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

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 [FEE REQUIRED] for the fiscal year ended June 30, 1998

[  ] Transition   report under section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 [NO FEE REQUIRED] for the transition period from to

Commission file number: 0-22916

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

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

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

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

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

                                      NONE.

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


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

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

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

The issuer's revenues for the fiscal year ended June 30, 1998 were $ 21,246,189.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked prices of such stock,  as of  September  15, 1998,  was  $4,615,671.  (See
definition of affiliate in Rule 12b-2 of Exchange Act).

At September 15, 1998, 4,935,267 shares of the issuer's Class A Common Stock and
727,328 shares of the issuer's Class B Common Stock were outstanding.

                 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                    Yes No X


                                     - 1 -
<PAGE>
     This  amendment to the  Company's  report on form 10-KSB for the year ended
June 30, 1998 filed with the Securities  and Exchange  Commission on October 13,
1998, is being filed to reflect the following information:

1.   Item 3. Legal Proceedings  expanded to include detail  previously  reported
     under "Closed and Discontinued operations-Franvale".

2.   Item 6. Management Discussion and Analysis or Plan of Operation expanded to
     included the changes in the restatement of the financial statements.

3.   Item 7. Financial Statements restated to include:

     a.   To dual date auditors' report to include information related to QCC as
          of October 5, 1998 and reflected in Note I.

     b.   An additional expense of approximately $148,000 for warrants issued in
          lieu of cash for investor relations services.

     c.   Dividends of $190,000 charged to retained  earnings for the beneficial
          conversion feature of the series B convertible preferred stock.

     d.   Expanded footnote A to the financial  statements  relating to business
          segment reporting.

     e.   Expanded  footnote J to the  financial  statements  relating to equity
          transactions

4.   Item 11. Security  Ownership of Certain Beneficial Owners and Management to
     include an additional 5% owner previously omitted.


                                     - 2 -
<PAGE>
                                     PART I
  ITEM 3.  LEGAL PROCEEDINGS.

     In September 1998, the Company and Franvale were each served with subpoenas
in connection with an on-going  investigation of Franvale being conducted by the
Attorney General of the Commonwealth of  Massachusetts.  While the investigation
apparently  is in a  preliminary  phase,  the focus appears to be the quality of
patient  care  provided  by  Franvale  during the period of early 1997 until the
facility was placed into  receivership  in June 1998. The Company is cooperating
fully with the  investigation  and  currently is engaged in producing  documents
requested  in the  subpoenas.  The Company does not believe that it has violated
any laws.

     The  Company  has  been  named as a  defendant  in a  proceeding  captioned
HEALTHCARE  SERVICES GROUP, INC. V .QUALITY CARE CENTERS OF MASSACHUSETTS,  INC.
AND PHC, INC.,  C.A. No. 98-132 (Sup.  Ct.,  Suffolk Co., MA). The plaintiff,  a
supplier of  housekeeping  and laundry  services to Franvale,  recently  filed a
motion to add the Company as a party  defendant.  The  plaintiff has alleged two
causes of action against the Company in the Substitute First Amended  Complaint.
In Count III (Accord  and  Satisfaction),  Plaintiff  seeks  $51,845.61  for the
Company's  alleged  breach of an agreement to pay plaintiff the money owed to it
by Franvale.  In Count IV (Guaranty),  plaintiff alleges that the Company agreed
to pay  Franvale's  debt but did not do so and  plaintiff  seeks a  judgment  of
$67,412.60.  The Court has not yet  ruled on the  plaintiff's  motion to add the
Company  as a  defendant  and the  Company  has not been  formally  served  with
process.  If the  Company is joined as a  defendant,  it intends  vigorously  to
contest the plaintiff's  claims. At this time it is not possible to evaluate the
likelihood of an unfavorable outcome or to predict the Company's potential loss.
Based on the AD DAMNUM clause of the  Substitute  First Amended  Complaint,  the
maximum  potential loss to the Company is alleged to be  $67,412.60,  plus costs
and interest from the date of demand.

     The Company has been named as a defendant  in a  proceeding  captioned  THE
HARTFORD PROVISION COMPANY V. PHC, INC., Civil Action No. 9886 CV 0395 (District
Court Department of the Trial Court, Peabody Division,  Mass.). Hartford alleges
that it provided  food  products  and other  goods to  Franvale  pursuant to the
Company's  Credit  Application  and  Guaranty  Agreement.  Hartford  claims that
Franvale has a balance due and owing of  $25,579.16.  Count I alleges  breach of
contract and Count II alleges violation of G. L. c. 93A,  Massachusetts'  unfair
and deceptive  trade  practices act. The Company filed a Motion to Dismiss Count
II for failure to allege anything other than a simple breach of contract action.
With regard to Count I, Hartford has thus far been unable to produce the written
contract with the Company's  signature on it, as they allege. The Company denies
any  liability and asserts that the goods were provided to Franvale and that the
Company never signed any Credit Application and it intends to vigorously contest
Plaintiff's claims.

     Although the results of these litigations cannot be estimated at this time,
the Company does not believe that any monetary  payments will be material to the
financial position or results of operations of the Company.


                                     - 3 -
<PAGE>
                                     PART II

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

     The following is a discussion  and analysis of the financial  condition and
results of operations of the Company for the years ended June 30, 1998 and 1997.
It should be read in conjunction with the consolidated  financial statements and
notes  thereto  appearing  elsewhere  herein.  During the fiscal  years  several
businesses were acquired or closed which makes  comparability  of period results
difficult.

OVERVIEW

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

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

RESULTS OF OPERATIONS

YEARS ENDED JUNE 30, 1998 AND 1997

     The Company  experienced a significant  loss for fiscal year ended June 30,
1998 including increased expenses incurred related to the closure and buy out of
the  lease at PHC of Rhode  Island,  Inc.,  approximately  $500,000,  the  final
write-down of receivables of the California  facility,  approximately  $100,000,
the  write  down  of  approximately  10% of the  amount  due  to  BSC-NY,  Inc.,
approximately  $380,000,  from the related Professional  Corporation due to cash
flow problems and slow  collections,  an additional  increase in reserve for bad
debts  excluding the above of  approximately  $950,000 and,  although the actual
closure of the Blacksburg,  Virginia clinic happened subsequent to year end, the
effect  of the  closure  and buy out of the  lease  of the  Blacksburg  Virginia
clinic, approximately $140,000, is also reflected in the June 30, 1998 financial
statements.  Adjustments  relating  to  the  foregoing  matters  were  primarily
recorded in the fourth quarter of fiscal 1998. There are also additional  losses
for Franvale Nursing and  Rehabilitation  Center since the Company was unable to
complete the sale of the facility as  originally  planned when  operations  were
reported as discontinued  (see `Business - Closed and Discontinued  Operations -
Franvale' for additional details related to the sale of the facility).

     The  environment  the  Company   operates  in  today  makes  collection  of
receivables,  particularly  older  receivables,  more difficult than in previous
years. Accordingly,  the Company recorded an increase in its accounts receivable
reserve in the year ended June 30, 1997 and has continued  with a more stringent
reserve  policy  through  the year ended June 30, 1998  including a  significant
increase in reserve  amounts during the fourth quarter of 1998. The company also
instituted a more aggressive collection policy in response to today's healthcare
environment, which has begun to produce results. The Company's collection policy
calls for earlier 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.  This  early
concentration on claim collection allows facility staff to become aware of minor
billing  errors early and correct them before the claim can be denied for timely
and accurate submission.

     Total patient care revenue from all facilities, excluding Franvale which is
reported as  discontinued  operations,  decreased 3% to $21,246,189 for the year
ended June 30,  1998 from  $21,927,655  for the year ended June 30,  1997.  This
decline in revenue is due  primarily  to a decline in census and closure of Good
Hope  Center in Rhode  Island.  Net  inpatient  care  revenue  from  psychiatric
services  increased  slightly to $13,640,801  for the fiscal year ended June 30,
1998 compared to $13,557,703 for the year ended June 30, 1997 and net outpatient
care revenue decreased 13.5% to $6,128,552 for the year ended June 30, 1998 from
$7,089,340 for the year ended June 30, 1997.  Revenues from Practice  Management
and  Pioneer   Development  and  Support  Services  ("PDSS")  increased  15%  to
$1,476,836  for the year ended June 30, 1998 from  $1,280,613 for the year ended
June 30, 1997.

     Total patient care expenses for all facilities excluding Franvale increased
3% to $10,706,639 for the year ended June 30, 1998 from $10,346,111 for the year
ended June 30, 1997.  This increase in patient care expenses is largely a result
in increases in outpatient  and capitated  rate services  provided  which have a
higher  percentage of total  expenses  related  directly to patient care.  Total
Administrative  expenses for all facilities  excluding Franvale increased 10% to
$9,488,631  for the year ended June 30, 1998 from  $8,622,946 for the year ended
June 30,  1997.  Approximately  40% of this  increase  is due to the  accrual of
additional employee earned time benefits.  During the fiscal year ended June 30,
1998 the Company changed its vacation/sick time policy to an earned time policy.
Prior to 1998 the  company  accrued  vacation  time but did not accrue sick time
since  the  Company  was  not  obligated  to pay  sick  time at  termination  of
employment.  In fiscal 1998 the Company put in place an earned time policy which
provides for more days accrued per person with no distinction  between vacation,
holiday or sick time. This created a greater potential  liability for payment if
employment is  terminated  for any reason since federal law views earned time as
part of salary  and due to the  employee  in full at  termination.  The  Company
decided to adopt this more  costly  plan to  improve  employee  morale and bring
benefits more in line with the Company's competition.  Approximately 14% of this
increase  is due to the costs  related to the closing of the  Blacksburg  Clinic
primarily  the  write-off  of  intangible  assets  related  to that  clinic  and
approximately 8% of this increase is due to additional accounting and legal cost
related to the registration of securities.

YEAR 2000 COMPLIANCE

     The Company has contracted with its  Information  Systems Vendor to upgrade
its current  accounts  receivable  software to accommodate a four digit year and
bill,  track and age  receivables  accordingly.  This software is expected to be
installed  in test form by December 31,  1998.  The Company has also  contracted
with  another  company to provide  case  management  software  that is year 2000
compliant.  This software has already been installed at Pioneer  Development and
Support  Services in Utah and is currently  being  modified to meet the needs of
Harmony  Healthcare in Nevada. The Company has already upgraded Network software
at some  locations  and is  currently  upgrading  hardware  to  accommodate  the
software  upgrade  at all  other  locations.  If the  Company  is unable to make
required  changes prior to January 1, 2000 it will be required to change current
electronic billing to paper billing and insert the eight digit year on all paper
bills manually.  Although this is a costly and time consuming process,  it would
allow the company to continue processing claims.

         The Company is currently in the process of contacting  each third party
payor of accounts receivable, financial institution, major supplier of essential
products and utility to request the status of their year 2000 compliance.  As of
June 30, 1998 only 10% of vendors  notified have  responded to our requests.  We
are sending second notices and will explore alternative sources if responses are
not received by fiscal year end June 30, 1999.

         To date  the  Company  has  expended  approximately  $26,000  on  items
relating  to the year 2000  issues and  anticipates  approximately  $150,000  in
additional  expenses relating to the upgrade of Company's computer and telephone
systems.

                                     - 4 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     For the two fiscal years ended June 30, 1998, the Company met its cash flow
needs  through  accounts  receivable  financing  and by issuing  debt and equity
securities as follows:
<TABLE>
<S>   <C>                    <C>         <C>       <C>         <C>             <C>

 DATE      TRANSACTION TYPE    NUMBER OF  PROCEEDS    MATURITY     TERMS           STATUS
                               SHARES                   DATE
 11/96  Warrant issued as
        payment of commision   25,000                 10/7/2001  $2.00 exercise  outstanding
        on Convertible                                           price as
        Debentures                                               adjusted 7/97
                                                                 issued for
                                                                 services
 11/96  Convertible Debentures           $3,125,000    12/31/98  7% Interest     Converted
                                                                 per Yr.         8/97
 2/97   Warrant issued in       3,000                 2/18/2002  $2.80 per       outstanding
        exchange for investor                                    $1.25 shares
        relations services                                       adjusted for
                                                                 dilution issued
                                                                 for services
 3/97   Warrant issued in     160,000                 3/31/2002  exercise price  outstanding
        exchange for investor                                    $2.62 issued
        relations services                                       for services
 3/97   Warrants issued as    150,000                 3/31/2002  $2.00 exercise  outstanding
        registration penalty                                     price issued as
        on Convertible Debentures                                registration
                                                                 penalty
 5/97   Convertible Preferred   1,000   $1,000,000    05/31/99  6% Interest per Converted
        Stock                                                    per Yr.         6/97 through
                                                                 convertible     8/97
                                                                 at 80% of 5
                                                                 day average bid
                                                                 price
 6/97   Warrant issued in      50,000                06/04/2000  exercise price  outstanding
        conjuction with                                          $2.75
        the Private
        Placement of
        Convertible Preferred
        Stock 5/97
 9/97   Common Stock          172,414      $500,000       N/A  Issued with     Common
                                                                 warrants at a   Stock
                                                                 3.3% discount   Sold
 9/97   Warrant issued as      86,207                09/30/2002  exercise price  outstanding
        part of the units                                        $2.90
        in the Private
        Placement of
        Common Stock
 9/97   Warrant issued in     150,000                05/31/2002  exercise price  outstanding
        exchange for cash                                        $2.50
        and financial
        advisory services
 12/97  Mortgage advance                   $500,000  10/31/2001  Prime Plus 5%   outstanding
 3/98   Warrant issued as a     3,000                03/10/2003  exercise price  outstanding
        penalty for late                                         $2.90
        registration of
        Private Placement
        Common Stock
 3/98   Note Payable                       $350,000    11/10/98  Prime Plus 3.5% outstanding
                                                    as extended
 3/98   Warrants issued        52,500                03/10/2003  exercise price  outstanding
        as additional                                            $2.38
        interest on 3/98
        debt
 3/98   Common Stock issued   227,347      $534,265   N/A        N/A              N/A
        to the former owners
        of BSC-NY, Inc. for
        the earn out
        agreement in lieu of
        cash
 3/98   Convertible Preferred     950      $950,000  03/18/2000  6% Interest per  outstanding
        Stock                                                    Yr. convertible
                                                                 at 80% of 5
                                                                 day average
                                                                 bid price
 3/98   Warrants issued        49,990                03/18/2001  exercise price  outstanding
        in connection with                                       $2.31
        the Private
        Placement of
        convertible
        Preferred Stock
        on 3/98
 5/98   Note Payable -                      $50,000   on demand 12% annual      outstanding
        Related Party                                            interst rate
 6/98   Note  Payable -                     $50,000   on demand 12% annual      outstanding
        Related Party                                            interest rate

 </TABLE>                                    - 5 -
<PAGE>
<TABLE>
<S>    <C>                     <C>        <C>       <C>         <C>             <C>
 DATE      TRANSACTION TYPE    NUMBER OF  PROCEEDS    MATURITY     TERMS           STATUS
                               SHARES                   DATE
 7/98   Warrants issued        52,500                07/10/2003  exercise price  outstanding
        as additional                                            $1.81
        intrerest on
        extension of 3/98
        debt
 7/98   Warrants issued        20,000                07/10/2003  exercise price
                                                                                outstanding
        as additional                                            $1.81
        intrerest on
        extension of 3/98
        debt
 8/98   Warrants issued for    50,000                8/15/2001   exercise price  outstanding
        services                                                 $1.75
 8/98   Note  Payable -                    $100,000  on demand   12% annual      outstanding
        Related Party                                            interest rate
</TABLE>
     A  significant  factor in the liquidity and cash flow of the Company is the
timely collection of its accounts  receivable.  Accounts receivable from patient
care  decreased  15.9% to  $8,126,972  during the year ended June 30,  1998 from
$9,671,763 at June 30, 1997.  This decrease in accounts  receivable is primarily
due to the write off of uncollectable California receivables,  the write down of
Good Hope Center  accounts  receivable  with the close of the  facility  and the
overall  increase in reserve for bad debts.  The  Company  continues  to closely
monitor its accounts receivable balances and implement  procedures and policies,
including more aggressive collection  techniques,  to manage accounts receivable
growth and keep it  consistent  with growth in  revenues.  In February  1998 the
Company entered into an accounts  receivable  funding revolving credit agreement
with Healthcare Financial  Partners-Funding II, L.P. ("HCFP"), on behalf of five
of its  subsidiaries,  which  provides for funding of up to $4,000,000  based on
outstanding  receivables.  The outstanding balance on this receivables financing
on June 30, 1998 was approximately $1,680,000.

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

     The  liquidation of the assets and  liabilities of Franvale may result in a
non-cash  financial  statement gain of approximately  $2,000,000 during the year
ending June 30, 1999.


ITEM 7.  FINANCIAL STATEMENTS

         Independent auditors' reports                                F-2, F3

         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

         Consolidated notes to financial statements                   F-8

                                                                             F-1



                                     - 6 -
<PAGE>
INDEPENDENT AUDITORS' REPORT


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


We have audited the  accompanying  consolidated  balance  sheet of PHC, Inc. and
subsidiaries  as of June 30, 1998 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 generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our 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, 1998 and the results of their  operations and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.



                                                             BDO Seidman, LLP

Boston,  Massachusetts
September 18, 1998

October 5, 1998 as to the subsidiary Quality Care Centers of Massachusetts, Inc.
Chapter 7 Bankruptcy filing. (See Note I)


                                                                              F2

                                     - 7 -
<PAGE>
INDEPENDENT AUDITORS' REPORT


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


We have audited the  accompanying  consolidated  balance  sheet of PHC, Inc. and
subsidiaries  as of June 30, 1997 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 generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

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



Richard A. Eisner & Company, LLP

New York, New York
September 19, 1997

                                                                              F3


                                     - 8 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                                                            JUNE 30,
                                                       1998             1997
                                                       ______________________
Current assets:
   Cash and cash equivalents (Note A)               $  227,077      $  844,471
   Accounts receivable, net of allowance for
     doubtful accounts of $3,488,029 at June
     30, 1998 and $1,942,602 at June 30, 1997
     (Notes A, L and M)                              7,441,972       9,066,763
   Prepaid expenses                                    156,695         346,091
   Other receivables and advances                      127,064         249,218
   Deferred income tax asset (Note F)                  515,300         515,300
Other receivables, related party (Note K)               64,065          80,000
                                                    ___________     ___________
         Total current assets                        8,532,173      11,101,843

Accounts receivable, noncurrent                        685,000         605,000
Other receivables, noncurrent, related party,
   net of allowance for doubtful accounts of
   $382,000 in 1998 (Note K)                         2,941,402       2,983,177
Other receivables                                      426,195         134,284
Property and equipment, net (Notes A, B and D)       2,128,273       3,525,195
Deferred income tax asset (Note F)                     154,700         154,700
Deferred financing costs, net of amortization
  of $18,065 and $83,026 at June 30, 1998
  and 1997 respectively                                 53,608          60,575
Goodwill, net of accumulated amortization of
  $307,707 and $208,133 at June 30, 1998
  and 1997, respectively (Note A)                    2,011,613       1,644,252
Other assets (Note A)                                   19,386         214,150
                                                     ___________     ___________
      Total assets                                $ 16,952,350    $ 20,423,176
                                                    ___________     ___________
 LIABILITIES
Current liabilities:
   Accounts payable                                $ 2,346,213     $ 2,529,126
   Notes payable - related parties (Note E)            159,496          51,600
   Current maturities of long-term debt (Note C)     1,107,167         560,914
   Revolving credit note                             1,683,458       1,789,971
   Current portion of obligations under capital
    leases (Note D)                                     67,492          97,038
   Accrued payroll, payroll taxes and benefits         729,194         303,731
   Accrued expenses and other liabilities            1,004,763         672,154
   Net current liabilities of discontinued
    operations (Note A and I)                        2,641,537         334,349
                                                    ___________     ___________
         Total current liabilities                   9,739,320       6,338,883
                                                    ___________     ___________

Long-term debt, less current maturities
   (Note C)                                          2,850,089       3,021,540
Obligations under capital leases (Note D)               93,747       1,434,816
Notes payable - related parties (Note E)                    --          23,696
Convertible debentures ($3,125,000 less discount
  $390,625)                                                 --       2,734,375
Net long term liabilities of discontinued operations
   (Note A and I)                                           --       1,145,285
                                                    ___________     ___________
         Total noncurrent liabilities                2,943,836       8,359,712
                                                    ___________     ___________
         Total liabilities                          12,683,156      14,698,595

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

STOCKHOLDERS' EQUITY (NOTES H, J  AND K)
Convertible Preferred stock, $.01 par value;
  1,000,000 shares authorized, 950 and 500
  shares issued and outstanding June 30, 1998
  and June 30, 1997 respectively (liquidation
  Preference $950,000)                                      10              5
Class A common stock, $.01 par value; 20,000,000
  shares authorized, 4,935,267 and 2,877,836
  shares issued June 30, 1998 and June 1997,
  respectively                                          49,353         28,778
Class B common stock, $.01 par value; 2,000,000
  shares authorized, 727,328 and 730,360
  issued and outstanding June 30, 1998 and
  1997, respectively, convertible into one share
  of Class A Common Stock                                7,273          7,304
Class C common stock, $.01 par value; 200,000
  shares authorized, no shares outstanding
  June 30, 1998 and 199,816 shaers issued and
  outstanding June 30, 1997                                 --          1,998
Additional  paid-in capital                         15,485,895     10,398,630
Treasury stock, 2,776 and 8,656 common shares
  at cost June 30, 1998 and June 30, 1997,
  respectively                                         (12,122)       (37,818)
Accumulated deficit                                (11,261,215)    (4,674,316)
                                                    ___________     __________
    Total stockholders' equity                       4,269,194       5,724,581
                                                   ___________     ___________
    Total liabilities and stockholders' equity    $ 16,952,350    $ 20,423,176

SEE NOTES TO FINANCIAL STATEMENTS
                                                                             F-4

                                     - 9 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
                                                      YEAR ENDED JUNE 30,
                                                 1998                  1997
                                                ______________________________
Revenues:
     Patient care, net (Note A)                $ 19,649,353      $ 20,700,616
     Management fees (Note K)                       833,750           597,278
    Other                                           763,086           629,761
                                               _____________     ____________
         Total revenue                           21,246,189        21,927,655

Operating expenses:
    Patient care expenses                        10,706,639        10,346,111
     Cost of management contracts                   467,065           324,440
     Provision for doubtful accounts              3,684,452         2,593,573
     Administrative expenses                      9,488,631         8,622,946
                                               _____________     ____________
        Total operating expenses                 24,346,787        21,887,070
                                               _____________     ____________
 Income (loss)  from operations                  (3,100,598)           40,585
                                               _____________     ____________
Other income (expense):
     Interest income                                391,353           199,976
    Interest expense                             (1,289,642)       (1,441,030)
    Other income, net                                58,583           490,019
    Gain from operations held for sale
      (Note I)                                           --            26,853
                                               _____________     ____________
       Total other expense, net                    (839,706)         (724,182)
                                               _____________     ____________

LOSS BEFORE INCOME TAXES                         (3,940,304)         (683,597)
Income taxes (Note F)                               219,239           197,311
                                               _____________     ____________

LOSS FROM CONTINUING OPERATIONS                  (4,159,543)         (880,908)

LOSS FROM DISCONTINUED OPERATIONS
  (NOTES A AND I)                                (2,220,296)       (1,958,756)
                                               _____________     ____________
              Net loss                         $ (6,379,839)     $ (2,839,664)
Dividends                                          (207,060)         (204,330)
                                               _____________     _____________

Loss applicable to common shareholders         $(6,586,899)      $(3,043,994)

Basic and Diluted Loss per common share:
    Continuing Operations                           $ (.84)           $ (.33)
    Discontinued Operations                           (.42)             (.60)
                                               _____________     ____________
      Total                                        $ (1.26)           $ (.93)
                                               _____________     ____________
Basic and Diluted Weighted average number of
     shares outstanding                          5,237,168         3,270,175

See Notes to Financial Statements
                                                                             F-5

                                     - 10 -
<PAGE>

PHC, INC.  AND SUBSIDIARIES

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

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

BALANCE - JUNE 30, 1996       2,293,568  $ 22,936   812,237  $ 8,122   199,816  $1,998
Issuance of shares with         229,500     2,295
  acquisitions (Note K)
  NPP  15,000
  BSC 150,000
  PCV  64,500
Exercise of options              13,475       135
Payment of notes receivable
Conversion of shares             81,877       818   (81,877)    (818)
Issuance of employee stock
  purchase plan shares            9,452        94
Issuance of shares in
  connection with consulting
  agreement (Note J)             20,000       200
Issuance of warrants with
  convertible debentures
  (Note C)
Cancellation of notes receivable
Payment of notes receivable
Issuance of preferred stock,
  Series A (Note J)                                                                      1,000   $10
Adjustment related to
  beneficial conversion feature
  of convertible preferred
  stock and convertible debenture
  (Notes C and J)
Conversion of preferred stock
  Series A (Note J)             229,964     2,300                                         (500)   (5)
Dividend on preferred stock
Costs related to private
  placements
Net loss, year ended June 30,
  1997                         ________   ________   _______ _______   _______   _______  ________  ______

BALANCE - JUNE 30, 1997       2,877,836    28,778   730,360    7,304   199,816   1,998      500    5
Conversion of debt (Note C)   1,331,696    13,317
Conversion of preferred stock
  Series A (Note J)             246,305     2,463                                          (500)  (5)
Issuance of shares with
 Acquisition (Note K)            41,024       410
Issuance private placement
  shares (Note J)               172,414     1,724
Conversion of shares              3,032        31     (3,032)    (31)
Cancel Class C Common Stock                                           (199,816)(1,998)
Issue warrants for services
  (Note J)
Issuance of shares with
  consulting agreement
  (Note J)                       20,870       209
Issuance of Shares with
  earn out agreement
  (Note K)                      227,347     2,274
Issuance of employee stock
  purchase plan shares           14,743       147
Issuance of preferred stock
  Series B                                                                                 950    10
Adjustment related to
  beneficial conversion
  feature of convertible
  preferred stock
Warrant issued with debt
Treasury stock issued to
  employees
Dividends on preferred stock
Costs related to private
  placements
Net Loss - year ended June 30,
  1998

BALANCE - JUNE 30, 1998       4,935,267   $49,353    727,328  $7,273    0       $0         950    $10
(as restated)                 _________   _______    _______  ______    ______  ______    _____   _____

See Notes to Financial Statements
</TABLE>

                                     - 11 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES (con't)

Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S>                    <C>              <C>          <C>       <C>       <C>          <C>
                             Additional
                              Paid-In
                              Capital        Notes
                              Common       Receivable  Treasury  Shares      Accumulated
                              Stock        for Stock    Shares   Amount        Deficit     Total
                              _______________________________________________________________________

BALANCE - JUNE 30, 1996       $8,078,383   $ (63,928)                        $(1,630,322) $6,417,189
Issuance of shares with
  Acquisitions (Note K)          838,524                                                     840,819
     NPP   15,000
     BSC  150,000
     PCV   64,500
Exercise of options               59,709                                                      59,844
Payment of notes receivable                      662                                             662
Conversion of shares                                                                             -0-
Issuance of employee stock
  Purchase Plan Shares            30,530                                                      30,624
Issuance of shares in
  connection with consulting
  agreement (Note J)              79,800                                                      80,000
Issuance of warrants with
  convertible debentures
  (Note C)                       125,000                                                     125,000
Cancellation of notes receivable              37,818     8,656   $(37,818)                       -0-
Payment of notes receivable                   25,448                                          25,448
Issuance of preferred stock
  Series A (Note J)              999,990                                                   1,000,000
Adjustment related to beneficial
  conversion feature of
  convertible preferred stock
  and convertible debentures
  (Notes C and J)                330,284                                        (200,000)    130,284
Conversion of preferred stock
  Series A (Note J)               (2,295)                                                       -0-
Dividend on preferred stock                                                      (4,330)     (4,330)
Costs related to private
  placements                    (141,295)                                                  (141,295)
Net loss, year ended June 30,
   1997                                                                      (2,839,664)  2,839,664)
                              ____________________________________________________________________

BALANCE - JUNE 30, 1997        10,398,630          0      8,656   (37,818)   (4,674,316)  5,724,581
Conversion of debt (Note C)     2,696,789                                                 2,710,106
Conversion of preferred stock
  Series A (Note J)                (2,458)                                                        0
Issuance of shares with
  acquisition (Note K)             79,605                                                    80,015
Issuance Private Placement
  shares (Note J)                 498,276                                                   500,000
Conversion of Shares                                                                            -0-
Cancel Class C Common Stock         1,998                                                       -0-
Issue warrants for services
  (Note J)                        184,523                                                   184,523
Issuance of shares with
  consulting agreement (Note J)    36,249                                                    36,458
Issuance of shares with
  earn out agreement (Note K)     531,991                                                   534,265
Issuance of employee stock
  purchase plan shares             35,750                                                    35,897
Issuance of preferred stock
   Series B                       949,990                                                   950,000
Adjustment related to beneficial
  conversion feature of
  convertible preferred stock     190,000                                       (190,000)        -0-
Warrant issued with debt           48,809                                                     48,809
Treasury stock issued to employees                       (5,880)     25,696                   25,696
Dividends on Preferred Stock                                                     (17,060)    (17,060)
Costs related to private
  placements                     (164,257)                                                  (164,257)
Net Loss-year ended June 30,
  1998                                                                        (6,379,839)  6,379,839)
                               _____________________________________________________________________
BALANCE - JUNE 30, 1998       $15,485,895        $-0-     2,776    $(12,122)$(11,261,215) $4,269,194
(as restated)

SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
                                                                           F-6
                                     - 12 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    For the Year Ended June 30,
                                                       1998             1997
                                                    ___________________________
Cash flows from operating activities:
     Net loss                                          $(6,379,839) $(2,839,664)
     Adjustments to reconcile net loss to net
      cash used in operating activities:
         Depreciation and amortization                     674,162      469,118
         Beneficial conversion feature of
          convertible debt                                     --       130,284
        Compensatory stock options and stock and
          warrants issued for obligations                  269,790      205,000
        Changes in:
           Accounts receivable                           1,544,791   (2,929,003)
            Prepaid expenses and other current assets      257,173     (349,017)
            Other assets                                  (257,941)     196,339
            Net assets of operations held for sale              --       56,682
            Accounts payable                              (182,913)     884,299
            Accrued expenses and other liabilities         758,072     (143,943)
            Net liabilities of discontinued operations   1,161,903    1,299,795
                                                       ____________ ___________
                 Net cash used in operating activities  (2,154,802)  (3,020,110)
                                                       ____________ ___________

 Cash flows from investing activities:
     Acquisition of property and equipment
        and intangibles                                   (212,492)    (682,425)
     Loan receivable                                       152,749   (3,063,177)
                                                       ____________ ___________
       Net cash used in investing activities               (59,743)  (3,745,602)
                                                       ____________ ___________
Cash flows from financing activities:
      Revolving debt, net                                 (106,513)   1,789,981
         Proceeds from borrowings                          950,000    2,767,373
          Payments on Debt                                (557,883)    (696,886)
       Deferred financing costs                              6,967       21,498
      Preferred Stock Dividends                            (17,060)          --
       Issuance of Capital Stock                         1,321,640      944,173
     Convertible Debt                                           --    2,500,000
                                                       ____________ ___________

       Net cash provided by financing activities         1,597,151    7,326,139
                                                       ____________ ___________

Net increse (decrease) in cash and cash equivalents       (617,394)     560,427
Beginning balance of cash and cash equivalents             844,471      284,044
                                                       ____________ ___________

Ending balance of cash and cash equivalents              $ 227,077    $ 844,471
                                                       ____________ ___________

Supplemental cash flow information:
     Cash paid during the period for:
          Interest                                      $1,567,763  $ 1,279,862
          Income taxes                                    $130,290      $86,414
                                                       ____________ ___________

Supplemental disclosure of noncash investing and
   financing
     Stock issued for acquisitions and earn-out
       agreement                                        $  614,280     $840,819
     Capital leases                                         83,082      284,048
     Conversion of preferred stock                         500,000      500,000
     Beneficial conversion feature of preferred stock      190,000      200,000
      Warrant Valuations                                   233,332            0
     Conversion of Debt to Common Stock                  2,710,106            0
                     SEE NOTES TO FINANCIAL STATEMENTS
                                                                             F-7



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

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION:

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

Until May 31, 1998,  the Company  operated Good Hope Center,  a substance  abuse
treatment facility in West Greenwich,  Rhode Island ("Good Hope"). Until June 1,
1998 the Company also  operated a subacute  long-term  care  facility,  Franvale
Nursing and Rehabilitation Center ("Franvale"),  in Braintree Massachusetts.  On
June 1,  1998  Franvale  was  placed  into  state  receivership.  All  financial
information for Franvale is reported in the accompanying financial statements as
discontinued  operations.  The  liquidation  of the  assets and  liabilities  of
Franvale  may result in a non-cash  financial  statement  gain of  approximately
$2,000,000 during the year ending June 30, 1999.

During the year ended June 30,  1998,  the  Company  recorded an increase in its
accounts  receivable  reserve in line with its more  aggressive  reserve  policy
established last year,  reserved for the remaining  accounts  receivable balance
from a closed  California  facility  and  allowed  for a higher  reserve for the
closed Rhode Island facility.

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
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 currently based on established  rates depending on
the  level  of  care   provided   and  are  adjusted   prospectively.   Medicare
reimbursements  are  currently  based on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports filed by the Company with  Medicare.
The Company's cost reports to Medicare are routinely audited on an annual basis.
The Company  periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision has
been made in the financial statements for any adjustments that might result from
the outcome of Medicare audits.
                                                                            F-8

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

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

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

REVENUES  AND  ACCOUNTS  RECEIVABLE:  (CONTINUED)  The Company  has  $769,982 of
receivables  from  Medicaid and Medicare at June 30,  1998,  which  constitute a
concentration  of credit risk should Medicaid and Medicare defer or be unable to
make reimbursement payments as due. This amount does not include receivables due
to  Franvale  Nursing  and  Rehabilitation  which  is  reported  as net  current
liabilities of discontinued operations on the accompanying Balance Sheet.

Charity care amounted to approximately $504,000 and $725,000 for the years ended
June 30,  1998 and 1997,  respectively.  Patient  care  revenue is stated net of
charity care in the accompanying statements of operations.

PROPERTY AND EQUIPMENT:

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

                                                       Estimated
                    Assets                             Useful Life
                    ______                             ____________
                       Buildings                       39 years
                       Furniture and equipment          3 through 10 years
                       Motor vehicles                   5 years
                       Leasehold improvements           Term of lease

OTHER ASSETS:

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

GOODWILL, NET OF ACCUMULATED AMORTIZATION:

The  excess of the  purchase  price  over the fair  market  value of net  assets
acquired are being amortized on a straightline basis over twenty years.

BASIC AND DILUTED LOSS PER SHARE:

Net loss per share is computed by dividing net loss  applicable  to common stock
by the  weighted  average  number of shares of common stock for each fiscal year
excluding Class C Common Shares.

In 1997, the Financial  Accounting  Standards Board (FASB) issued  Statement No.
128,  Earnings per share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  affects of options,  warrants  and  convertible  securities.  Dilutive
earnings per share is similar to the previously  reported fully diluted earnings
per  share.  Diluted  loss  per  share  does  not  include  warrants,   options,
convertible  securities  or  contingently  issuable  shares  that  would have an
anti-dilutive effect.

                                                                          F-9
                                     - 15 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

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

ESTIMATES AND ASSUMPTIONS:

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

CASH EQUIVALENTS:
Cash  equivalents are short-term  highly liquid  investments  with maturities of
less than three months, when purchased. FAIR VALUE OF FINANCIAL INSTRUMENTS: The
carrying  amounts of cash,  trade  receivables,  other current assets,  accounts
payable, notes payable and accrued expenses approximate fair value.

IMPAIRMENT OF LONG-LIVED ASSETS:

During the year ended June 30, 1998 the Company wrote off the carrying  value of
goodwill for PHC of Rhode Island,  Inc.,  approximately $ 23,000,  and wrote off
equipment  and the land and building  assets  related to the capital  lease from
that facility which was closed May 31, 1998 aggregating approximately $1,240,000
in total assets less the liability of approximately  $1,300,000, in an agreement
to release the company from the lease. The company also wrote down the remaining
balance of accounts receivable from a closed California facility,  approximately
$92,000,  and the equipment,  goodwill and additional closing costs recorded for
the Blacksburg facility, approximately $136,000, which is being closed in fiscal
year 1999 to consolidate operations in the Salem, Virginia facility.  During the
year  ended  June 30,  1997 the  Company  wrote  off the  carrying  value of the
goodwill  for  PHC  of  Kansas,  one  of  its  subsidiaries  in  the  amount  of
approximately  $50,000.  All of the above write-downs were considered  necessary
due to the  closing of  facilities.  The  assets  had no  ongoing  value or were
written-down to their net realizable value. Write-downs in the carrying value of
goodwill and property and equipment are charged to depreciation and amortization
expense,  which  is  included  in  administrative   expenses  in  the  Company's
statements of operations. Write-downs in accounts receivable were charged to the
provision for doubtful accounts in the accompanying statements of operations. In
accordance  with FASB  statement  no. 121,  long-lived  assets are  reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be  recoverable.  For purposes of evaluating
the recoverability of long-lived  assets,  the recoverability  test is performed
using  undiscounted net cash flows related to the long-lived  assets. The amount
of the  impairment  losses  recognized  is  measured  as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.

STOCK-BASED COMPENSATION:

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

All of the Company's  employees are employed  under  leasing  arrangements.  The
Company  believes that its leased  employees  meet the common law  definition of
employee and  therefore  qualify as employees  for the purposes of applying SFAS
123.

RECENT ACCOUNTING PRONOUNCEMENTS
With the closure of Quality Care Centers of  Massachusetts,  Inc., the Company's
operations  are conducted in one business  segment,  the operation of behavioral
health treatment centers,  and all of the Company's operations are in the United
States  therefore,  there is no  additional  requirement  for segment  reporting
placed on the company by SFAS 131.
                                                                          F-10

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

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised as follows:


                                                          JUNE 30,
                                                    1998              1997
                                             _________________________________

                   Land                           $ 119,859         $ 119,859
                    Buildings                     1,676,963         3,154,799
                    Furniture and equipment         839,972           855,226
                    Motor vehicles                   41,444            50,889
                    Leasehold improvements          354,687           358,644
                                                 __________        __________
                                                  3,032,925         4,539,417
                    Less accumulated
                      depreciation and
                      amortization                  904,652         1,014,222
                                                 __________        __________
                                                 $2,128,273        $3,525,195


NOTE C - LONG-TERM DEBT                                  JUNE 30,
                                                     1998             1997
                                             _________________________________
Long-term debt is summarized as follows:
Note payable with interest at 9% requiring
  monthly payments of $1,150 through May
  2001                                              $34,636           $44,816
Note payable due in monthly installments of
  $2,000 including imputed interest at 8%.
  Approximately $21,000 of this obbligation
  was canceled in connection with the
  closing of GHC.                                        --            40,574
9% mortgage note due in monthly  installments
  of $4,850,  including  interest through
  July 1, 2012, when the remaining principal
  balance is payable                                478,582           492,996
Note payable due in monthly installments of
  $21,506 including  interest at 10.5% through
  November 1, 1999, collateralized by all assets
  of PHN and certain receivables.  Interest
  only payments have been made since May 1998
  per subsequent agreement.                         374,190           547,092
Note payable due in monthly installments of
  $26,131 including  interest at 11.5% through
  June 2000 when the remaining principal balance
  is payable, collateralized by all assets of NPP.
  Interest only payments have been made since May
  1998 per subsequent agreement.                    598,848           818,371
Note payable due in monthly  installments of
  $5,558 including  interest at 9.25% through
  May 2012 when the remaining principal balance
  is payable, collateralized by real estate.        521,000           538,605
Term  mortgage  note payable with  interest only
  payments  through  March 1998 principal due in
  monthly installments of $9,167 beginning April
  1998 through February 2001, a balloon payment
  of approximately $1,300,000 plus interest is
  due March 2001, interest at prime plus 5% (13.5%
  at June 30, 1998) collateralized by all assets
  of PHM.                                         1,600,000         1,100,000
Note  payable  bearing  interest at prime plus
  3-1/2% (12% at June 30, 1998)with the principal
  due on November 10, 1998 collateralized by MRC's
  real property and BSC's accounts receivable and
  cross-collateralized with the revolving credit
  note referred to below.                           350,000                --
                                                    __________      __________
                                                  3,957,256         3,582,454

Less current maturities                              1,107,167       560,914
                                                     _________     _________

Noncurrent maturities                               $2,850,089   $ 3,021,540
                                                    __________   ___________

                                                                            F-11
                                     - 17 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE C - LONG-TERM DEBT (CONTINUED)

Maturities of long-term debt are as follows as of June 30, 1998:

                           YEAR ENDING
                           JUNE 30,                            AMOUNT
                           ____________
                           1999                             $ 1,107,167
                           2000                                 560,171
                           2001                               1,863,216
                           2002                                  20,634
                           2003                                  22,570
                           Thereafter                           383,498
                                                            ___________
                                                            $ 3,957,256
                                                            ___________

The Company has a revolving  credit note under which a maximum of $4,000,000 may
be  outstanding  at any  time.  At June 30,  1998 the  outstanding  balance  was
$1,683,458.  Advances are made based on a percentage of accounts  receivable and
principal  is payable  upon  receipt of  proceeds  of the  accounts  receivable.
Interest is payable  monthly at prime plus 2.25% (10.75% at June 30, 1998).  The
agreement is automatically  renewable for one-year periods unless  terminated by
either party. Upon expiration,  all remaining principal and interest is due. The
notes are  collateralized  by  substantially  all of the assets of the Company's
subsidiaries excluding Franvale and guaranteed by PHC.

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

NOTE D - CAPITAL LEASE OBLIGATION

At June 30, 1998,  the Company was obligated  under various  capital  leases for
equipment providing for monthly payments of approximately $7,000 for fiscal 1999
and terms expiring from July 1998 through February 2002.

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

                                                         June 30
                                                 ______________________
                                                    1998             1997
                                                    ____             ____

     Building (Good Hope Center - Capital Lease)    $    --       $1,477,800
     Equipment and improvements                      511,517         485,004
     Less accumulated depreciation and amortization (225,703)       (501,732)
                                                    ---------      ----------
                                                    $285,814      $1,461,072
                                                                           F-12
                                     - 18 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

Future minimum lease  payments  under the terms of the capital lease  agreements
are as follows at June 30, 1998:

          Year Ending
           JUNE 30,                          EQUIPMENT
          ___________                        _________
           1999                               $83,203
           2000                                59,897
           2001                                40,807
           2002                                 3,138
           Thereafter                              --
                                             ________

          Total future minimum lease
            payments                          187,045
          Less amount representing interest    25,806
                                             ________

           Present value of future minimum
             lease payments                   161,239

           Less current portion                67,492
                                              _______

           Long-term obligations under
             capital lease                    $93,747
                                             =========


NOTE E - NOTES PAYABLE - RELATED PARTIES

Related party debt is summarized as follows:             JUNE 30,
                                                    ____________________
                                                    1998         1997
                                                    ____________________

Note payable, President and principal
  stockholder, interest at 8%, due in
  installments through December 1998                $39,496     $ 55,296
Notes payable, Tot Care, Inc., Company
  owned by the President and principal
  stockholder, interest at 12% and payable
  on demand                                         100,000           --
Notes payable, other related parties, interest
  at 12% and payable on demand                       20,000       20,000
                                                    _______     ________
                                                    159,496       75,296

Less current maturities                             159,496       51,600
                                                    _______      _______
                                                    $   -0-      $23,696
                                                                           F-13
                                     - 19 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE F - INCOME TAXES

The Company has the following  deferred tax assets included in the  accompanying
balance sheets:
                                                              YEAR ENDED
                                                                 June 30
                                                       ________________________
                                                        1998             1997
                                                       ________________________
           Temporary differences attributable to:
           Allowance for doubtful accounts             $1,315,000    $1,007,000
           Facility Closing Costs                          85,000            --
           Depreciation                                   225,000       147,000
           Other                                            2,000         3,000
           Operating loss carryforward                  1,650,000       340,000
                                                        _________    __________

           Total deferred tax asset                     3,277,000     1,497,000

           Less:
             Valuation allowance                       (2,607,000)     (827,000)
                                                       ___________   __________
           Subtotal                                       670,000       670,000
             Current portion                             (515,300)     (515,300)
                                                       ___________   __________

                          Long-term portion             $ 154,700     $ 154,700
                                                        _________    __________

The Company had no deferred tax liabilities at June 30, 1998 and 1997.

Income tax expense (benefit) is as follows:
                                                               YEAR ENDED
                                                           ____________________
                                                           1998          1997
                                                           ____________________

               Current state income taxes                $ 219,239      $197,311
                                                         _________      ________

Reconciliations  of the statutory  U.S.  Federal income taxes based on a rate of
34% to actual income taxes is as follows:
                                                                YEAR ENDED
                                                           ____________________
                                                            1998         1997
                                                           ____________________

         Income tax benefit at statutory rate          $(2,044,400)   (898,400)
         State income taxes, net of federal benefit        144,700     130,200
         Increase in valuation allowance                 1,780,000     827,000
         Increase due to nondeductible items, primarily
          penalties and travel and entertainment expenses  161,231      12,000
         Other                                             177,708     126,511
                                                       ___________    ________
                                                          $219,239    $197,311
                                                       ___________    ________

At June 30,1998 the Company had a net operating loss  carryforward  amounting to
approximately $4,865,000 which expires at various dates through 2013.

If the Company has significant  sales of stock in future years,  the utilization
of the net operating  loss  carryforward  in any given year may be limited under
provisions of the Internal Revenue Code.

The Company  anticipates  that it will have sufficient  taxable income in future
fiscal  years to realize  its net  deferred  tax assets  existing as of June 30,
1998. The Company has closed two facilities that contributed most  significantly
to its past losses, the Franvale Nursing and Rehabilitation  Center and the Good
Hope  Center.  The  Company  has also  implemented  procedures  to  improve  the
operating efficiency of its remaining centers. The Company also anticipates that
it will have a substantial gain on the closing of its Franvale  facility of over
$2,000,000 (see Note I).

                                                                           F-14
                                     - 20 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

OPERATING LEASES:

The Company  leases office and treatment  facilities and furniture and equipment
under operating  leases expiring on various dates through January 31, 2004. Rent
expense for the years ended June 30,  1998 and 1997 was  approximately  $882,000
and $752,000,  respectively.  Rent expense  includes  certain short term rentals
and, in 1998  additional  rent expense  associated with the closing of Good Hope
Center.  Minimum future rental payments under  noncancelable  operating  leases,
having remaining terms in excess of one year as of June 30, 1998 are as follows:

                                         YEAR ENDING
                                          JUNE 30,             AMOUNT
                                        ____________        ____________
                                           1999               $413,364
                                           2000                280,974
                                           2001                186,820
                                           2002                120,061
                                           2003                 97,165
                                           Thereafter           42,490
                                                             ___________
                                                            $1,140,874
LITIGATION:

In connection with the  liquidation of Franvale,  some vendors allege that there
are amounts due for services  which are the  obligation of PHC, Inc. At June 30,
1998 total claims pending amounted to approximately $93,000.

In September  1998,  the Company and Franvale were each served with subpoenas in
connection  with an on-going  investigation  of Franvale being  conducted by the
Attorney General of the Commonwealth of  Massachusetts.  While the investigation
apparently  is in a  preliminary  phase,  the focus appears to be the quality of
patient  care  provided  by  Franvale  during the period of early 1997 until the
facility was placed into  receivership  in June 1998. The Company is cooperating
fully with the  investigation  and  currently is engaged in producing  documents
requested  in the  subpoenas.  The Company does not believe that it has violated
any laws.

CONTINGENCY:

In addition,  the  Commonwealth of  Massachusetts  may institute a claim against
PHC,  Inc.  to  recover  expenses   incurred  as  a  consequence  of  Franvale's
receivership.  The Company believes that it has valid defenses to any such claim
and, in any event, it believes that there will be adequate  assets  remaining in
Franvale to satisfy any receivership expenses.

NOTE H - STOCK PLANS

[1]     Stock plans:
         The Company has three stock plans:  a stock  option  plan,  an employee
         stock purchase plan and a nonemployee directors' stock option plan.
                                                                           F-15
                                     - 21 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE H - STOCK PLANS (CONTINUED)

    [1] STOCK PLANS: (CONTINUED)

         The stock option plan provides for the issuance of a maximum of 400,000
         shares of Class A common stock of the Company  pursuant to the grant of
         incentive stock options to employees or  nonqualified  stock options to
         employees,   directors,   consultants  and  others  whose  efforts  are
         important to the success of the Company.  Subject to the  provisions of
         this plan, the  compensation  committee has the authority to select the
         optionees  and determine  the terms of the options  including:  (i) the
         number of shares,  (ii) option  exercise  terms,  (iii) the exercise or
         purchase price (which in the case of an incentive stock option will not
         be less than the  market  price of the  Class A common  stock as of the
         date  of  grant),   (iv)  type  and   duration  of  transfer  or  other
         restrictions  and (v) the time and form of payment for restricted stock
         upon exercise of options. The employee stock purchase plan provides for
         the  purchase of Class A common  stock at 85 percent of the fair market
         value at specific  dates,  to encourage stock ownership by all eligible
         employees. A maximum of 150,000 shares may be issued under this plan.

         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, 1998, options for 17,500 shares
         were granted  under this plan. A maximum of 50,000 shares may be issued
         under this plan. Each outside director is granted an option to purchase
         2,000  shares of Class A common  stock at fair market value on the date
         of grant,  vesting 25%  immediately  and 25% on each of the first three
         anniversaries of the grant.

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

         Under the above plans, at June 30, 1998,  164,555 shares were available
for future grant or purchase.

         The Company had the  following  activity in its stock  option plans for
fiscal 1998 and 1997:
                                                NUMBER          WEIGHTED-AVERAGE
                                                  OF             EXERCISE PRICE
                                                SHARES            PER SHARE
                                               _______________________________
                    Option plans:
                     Balance - June 30, 1996    114,750                $5.56
                     Granted                    125,500                $4.56
                     Repriced options:
                        Original                (95,375)               $5.99
                        Repriced                 95,375                $3.50
                     Cancelled                  (21,400)               $6.05
                     Exercised                  (13,475)               $5.16
                                               __________
                     Balance - June 30, 1997    205,375                $4.27
                     Granted                    210,000                $2.37
                     Cancelled                  (40,000)               $3.21
                                               __________
                     Balance - June 30, 1998    375,375                $3.32
                                              __________

                                                                            F-16
                                     - 22 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE H - STOCK PLANS (CONTINUED)

[2]     STOCK-BASED COMPENSATION:

         Options  for  169,000  shares are  exercisable  as of June 30,  1998 at
         exercise  prices  ranging  from  $2.00 to $6.63 and a  weighted-average
         exercise   price   of   approximately   $3.08   per   share,   with   a
         weighted-average  remaining  contractual  life of  approximately  three
         years.

         The exercise prices of options  outstanding at June 30, 1998 range from
         $2.00 to $6.63 per share and have a weighted-average  exercise price of
         approximately  $3.03  per  share,  with  a  weighted-average  remaining
         contractual life of approximately four years.

         Subsequent  to June 30, 1998 223,875 of the  outstanding  stock options
         were  repriced  to $1.25 and  50,000  were  repriced  to $1.50.  Of the
         outstanding  stock  options  101,500 are held by  Directors  and former
         employees and were not repriced. The weighted average exercise price of
         the options that were not repriced is $3.15.

          The Company has adopted  the  disclosure-only  provisions  of SFAS No.
          123,  but  applies  Accounting  Principles  Board  Opinion  No. 25 and
          related  interpretations  in  accounting  for its plans.  There was no
          compensa- tion expense  recognized in 1998 or 1997. If the Company had
          elected to recognize compensation cost for the plans based on the fair
          value at the grant date for awards granted, consistent with the method
          prescribed by SFAS No. 123, net loss per share would have been changed
          to the pro forma amounts indicated below:


                                                       YEAR ENDED
                                                        JUNE 30,
                                                   1998           1997
                                                _____________________________
           Net loss    As reported
                         Continuing Operations    $(4,011,925)    $ (880,908)
                         Discontinued Operations   (2,220,296)    (1,958,756)

                       Pro forma
                         Continuing Operations     (4,140,252)      (934,516)
                         Discontinued Operations   (2,220,296)    (1,958,756)

           Net loss
           per share   As reported
                        Continuing Operations            (.77)          (.27)
                        Discontinued Operations          (.42)          (.60)

                       Pro forma
                        Continuing Operations            (.79)          (.28)
                        Discontinued Operations          (.42)          (.60)

The fair value of the Company's stock options used to compute pro forma net loss
and net loss per share  disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998 and 1997: dividend yield of 0%; expected volatility of 30%;
a risk-free  interest rate of between 5% and 7%; and an expected  holding period
of five years.

     The per share  weighed-average  grant-date  fair value of  options  granted
during the years ended June 30, 1998 and 1997 was $.84 and $3.44,  respectively.

                                                                           F-17
                                     - 23 -
<PAGE>
PHC, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS

On May 26, 1998,  PHC,  Inc.'s  wholly owned  subsidiary,  Quality  Care,  which
operates  Franvale filed for  reorganization  under Chapter 11. On May 29, 1998,
the Bankruptcy Court terminated the Chapter 11 proceeding determining that there
was no  likelihood  of  reorganization  since the  prospective  acquirer  of the
facility was now imposing certain terms  unacceptable to all interested  parties
and that the transfer of patients and  liquidation of assets could be as readily
effectuated in a state court  receivership  under the aegis of the Massachusetts
Health Care Statutes and  accordingly  dismissed the Chapter 11 case. On June 1,
1998, a receiver  was  appointed to transfer the patients and close the facility
expeditiously.  The Company has recorded the losses of Franvale  through May 31,
1998 in the accompanying financial statements.

         Subsequent to year end the Company's  Bankruptcy  Attorney was notified
that effective September 30, 1998 the patient care receivership for Quality Care
had been  terminated.  On October 5, 1998, in response to the termination of the
State Receivership, the Company filed for protection under Chapter 7.

Although  the full  extent  of the  financial  impact  on PHC,  Inc.  cannot  be
determined at this time,  the  management of PHC, Inc. does not believe that the
liquidation  of  the  assets  and  liabilities  of  Quality  Care  will  have  a
substantial   negative  impact  on  PHC's  financial  position  and  results  of
operations. The liquidation of the assets and liabilities of Franvale may result
in a non-cash  financial  statement gain of approximately  $2,000,000 during the
year ending June 30, 1999. The Company is subject to a guarantee  signed by PHC,
Inc for furniture and equipment purchased by Quality Care during the fiscal year
ended June 30,  1996.  The amount of this debt  recorded by Quality  Care in the
accompanying financial statements is approximately $148,000.

NOTE J - CERTAIN CAPITAL TRANSACTIONS

In addition to the outstanding options under the Company's stock plans (Note H),
the Company has the following options and warrants outstanding at June 30, 1998:

                                     - 24 -
<PAGE>

 <TABLE>
<S>           <C>
                                                                         <C>          <C>            <C>
                                                                         NUMBER of    EXERCISE        EXPIRATION
       DATE                              DESCRIPTION                      UNITS       PRICE             DATE
                                                                          SHARE
___________________________________________________________________________________________________________________

09/01/93      Warrants to purchase units issued with bridge financing      5,946 units  $3.70 per unit   September 1998
               Equity treatment
03/10/94      Unit purchase option issued as part of the IPO             156,271 units  $5.60 per unit   March 1999
               Equity transaction
03/10/94      IPO warrants                                             1,772,073        $5.97 per share  March 1999
               Equity transaction
02/08/96      Private placement warrants with common stock issuance      737,170        $3.76 per share  January 2001
               Equity transaction
02/27/96      Warrants issued with the exercise of Bridge warrants        36,573        $7.02 per share  February 2001
               Equity transaction
11/01/96      Warrants for debt placement service                         25,000        $2.00 per share  October 2001
               $125,000 value charged to interest expense over term
               of debt
02/18/97      Warrant for investor relation services                       3,753        $2.80 per share  February 2002
               $1,210 value passed as an adjustment
03/03/97      Consultant warrant for investor relations                  160,000        $2.62 per share  March 2002
               $16,306 value passed as an adjustment
03/31/97      Warrants issued as registration penalty on                 150,000        $2.00 per share  March 2002
               Convertible Debentures
               $46,375 value charged to interest expense over
               term of debenture
06/04/97      Warrants issued with preferred stock placement              50,000        $2.75 per share  June 2000
               Equity transaction
06/01/97      Warrants issued for investment banker services             150,000        $2.50 per share  May 2002
               $193,748 value charged to professional fees
09/19/97      Private Placement warrants with common stock issuance       86,207        $2.90 per share  March 2003
               Equity transaction
03/10/98      Penalty warrants issued for late registration of private     3,000        $2.90 per share  March 2003
               placement shares
               Equity transaction
03/10/98      Warrants issued as additional interest on debt              52,500        $2.38 per share  March 2003
               $48,809 value charged to interest expense over
               term of loan
03/19/98      Warrants issued with preferred stock private placement      49,990        $2.31 per share  March 2001
               Equity transaction
</TABLE>

                                                                           F-18
                                     - 25 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE J - CERTAIN CAPITAL TRANSACTIONS

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

In February 1998, the Company received  $950,000 in exchange for the issuance of
Series B convertible  preferred  stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001.  The number of shares of Class A common stock into which the  preferred
stock may be  converted  is equal to 80% of the closing bid price of the Class A
common  stock as  reported  by  NASDAQ  for the five  trading  days  immediately
preceding the conversion.  Cumulative preferred dividends are at the rate of $60
per share per year,  payable  quarterly.  Dividends  are  payable  in cash or in
shares of preferred stock at $1,000 per share.  For the year ended June 30, 1998
and 1997 dividends amounted to $ 17,060 and $4,330 respectively. On July 1, 1998
the Company issued 13 shares of series B preferred stock in payment of dividends
payable for the fiscal year ended June 30, 1998.

As part of the Consultant Warrant agreement to purchase 160,000 shares as listed
in the table above,  80,000 may be canceled if certain stock prices,  as defined
in the agreement, are not achieved by March 31, 1999 and June 30, 1999.

Under  existing  dilution  agreements  with other  stockholders  the issuance of
common stock under  agreements other than the employee stock purchase and option
plans will  increase  the number of shares  issuable  and  decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then  current  market  price and the price at which the new common  stock is
being issued.  The dilutive  effect of  transactions  prior to June 30, 1998 are
reflected in the table above.

During fiscal 1998, the Class C common stock was canceled and retired because of
restrictions on the release of the stock, due to earnings targets which were not
achieved.

In June 1997,  the Company  received  $1,000,000 in exchange for the issuance of
Series A Convertible  preferred  stock and warrants to purchase 50,000 shares of
Class A common stock. The warrants are exercisable at $2.75 per share and expire
in 2000.  The warrants  were valued at $30,000.  The number of shares of Class A
common stock into which the  preferred  stock was  converted was equal to 80% of
the closing bid price of the Class A common  stock as reported by NASDAQ for the
five  trading  days  immediately   preceding  the  conversion.   The  beneficial
conversion  feature,  due to the 80%  discount  above,  valued at  $200,000  was
recorded as additional  dividends.  In June 1997, 500 shares of preferred  stock
were converted into 229,640 shares of Class A common stock.  In fiscal 1998, the
500 remaining  shares of preferred  stock were  converted into 246,305 shares of
Class A common  stock.  The  issuance  of these  securities  will  result in the
issuance  of some  additional  Class A common  shares  under  existing  dilution
agreements with other stockholders.

In September  1997,  the Company sold units  consisting of four shares of common
stock and a warrant to purchase  two shares of common  stock for  $500,000.  The
common  shares sold under this  arrangement  amounted to 172,414  shares and the
warrants allow the holder to purchase an additional  86,207 common  shares.  The
exercise  price of the  warrants  is $2.90  per  share of  common  stock and the
warrants  expire in September  2002.  The agreement  required that the shares be
registered  within 90 days of the  closing  date of the private  placement.  The
registration was not complete by the deadline therefore the Company was required
to issue warrants to purchase 3,000 additional shares of class A common stock at
$2.90 per share.
                                                                            F-19

                                     - 26 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

In connection  with the  acquisition  of a business in fiscal 1996,  the Company
entered  into a  consulting  agreement  with the  former  owner of the  business
whereby  the former  owner  would be granted,  as partial  compensation,  20,000
shares of common  stock for each of the four fiscal  years ending June 30, 2000.
The consulting  agreement  provides that if the traded market value is less than
$60,000,  then the number of shares issued will be increased to raise the traded
market value to $60,000.  The shares issued pursuant to the consulting agreement
have been  charged  to  compensation  expense.  The  consulting  agreement  also
provides for an annual salary of approximately $24,000 through October 1999.

NOTE K - ACQUISITIONS

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

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

Concurrent  with the asset  purchase  agreement,  NPP entered into an employment
agreement with a former owner which requires an annual salary of $150,000 and an
annual bonus.  The  agreement is effective  for four years and is  automatically
extended for successive one year terms unless  terminated.  The salary and bonus
are subject to adjustment based on collected  billings.  NPP also entered into a
management  agreement  whereby  $1,500 per month would be paid for five years to
the former  owners.  During  fiscal 1998 in connection  with the asset  purchase
agreement, the Company issued 15,000 unregistered shares of Class A common stock
which was accounted for as additional purchase price.

On  November 1, 1996,  BSC-NY,  Inc.  ("BSC"),  merged  with  Behavioral  Stress
Centers,  Inc.,  a  provider  of  management  and  administrative   services  to
psychotherapy  and  psychological   practices  in  the  greater  New  York  City
Metropolitan  Area. In connection with the merger,  the Company advanced 150,000
shares of PHC, Inc. Class A common stock to Shliselberg Physician Services, P.C.
formerly Perlow Physicians,  P. C. ("Perlow"),  which were in turn issued to the
former owners of Behavioral  Stress  Centers,  Inc. to acquire the assets of the
medical practices  previously  serviced by BSC. At June 30, 1998 Perlow owed the
Company  $3,292,428 which includes some acquisition  costs,  management fees and
interest  on the  advances of  approximately  $481,119.  During  fiscal 1998 the
Company established a reserve against this receivable in the amount of $382,000.
It is expected that collections will be received over the next several years and
accordingly,  these amounts have been classified as noncurrent.  The Company has
no  ownership  interest  in  Perlow  and  therefore  does  not  consolidate  its
operations.
                                                                            F-20
                                      - 27 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE K - ACQUISITIONS (CONTINUED)

The purchase price of BSC was allocated as follows:

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

The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral  Stress Centers,  Inc. for the three years following
the merger date.  The  additional  purchase  price is based on the income of BSC
before taxes and is to be paid in PHC stock,  at market value up to $200,000 and
the  balance,  if any, in cash.  On March 26, 1998 the  Company  issued  227,347
shares of the Company's  Class A Common Stock to the former owners of Behavioral
Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be
paid to them for the  year  ended  October  31,  1997  resulting  in  additional
goodwill.  Of the 227,347  shares issued 127,924 were issued in lieu of cash and
are subject to a price  guarantee  of $2.35,  payable in shares.  The Company is
required to issue shares for the  difference  between the selling  price and the
guarantee  price if the selling price is less than $2.35.  At September 15, 1998
the market price per share was $.938. Subsequent to year end a former owner sold
30,382  shares.  If that owner  sells the  additional  320  shares he owns,  the
Company  will  issue  approximately  $50,000  in  additional  shares of stock in
accordance to the price guarantee agreement.

BSC also entered into a management agreement with Perlow whereby management fees
are  required  of Perlow on a monthly  basis  over a  five-year  period  with an
automatic  renewal for an additional  five-year  period.  The management fee was
calculated at 25% of the total monthly expenses of Perlow and effective  January
1, 1998 the management  agreement was amended to provide for a management fee of
20% of the total monthly expenses of Perlow.
         .........
On November 1, 1996, BSC entered into a lease agreement for its facilities.  The
lease  payments are due in equal monthly  installments  over a three year period
with an option to extend annually for three additional years. The lease is to be
paid by Perlow in accordance with the management agreement.

     Summary,  unaudited financial information for Perlow as of and for the year
ended June 30, 1998 is as follows:

                           Total assets                       $3,783,000
                           Stockholder's deficit              $ (382,000)
                           Net revenue                        $3,110,000
                           Net loss                           $ (304,000)

Effective  January 1, 1997, the Company entered into a Stock Exchange  Agreement
with a Virginia  corporation owned by two individuals to whom the Company has an
outstanding  note  payable.  The  corporation  consists of private  practices of
psychiatry.  The Stock Exchange  Agreement provided that in exchange for $50,000
in cash and  64,500  shares of  restricted  Class A common  stock,  the  Company
received an 80% ownership interest in the Virginia corporation. The Company also
paid $80,444 in legal fees in connection with the Agreement. Concurrent with the
Stock  Exchange  Agreement  the two  owners  of the  Virginia  corporation  each
executed  Employment   Agreements  with  the  Virginia  corporation  to  provide
professional  services and each was granted an option to purchase  15,000 shares
of Class A common  stock at an  exercise  price of $4.87 per share.  The options
expire on April 1, 2002.  Each  agreement  requires an annual salary of $200,000
and expires in five years.  Further, a Plan and Agreement of Merger was executed
whereby the Virginia corporation was merged into PCV.
                                                                            F-21
                                     - 28 -
<PAGE>
PHC INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE K - ACQUISITIONS (CONTINUED)

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

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

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

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

On October 1, 1997 PCV purchased the assets of a clinic  located in  Blacksburg,
Virginia  in exchange  for  $50,000 in cash and 26,024  shares of Class A Common
Stock.  The company  entered into a lease with the former  owners for the clinic
property and an employment agreement with one of the owners.

In  accordance  with the above  agreements  the purchase  price was allocated as
follows:
               Fixed  Assets                                     10,000
               Covenant not to compete                           50,000
               Goodwill                                          38,632
                                                               ________
                                                               $ 98,632
                                                               ________

         During  fiscal  1998 the Company  consolidated  the  operations  of the
Blacksburg clinic with the Salem Virginia clinic to enhance  profitability.  The
closure of the Blacksburg  clinic including the write down of related assets and
buy out of the lease is reflected in the June 30, 1998 financial statements.

Information is not available to present pro forma financial information relating
to the 1997  acquisitions.  The Company so advised the  Securities  and Exchange
Commission and received a no action letter with respect to this matter.  Had the
Blacksburg  acquisition made during the fiscal year ended June 30, 1998 (October
1, 1997),  been made as of July 1, 1997,  the pro forma effect on the  Company's
results of operations would have been immaterial and therefore are not shown.

NOTE L - SALE OF RECEIVABLES

The Company had a sale and purchase  agreement whereby  third-party  receivables
were sold at a discount  with  recourse.  The amount of  receivables  subject to
recourse at June 30, 1997 totaled approximately $577,000. Proceeds from the sale
of these receivables  totaled  approximately  $3,000,000 for the year ended June
30, 1997.  The purchase  fees related to the agreement  amount to  approximately
$127,000 for the year ended June 30, 1997 and are  included in interest  expense
in the accompanying  consolidated statement of operations.  In February 1998 the
Company  entered into a finance  agreement with Healthcare  Financial  Partners,
Inc. to provide for  receivables  funding and  liquidate  the debt due to Finova
Capital  from the above  referenced  sale and  purchase  agreement  and  provide
receivables  funding for PHC of Virginia,  Inc.,  PHC of Rhode Island,  Inc. and
Pioneer Counseling of Virginia, Inc.
                                                                           F-22
                                     - 29 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997

NOTE M - FOURTH QUARTER ADJUSTMENTS

The Company  recorded  significant  adjustments  in the fourth quarter of fiscal
1998 related to the closure of Good Hope Center,  the write down of  receivables
of the  closed  California  facility,  the write down of the amount due BSC from
Perlow,  the  closure of the  Blacksburg  facility  and an  increase in accounts
receivable reserves of the other facilities.

NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1998

On July 10, 1998 the  Company  issued  warrants  to  purchase  52,500 and 20,000
shares of PHC, Inc.  Class A Common Stock,  exercisable  at $1.81 per share,  to
Healthcare  Financial  Partners,  Inc. in conjunction with the payment extension
granted on the $350,000 financing provided to PHC, Inc.

On August 13, 1998 the Company borrowed $100,000 from Bruce A. Shear,  President
and Principal  Stockholder.  This amount bears interest at 12% and is payable on
demand.

Subsequent to year end the Company issued a warrant to purchase 50,000 shares of
PHC, Inc. Class A Common Stock,  exercisable at $1.75 per share. The warrant may
be  canceled  if certain  stock  prices,  as defined in the  agreement,  are not
achieved.

NOTE O - BUSINESS SEGMENT INFORMATION

The Company's operations are conducted in one business segment, the operation of
behavioral health treatment centers.  All of the Company's operations are in the
United States.

                                                                            F-23
                                     - 30 -
<PAGE>
PART III

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding the ownership
of shares of the  Company's  Class A Common  Stock and Class B Common Stock (the
only classes of capital stock of the Company currently outstanding) as of August
15, 1998 by (i) each person known by the Company to  beneficially  own more than
5% of any class of the Company's  voting  securities,  (ii) each director of the
Company,  (iii)  each of the  named  executive  officers  as  defined  in 17 CFR
228.402(a)(2)  and (iv) all  directors  and  officers of the Company as a group.
Unless otherwise  indicated below, to the knowledge of the Company,  all persons
listed below have sole voting and investment  power with respect to their shares
of Common  Stock,  except to the extent  authority  is shared by  spouses  under
applicable law. In preparing the following  table, the Company has relied on the
information furnished by the persons listed below:


                                                          Amount
                                    Name And Address    and Nature
                                    of Beneficial      of Beneficial   Percent
    Title of Class                     Owner             Owner       Class (12)
_______________________________________________________________________________

Class A Common Stock               Gerald M. Perlow      19,750(1)           *
                                   c/o PHC, Inc.
                                   200 Lake Street
                                   Peabody MA  01960

                                   Donald E. Robar       13,875(2)           *
                                   c/o PHC, Inc.
                                   200 Lake Street
                                   Peabody MA  01960

                                   Bruce A. Shear        36,000(3)           *
                                   c/o PHC, Inc.
                                   200 Lake Street
                                   Peabody MA  01960

                                   Robert H. Boswell     43,587(4)           *
                                   c/o PHC, Inc.
                                   200 Lake Street
                                   Peabody MA 01960

                                   Howard W. Phillips    41,504(5)           *
                                   P. O. Box 2047
                                   East Hampton NY 11937

                                   William F. Grieco     63,280(6)(7)       1.3%
                                   115 Marlborough Street
                                   Boston MA  02116

                                   J. Owen Todd          59,280(7)          1.2%
                                   c/o Todd and Weld
                                   1 Boston Place
                                   Boston MA  02108

                                   ProFutures Special   482,397(8)          8.9%
                                   Equities Fund, L.P.
                                   11612 Bee Cave RD-STE 216
                                   Austin TX  78733

                                   All Directors and
                                   Officers as a Group  240,420(9)         4.9%
                                   (7 persons)

Class B Common Stock (10).......   Bruce A. Shear       671,259(11)       92.3%
                                   c/o PHC, Inc.
                                   200 Lake Street
                                   Peabody MA  01960

                                   All Directors and
                                   Officers as a Group  671,259           92.3%
                                   (7 persons)

  *    Less than 1%.
(1)    Includes 9,750 shares issuable  pursuant to currently  exercisable  stock
       options or stock options which will become exercisable within sixty days,
       having an exercise price range of $2.06 to $6.63 per share.
(2)    Includes 12,375 shares issuable  pursuant to currently  exercisable stock
       options or stock options which will become exercisable within sixty days,
       having an exercise price range of $2.06 to $6.63 per share.
(3)    Includes  25,000  shares of Class A Common  Stock  issuable  pursuant  to
       currently  exercisable  stock options,  having an exercise price of $2.63
       per share. Excludes an aggregate of 59,280 shares of Class A Common Stock
       owned by the Shear  Family  Trust and the NMI  Trust,  of which  Bruce A.
       Shear is a remainder beneficiary.
(4)    Includes an aggregate of 36,500  shares of Class A Common Stock  issuable
       pursuant to  currently  exercisable  stock  options at an exercise  price
       range of $2.00 to $3.50 per share.
(5)    Includes  37,504  shares  issuable  upon  the  exercise  of  a  currently
       exercisable Unit Purchase Option for 18,752 Units, at a price per unit of
       $5.60,  of which each unit  consists of one share of Class A Common Stock
       and one warrant to purchase an  additional  share of Class A Common Stock
       at a price  per  share of $7.50 and 4,000  shares  issuable  pursuant  to
       currently  exercisable  stock options  having an exercise  price range of
       $2.06 to $3.50 per share.
(6)    Includes  4,000  shares  of Class A Common  Stock  issuable  pursuant  to
       currently  exercisable  stock options,  having an exercise price range of
       $2.06 to $3.50 per share
(7)    Messrs.  Todd  and  Grieco  are  the two  trustees  of the  Trusts  which
       collectively  hold  59,280  shares of the  Company's  outstanding  Common
       Stock.   Gertrude  Shear,  Bruce  A.  Shear's  mother,  is  the  lifetime
       beneficiary of the Trusts.  In addition to the shares held by the Trusts,
       to the best of the Company's  knowledge,  Gertrude  Shear  currently owns
       less than 1% of the Company's outstanding Class B Common Stock.
(8)    Includes  165,522  shares  of  Class A  Common  Stock  issuable  upon the
       exercise of  outstanding  warrants  and 316,875  shares of Class A Common
       Stock   estimated  to  be  issuable  upon  the  conversion  of  Series  B
       Convertible Preferred Stock.
(9)    Includes an aggregate of 110,625  shares  issuable  pursuant to currently
       exercisable stock options. Of those options, 4,125 have an exercise price
       of $6.63 per share,  68,250  have an  exercise  price of $3.50 per share,
       35,000 have an exercise  price of $2.63 and 2,000 have an exercise  price
       of $2.06 and 1,250 have an exercise price of $2.00.  Also includes 37,504
       shares  issuable  upon  the  exercise  of the  Unit  Purchase  Option  as
       described in (5).
(10)   Each share of Class B Common Stock is convertible into one share of Class
       A Common Stock  automatically upon any sale or transfer thereof or at any
       time at the option of the holder.
(11)   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.
 (12)  Represents  percentage  of equity of class,  based on  numbers  of shares
       listed  under  the  column  headed   "Amount  and  Nature  of  Beneficial
       Ownership".  Each share of Class A Common  Stock is  entitled to one vote
       per  share and each  share of Class B Common  Stock is  entitled  to five
       votes per share on all  matters on which  stockholders  may vote  (except
       that the  holders of the Class A Common  Stock are  entitled to elect two
       members of the  Company's  Board of Directors  and holders of the Class B
       Common  Stock are  entitled  to elect all the  remaining  members  of the
       Company's Board of Directors).

     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 15, 1998:

          Bruce A. Shear ........................................39.28%
         J. Owen Todd..............................................0.7%
         William F. Grieco.........................................0.7%
         ProFutures Special Equities Fund, LP......................5.3%
         All Directors and Officers as a Group (7 persons).......40.23%


                                     - 31 -
<PAGE>
ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K.

      (a)   EXHIBITS.

    Exhibits Index

Exhibit No.                              Description

   23.1      Consent of Independent Auditors.
   23.2      Consent of Independent Auditors.


                                     - 32 -
<PAGE>

                                   SIGNATURES


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

                                             PHC, INC.




Date:    December 7, 1999                    By: /s/ Bruce A. Shear
                                                      President
                                                      Chief Executive Officer


                                     - 33 -
<PAGE>

Exhibit 23.1

 INDEPENDENT AUDITORS' CONSENT

We  hereby  consent  to the  incorporation  by  reference  in this  Registration
Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September
18, 1998 (October 5, 1998 as to the second paragraph of Note I and September 10,
1999 as to Note P)  relating to the  consolidated  financial  statements  of the
Company  appearing in the  Company's  Annual  Report on Form 10-KSB for the year
ended June 30, 1998.

BDO Seidman, LLP

Boston, Massachusetts
December 6, 1999





                                     - 34 -
<PAGE>

Exhibit 23.2


INDEPENDENT AUDITORS' CONSENT

We  hereby  consent  to the  incorporation  by  reference  in this  Registration
Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September
19,  1997,  relating to the  consolidated  financial  statements  of the Company
appearing in the Company's  Annual Report on Form 10-KSB for the year ended June
30, 1997.

/s/  Richard A. Eisner Company, LLP
     New York, New York
     December 6, 1999


                                     - 35 -
<PAGE>