006, which is included in  administrative  expenses
as follows:

                                              Year ended June 30,
                                                      2006

              Directors fees                   $    21,000
              Employee compensation                105,300
                                               ___________
                   Total                       $   126,300
                                               ===========

     The Company utilized the  Black-Scholes  valuation model for estimating the
fair value of the stock  compensation  granted  after the adoption of SFAS 123R.
The  weighted-average  fair values of the options granted under the stock option
plans was $2.42, $.63 and $.46 for the years ended June 30, 2006, 2005 and 2004,
respectively, using the following assumptions:

                                                                            F-15
                                    -- 53 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Stock-based compensation: (continued)

                                                   June 30,
                                           2006         2005         2004
                                          _____________________________________

  Risk free interest rate                  4.45%        4.00%        4.00%
  Expected dividend yield                    --           --            --
  Expected lives                           5-10 years   5-10 years   5-10 years
  Expected volatility                      47.27%       45%          30%
  Weighted average value of grants
    per share                             $2.42        $.63         $ .46
  Weighted average remaining contractual
    life of options outstanding (years)    3.65         3.70         4.05

     The dividend  yield of zero is based on the fact that the Company has never
paid cash dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical  volatility of the Company's  common stock
over  the  period  commensurate  with  the  expected  life of the  options.  The
risk-free  interest  rate is the U.S.  Treasury  rate on the date of grant.  The
expected life was calculated using the Company's  historical  experience for the
expected term of the option.

     Based on the Company's  historical voluntary turnover rates for individuals
in the  positions  who received  options in the period,  there was no forfeiture
rate assessed.  It is assumed these options will remain outstanding for the full
term of issue.  Under the true-up  provisions  of SFAS 123R, a recovery of prior
expense will be recorded if the actual forfeiture is higher than estimated.

     SFAS  123R  requires  the  presentation  of pro forma  information  for the
comparative  period  prior to the adoption as if all of the  Company's  employee
stock options had been accounted for under the fair value method of the original
SFAS 123. The following table  illustrates the effect on net income and earnings
per share if the Company had applied the fair value  recognition  provisions  of
SFAS 123 to stock-based employee compensation to the prior-year period.

     For the years  ended June 30, 2005 and 2004 in the  accompanying  financial
statements,  the Company  accounted  for its employee  stock-based  compensation
arrangements  using the  intrinsic  value  method  under the  provisions  of APB
Opinion No. 25, "Accounting for Stock Issued to Employees",  and FIN No. 44. The
Company  had  elected to use the  disclosure-only  provisions  of SFAS No.  123,
"Accounting for  Stock-Based  Compensation";  and SFAS No. 148,  "Accounting for
Stock-Based  Compensation-Transition  and Disclosure." Had compensation  expense
for stock option  grants to employees  been  determined  based on the fair value
method at the grant dates for awards  under the stock  option  plans  consistent
with the method  prescribed by SFAS No. 123, the Company's net income (loss) and
net income (loss) per share would have  decreased  (increased)  to the pro forma
amounts indicated as follows:

                                                                            F-16
                                    -- 54 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

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

Stock-based compensation: (continued)
                                                        Year Ended June 30,
                                                     2005              2004
                                                 ______________________________

  Net income (loss), as reported                 $ 3,155,900        $ (257,003)
  Add:  Stock-based employee compensation
     expense included in reported net income
     (loss), net of related tax effects              105,681            74,142
  Deduct: Total stock-based employee compensation
     expense determined under fair value based
     method for all awards, net of related taxes    (298,084)         (134,630)
                                                 ____________      ____________
  Pro forma net income (loss)                     $2,963,497        $ (317,491)
                                                 ============      ============
  Earnings (loss) per share:
               Basic - as reported               $      0.18        $    (0.02)
                                                 ============      ============
               Basic - pro forma                 $      0.17        $    (0.02)
                                                 ============      ============
               Diluted - as reported             $      0.17        $    (0.02)
                                                 ============      ============
               Diluted - pro forma               $      0.16        $    (0.02)
                                                 ============      ============
Reclassifications:

     Certain  June 30,  2005 and  2004  amounts  have  been  reclassified  to be
consistent with the June 30, 2006 presentation.

Recent accounting pronouncements:

     In February 2006, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140," to permit fair value re-measurement for any
hybrid financial  instrument that contains an embedded derivative that otherwise
would require  bifurcation  in accordance  with the  provisions of SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities.".  The company
does not expect the  adoption  of SFAS No. 155 to have a material  affect on the
company's Consolidated Financial Statements.

     In June 2006, the Financial  Accounting  Standards Board (FASB) issued FASB
Interpretation  No.  48,  "Accounting  for  Uncertainty  in  Income  Taxes",  an
interpretation  of  FASB  Statement  No.  109,  (FIN  48),  which  prescribes  a
recognition  threshold and  measurement  attribute  for the financial  statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  FIN 48 also provides  guidance on  de-recognition,  classification,
interest  and  penalties,   accounting  in  interim   periods,   disclosure  and
transition.  FIN 48 is effective for fiscal years  beginning  after December 15,
2006.  We do not expect the adoption of FIN 48 to have a material  impact on our
financial  reporting,  and we are currently  evaluating the impact,  if any, the
adoption of FIN 48 will have on our disclosure requirements.

                                                                            F-17
                                    -- 55 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:

                                                     As of June 30,
                                               2006                2005
                                           ___________________________________

Land                                        $   69,259          $   69,259
Buildings                                    1,136,963           1,136,963
Furniture and equipment                      2,048,006           1,610,327
Motor vehicles                                 174,302             174,302
Leasehold improvements                       1,224,624             816,197
                                            __________         ___________
                                             4,653,154           3,807,048
Less accumulated depreciation and
  amortization                               2,853,266           2,290,934
                                            __________         ___________
Property and equipment, net                 $1,799,888          $1,516,114
                                            ===========        ===========


NOTE C - NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                         As of June 30,
                                                        2006           2005
                                                      ________________________
Pivotal acquisition note (Note A) due in 16
  quarterly principal installments, plus interest
  at 6% per annum, beginning  January 2005. The
  principal on this $1,000,000 note was increased
  by $40,000 on January 1, 2005 for accrued
  interest through December 31, 2004 and is
  subject to two annual adjustments based on
  earnings. The first earn out adjustment of
  $169,832 was added to the note on February 1,
  2005. Current quarterly payments are $76,322
  plus accumulated interest at 6% per annum.           $728,218     $1,068,510
Term mortgage note payable with monthly principal
  installments  of $25,000  beginning November
  2004 through October 2005 and increasing
  annually by $12,500 through October 1, 2007
  at which time the remaining balance becomes
  due.  The note bears interest at prime (6.25%
  at June 30, 2006) plus 3.5% and is
  collateralized by all of the assets of the
  Company and its material subsidiaries  except
  Pivotal Research Centers, Inc.                        662,840      1,019,612
9% mortgage note due in monthly installments of
   $4,850 including interest through July 1, 2012,
   when the remaining principal balance is payable,
   collateralized by a first mortgage on the PHC
   of Virginia, Inc, Mount Regis Center facility.       302,273        331,808
Note  payable in conjunction with the earn out of the
   Pivotal  Research Centers,  LLC  acquisition.
   Minimum  payment amount  $200,000 in class A
   common stock due March 2009 interest imputed at
   6%. (Note K)                                         169,648        159,793
Note payable due in monthly installments of $578
   including interest at 5.9% through May 2010.          23,746         29,108
Note payable due in monthly  installments  of $555
   including interest at 3.9% through March 2010.        23,180         28,811


                                                                           F-18

                                    -- 56 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

Long-term debt is summarized as follows: (continued)
                                                           As of June 30,
                                                        2006           2005
                                                        ____________________
Note payable due in monthly  installments
   of $775 including  interest at 3.9%
   through October 2008.                                20,698         28,998
Note payable due in monthly installments
   of $665 including interest at 10.8 %
   through November 2005.                                   --          2,981
                                                      _________     __________
                  Total                               1,930,603     2,669,621
Less current maturities                                 909,057       769,599
                                                      _________     __________
Long-term portion                                   $ 1,021,546    $ 1,900,022
                                                    ===========    ===========

Maturities of long-term debt are as follows as of June 30, 2006:

                 Year Ending
                 June 30,                     Amount
                 ________________          _________
                 2007                      $ 909,057
                 2008                        450,853
                 2009                        194,528
                 2010                         52,816
                 2011                        215,893
                 Thereafter                  107,456
                                          __________
                                          $1,930,603

     In October 2004,  the Company  refinanced  its revolving  credit note under
which a maximum of $3,500,000 may be  outstanding  at any time. The  outstanding
balance on this note was  $1,603,368  and  $2,385,629 at June 30, 2006 and 2005,
respectively.   Advances  are  available  based  on  a  percentage  of  accounts
receivable  and the payment of  principal is payable upon receipt of proceeds of
the accounts receivable. Interest is payable monthly at prime (6.25% at June 30,
2006) plus 2.25%,  but not less than 6.75%. The initial term of the agreement is
for three years,  renewable for two additional one year terms. In November 2005,
by mutual  agreement,  the Company and the lender extended the Agreement through
October 2008. Upon expiration, all remaining principal and interest are due. The
revolving credit note is  collateralized  by substantially  all of the assets of
the Company's  subsidiaries except Pivotal Research Centers, Inc. and guaranteed
by PHC.

     As of  June  30,  2006,  the  Company  was in  compliance  with  all of its
financial  covenants  under the  revolving  line of credit  note.


NOTE D - CAPITAL LEASE OBLIGATION

     At June 30, 2006,  the Company was obligated  under various  capital leases
for equipment  providing for aggregate monthly payments of approximately  $4,600
and terms expiring from June, 2008 through June 2011.

                                                                            F-19
                                    -- 57 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

     The carrying value of assets under capital leases included in property and
equipment is as follows:
                                                          June 30,
                                                    2006           2005
                                                ____________________________

         Equipment and improvements              $ 287,099       $ 131,989
         Less accumulated amortization            (168,869)        (95,446)
                                                 __________     __________
                                                 $ 118,230       $  36,543
                                                 ==========     ==========

Future minimum lease  payments  under the terms of the capital lease  agreements
are as follows at June 30, 2006:

           Year Ending June 30,
           2007                                             $65,546
           2008                                              58,157
           2009                                               4,572
           2010                                               4,572
           2011                                               2,666
                                                            _______
           Future minimum lease payments                    135,513
           Less amount representing interest                 15,720

           Total future principle payments                  119,793
           Less current portion                              57,881
                                                            _______
           Long-term obligations under capital leases       $61,912
                                                            =======

     In addition to the above capital lease  obligations,  on April 20, 2006, in
conjunction with the agreement the Company entered into with Medical Information
Technologies,  Inc., ("Meditech"),  as disclosed in the Company's report on form
8-K filed with the  Securities  and Exchange  Commission on April 26, 2006,  the
Company  signed a Master  Lease  Agreement  with Bank of America to finance  the
acquisition  of the software and the  required  hardware  which will provide the
Company with enhanced billing, collection and clinical reporting capabilities.

     Future  minimum lease  payments under the terms of this master lease are as
follows at June 30, 2006:

    Year Ending June 30,
    2007                                                      $134,125
    2008                                                       191,206
    2009                                                       191,206
    2010                                                       118,425
    2011                                                       118,425
    Thereafter                                                  29,606
                                                             _________
    Future minimum lease payments                              782,993
    Less amount representing interest                          120,561
                                                             _________
    Total future principle payments on the
      master lease                                             662,432
    Less current portion                                        87,861
                                                             _________
    Long-term principle obligation under the master lease     $574,571
                                                             =========

     As of June 30, 2006 no funds had been advanced on these leases.  During the
first quarter of fiscal 2007,  the Company has now been  advanced  funds for the
purchase  of  hardware  and has begun  making  payments  according  to the above
schedule.  The  expected  date of  completion  of the hardware  installation  is
November 1, 2006 and the software is April 1, 2007.

                                                                            F-20

                                    -- 58 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE E - ACCRUED EXPENSES AND OTHER LIABILITIES

     Accrued expenses and other liabilities consist of the following:

                                                             June 30
                                                     2006             2005
                                                  ___________________________

    Accrued professional fees                    $  249,260       $  767,592
    Accrued operating expenses                      522,063          284,181
    Income tax payable                              255,096           11,416
                                                  _________       __________

                               Total             $1,026,419       $1,063,189
                                                 ===========      ==========

NOTE F - INCOME TAXES

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

                                                       Years Ended June 30,
                                                        2006           2005
                                                  ___________________________
    Deferred tax asset:
      Allowance for doubtful accounts               $ 1,179,000    $  744,000
      Depreciation                                      261,000       120,000
      Reserves not currently deductible and other            --            --
      Difference between book and tax bases of
        intangible assets                                 8,000         9,000
      Operating loss carryforward                     1,837,000      3,094,00
                                                    ___________    ___________
            Gross deferred tax asset                  3,285,000     3,967,000
                                                    ___________    ___________
      Less:
        Valuation allowance                            (175,000)   (2,291,200)
                                                    ___________    ___________
      Deferred tax asset                              3,110,000     1,375,800
                                                    ___________    ____________
          Current portion                            (3,110,000)   (1,375,800)
                                                    ___________    ___________
            Long-term portion                       $        --    $       --
                                                    ===========    ===========
       Deferred tax liability:
         Difference between book and tax bases
           of intangible assets                     $  (325,000)   $ (229,000)
                                                    ___________    ___________
       Net deferred tax liability                   $  (325,000)   $ (229,000)
                                                    ===========    ===========

                                                                            F-21

                                    -- 59 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

     NOTE F - INCOME TAXES (CONTINUED)

     The  components of the income tax  provision  (benefit) for the years ended
June 30, 2006, 2005, and 2004 are as follows:

                                             2006        2005            2004
                                           ___________________________________
      Current
         Federal                        $   78,399      $     --     $      --
         State                             250,211       230,571        45,493
                                           328,610       230,571        45,493
                                           _______     _________     _________
       Deferred
         Federal                        $(1,467,302)    (235,595)           --
         State                            (171,411      (68,399)      (34,199)
                                        __________     _________     _________
                                        (1,638,713)     (303,994)      (34,199)

       Income tax provision (benefit)   $1.310,103      $(73,423)    $  11,294
                                        __________     _________     _________

     A reconciliation of the federal  statutory rate to the Company's  effective
tax rate for the years ended June 30, 2006, 2005 and 2004 is as follows:

                                             2006         2005         2004
                                           ___________________________________
       Income tax provision at federal
         statutory rate                      34.0%        34.0%        34.0%
       Increase (decrease) in tax
         resulting from:
       State tax provision, net of
              federal benefit                 4.7%         4.5%         4.5%
            Non-deductible expenses           1.7%         1.0%         1.0%
            Other, net                         --          1.5%        (5.0%)
            Valuation allowance             (88.3%)      (43.0%)      (34.0%)
                                           ________      _______      _______
       Effective income tax rate            (49.9%)       (2.0%)        1.0%
                                           =========     =======      =======

     At June 30, 2006, the Company had a federal net operating loss carryforward
amounting to approximately $4,548,000.  The Company's Federal net operating loss
carryforwards  are subject to review and  possible  adjustment  by the  Internal
Revenue  Service  and  are  subject  to  certain  limitations  in the  event  of
cumulative changes in the ownership interest of significant  stockholders over a
three-year period in excess of 50%. The Federal  carryforward  expires beginning
in 2011 through 2024. The Company has provided a valuation allowance  ($175,000)
against  its state net  operating  loss  carryforwards  ($4,375,000)  due to the
uncertainty  of the  utilization  of these  net  operating  loss  carryforwards.
Realization  is  dependent  on  generating  sufficient  taxable  income prior to
expiration  of the loss  carryforwards.  Although  realization  is not  assured,
management  believes  it is more likely  than not that all of the  deferred  tax
asset  will be  realized.  The  amount  of the  deferred  tax  asset  considered
realizable,  however,  could be reduced in the near term if  estimates of future
taxable  income  during the  carryforward  period  are  reduced.  The  valuation
allowance changed by ($2,416,200),  ($2,076,994) and 608,801 for the years ended
June 30, 2006, 2005 and 2004 respec6tively.

     In the past,  the Company has provided a  significant  valuation  allowance
against  its  deferred  tax asset based on the  projections  for the next fiscal
year. During the fiscal year ended June 30, 2006, the Company recognized 100% of
the tax benefit  associated  with the federal loss carry  forwards  based on the
Company's future projections.

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

     The Company leases office and treatment facilities, furniture and equipment
under operating  leases  expiring on various dates through  September 2011. Rent
expense  for the years  ended  June 30,  2006,  2005 and 2004 was  approximately
$1,695,000,  $1,484,000  and  $1,035,000,  respectively.  Rent expense  includes
certain short-term rentals.  Minimum future rental payments under non-cancelable
operating  leases,  having  remaining terms in excess of one year as of June 30,
2006 are as follows:

                                                                            F-22

                                    -- 60 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

 NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)


                          Year Ending
                            June 30,               Amount

                          2007                 $ 1,524,688
                          2008                   1,519,616
                          2009                   1,495,551
                          2010                   1,198,459
                          2011                     486,249
                          Thereafter               144,291
                                              ____________
                                               $ 6,368,854

     In  addition  to the above  leases,  during the fiscal  year ended June 30,
2006,  the  Company  entered  into a lease  agreement  to lease the Seven  Hills
Hospital property,  a 60-bed psychiatric  hospital located in Las Vegas, Nevada,
with initial rent payments of $68,351 per month beginning upon completion of the
building  estimated to be in the quarter  ending March 31, 2007.  In addition to
the 10-year lease on the property,  the Company also has an option to purchase a
50% membership interest in the property.

Contingent Notes Payable:

     In conjunction with the acquisition of Pivotal Research Centers,  LLC (Note
K), the Company signed three notes with face amounts of $1,000,000, $500,000 and
$1,000,000. The ultimate amount payable under these notes is based on the future
earnings of the acquired entity. Since all but $200,000 was contingent on future
earnings,  only $200,000 less imputed interest was recorded as a liability as of
June 30, 2004 as stipulated in SFAS No. 141. In December 2004 the first earn-out
period ended and  resulted in the  recording of  $1,209,832  as a liability.  On
April 1,  2006 the  second  earn-out  adjustment  was  made to this  note.  This
adjustment  resulted in the  reduction  of the  liability of $39,746 as earn-out
targets  were  not met for the  calendar  year  ended  December  31,  2005.  The
earn-outs  are recorded as a change in the purchase  price and effect  goodwill.
(See Note K for discussion of the terms of these notes.)

Litigation:

     The Company is a party in two separate  actions  between a former  employee
who was  terminated and filed a claim for wrongful  termination  and a breach of
contract on an indemnification  claim against the same terminated employee where
the company is the plaintiff.  Both matters are being resolved  through  binding
arbitration  and  awards in either  case will  offset.  The  outcome  of the two
actions  together  cannot be determined at this time,  but  management  does not
expect the outcome to have a material  adverse effect on the financial  position
or results of operations of the Company.

     The Company is subject to various claims and legal action that arise in the
ordinary  course of business.  In the opinion of management,  the Company is not
currently a party to any proceeding that would have a material adverse affect on
its financial condition or results of operations.

Other:

     On December  20, 2004,  Harbor Oaks  Hospital  experienced  a loss due to a
flood at the facility.  The physical  damage has been repaired and the claim for
that  damage  has been paid.  The  Company  subsequently  filed a claim for lost
business income as allowed by the insurance policy. The outcome of this claim is
not estimable at this time.

                                                                            F-23

                                    -- 61 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE H - STOCK AND STOCK PLANS

Common Stock

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

Class A Common Stock

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

     The Class A common stock is non-redeemable and  non-convertible  and has no
pre-emptive rights.

Class B Common Stock

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

     The Class B common stock is non-redeemable and has no pre-emptive rights.

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

     All of the  outstanding  shares of Class B common  stock are fully paid and
nonassessable.

Preferred  Stock

     The  Board of  Directors  is  authorized,  without  further  action  of the
shareholders,  to issue up to 1,000,000  shares in one or more classes or series
and to determine,  with respect to any series so established,  the  preferences,
voting powers,  qualifications and special or relative rights of the established
class or  series,  which  rights  may be in  preference  to the rights of common
stock.  No shares of the  Company's  preferred  stock  are  currently  issued or
outstanding.

Stock Plans

     The Company has three active stock plans:  a stock option plan, an employee
stock purchase plan and a non-employee  directors'  stock option plan, and three
expired  plans,  the 1993  Employee and  Directors  Stock Option plan,  the 1995
Non-employee  Directors'  stock option plan and the 1995 Employee Stock Purchase
Plan.

                                                                            F-24

                                    -- 62 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

     The stock  option plan dated  December  2003 and  expiring  December  2013,
provides  for the  issuance of a maximum of  1,300,000  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 of the Board of Directors
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.  As of
June 30, 2006, 703,750 options were granted under this 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.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan period to encourage  stock ownership by all eligible
employees.  The plan was amended on December  19, 2001 and  December 19, 2002 to
allow for a total of 500,000  shares of Class A Common  Stock to be issued under
the plan. On January 31, 2006 the stockholders  approved a replacement  Employee
Stock  Purchase Plan to replace the 1995 plan which expired on October 18, 2005.
A maximum of 500,000  shares may be issued  under the January  2006 plan.  As of
June 30,  2006,  no shares hae been  issued  under  this  plan.  The new plan is
identical to the old plan and expires on January 31, 2016.  As of June 30, 2006,
a total of 157,034  shares of Class A Common  Stock have been  issued  under the
1995 plan.  Fourteen  employees are participating in the current offering period
under the new plan,  which began on February 1, 2006 and will end on January 31,
2007.

     The  non-employee  directors'  stock option plan  provides for the grant of
nonstatutory  stock options  automatically at the time of each annual meeting of
the Board.  Through June 30, 2006, options for 145,500 shares were granted under
the 1995 plan.  This plan  expired in August  2005 and,  in  January  2005,  the
shareholders voted to approve a new non-employee  directors' stock plan. The new
plan is  identical  to the plan it  replaced.  Under the new plan a  maximum  of
350,000  shares may be issued.  As of June 30, 2006, a total of 100,000  options
were  issued  under the plan.  On January  31,  2006,  this plan was  amended to
increase the number of options  issued to each outside  director  each year from
10,000 options to 20,000 options.  Each outside director is granted an option to
purchase  20,000 shares of Class A common stock annually at fair market value on
the date of grant,  vesting 25%  immediately  and 25% on each of the first three
anniversaries  of the grant and expiring ten years from the grant date.  The new
plan will  expire  in  January  2015,  ten  years  from the date of  shareholder
approval.

     Under the above plans,  at June 30, 2006,  1,373,750  shares were available
for future grant or purchase.

     The Company had the following activity in its stock option plans for fiscal
2006, 2005 and 2004:
                                       Weighted-Average
                      Number                       Remaining
                        of         Exercise       Contractual      Aggregate
                      Shares         Price            Term      Intrinsic Value
                 ______________________________________________________________

 Outstanding
  Balance - June 30,
    2003              1,002,000      $0.54
  Granted               130,000      $1.17
  Exercised             (68,500)     $0.41
  Expired              (118,500)     $0.49
                      __________     _____
 Outstanding
  Balance - June 30,
    2004                945,000      $0.64
  Granted               320,000      $1.30
  Exercised            (104,750)     $0.33
  Expired               (22,000)     $0.76
                      __________     _____
 Outstanding
  Balance - June 30,
    2005              1,138,250      $0.85
                      ==========    =======
  Granted               408,750      $2.42
  Exercised            (277,750)     $0.39
  Expired               (35,000)     $1.84
                      __________     _____
 Outstanding
  Balance - June 30,
    2006              1,234,250      $1.45         3.65           $1,052,605
                      _________      _____         ____           __________
 Exercisaqble
  at June 30,
  2006                  933,313      $1.14         3.18           $1,032,486
                      _________      _____         ____           __________

     Of the options granted during the fiscal year ended June 30, 2006,  102,188
were veste,  the other  306,562  will vest over the next three  years.  The fair
value of the options vested was $1.17 per option.


                                                                            F-25

                                    -- 63 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

     The following tables summarize  information about stock options outstanding
and exercisable at June 30, 2006:

                                     Weighted-Average
                    Number        Remaining Contractual
    Exercise     Outstanding         Life of Options        Number Exercisable
     Price      At June 30,2006     Outstanding years         At June 30, 2006
    ________    _______________    ___________________      __________________
    $ .22             6,000                4.54                   6,000
      .35            40,000                4.22                  40,000
      .45            19,000                0.47                  19,000
      .55           138,000                0.80                 138,000
      .69            35,000                1.47                  35,000
      .74            50,000                5.53                  50,000
      .75           146,000                1.24                 146,000
      .81             6,000                3.48                   6,000
     1.03             6,000                2.48                   6,000
     1.07            10,000                1.94                  10,000
     1.11            50,000                2.94                  50,000
     1.17            20,000                2.64                  20,000
     1.20            35,000                3.26                  35,000
     1.21            50,000                3.28                  50,000
     1.33            50,000                6.53                  50,000
     1.37            15,000                3.35                  15,000
     1.38             5,000                3.56                   5,000
     1.41            50,000                3.48                  50,000
     1.45            50,000                3.49                  31,250
     1.48            50,000                7.53                  50,000
     1.95             1,250                4.35                     313
     2.05             3,750                4.35                     938
     2.06             6,000                1.49                   6,000
     2.11            80,000                8.30                  20,000
     2.20            30,000                4.23                   7,500
     2.28            23,750                4.23                   5,938
     2.35             5,000                4.35                   1,250
     2.38            15,000                3.96                  15,000
     2.53            37,500                4.00                   9,375
     2.68            90,000                4.23                  22,500
     2.73           105,000                4.23                  26,250
     3.50             6,000                0.64                   6,000
    _____         _________               _____                _________
    $1.45         1,234,250                3.65                 933,313
    =====         ==========              =====                ========

     On June 30,  2005,  the Company  accelerated  the vesting on the  remaining
326,250  outstanding  unvested  options.  This resulted in a non-cash  charge to
compensation  of $27,025.  The  decision to  accelerate  these  options was made
primarily to avoid recognizing  compensation cost in the consolidated  statement
of  operations  in  the  Company's   future   financial   statements   upon  the
effectiveness  of SFAS  123R.  During the fiscal  year ended June 30,  2006,  an
additional $9,875 was recognized as a result of this accelerated vesting.

                                                                            F-26

                                    -- 64 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

     In February  2006,  12,617  shares of common  stock were  issued  under the
employee  stock purchase plan.  The Company  recorded as  compensation  expenses
$3,028.

     During the fiscal year ended June 30, 2006 277,750  options were  exercised
resulting in $84,077 in proceeds.  Included in the above balance, 26,500 options
were exercised using a cashless  exercise  feature  resulting in the issuance of
18,577 common shares.

     The weighted  average  grant-date  fair value of options granted during the
fiscal  years  ended  June 30,  2006,  2005 and 2004 was  $1.17,  $2.33 and $.66
respectively.  The total intrinsic value of options  exercised during the fiscal
years ended June 30,  2006,  2005 and 2004 was  $517,917,  $188,243  and $47,432
respectively.

     As of June 30, 2006, there was $357,459 in unrecognized  compensation  cost
related  to  nonvested  share-based  compensation   arrangements  granted  under
existing  stock  option  plans.  This cost is expected to be  recognized  over a
weighted average pe5iod of three years.

NOTE I - CERTAIN CAPITAL TRANSACTIONS

     In addition to the  outstanding  options  under the  Company's  stock plans
(Note H), the Company has the following warrants outstanding at June 30, 2006:
<TABLE>
<S>       <C>                             <C>         <C>                    <C>
   Date of                                      Number of      Exercise    Expiration
  Issuance         Description                    Shares       Price          Date
_____________________________________________________________________________________

04/01/2003   Warrants issued for
              consulting services $3,185
              charged to professional fees.   10,000 shares  $1.00 per share  April 2008
09/22/2003   Warrants issued for consulting
              services $6,261 charged
              to professional fees            20,000 shares  $.90 per share   Sept 2008
10/20/2003   Warrants issued for investor
              relations consulting
              services $6,842 charged to
              professional fees               30,000 shares  $.86 per share   Oct 2006
10/20/2003   Warrants issued for investor
              relations consulting
              services $6,578 charged to
              professional fees               30,000 shares  $ .84 per share  Oct 2006
03/02/2004   Warrants issued in a private
              placement of class A
              common stock                    15,113 shares  $1.10 per share  Mar 2007
04/29/2004   Warrants issued in a private
              placement of class A
              common stock                   246,590 shares  $1.10 per share  Apr 2007
04/30/2004   Warrants issued as a finder's
              fee in connection with the
              acquisition of Pivotal, $51,307
              recorded as acquisition costs.   6,750 shares  $1.24 per share  Apr 2007
10/19/2004   Warrants issued in conjunction
              with long-term debt transaction,
              $167,185 recorded as debt
              discount.                      250,000 shares  $1.15 per share  Oct 2014
10/10/2005   Warrants issued as a finder's fee
              in connection with the
              acquisition of Pivotal, $56,180
              recorded as acquisition costs. 100,000 shares  $1.10 per share  Sept 2007
</TABLE>
     Warrants  issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and accounted for in a
manner consistent with the underlying  reason the warrants were issued.  Charges
to  operations in  connection  with warrants were $25,358 in fiscal 2004.  There
were no charges to  operations  in  connection  with  warrants in fiscal 2006 or
2005. All of these warrants were fully vested at the grant date.


                                                                            F-27


                                    -- 65 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE I - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

     On October 19, 2004, the Company issued 250,000 warrants to purchase shares
of common stock of the Company, exercisable at $1.15 and expiring ten years from
the  date  first  issued,  to a  lender  in  connection  with a long  term  debt
transaction  (see next to last item in the above table).  Under the terms of the
warrant   agreement,   future  issuances  of  equity  resulting  in  a  dilutive
transaction will require the Company to adjust shares issuable under the Warrant
Agreement.  The  additional  shares  issuable is determined  by  performing  the
following calculation:  divide the non-dilutive price of a warrant share then in
effect  multiplied by the number of warrant shares then issuable  hereunder,  by
the weighted average per share value. In addition, the warrant also provides for
a put right that provides for the right of the holder to put the warrant  shares
back to the Company during any put period, as defined, provided that the Company
does not have  reserved and  available  for issuance  and  delivery,  sufficient
shares  to  permit  the  exercise  in full of this  warrant,  and  each  period:
commencing  on the  earlier  of:  a)  maturity  of the  debt  agreement,  b) the
occurrence of a value event,  c) occurrence of any event of default,  and d) the
payment date. The put period is limited to the earlier of the expiration date of
the warrant or the 60th calendar day after the commencement of the put period.

     The Company analyzed this financial instrument in accordance with Statement
of Financial  Accounting  Standards  ("SFAS")  No. 133 and Emerging  Issues Task
Force ("EITF") Issue No. 00-19 to determine if this hybrid contract has embedded
derivatives  that must be  bifurcated.  The Company  evaluated the put rights in
accordance with SFAS No. 150. In addition,  free standing warrants are accounted
for as either equity or  liabilities  in accordance  with the provisions of EITF
Issue No.  00-19.  The  Company  determined  that it has within its  control the
ability to limit the effects of the dilution provision thereby not requiring the
Company to issue an  indeterminable  number of common  shares which would exceed
its authorized  capital,  and the Company concluded that they do have sufficient
available  and unissued  shares and,  therefore,  physical  share  settlement is
within the control of the Company. The Company also evaluated the put rights and
concluded they are not a liability under SFAS 150.

     The Company initially recorded the warrants as debt discount of $167,185 at
the date of issuance and recorded as interest  expense of $55,728 and $41,796 in
the years ended June 30, 2006 and 2005, respectively.  (See the Company's report
on form 8-K, filed with the  Securities  and Exchange  commission on October 22,
2004, for additional information regarding this transaction).

     During the fiscal year ended June 30,  2006,  the Company  acquired  17,360
shares of Class A common stock for $36,613 from a former employee.

     During the fiscal year ended June 30, 2006, 121,409 warrants were exercised
resulting in $52,450 in proceeds. Included in the above total are 60,909 warants
exercised using a cashless  exercise feature resulting in the issuance of 37,973
common shares.

NOTE J - BUSINESS SEGMENT INFORMATION

     The Company's  behavioral  health treatment  services have similar economic
characteristics,  services,  patients and clients.  Accordingly,  all behavioral
health treatment  services are reported on an aggregate basis under one segment.

                                                                            F-28

                                    -- 66 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE J - BUSINESS SEGMENT INFORMATION(CONTINUED)

The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative  services
segment. The following summarizes the Company's segment data:

<TABLE>
<S>                 <C>          <C>                 <C>           <C>           <C>               <C>
                          Behavioral
                            Health
                           Treatment   Pharmaceutical   Contract    Administrative
                           Services    Study Services   Services       Services      Eliminations     Total
                         _______________________________________________________________________________________
 For the Year ended
   June 30, 2006
Revenues-external
   customers             $27,861,701    $5,799,815      $4,351,576   $       --    $       --      $38,013,092
Revenues - intersegment       38,750            --          88,875    3,264,000    (3,391,625)              --
Segment net income
(loss)                     3,172,699       972,973       1,636,408   (1,950,045)           --        4,045,482
Total assets              10,399,918     5,584,753         844,784    6,093,650            --       21,984.987
Capital expenditures         603,152        51,628         144,636       65,291            --          864,707
Depreciation &
   amortization              436,488       170,167          62,220       61,139            --          730,014
Goodwill                     969,099     1,695,544              --           --            --        2,664,643
Interest expense             485,589        67,528           5,048       48,728            --          606,893
Income tax expense
(benefit)                    210,231         3,840          34,860   (2,497,152)           --       (1,310,103)

   For the Year ended
     June 30, 2005
Revenues-external
   customers             $26,087,088    $4,509,338      $3,466,832   $       --    $       --      $34,063,258

Revenues - intersegment        5,940            --          62,707    2,724,000    (2,792,647)              --
Segment net income
(loss)                     4,543,372       180,820       1,243,514   (2,811,806)           --        3,155,900
Total assets               9,333,260     5,596,917         669,229    2,296,242            --       17,895,648
Capital expenditures         365,644        18,336          38,057       61,425            --          483,462
Depreciation &
   amortization              233,734       144,010           7,899      139,295            --          524,938
Goodwill                     969,099     1,679,110              --           --            --        2,648,209
Interest expense             469,384        65,651              --      119,836            --          654,871
Income tax expense(benefit)  105,400            --          25,800     (204,623)           --         (73,423)

 For the Year ended
     June 30, 2004
Revenues-external
   customers             $22,418,355    $1,246,013      $2,984,477   $       --    $       --      $26,648,845
Revenues - intersegment      197,780            --           4,140    3,234,840    (3,436,760)              --
Segment net income
(loss)                     1,822,642       (68,870)        706,817   (2,717,592)           --         (257,003)
Total assets               7,799,709     3,620,676         283,666    1,607,518            --       13,311,569
Capital expenditures         126,848         2,208           5,973       58,156            --          193,185
Depreciation &
   amortization              175,810        28,325           4,371      113,329            --          321,835
Goodwill                     969,099       447,020              --           --            --        1,416,119
Interest expense             378,163         2,307              --      151,094            --          531,564
Income tax expense            10,000         1,294              --           --            --           11,294

</TABLE>

NOTE K - ACQUISITIONS

     On April 30, 2004,  the Company  acquired  Phoenix-based  Pivotal  Research
Centers,  LLC,  ("Pivotal")   significantly  expanding  the  Company's  clinical
research capabilities and geographic presence.  As part of the acquisition,  one

                                                                            F-29

                                    -- 67 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE K - ACQUISITIONS(CONTINUED)

of the former  owners and CEO signed a  three-year  employment  and  non-compete
agreements.

     Pivotal,  at the time of the acquisition,  performed all phases of clinical
research for Phase I-IV drugs under development  through two dedicated  research
sites.  When acquired,  Pivotal had  approximately  22 enrolling  studies and an
additional  31 ongoing  studies with  approximately  75-80  percent of Pivotal's
research activity in central nervous system (CNS) research.

     The Company  paid $1.5 million in cash and  $500,000 in PHC,  Inc.  Class A
Common Stock based on the closing market price of $1.17.  The value of the Class
A Common Stock was determined in accordance with EITF 99-12,  "Determination  of
the  Measurement  Date for the Market Price of Acquirer  Securities  Issued in a
Purchase  Business  Combination."  Additionally,  the  Company  agreed  to three
performance-based  promissory  notes (Notes A, B and C) which are staged  during
the next five years based on future  profitability and secured by all the assets
of Pivotal as well as by PHC, Inc.'s ownership interest in Pivotal.

     Promissory  note A is a secured note with a face value of $1,000,000,  with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly  installments beginning January 2005. The outstanding principal
was adjusted in the first and second years of the note based on adjusted  EBITDA
as defined in the agreement of $780,000.  When adjusted  EBITDA was greater then
$780,000  for the period the note value  increased  by the  difference  and when
adjusted  EBITDA was less than $780,000 for the period the note value  decreased
by the difference.  Quarterly payments are then made based on the adjusted value
of the promissory  notes.  The first adjustment of $169,832 was made on February
1, 2005.  The Company  recorded the value of Note A of  $1,169,832 as additional
purchase price during fiscal 2005.  The second  adjustment of ($39,746) was made
on April 1, 2006. As of June 30, 2006, $728,218 is due under Note A.

     Promissory note B is a secured note with a face value of $500,000,  with an
annual  interest  rate of 6%, a maturity  date of December 31, 2008 and payments
due in quarterly  installments beginning January 2007. The outstanding principal
will be adjusted on February 1, 2007 based on annual  adjusted EBITDA as defined
in the  agreement  of  $780,000  for the  adjustment  period of  January 1, 2006
through  December 31, 2006.  Where adjusted EBITDA greater then $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment  period will decrease the note value by
the difference.  Quarterly payments are then made based on the adjusted value of
the promissory  notes.  As of June 30, 2006, no amounts have been recorded under
promissory note B.

     Promissory  note C is a secured  note with a face  value of  $1,000,000,  a
maturity  date of March 31,  2009 and annual  payments  commencing  on March 31,
2005.  Note payment  amounts will be determined  based on the adjusted EBITDA as
defined in the agreement of the non-Pivotal  Research  business for each payment
period  beginning at the effective  date of the agreement and ending on December
31, 2004 and each year thereafter multiplied by .35. In addition this promissory
note  provides  for the issuance of up to $200,000 in PHC,  Inc.  Class A Common
Stock,  should the total of the five note  payments be less than the  $1,000,000
face  value of the note.  The value of the  $200,000  stock  minimum  value less
imputed interest at 6% was recorded at the time of acquisition.

     Since all but $200,000 of these  promissory  notes is  contingent on future
earnings, only $200,000, less imputed interest, was recorded as of June 30, 2004
as  stipulated  in SFAS No.  141.  At June 30,  2006 the balance on this note is
$169,648.

                                                                            F-30

                                    -- 68 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2006

NOTE K - ACQUISITIONS (CONTINUED)

         The purchase price was allocated as follows:

                                           2006          2005           2004
                                           ____          ____           ____

   Property and equipment               $      --    $       --     $   85,000
   Intangible assets                       16,434     1,209,832      2,847,020
   Accrued expenses                            --            --        (40,000)
   Accrued acquisition costs                   --            --       (149,016)
   Warrants issued in lieu of cash
     payment for acquisition(
     costs                                (56,180)           --        (51,307)
   Cash paid for purchase                                            2,191,697
   Note recorded for earn-out              39,746    (1,209,832)            --
                                       __________     __________    ___________
   Fair value of stock issued           $      --    $       --     $  500,000
                                       ===========   ===========    ===========

     The fair value  assigned to customer  relationships  was  determined by the
Company based on information provided by the former owners.

     The  acquisition  of Pivotal is accounted for as a purchase  under SFAS No.
141, "Business Combinations". Accordingly, the operating results of Pivotal have
been included in the Company's  consolidated  statements of operations since the
acquisition date. Goodwill generated from this acquisition is deductible for tax
purposes  over a period of 15 years.  The Company  estimates the useful lives of

                                                                            F-31

                                    -- 69 --
<PAGE>

customer relationships to be twenty years.

NOTE L - QUARTERLY INFORMATION (Unaudited)

     The following  presents selected  quarterly  financial data for each of the
quarters in the years ended June 30, 2006 and 2005.

                          1st Quarter   2nd Quarter   3rd Quarter  4th Quarter
                          ___________   ___________   ___________  ___________
 2006
 Revenue                   $8,944,826    $8,702,513    $9,953,959   $10,411,794
 Income from operations       601,404       549,060     1,112,980       920,982
 Net income available to
   common shareholders        384,207       346,782       950,549     2,363,944

 Earnings per share:
   Basic                   $     0.02    $     0.02    $     0.05   $      0.13
   Diluted                 $     0.02    $     0.02    $     0.05   $      0.12

 2005
 Revenue                   $7,957,515    $8,069,201    $8,763,682   $ 9,272,860
 Income from operations       884,835       679,895       982,872     1,039,810
 Net income available to
   common shareholders        775,628       408,804       880,456     1,091,012

 Earnings per share:
   Basic                   $     0.04    $     0.02    $     0.05   $      0.06
   Diluted                 $     0.04    $     0.02    $     0.05   $      0.06

     The Company has reassessed its recoverability of its deferred tax assets in
the fourth quarter.  Based upon all information available to the Company, it has
concluded  that no valuation  allowance  is necessary  except for it's State net
operating loss carryforwards. The Company has reduced its valuation allowance by
$2,416,200  and has recorded a federal  income tax benefit of  $1,638,713  as of
June 30, 2006.

                                                                            F-32

                                    -- 70 --
<PAGE>
Item 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     During the fiscal year ended June 30, 2006, the Company changed independent
registered public accounting firms from BDO Seidman,  LLP, to Eisner,  LLP. This
change was not made as a result of any disagreements between the accountants and
the  management of the Company.  See the Company's  report on form 8-K and 8-K/A
filed with the  Securities  and Exchange  Commission on March 10, 2006 and March
23, 2006, respectively.

Item 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     We maintain  disclosure  controls  and  procedures  designed to ensure that
information  required to be  disclosed  in our Exchange Act reports is recorded,
processed,  summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions  regarding required  disclosure.  In
designing and evaluating the disclosure controls and procedures,  our management
recognized  that any controls and  procedures,  no matter how well  designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives,  and  management was  necessarily  required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

     As of the end of the period  covered  by this  report,  we  carried  out an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive  officer and chief  financial  officer,  of the  effectiveness  of the
design and  operation  of our  disclosure  controls and  procedures  to meet the
criteria referred to above. Based on the foregoing,  our chief executive officer
and  chief  financial  officer  concluded  that  our  disclosure   controls  and
procedures were effective.

Change in Internal Controls

     During the quarter ended June 30, 2006,  the Company became aware of a loss
from a theft of funds by an individual in our smallest  in-patient  facility who
had the  responsibility  for the  collection  of patient  payments.  The Company
investigated  further  and has  identified  approximately  $20,000 in missing or
misappropriated  funds.  Corrections  have been made to the patient  accounts to
reflect the correct receivables as discrepancies were discovered. As of June 30,
2006 $2,500 in loss from this theft was recorded.  The Company has increased its
reserve by $20,000 to account for additional  amounts discovered after year end.
The  Company  believes  it has  identified  the full extent of the theft and all
infractions  of the  policies.  The  Company has put systems in place to prevent
recurrence  of the problem.  The Company does not believe the total amount to be
material.

     Except as noted above,  there were no  significant  changes in our internal
controls or in other  factors that could  significantly  affect  these  controls
subsequent to the date of their most recent evaluations.

                                    -- 71 --
<PAGE>
PART III

Item 10.     Directors, Executive Officers, Promoters and Control Persons

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  directors  and officers of the Company as of the date of the Company's
Annual Report on Form 10-K are as follows:

  Name                           Age           Position
__________________________       ___  ____________________________________

Bruce A. Shear                   51   Director, President and Chief
                                       Executive Officer
Robert H. Boswell                58   Senior Vice President
Paula C. Wurts                   57   Treasurer, Chief Financial Officer
                                       and Clerk
Donald E. Robar (1)(2)(3)        69   Director
Howard W. Phillips               76   Director
William F. Grieco (1)(2)(3)      52   Director
David E. Dangerfield (1)(3)      65   Director

(1) Member of Audit Committee. (2) Member of Compensation Committee.
(3) Member of the Nominating/Governance Committee

     Directors may be nominated by the Board of Directors or by  stockholders in
accordance with the Company's Amended and Restated Articles of Incorporation and
Bylaws.   All  of  the  directors  hold  office  until  the  annual  meeting  of
stockholders  next  following  their  election,  or until their  successors  are
elected and qualified. The primary duties of the various committees of the Board
are shown below. 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 fifteen years. Mr. Shear received
an M.B.A.  from Suffolk  University in 1980 and a B.S. in Accounting and Finance
from  Marquette  University in 1976.  Since  November 2003, Mr. Shear has been a
member of the board of directors of Vaso Active Pharmaceuticals,  Inc., a public
company  marketing  and selling  over-the-counter  pharmaceutical  products that
incorporate Vaso's transdermal drug delivery technology.

     ROBERT H.  BOSWELL has served as the Senior Vice  President  of the Company
since  February 1999 and as Executive Vice President of the Company from 1992 to
1999.   From  1989  until  the  spring  of  1994,  Mr.  Boswell  served  as  the
Administrator  of the Company's  Highland  Ridge  Hospital  facility where he is
based.  Mr. Boswell is principally  involved with the Company's  substance abuse
facilities.  From 1981 until 1989, he served as the Associate  Administrator  at
the Prevention  Education  Outpatient  Treatment  Program--the  Cottage Program,
International.  Mr. Boswell  graduated from Fresno State  University in 1975 and
from 1976 until 1978 attended Rice University's  doctoral program in philosophy.
Mr. Boswell is a Board Member of the National  Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.

     PAULA C. WURTS has served as the  Controller  of the Company since 1989, as
Assistant Clerk from January 1996 until February 2006, when she became Clerk, as
Assistant  Treasurer from 1993 until April 2000 when she became  Treasurer.  Ms.
Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms. Wurts
received  an  Associate's  degree in  Accounting  from the  University  of South
Carolina in 1980, a B.S. in Accounting from Northeastern  University in 1989 and
passed the examination for Certified Public Accountants. She received a Master's
Degree in Accounting from Western New England College in 1996.



                                    -- 72 --
<PAGE>
     DONALD E. ROBAR has served as a Director of the  Company  since 1985 and as
the Treasurer from February 1996 until April 2000. He served as the Clerk of the
Company  from 1992 to 1996.  Dr.  Robar has been a professor  of  Psychology  at
Colby-Sawyer  College in New London,  New Hampshire from 1967 to 1997 and is now
Professor Emeritus. Dr. Robar received an Ed.D. (Counseling) from the University
of Massachusetts in 1978, an M.A. in Clinical  Psychology from Boston College in
1968 and a B.A. from the University of Massachusetts in 1960.

     HOWARD W.  PHILLIPS  has served as a Director of the Company  since  August
1996 and has been employed by the Company as a public relations specialist since
August 1995.  From 1982 until 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.

     WILLIAM F. GRIECO has served as a Director of the  Company  since  February
1997. Mr. Grieco is the Vice President and General  Counsel of American  Science
and Engineering,  Inc., an X-Ray inspection  technology company.  Prior to that,
from 1999 to 2005, he was Managing Director of Arcadia Strategies,  LLC, a legal
and business consulting organization servicing science and technology companies.
From 2001 to 2002, he also served as Senior Vice  President and General  Counsel
of IDX Systems Corporation,  a healthcare  information  technology Company. From
1995 to 1999 he was Senior  Vice  President  and General  Counsel for  Fresenius
Medical Care North  America.  Prior to that, Mr. Grieco was a partner at Choate,
Hall & Stewart,  a general  service law firm.  Mr.  Grieco  received a B.S. from
Boston  College in 1975,  an M.S. in Health Policy and  Management  from Harvard
University in 1978 and a J.D. from Boston College Law School in 1981.

     DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has served as the Chief Executive Officer for Valley Mental
Health in Salt Lake City, Utah.  Since 1974, Mr.  Dangerfield has been a partner
for  Professional  Training  Associates  (PTA).  In 1989, he became a consultant
across the nation for managed  mental health care and the  enhancement of mental
health  delivery  services.  David  Dangerfield  serves as a Board member of the
Mental  Health Risk  Retention  Group and Utah Alliance for the Mentally Ill, an
advocacy  organization  of family and  friends of the  mentally  ill,  which are
privately held corporations, and the Utah Hospital Association, which is a trade
organization in Utah. Mr.  Dangerfield  graduated from the University of Utah in
1972 with a Doctorate of Social Work after  receiving his Masters of Social Work
from the University in 1967.

Meetings of the Board of Directors

     During  fiscal 2006,  the Board of Directors  held a total of four meetings
and took action by written consent five times. Each director attended all of the
meetings of the Board and committees of the Board on which such director served.

Audit Committee

     The Board of Directors has appointed an audit committee to assist the Board
in the  oversight  of  the  financial  reports,  internal  controls,  accounting
policies and procedures. The primary responsibilities of the Audit Committee are
as follows:

     o    Hire,   evaluate   and,  when   appropriate,   replace  the  Company's
          independent  registered  public  accounting  firm, whose duty it is to
          audit the books and accounts of the Company and its  subsidiaries  for
          the fiscal year in which it is appointed.
     o    Approve all audit fees in advance of work performed.
     o    Approve  any  accounting  firm and fees to be charged for taxes or any
          other  non-audit  accounting  fees.
     o    Review internal controls over financial reporting with the independent
          accountant and a designated accounting staff member.
     o    Review with management and the registered  public  accounting  firm:
          o    The independent accountant's audit of and report on the financial
               statements.
          o    The auditor's  qualitative  judgments about the  appropriateness,
               not  just  the  acceptability,   of  accounting   principles  and
               financial  disclosures and how aggressive (or  conservative)  the
               accounting principles and underlying estimates are.



                                    -- 73 --
<PAGE>
          o    Any serious difficulties or disputes with management  encountered
               during the course of the audit.
          o    Anything  else about the audit  procedures  or findings that GAAS
               requires the auditors to discuss with the committee.
     o    Consider and review with management and a designated  accounting staff
          member:
          o    Any  significant   findings  during  the  year  and  management's
               responses to them.
          o    Any  difficulties an accounting  staff member  encountered  while
               conducting  audits,  including any  restrictions  on the scope of
               their work or access to required information.
          o    Any changes to the planned scope of  management's  internal audit
               plan that the  committee  thinks  advisable.
     o    Review the annual filings with the SEC and other  published  documents
          containing the company's financial statements and consider whether the
          information in the filings is consistent  with the  information in the
          financial statements.
     o    Review the interim financial reports with management,  the independent
          registered public accounting firm and an accounting staff member.
     o    Prepare a letter for inclusion in the annual report that describes the
          committee's    composition   and    responsibilities   and   how   the
          responsibilities were fulfilled.
     o    Review the audit  committee  charter at least  annually  and modify as
          needed.

     During fiscal 2006 the Audit Committee  consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco.  As required by the SEC, all members of
the audit  committee  are  "independent"  as such term is  defined  pursuant  to
applicable SEC rules and regulations. Dr. Dangerfield serves as the chairman and
is the audit  committee  financial  expert.  The Audit  Committee met five times
during fiscal 2006. All of the committee members attended the meetings.

Nominating and Corporate Governance Committee

     The  Nominating  and  Corporate  Governance  Committee was  established  in
October,  2005.  This  committee is appointed by the Board of Directors  for the
purpose of  identifying  individuals  qualified to become  Board  members and to
recommend  that the Board select these  individuals  as nominees for election to
the  Board  at the  next  annual  meeting  of the  Company's  stockholders,  and
developing and recommending to the Board a set of effective corporate governance
policies and procedures  applicable to the Company. The Nominating and Corporate
Governance Committee consists of Dr. David Dangerfield, Mr. Donald Robar and Mr.
William Grieco.

Compensation Committee

     The Board of  Directors  has  appointed  the  members  of the  Compensation
Committee to review and approve  officer's  compensation,  formulate bonuses for
management and administer the Company's equity compensation plans. During fiscal
2006 the  Compensation  Committee  consisted of Mr. Donald Robar and Mr. William
Grieco.  The Compensation  Committee met once during fiscal 2006. Mr. Shear does
not participate in discussions  concerning,  or vote to approve, his salary. All
members of the compensation  committee are independent under Rule 4200(a)(15) of
the NASD Manual.

Code of Ethics

     The Company maintains a Corporate  Compliance Plan, which  incorporates our
code of ethics that is applicable to all employees,  including all officers. The
Corporate   Compliance  Plan  incorporates  our  guidelines  designed  to  deter
wrongdoing  and to promote  honest  and  ethical  conduct  and  compliance  with
applicable laws and  regulations.  It also  incorporates our expectations of our
employees  that  enable us to  provide  accurate  and timely  disclosure  in our
filings  with  the   Securities   and  Exchange   Commission  and  other  public
communications. In addition, it incorporates our guidelines pertaining to topics
such as health and safety compliance, diversity and non-discrimination,  patient
care and privacy.
[
     The full text of our Corporate  Compliance Plan is published on our website
at  www.phc-inc.com.  We will post any  amendments to the  Corporate  Compliance
Plan,  as well as any waivers  that are required to be disclosed by the rules of
the SEC, on our website.

                                    -- 74 --
<PAGE>
Compliance with Section 16(A) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors  and  executive  officers,  and  persons  who own more than 10% of the
Company's Common Stock, to file with the SEC reports of ownership and reports of
changes in  ownership  of Common  Stock.  SEC rules also  require the  reporting
persons and  entities to furnish  the  Company  with a copy of the reports  they
file. The Company is required to report any failure to file these reports.

     During a review of these  filings the Company  found that Robert H. Boswell
failed to file a Form 4  reporting  the sale of 7,000  shares  on May 25,  2006.
These shares were  reported on an amended Form 5 filed on July 27, 2006 when the
oversight  was  discovered.  Based on the  review  of the  filings  and  written
representations  from the Company's directors and executive officers,  except as
noted,  the Company  believes that all reports required to be filed with the SEC
by Section  16(a) during the most recent fiscal year have been filed on a timely
basis.

Item 11.    Executive Compensation

Employment agreements

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

Executive Compensation

     Three executive  officers of the Company received  compensation in the 2006
fiscal  year,  which  exceeded  $100,000.  The  following  table  sets forth the
compensation  paid or accrued by the  Company  for  services  rendered  to these
executives in fiscal year 2006, 2005 and 2004:
<TABLE>
<S>              <C>       <C>       <C>       <C>          <C>            <C>
                           Summary Compensation Table
                                                                Long Term
                                                               Compensation
                              Annual Compensation                 Awards
                              ___________________              ____________
 (a)                   (b)     (c)       (d)        (e)            (g)           (i)
                                                   Other        Securities
Name and                                           Annual       Underlying    All Other
Principal              Year   Salary    Bonus    Compensation   Options/SARs  Compensation
Position                       ($)       ($)          ($)            (#)         ($)
___________________________________________________________________________________________
Bruce A. Shear         2006   $393,515   $70,000   $27,458 (1)   105,000       $124,800
  President and Chief  2005   $383,965   $45,000   $62,498 (2)    60,000       $ 37,050
  Executive Officer    2004   $345,416   $25,147   $15,395 (3)        --       $     --

Robert H. Boswell      2006   $176,878   $40,000   $14,701 (4)    28,750       $ 33,488
  Senior Vice          2005   $164,590   $10,000   $29,016 (5)    25,000       $ 15,750
  President            2004   $155,417   $32,794   $15,582 (6)        --       $     --

Paula C. Wurts         2006   $152,878   $35,000   $15,029 (7)    27,500       $ 32,300
  Chief Financial      2005   $140,586   $10,000   $35,009 (8)    25,000       $ 15,750
  Officer, Clerk       2004   $129,125   $17,647   $13,901 (9)        --       $     --
  and Treasurer

</TABLE>

(1)  This amount represents  $8,910  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear, $13,648 in premiums
     paid by the Company with respect to life and  disability  insurance for the
     benefit of Mr. Shear,  $864 in club membership dues paid by the Company for
     the benefit of Mr. Shear,  and $4,036 personal use of a Company car held by
     Mr. Shear.

                                    -- 75 --
<PAGE>
(2)  This amount represents  $7,789  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $7,541 in premiums
     paid by the Company with respect to life and  disability  insurance for the
     benefit of Mr. Shear,  $2,805 in club  membership  dues paid by the Company
     for the benefit of Mr. Shear,  $4,027 personal use of a Company car held by
     Mr.  Shear and $40,336  based on the  intrinsic  value of the  repricing of
     options held by Mr. Shear.

(3)  This amount represents  $5,063  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $5,532 in premiums
     paid by the Company with respect to life and  disability  insurance for the
     benefit of Mr. Shear,  $912 in club membership dues paid by the Company for
     the benefit of Mr. Shear,  $3,888 personal use of a Company car held by Mr.
     Shear.

(4)  This amount represents a $6,000 automobile allowance, $8,172 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell and $529 in benefit derived from the purchase of shares through
     the employee stock purchase plan.

(5)  This amount represents a $6,000 automobile allowance, $6,656 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell,  $1,020 in benefit derived from the purchase of shares through
     the employee stock purchase plan, and $15,340 based on the intrinsic  value
     of the repricing of options held by Mr. Boswell.

(6)  This amount represents a $6,000 automobile allowance, $4,650 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell, $428 in membership dues paid by the Company for the benefit of
     Mr.  Boswell,  $699 in benefit  derived from the purchase of shares through
     the employee stock  purchase plan, and $3,805 based on the intrinsic  value
     of the repricing of options held by Mr. Boswell.

(7)  This amount represents a $4,800 automobile  allowance,  $10,053 contributed
     by the Company to the Company's  Executive  Employee Benefit Plan on behalf
     of Ms.  Wurts  and $176 in  benefit  derived  from the  purchase  of shares
     through the employee stock purchase plan.

(8)  This amount represents a $4,800 automobile allowance, $8,392 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $340 in benefit derived from the purchase of shares through the
     employee  stock  purchase plan and $21,477 based on the intrinsic  value of
     the repricing of options held by Ms. Wurts.

(9)  This amount represents a $4,800 automobile allowance, $5,063 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $233 in benefit derived from the purchase of shares through the
     employee stock purchase plan and $3,805 based on the intrinsic value of the
     repricing of options held by Ms. Wurts.

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  $10,000 stipend per year and $2,500 for each Board meeting they attend.
The Audit Committee Chairperson receives an annual stipend of $5,000, members of
the audit  committee  receive  an annual  stipend  of  $3,000  and  compensation
committee  and  nominating/governance  committee  receive  an annual  stipend of
$2,000.  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").

Compensation Committee Interlocks and Insider Participation

     During fiscal 2006 the Compensation Committee consisted of Mr. Donald Robar
and Mr.  William  Grieco,  neither of which was an officer  or  employee  of the


                                    -- 76 --
<PAGE>
Company during the 2006 fiscal year. Mr. Robar served as the Company's Treasurer
from  February 1996 until April 2000.  During the 2006 fiscal year,  none of our
executive  officers served on our  Compensation  Committee (or  equivalent),  or
board of directors,  of another entity whose executive  officer(s) served on our
Compensation Committee or Board of Directors.

OPTION PLANS

Stock Plan

     The Board of  Directors  adopted the  Company's  first stock option plan on
August 26, 1993. This stock option plan has expired however, options to purchase
358,000  shares  remain  outstanding  under the plan.  On September 22, 2003 the
Board of  Directors  adopted the  Company's  current  stock  option plan and the
stockholders  of the Company  approved the plan on December 31, 2003.  The Stock
Plan  provides for the issuance of a maximum of 1,300,000  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  Board  of  Directors  administers  the  Stock  Plan.  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 option
holder  except  by  will or by the  laws  of  descent  and  distribution.  Also,
generally, no option may be exercised more than 60 days following termination of
employment.  However,  in  the  event  that  termination  is  due  to  death  or
disability,  the option is  exercisable  for a period of one year following such
termination.

     During the fiscal year ended June 30, 2006, the Company  issued  additional
options to purchase  408,750 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share  ranging from $1.45 to $2.73.  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.

     A total of 277,750 options were exercised during the fiscal year ended June
30, 2006, of which 11,250 options were  exercised at $1.05,  25,900 options were
exercised  at $.79,  2,000  options  were  exercised  at $.22 and  230,500  were
exercised at $.30.

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.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan  period.  The plan was amended on December  19, 2001
and December  19, 2002 to allow for a total of 500,000  shares of Class A Common
Stock to be issued under the plan. On January 31, 2006 the stockholders approved
a  replacement  Employee  Stock  Purchase  Plan to  replace  the 1995 plan which
expired on  October  18,  2005.  The new plan is  identical  to the old plan and
expires on January 31, 2016.

     As of June 30, 2006, a total of 157,034 shares of Class A Common Stock have
been issued under the 1995 plan.  Fourteen  employees are  participating  in the
current  offering period under the new plan, which began on February 1, 2006 and
will end on January 31, 2007.

Non-Employee Director Stock Plan

     The  non-employee  directors'  stock option plan  provides for the grant of
nonstatutory  stock options  automatically at the time of each annual meeting of
the Board.  Through June 30, 2006, options for 145,500 shares were granted under


                                    -- 77 --
<PAGE>
the 1995 plan.  This plan  expired in August  2005 and,  in  January  2005,  the
shareholders voted to approve a new non-employee  directors' stock plan. The new
plan is  identical  to the plan it  replaced.  Under the new plan a  maximum  of
350,000  shares may be issued.  A total of 40,000  options were issued under the
plan on January 6, 2005. On January 31, 2006,  this plan was amended to increase
the number of options  issued to each  outside  director  each year from  10,000
options  to 20,000  options.  Each  outside  director  is  granted  an option to
purchase  20,000 shares of Class A Common Stock annually at fair market value on
the date of grant,  vesting 25%  immediately  and 25% on each of the first three
anniversaries  of the grant and expiring ten years from the grant date.  The new
plan will  expire  in  January  2015,  ten  years  from the date of  shareholder
approval.

     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.

     During the fiscal  year ended June 30,  2006,  60,000  options  were issued
under the new plan. As of June 30, 2006 no options have been exercised under the
original plan; however, 5,500 options expired unexercised.

     The following table provides information about options granted to the named
executive officers during fiscal 2006 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

<TABLE>
<S>            <C>            <C>           <C>          <C>          <C>
                           Individual Grants

(a)                 (b)           (c)            (d)         (e)            (h)
                    Number of     % of Total                               Alternative
                    Securities    Options/SARs     Exercise                to (f) and
                    Underlying    Granted to       or Base                 (g) Grant
                    Options/SARs  Employees        Price     Expiration    Date
Name                Granted (#)   in Fiscal Year   ($/Share)*   Date       Value
_____________________________________________________________________________________

Bruce A. Shear      15,000            3.67%         2.68      09/20/2010     18,300
                    75,000           18.35%         2.68      09/20/2010     91,500
                    15,000            3.67%         2.20      05/22/2011     15,000

Robert H. Boswell   20,000            4.89%         2.73      09/22/2010     24,800
                     1,250            0.31%         1.95      02/16/2011      1,188
                     7,500            1.83%         2.20      05/22/2011      7,500

Paula C. Wurts      20,000            4.89%         2.73      09/22/2010     24,800
                     7,500            1.83%         2.20      05/22/2011      7,500
</TABLE>
     * Exercise  Price of options at issue date was equal to or greater than the
fair market value.

     The Company utilized the  Black-Scholes  valuation model for estimating the
Grant  Date  Value  with  no  adjustments  for  non-transferability  or  risk of
forfeiture. The assumptions used are as follows:

       Risk free interest rate                      4.5%
       Expected dividend yield                      0.0%
       Expected lives                               5
       Expected volatility                          5.0%



                                    -- 78 --
<PAGE>
     The following  table provides  information  about options  exercised by the
named executive  officers during fiscal 2006 and the number and value of options
held at the end of fiscal 2006.

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

Bruce A. Shear     67,000    $127,300   146,250/78,750     $140,950/$199,238
Robert H. Boswell  36,000    $ 68,400   82,188/21,562      $  98,078/$54,533
Paula C. Wurts     36,000    $ 68,400   81,875/20,625      $  98,000/$52,181

     On June 30,  2005,  the Company  accelerated  the vesting on the 326,250 of
outstanding  unvested  options held by  employees.  This  resulted in a non-cash
charge to  compensation of $9,875 and $27,025 in the fiscal years ended June 30,
2006 and 2005, respectively.

                                    -- 79 --
<PAGE>
Item 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
     RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information  regarding the ownership
of shares of the  Company's  Class A Common  Stock and Class B Common Stock (the
only classes of common stock of the Company currently  outstanding) as of August
10, 2006 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named  executive  officers  as  defined in 17 CFR  228.402(a)(2)  and all
directors and officers of the Company as a group. Shares of common stock subject
to stock options  vesting on or before October 9, 2006 (within 60 days of August
10, 2006) are deemed to be outstanding  and  beneficially  owned for purposes of
computing  the  percentage  ownership  of such  person  but are not  treated  as
outstanding for purposes of computing the percentage ownership of others. Unless
otherwise  indicated below, to the knowledge of the Company,  all persons listed
below have sole  voting and  investment  power with  respect to their  shares of
common  stock,  except  to the  extent  authority  is shared  by  spouses  under
applicable law. In preparing the following  table, the Company has relied on the
information furnished by the persons listed below:

                       Name and Address        Amount and Nature        Percent
Title of Class         of Beneficial Owner   of Beneficial Owner (11)  of Class
____________________   ___________________   ________________________  ________
Class A Common Stock   Bruce A. Shear              661,245(1)            3.7%
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       Robert H. Boswell           248,754(2)            1.4%
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       Paula C. Wurts              202,106(3)            1.1%
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       Howard W. Phillips          178,750(4)            1.0%
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       Donald E. Robar             137,232(5)            *
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       William F. Grieco           142,750(6)            *
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       David E. Dangerfield         55,000(7)            *
                       c/o PHC, Inc.
                       200 Lake Street
                       Peabody, MA   01960
                       All  Directors  and
                         Officers as             1,625,837(8)            8.9%
                         a Group (7 persons)

                       Marathon Capital Mgmt,
                         LLC                     1,302,750               7.3%
                       P. O. Box 771
                       Hunt Valley, MD  21030



                                    -- 80 --
<PAGE>
Class B Common        Bruce A. Shear
  Stock (9)           c/o PHC, Inc.               721,259(10)           93.0%
                      200 Lake Street
                      Peabody, MA   01960
                      All Directors and Officers
                       as a Group
                      (7 persons)                 721,259               93.0%

*    Less than 1%
1.   Includes  146,250  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.55
     to $2.68 per share.
2.   Includes  82,188  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options at an exercise price range of $.45 to
     $2.73 per share.
3.   Includes  81,875  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.45
     to $2.73 per share.
4.   Includes  75,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable stock options having an exercise price range of $.35
     to $2.11 per share.
5.   Includes  82,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable stock options having an exercise price range of $.22
     to $3.50 per share.
6.   Includes  82,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.22
     to $3.50 per share.
7.   Includes  50,000  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options,  having an exercise price range of $
     .55 to $2.11 per share.
8.   Includes an  aggregate of 605,813  shares of Class A Common Stock  issuable
     pursuant to currently  exercisable stock options.  Of those options,  4,000
     have an exercise price of $3.50 per share, 10,000 have an exercise price of
     $2.73 per share,  22,500 have an exercise price of $2.68 per share,  15,000
     have an exercise price of $2.38 per share,  7,500 have an exercise price of
     $2.20,  20,000  have an  exercise  price of $2.11 per share,  4,000 have an
     exercise price of $2.06 per share,  313 have an exercise price of $1.25 per
     share,  40,000  have an exercise  price of $1.48 per share,  50,000 have an
     exercise  price of $1.41 per share,  15,000 have an exercise price of $1.37
     per share, 40,000 have an exercise price of $1.33 per share, 15,000 have an
     exercise  price of $1.21,  4,000 have an exercise price of $1.03 per share,
     4,000 have an exercise  price of $.81 per share,  130,000  have an exercise
     price of $.75 per share,  40,000 have an exercise  price of $.74 per share,
     15,000 have an exercise  price of $.69 per share,  120,500 have an exercise
     price of $.55 per share,  15,000 have an exercise  price of $.45 per share,
     30,000 have an exercise  price of $.35 per share and 4,000 have an exercise
     price of $.22 per share.
9.   Each share of Class B Common Stock is convertible into one share of Class A
     Common Stock  automatically upon any sale or transfer 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.  "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).

     By virtue of the fact that Mr. Shear owns 93% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders,  Mr. Shear has the right to elect
the majority of the members of the board of directors and may be deemed to be in
control of the Company.

                                    -- 81 --
<PAGE>
     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 August 10, 2006:

                Bruce A. Shear ........................................19.59%
                All Directors and Officers as a Group
                   (7 persons).........................................23.53%

SECURITIES  AUTHORIZED FOR ISSUANCE UNDER EQUITY  COMPENSATION  PLANS as of JUNE
30, 2006

                              (a)            (b)               (c)
    PLAN                       Number of                       Number of
                               securities                      securities
                               to be                           remaining
                               issued         Weighted-        available for
                               upon           average          further issuance
                               exercise       exercise         under equity
                               of             price of         compensation
                               outstanding    outstanding      plans (excluding
                               options,       options          securities
                               warrents       warrents and     reflected
                               and rights     rights           in column (a))
                              _________________________________________________

 1993 Option plan               358,000          $0.64
 2003 Option plan               636,250          $1.94            623,750
 2006 Employee stock Purchase
   plan                              --          $0               500,000
 1995 Director plan             140,000          $0.99                 --
 2005 Director plan             100,000          $1.86            250,000
                              __________     __________         ____________
   Total Shares and Options
     authorized               1,234,250          $1.45          1,373,750
                              ==========     =========          =========

All equity compensation plans were approved by the security holders.


Item 13.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
                                         None

Item 14.  Principal Accountant Fees and Services

     The Company changed  independent  registered public accounting firms during
the fiscal year ended June 30,  2006.  The  following  table  presents  fees for
professional audit services rendered by BDO Seidman, LLP and Eisner, LLP for the
Company's  annual  financial  statements and quarterly review services and other
related services for the fiscal years ended June 30, 2006 and 2005:

                                             2006                2005
                                             ____                ___

         Audit Fees                       $ 186,600           $ 125,500
         All other fees                       5,000                  --
                                          __________           _________
              Total fees                  $ 191,600           $ 125,500
                                          =========           =========

     In fiscal 2006,  BDO Seidman,  billed the Company an  additional  $5,000 in
connection  with the review of the company's  S-8. This amount is listed as "All
other fees" in the above table and relate to services  traditionally provided by
auditors,  which  are  compatible  with BDO  Seidman,  LLP's  independence.  The
Company's  Audit  Committee  considered the non-audit  services  rendered by BDO
Seidman,  LLP  during  fiscal  2006  and  determined  that  such  services  were

                                    -- 82 --
<PAGE>
compatible with BDO Seidman,  LLP's independence.  Firms other than BDO Seidman,
LLP, and Eisner, LLP, provide tax and other accounting services.

     Neither BDO Seidman,  LLP nor Eisner, LLP directly or indirectly,  operate,
or supervise the operation of, the Company's  information  systems or manage the
Company's  local area  network,  nor did they design or  implement a hardware or
software system that aggregates source data underlying the financial  statements
of the Company or generates  information  that is  significant  to the Company's
financial statements taken as a whole.

     The charter of the Audit  Committee  provides that the Audit Committee must
pre-approve  all  auditing  and  non-auditing  services  to be  provided  by the
auditor.  In addition,  any  services  exceeding  pre-approved  cost levels will
require specific pre-approval by the Audit Committee.  All services shown in the
table above were pre-approved by the Audit Committee.

                                    -- 83 --
<PAGE>
PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  The  following  documents  are filed as part of this Annual  Report on Form
     10-K.

1)   Consolidated Financial Statements:                              Page Number
     o    Report of Independent Registered Public Accounting Firms      F-2-F3
     o    Consolidated balance sheets                                   F-4
     o    Consolidated statements of operations F-5
     o    Consolidated statements of changes in stockholders' equity    F-6
     o    Consolidated statements of cash flows                         F-7-F-8
     o    Notes to consolidated financial statements                    F-9-F-32
2)   Financial   Statement   Schedules:   All  schedules  are  included  in  the
     Consolidated financial statements and footnotes thereto
3)   The  following  exhibits are filed as part of or  furnished  with this Form
     10-K as applicable:

       (b)  Exhibits

Exhibit No.                Description

3.1  Restated Articles of Organization of the Registrant,  as amended. (Filed as
     exhibit 3.1 to the Company's Registration Statement on March 2, 1994).
3.2  By-laws  of the  Registrant,  as  amended.  (Filed  as  exhibit  3.2 to the
     Company's  Post-Effective  Amendment  No.  2 on  Form  S-3 to  Registration
     Statement on Form SB-2 under the  Securities Act of 1933 dated November 13,
     1995.)
4.1  Warrant Agreement issued to CapitalSource  Finance, LLC to purchase 250,000
     Class A Common shares dated October 19, 2004. (Filed as exhibit 4.14 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Commission on October 22, 2004. Commission file number 0-22916).
4.2  Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC,  Inc.,  and Heller  Healthcare  Finance dated March 16,
     1998.  (Filed as exhibit  4.17 to the  Company's  quarterly  report on Form
     10-QSB,  filed with the Securities and Exchange  Commission on November 14,
     2000. Commission file number 0-22916).
4.3 Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC, Inc., and Heller Healthcare  Finance dated December 18,
     2000.  (Filed as exhibit 4.19 to the Company's  report on Form 10-KSB dated
     September 25, 2001. Commission file number 0-22916).
4.4 Form of Subscription  Agreement and Warrant.  (Filed as exhibit 4.20 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Cmmission on May 13, 2004. Commission file number 0-22916).
10.1 Deed of Trust Note of Mount Regis Center  Limited  Partnership  in favor of
     Douglas  M.  Roberts,  dated  July 28,  1987,  in the  amount of  $560,000,
     guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis Center,
     Limited Partnership of even date. (Filed as exhibit 10.1 to Form SB-2 dated
     March 2, 1994).  Assignment and Assumption of Limited Partnership Interest,
     by and between PHC of Virginia Inc. and each assignor  dated as of June 30,
     1994. (Filed as exhibit 10.57 to Form 10-KSB on September 28, 1994).
10.2 Copy of Note of Bruce A. Shear in favor of Steven J. Shear,  dated December
     1988, in the amount of $195,695;  Pledge  Agreement by and between Bruce A.
     Shear and  Steven  J.  Shear,  dated  December  15,  1988;  Stock  Purchase
     Agreement by and between Steven J. Shear and Bruce A. Shear, dated December
     1, 1988. (Filed as exhibit 10.2 to the Company's  Registration Statement on
     Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.3 Agreement  between  Family  Independence  Agency and Harbor  Oaks  Hospital
     effective  January 1, 1997.  (Filed as exhibit 10.4 to the Company's report
     on Form 10-KSB,  with the Securities and Exchange Commission on October 14,
     1997. Commission file number 0-22916)

                                    -- 84 --
<PAGE>
Exhibit No.                Description

10.4 Master Contract by and between Family  Independence  Agency and Harbor Oaks
     Hospital effective January 1, 1997. (Filed as exhibit 10.5 to the Company's
     report on Form 10-KSB, filed with the Securities and Exchange Commission on
     October 14, 1997. Commission file number 0-22916).
10.5 The  Company's  1993 Stock  Purchase and Option Plan,  as amended  December
     2002.  (Filed as exhibit  10.23 to the  Company's  report on Form S-8 dated
     January 8, 2003. Commission file number 333-102402).
10.6 The  Company's  1995  Non-Employee  Director  Stock Option Plan, as amended
     December 2002.  (Filed as exhibit 10.24 to the Company's report on Form S-8
     dated January 8, 2003. Commission file number 333-102402).
10.7 The Company's 1995 Employee Stock Purchase Plan, as amended  December 2002.
     (Filed as exhibit 10.25 to the  Company's  report on Form S-8 dated January
     8, 2003. Commission file number 333-102402).
10.8 Membership  Purchase  Agreement  between  PHC,  Inc.  and Pivotal  Research
     Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and Anthony A
     Bonacci  dated April 30,  2004.  (Filed as exhibit  10.27 to the  Company's
     report on Form 8-K filed with the Securities and Exchange Commission on May
     13, 2004. Commission file number 0-22916).
10.9 Pledge  Agreement  entered into April 30, 2004 by and between PHC, Inc. and
     Louis C. Kirby,  Carol A. Colombo and Anthony A Bonacci.  (Filed as exhibit
     10.28 to the  Company's  report on Form 8-K filed with the  Securities  and
     Exchange  Commission  on May 13,  2004.  Commission  file number  0-22916).
10.10 Security  Agreement  entered into April 30, 2004 by and between PHC,  Inc.
     and Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A Bonacci.  (Filed as
     exhibit 10.29 to the Company's report on Form 8-K filed with the Securities
     and Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.11 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note A).  (Filed as exhibit 10.30 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.12 Secured  Promissory Note dated April 30, 2004 in the amount of $500,000 by
     PHC,  Inc.  in favor of Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A
     Bonacci (Note B).  (Filed as exhibit 10.31 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.13 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note C).  (Filed as exhibit 10.32 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.14 Kirby Employment and Non-Compete Agreement. (Filed as exhibit 10.33 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Commission on May 13, 2004. Commission file number 0-22916).
10.15 Colombo Employment and Non-Compete  Agreement.  (Filed as exhibit 10.34 to
     the  Company's  report on Form 8-K filed with the  Securities  and Exchange
     Commission on May 13, 2004. Commission file number 0-22916).
10.16 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.35 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
     Commission file number 0-22916).
10.17 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.36 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
     Commission file number 0-22916).

                                    -- 85 --
<PAGE>
Exhibit No.                   Description

10.18 Revolving  Credit,  Term Loan and Security  Agreement,  dated  October 19,
     2004, by and between PHC, Inc, PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,
     PHC of Michigan,  Inc.,  PHC of Nevada,  Inc.,  North Point  Pioneer,  Inc,
     Wellplace,  Inc.,  Detroit  Behavioral  Institute,  Inc. and  CapitalSource
     Finance,  LLC. (Filed as exhibit 10.38 to the Company's  report on Form 8-K
     filed with the  Securities  and  Exchange  Commission  on October 22, 2004.
     Commission file number 0-22916).
10.19 Term Loan Note,  dated  October 19, 2004,  by and between PHC, Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $1,400,000.
     (Filed as exhibit 10.39 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.20 Revolving  Note dated  October 19, 2004,  by and between PHC,  Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $3,500,000.
     (Filed as exhibit 10.40 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.21 One of two (2) Revolving  Credit Notes in the amount of $1,500,000  issued
     to replace the $3,500,000  note signed in favor of  CapitalSource  Finance,
     LLC dated  October 19, 2004 by and between PHC of  Michigan,  Inc.,  PHC of
     Nevada,  Inc.,  PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,  North Point -
     Pioneer,  Inc.,  Wellplace,  Inc., Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance LLC. (Filed as exhibit 10.47 to the Company's report
     on Form 10-QSB dated May 13, 2005. Commission file number 0-22916).
10.22 One of two (2) Revolving  Credit Notes in the amount of $2,000,000  issued
     to replace the $3,500,000  note signed in favor of  CapitalSource  Finance,
     LLC dated  October 19, 2004 by and between PHC of  Michigan,  Inc.,  PHC of
     Nevada,  Inc.,  PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,  North Point -
     Pioneer,  Inc.,  Wellplace,  Inc., Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance LLC. (Filed as exhibit 10.48 to the Company's report
     on Form 10-QSB dated May 13, 2005. Commission file number 0-22916).
10.23 Agreement  to purchase  licensed  software by and between PHC,  Inc.,  and
     Medical  Information  Technology,  Inc.,  dated March 31,  2006.  (Filed as
     exhibit  10.49 to the  Company's  report on Form 10-QSB dated May 22, 2006.
     Commission file number 0-22916).
 10.24 Master lease agreement by and between PHC, Inc., and
     Banc of America  Leasing & Capital,  LLC,  dated April 20, 2006,  effective
     April 1, 2006,  in the amount of $662,431.  (Filed as exhibit  10.50 to the
     Company's report on Form 10-QSB dated May 22, 2006.  Commission file number
     0-22916).
*10.25 First Amendment to Revolving  Credit,  Term Loan and Security  Agreement,
     dated October 19, 2004, by and between PHC, Inc, PHC of Utah,  Inc., PHC of
     Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,  Inc.,  North Point
     Pioneer,  Inc,  Wellplace,  Inc.,  Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance,  LLC.  ,  adjusting  the  covenants  for census and
     EBITDAM.
*10.26 Second Amendment to Revolving Credit,  Term Loan and Security  Agreement,
     dated October 19, 2004, by and between PHC, Inc, PHC of Utah,  Inc., PHC of
     Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,  Inc.,  North Point
     Pioneer,  Inc,  Wellplace,  Inc.,  Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance,  LLC. , extending the term of the agreement through
     October 19, 2008.
*14.1 Code of Ethics
 21.1 List of Subsidiaries.
*23.1 Consent of Eisner, LLP, an independent registered public accounting firm.
*23.2 Consent of BDO Seidman,  LLP, an independent  registered public accounting
     firm.

                                    -- 86 --
<PAGE>
23.3 Consent  of Wood & Dwyer,  P.L.C.  accountants  for the  acquired  company.
     (Filed as exhibit 23.1 to the Company's report on Form 8-K/A filed with the
     Securities and Exchange Commission on June 29, 2004. Commission file number
     0-22916).
*31.1 Certification  of Chief Executive  Officer  pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.
*31.2 Certification  of the Chief Financial  Officer  pursuant to Section 302 of
     the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Chief Executive  Officer and Chief Financial  Officer
     pursuant  to 18 U.S.C.  1350,  as adopted  Pursuant  to Section  906 of the
     Sarbanes-Oxley Act of 2002.

     *Filed herewith

                                    -- 87 --
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  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 12, 2006                By:  /S/ BRUCE A. SHEAR
                                                __________________________
                                                  Bruce A. Shear, President
                                                  and Chief Executive Officer


     Pursuant to the  requirements of 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 12, 2006
_________________________    Executive Officer and
    Bruce A. Shear           Director  (principal
                             executive officer)


/s/ PAULA C. WURTS           Chief Financial Officer      October 12, 2006
_________________________    Treasurer and Clerk
    Paula C. Wurts           (principal  financial
                             and accounting officer)


/s/ DONALD E. ROBAR          Director                      October 12, 2006
_________________________
         Donald E. Robar


/s/ HOWARD PHILLIPS          Director                      October 12, 2006
_________________________
      Howard Phillips


 /s/ WILLIAM F. GRIECO       Director                      October 12, 2006
_________________________
     William F. Grieco


/S/ DAVID E. DANGERFIELD     Director                     October 12, 2006
_________________________
    David E. Dangerfield




                                    -- 88 --