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, 1997

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


Commission file number: 0-23524

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


MASSACHUSETTS                                             04-2601571
(State or  other  jurisdiction of             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

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

                                    NONE.

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

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

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

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

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

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

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

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

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

                TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                   Yes No X




<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

The following  listing of Exhibits  filed with 10K-SB for Fiscal Year ended June
30, 1997 was omitted from the Edgar filing in error:

Exhibit Index:

  4.23   Warrant Agreement by and between Brean Murray & Company and PHC., Inc.
         dated 07/31/97 (See 10.125).
  4.24   Subscription Agreement by and between PHC, Inc. and ProFutures Special
         Equities Fund, L.P. to purchase PHC, Inc. Units dated 09/19/97.
  4.25   Warrant Agreement  by  and between PHC, Inc. and  ProFutures Special
         Equities Fund, L.P. for up to 86,207 shares of Class A Common Stock
         dated 09/19/97.
10.122   Agreement between Family Independence Agency and Harbor Oaks Hospital
         effective January 1, 1997.
10.123   Master  Contract by and between Family Independence Agency and Harbor
         Oaks Hospital effective January 1, 1997.
10.124   Deed, Deed of Trust and Deed Trust Note in the amount of $540,000  by
         and  between  Dillon and Dillon Associates  and Pioneer Counseling of
         Virginia, Inc. (Related to Exhibit 10.109).
10.125   Financial  Advisory  Agreement,  Indemnification Agreement and Form of
         Warrant  by and between Brean  Murray & Company  and PHC,  Inc. dated
         06/10/97.
10.126   Employment Agreement by and between  Harbor Oaks  Hospital  and Sudhir
         Lingnurkar,  and Pioneer Counseling Center and Sudhir Lingnurkar dated
         August 1, 1997.
10.127   Asset Purchasing Agreement, Restrictive  Covenants Agreement and Lease
         with Option to Purchase by and between Pioneer Counseling of Virginia,
         Inc. and Dianne Jones-Freeman dated August _____, 1997.
10.128   Employment Agreement  by and between  Pioneer Counseling of Virginia,
         Inc. and Dianne Jones-Freeman dated August _____, 1997.

In the listing of Exhibits, the following misprints occurred:
 
           4.8   Should  read  "Form of  Warrant  Agreement  by and among the
                 Company,   American  Stock  Transfer  &  Trust  Company  and
                 AmeriCorp  Securities,  Inc. executed in connection with the
                 Private Placement."
           4.24  Incorrectly listed date of Units as 1/19/97.  The correct
                 date is 9/19/97.
          10.128 Listed as "10128"
 
    There were two descriptions for footnotes ##.  These should read:

          ##    Filed as an exhibit to the Company's report on Form 10-KSB,
                filed with the Securities and Exchange Commission on
                September 28, 1994.
          ###   Filed as an  exhibit  to the  Company's  Current  Report  on
                Form 8-K, filed with the securities and Exchange  Commission
                (Commission File number 0-23524) on November 5, 1996.

      (b)  Reports on Form 8-K

Omitted - should read "No  reports on Form 8-K were filed by the Company  during
the last quarter of the period covered by this report."

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

Additional Information.

During the first three  quarters of the fiscal year ended June 30,  1997,  the
Company  provided for allowances for bad debts based on historical  experience
supplemented by certain other current  information.  During the preparation of
the annual  financial  statements for fiscal 1997, it was determined  that the
allowances  were  understated   based  on  a  detailed  analysis  of  accounts
receivable  data. The Company  reviewed the year-end  adjustments to determine
if some of the adjustments  should have been made in the prior fiscal quarters
of fiscal 1997.

The  Company  has  concluded  that  it  is  not  possible  to  determine  what
adjustments,  if any,  should  have been made to  allowance  reserves in prior
fiscal  quarters  of 1997  because  the  information  on  which  the  year-end
analysis was based is not available on a quarterly basis.

The  Company  has  changed  its  internal  systems  to make  such  information
available  on a quarterly  basis in the future and will  analyze  such data to
determine  the  adequacy  of  its  reserves  for  future  quarterly  financial
statements commencing with the quarter ended September 30, 1997.

ITEM 7 - FINANCIAL STATEMENTS

Many typographical  errors were identified in the Financial  Statement printing.
Note I -  Segment  Information  was  changed  to show  net  revenues  from  PDSS
operations.  Note K - Certain  capital  transactions  were  changed  to show the
effect of dilution  activity  through June 30, 1997.  Financial  Statements  are
being resubmitted in their entirety to avoid confusion.

  
<PAGE>

    PHC, INC. AND SUBSIDIARIES

         Contents

         Consolidated Financial Statements

   Independent auditors' report                                 F-2

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

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

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

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

   Notes to financial statements                                F-7







                                                                             F-1
                                                    


<PAGE>

                                              Richard A. Eisner & Company, LLP
                                                   Accountants and Consultants





INDEPENDENT AUDITORS' REPORT


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


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

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

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



Richard A. Eisner & Company, LLP

Cambridge, Massachusetts
September 19, 1997





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


<PAGE>

PHC, INC.  AND SUBSIDIARIES

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

Accounts receivable, noncurrent                        605,000         740,000
Loans receivable                                       134,284         113,805
Property and equipment, net (Notes A and B)          8,408,211       7,884,063
Deferred income tax asset (Note F)                     154,700         154,700
Deferred financing costs, net of amortization          751,325         772,823
Goodwill, net of accumulated amortization (Note A)   1,644,252         841,413
Restricted deposits and funded reserves                170,874
Other assets (Note A)                                  222,032         252,445
Net assets of operations held for sale (Note J)                         56,682
Other receivables, noncurrent, related party
 (Note L)                                            2,983,177
                                                   ____________   ____________
                                                   $27,860,809     $20,817,217
                                                   ____________   ____________
LIABILITIES
Current liabilities:
   Accounts payable                                $ 4,171,334     $ 3,127,052
   Notes payable - related parties (Note E)             51,600          56,600
   Current maturities of long-term debt (Note C)       580,275         403,894
   Revolving credit note and secured term note       1,789,971
   Current portion of obligations under capital
     leases (Note D)                                   139,948          88,052
   Accrued payroll, payroll taxes and benefits         703,842         715,515
   Accrued expenses and other liabilities              587,024         738,784
                                                   ____________   ____________
      Total current liabilities                      8,023,994       5,129,897
                                                   ____________   ____________
Long-term debt and accounts payable (Note C)         9,759,601       7,754,262
Obligations under capital leases (Note D)            1,594,562       1,468,475
Notes payable - related parties (Note E)                23,696          47,394
Convertible debentures ($3,125,000 less discount
  $390,625)(Note C)                                  2,734,375
                                                   ____________   ____________

      Total noncurrent liabilities                  14,112,234       9,270,131
                                                   ____________   _____________
      Total liabilities                             22,136,228      14,400,028
                                                   ____________   _____________
Commitments and contingent liabilities 
  Notes A, G, H, K, L and M)

STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
  shares authorized, 500 shares issued and
  outstanding in 1997 (liquidation preference            
  $504,333)                                                  5
Class A common stock, $.01 par value; 20,000,000
  shares authorized, 2,877,836 and 2,293,568 shares
  issued and outstanding in 1997 and 1996,       
  respectively                                          28,778          22,936
Class B common stock, $.01 par value; 2,000,000 shares
  authorized, 730,360 and 812,237 issued and
  outstanding in 1997 and 1996, respectively    .        
  convertible into one share of Class A common stock     7,304           8,122
Class C common stock, $.01 par value; 200,000 shares
  authorized, 199,816 shares issued and outstanding
  in 1997 and 1996                                       1,998           1,998 
Additional paid-in capital                          10,398,630       8,078,383
Notes receivable related to purchase of 31,000
  shares of Class A common stock                                       (63,928)
Treasury stock, 8,656 shares at cost                   (37,818)
Accumulated deficit                                 (4,674,316)     (1,630,322)
                                                   ____________    ____________

      Total stockholders' equity                     5,724,581       6,417,189
                                                   ____________    ____________
                                                    $27,860,809     $20,817,217
                                                   ____________    ____________
                                          
See notes to financial statements                                           F-3
                                                   



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Operations
 
                                                            Year Ended
                                                              June 30,
                                                       _______________________

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

      Total revenue                                    27,234,372   21,802,758
                                                      ___________  ___________
Operating expenses:
   Patient care expenses                               14,436,784   12,004,383
   Cost of management contracts                           324,440      146,407
   Provision for doubtful accounts                      3,397,693    1,894,087
   Administrative expenses                             10,341,973    7,800,715
                                                      ___________  ___________
      Total operating expenses                         28,500,890   21,845,592
                                                      ___________  ___________
                                                         
Loss from operations                                   (1,266,518)     (42,834)
                                                       __________   __________
Other income (expense):
Interest income                                           201,286       14,486
Other income, net                                         490,327      211,292
Start-up costs (Note A)                                               (128,313)
Interest expense                                       (2,094,301)    (863,484)
Gain from operations held for Sale (Note J)                26,853       11,947
                                                       ___________  ___________
      Total other expense                              (1,375,835)    (754,072)
                                                       ___________  ___________
Loss before income taxes (benefit)                     (2,642,353)    (796,906)
Income taxes (benefit) (Note F)                           197,311     (211,591)
                                                      ___________  ___________
Net Loss                                              $(2,839,664)   $(585,315)
                                                      ___________  ___________
Net loss per share (Note A)                                 $(.87)       $(.22)
                                                      ___________  ___________
Weighted average number of shares outstanding           3,270,175    2,709,504
                                                      ___________  ___________ 
See notes to financial statements                                  

                                                                            F-4






<PAGE>

PHC, INC.  AND SUBSIDIARIES


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

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

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

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

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

Balance - June 30,                                                 
  1997                2,877,836 $28,778 730,360  $7,304 199,816  $1,998     500    $ 5                     
                                                           

</TABLE>

See notes to financial statements

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

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

                       Additional                          
                        Paid-in       Notes                                    
                        Capital,   Receivable    Treasury Shares    Accumulated
                      Common Stock  for Stock     Shares   Amount     Deficit       Total
                      ____________  _________   ________   ______  ___________   ____________
                                                 
Balance - June 30,       
1995                    $5,554,874  $(75,362)                      $(1,045,007)  $4,460,540
Payment of notes                      
  receivable                          11,434                                         11,434
Conversion of shares             2                                                       -0-
Exercise of options        113,575                                                  113,800
Issuance of stock
  for obligations in          
  lieu of cash              36,184                                                   36,250 
Exercise of bridge
  loan warrants            153,617                                                  153,952
Sale of stock in
  connection with          
  private placement      1,970,063                                                1,975,000
Costs related to
  private placement       (442,395)                                                (442,395)
Exercise of IPO           
warrants                   137,785                                                  138,000
Issuance of shares
  with acquisitions        392,678                                                  393,548
Exercise of private
  placement warrants       149,625                                                  150,000
Amount paid for
  options, not yet
  issued                     9,375                                                    9,375
Compensatory stock           
  options                    3,000                                                    3,000
Net loss, year ended                                         
  June 30, 1996                                                       (585,315)    (585,315)
                         _________   _______    _______ _________   ___________    _________
Balance - June 30,
1996                     8,078,383   (63,928)                       (1,630,322)   6,417,189
Costs related to
  private placements      (141,295)                                                (141,295)
Issuance of shares
  with acquisitions        838,524                                                  840,819
Exercise of options         59,709                                                   59,844
Payment of notes
  receivable                   662                                                      662
Conversion of shares                                                                    -0-
Issuance of employee
  shares stock              
  purchase plan             30,530                                                   30,624
Issuance of shares
  in connection with
  consulting agreement      79,800                                                   80,000
Issuance of warrants
  with convertible
  debentures               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          999,990                                                1,000,000
Adjustment related
  to beneficial
  conversion
  feature of      
  convertible preferred
  stock
  and convertible
  debentures               330,284                                    (200,000)     130,284
Conversion of              
preferred stock             (2,295)                                                      -0-
Dividend on                                                          
preferred stock                                                         (4,330)      (4,330)
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)  $5,724,518        
</TABLE>

            See notes to financial statements                              F-5




<PAGE>

PHC, INC.  AND SUBSIDIARIES                                 Year Ended
                                                             June 30,
                                                            ____________
                                                        1997            1996
                                                    __________________________
Consolidated Statements of Cash Flows       

Cash flows from operating activities:
  Net loss                                          $ (2,839,664)   $ (585,315)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Deferred tax benefit                                              (418,137)
    Depreciation and amortization                       679,248        554,025 
    Beneficial conversion feature of
     convertible debt                                   130,284
    Compensatory stock options and stock and warrants
      issued for obligations                            205,000         39,250
    Changes in:
      Accounts receivable                            (1,649,303)    (2,985,052)
      Prepaid expenses and other current assets        (309,188)       (69,978)
      Other assets                                      113,419       (107,711)
      Net assets of operations held for sale             56,682        106,886 
      Accounts payable                                1,044,282      1,414,089
      Accrued expenses and other liabilities           (167,763)       295,475 
                                                     ___________    ___________
                               
             Net cash used in operating activities   (2,737,003)    (1,756,468)
                                                     ___________    ___________
Cash flows from investing activities:
    Acquisition of property and equipment
      and intangibles                                  (895,914)    (1,557,419)
    Loan receivable                                  (3,063,177)       (17,462)

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

Cash flows from financing activities:
    Revolving debt, net                               1,789,981
    Proceeds from borrowings                          2,749,505      2,043,748 
    Payments on debt                                   (696,886)      (402,828)
    Deferred financing costs                             21,498       (711,960)
    Issuance of capital stock                           944,173      2,109,166
    Convertible debt                                  2,500,000
                                                      _________      __________
         Net cash provided by financing activities    7,308,271      3,038,126
                                                      _________      __________

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

    Supplemental disclosures of noncash investing
      and financing activities:
      Stock issued for acquisitions of equipment
        and services                                $   840,819    $   393,548 
      Note payable due for litigation                               
        settlement                                                 $   225,000 
      Capital leases                                $   284,048    $    94,699 
      Conversion of preferred stock                 $   500,000
      Beneficial conversion feature of preferred
        stock                                       $   200,000

        See notes to financial statements                                  F-6


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

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

For the year ended June 30, 1996, the Company incurred  start-up costs related
to an  addition  at  Quality  Care  prior  to  obtaining  a  license  to admit
patients.  These costs,  amounting to $128,313,  are included in other expense
in the  accompanying  statement  of  operations  under the  caption  "Start-up
Costs".

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

Revenues and accounts receivable:

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

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

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

                                                                             F-7



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable: (continued)
The Company has $1,787,000 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.

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

Property and equipment:

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

                                                        Estimated
              Assets                                   Useful Life
              _______                               __________________    
               Buildings                            20 through 39 years
               Furniture and equipment               3 through 10 years
               Motor vehicles                        5 years
               Leasehold improvements               Term of lease

Other assets:

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

Goodwill, net of accumulated amortization:

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

Loss per share:

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

Use of estimates:

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

                                                                             F-8


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

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

Cash equivalents:

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

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

Impairment of long-lived assets:

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

Stock-based compensation:

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

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised as follows:

                                                            June 30,  
                                                            ________
                                                        1997       1996
                                                      _____________________

              Land                                   $ 302,359  $ 251,759
              Buildings                              7,854,419  7,338,838
              Furniture and equipment                1,760,359  1,404,716
              Motor vehicles                            50,889     50,889
              Leasehold improvements                   385,543    301,067
                                                    __________  __________

                                                    10,353,569  9,347,269
              Less accumulated depreciation 
              and amortization                       1,945,358  1,463,206
                                                    __________  __________
                                                    $8,408,211 $7,884,063
                                                    __________  __________


  NOTE C - LONG-TERM DEBT

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


                                                                             F-9



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, l997 and 1996

NOTE C - LONG-TERM DEBT (CONTINUED)   

Long-term debt is summarized as follows:
                                                               June, 30,
                                                           1997         1996
                                                       ______________________
Note payable with interest at 9% requiring monthly
  payments of $1,150 through May 2001                    $44,816       $58,154
Note payable due in monthly installments of $2,000
  including imputed interest at 8% through April 1,
  1999                                                    40,574        60,163  
9% mortgage note due in monthly installments of $4,850
  through July 1, 2012, when the remaining principal
  balance is payable                                     492,996       505,485
Note payable due in monthly installments of $21,506 
  including interest at 10.5% through November 1, 1999,
  collateralized by all assets of PHN and certain
  receivables                                             547,092      735,213 
Construction obligations:
  Construction note payable collateralized by real
    estate and insured by HUD due in monthly installments
   of $53,635, including interest at 9.25%, through
   December 2035                                        6,757,422    6,301,986  
  Other construction obligations to be added to note
   payable                                                             344,802
Note payable to a former vendor, payable in monthly
  installments of $19,728 including interest at 9.5%                   152,353 
Note payable due in monthly installments of $26,131
  including interest at 11.5% through June 2000 when 
  the remaining principal balance is payable,
  collateralized by all assets of NPP (see Note L)        818,371
Note payable due in monthly installments of $5,558
  including interest at 9.25% through May 2012 when
  the remaining principal balance is payable,
  collateralized by the real estate                       538,605
Term mortgage note payable with interest only payments
  through March 1998 principal due in monthly
  installments of $9,167 beginning April 1998 through
  February 2001, a balloon payment of approximately
  $780,000 plus interest is due March 2001, interest
  at prime plus 5% (13.5% at June 30, 1997) 
  collateralized by all assets of PHM                   1,100,000
                                                       __________    __________
                                                       10,339,876    8,158,156 
          Less current maturities                         580,275      403,894
                                                       __________    __________
          Noncurrent maturities                        $9,759,601   $7,754,262
                                                       __________    __________

                                                                            F-10


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE C - LONG-TERM DEBT (CONTINUED)

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

                 Year Ending
                   June 30,                                   Amount 
                 ___________                               ___________
                 1998                                       $580,275
                 1999                                        692,681
                 2000                                        583,450
                 2001                                      1,388,742
                 2002                                         48,624
                 Thereafter                                7,046,104

                                                         $10,339,876

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

     The  Company has entered  into a revolving  credit note and a secured  note
with maximum advances of $1,500,000 and $1,000,000,  respectively.  Advances are
made based on a percentage of accounts  receivable and principal is payable upon
receipt of proceeds of the accounts  receivable.  Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997).  These agreements expire on February
1999 and July 1998,  respectively,  automatically renewable for one-year periods
thereafter  unless  terminated by either party.  Upon expiration,  all remaining
principal and interest is due. The notes are collateralized by substantially all
of the assets of the Company's subsidiaries.

NOTE D - CAPITAL LEASE OBLIGATION

     At June 30, 1997, the Company is obligated under various capital leases for
equipment  and real  estate  providing  for monthly  payments  of  approximately
$31,000 for fiscal 1998 and terms  expiring from December 1997 through  February
2014. The carrying value of assets under capital leases is as follows:

                                                               June 30, 
                                                          1997         1996
                                                       _______________________

       Building                                        $1,477,800  $1,477,800
       Equipment and improvements                         485,004     214,754
       Less accumulated depreciation and                 (501,732)   (400,768)
       amortization

                                                       $ 1,461,07   1,291,786
                                                       __________   __________


                                                                            F-11


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

     Future  minimum  lease  payments  under  the  terms  of the  capital  lease
agreements are as follows at June 30, 1997:
 
       Year Ending                                   
        June 30,                                        Real
                                       Equipment       Property        Total 
       ____________                   __________     __________     __________ 
       1998                             $140,307      $ 231,000       $371,307
       1999                              117,083        239,000        356,083
       2000                               95,121        259,248        354,369
       2001                               70,828        272,208        343,036
       2002                               13,557        295,188        308,745
       Thereafter                                     4,641,341      4,641,348
                                      __________     __________      __________

       Total future minimum lease        436,896      5,937,992      6,374,888
       payments
       Less amount representing           
       interest                           83,804      4,556,574      4,640,378
                                      __________     __________      __________
       Present value of future
         minimum lease payments          353,092      1,381,418      1,734,510
       Less current portion              102,632         37,316        139,948
                                      __________     __________      __________
       Long-term obligations under     
       capital lease                    $250,460     $1,344,102     $1,594,562
                                      __________     __________      __________

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

NOTE E - NOTES PAYABLE - RELATED PARTIES

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

Less current maturities                                 51,600       56,600
                                                       ________     ________
                                                       $23,696       47,394
                                                       ________     ________

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

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

     Related party interest on notes receivable related to the purchase of Class
A common stock approximated  $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.
                                                                            F-12


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE F - INCOME TAXES

     The  Company  has  the  following  deferred  tax  assets  included  in  the
accompanying balance sheets:
                                                               Year Ended
                                                                 June 30,  
                                                               ____________
                                                              1997      1996
                                                         ___________   ________
      Temporary differences attributable to:
         Allowance for doubtful accounts                  $1,007,000  $ 510,000
         Depreciation                                        147,000    154,700
         Other                                                 3,000      5,300
      Operating loss carryforward                            340,000          
                                                         ___________   ________

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

      Less:
         Valuation allowance                                (827,000)
         Current portion                                    (515,300)  (515,300)
                                                         ___________   ________

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

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

Income tax expense (benefit) is as follows:
                                                                 YearEnded
                                                                  June 30, 
                                                               ____________   
                                                              1997       1996
                                                           __________ _________
          Deferred income taxes benefit                               $(418,137)
          Current income taxes                              $197,311    206,546
                                                           __________ _________
                                                            $197,311  $(211,591)
                                                           __________ _________
 
     Reconciliations  of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
                                                                 YearEnded
                                                                  June 30, 
                                                               ____________  
                                                              1997       1996
                                                           __________ _________
          Income tax benefit at statutory rate             $(898,400) $(271,000)
          Increase in valuation allowance                    827,000
          Increase due to nondeductible items, primarily
             penalties and travel and entertainment
             expenses                                         12,000     12,100
          Other                                               59,400    (33,541)
                                                           __________ _________

                                                           $ 197,311  $(211,591)
                                                           __________ _________
 
     The  Company  has  a  net   operating   loss   carryforward   amounting  to
approximately $994,000 which expires at various dates through 2012.

     Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.
                                                                            F-13



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

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

             Year Ending
             June 30,                                           Amount
            _____________                                     __________
             1998                                             $ 688,105
             1999                                               441,833
             2000                                               297,780
             2001                                               202,876
             2002                                                93,450
             Thereafter                                         136,864
                                                            ____________
                                                         
                                                             $1,860,908
                                                            ____________
Litigation:

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

NOTE H - STOCK PLANS

[1]  Stock plans:

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

     The stock  option plan  provides  for the  issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock  options  to  employees  or  nonqualified   stock  options  to  employees,
directors,  consultants and others whose efforts are important to the success of
the Company.  Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including:  (i) the number of shares,  (ii)  option  exercise  terms,  (iii) the
exercise or purchase price (which in the case of an incentive  stock option will
not be less than the market  price of the Class A common stock as of the date of
grant),  (iv) type and  duration of transfer or other  restrictions  and (v) the
time and form of payment for restricted stock upon exercise of options.

     The  employee  stock  purchase  plan  provides  for the purchase of Class A
common  stock at 85 percent  of the fair  market  value at  specific  dates,  to
encourage  stock  ownership  by all  eligible  employees.  A maximum of 1 00,000
shares may be issued under this plan.

     Also in October 1995, the Company  adopted a nonemployee  directors'  stock
option  plan  that  provides  for  the  grant  of  nonstatutory   stock  options
automatically at the time of each annual meeting of the Board.  Through June 30,
1997,  options for 1 1,500  shares were  granted  under this plan.  A maximum of
30,000  shares may be issued  under this plan.  Each outside  director  shall be
granted an option to purchase 2,000 shares of Class A
                                                                            F-14
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30,1997 and 1996

NOTE H - STOCK PLANS (CONTINUED)

[1]  Stock plans: (continued)

     common stock at fair market value,  vesting 25% immediately and 25% on each
of the first three anniversaries of the grant.

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

     Under the above plans  179,198  shares are  available  for future  grant or
purchase.

     The Company had the following activity in its stock option plans for fiscal
1997 and 1996:
 
                                                 Number       Weighted-Average
                                                  of           Exercise Price
                                                 Shares          Per Share
                                                _________     ________________ 
               Option plans:
               Balance - June 30, 1995           92,000             $5.10
               Granted                           46,500             $6.20
               Cancelled                         (1,250)            $5.00
               Exercised                        (22,500)            $5.06
                                               _________   
               Balance - June 30, 1996          114,750             $5.56
               Granted                          125,500             $4.56
               Repriced options:
                 Original                       (95,375)            $5.99
                 Repriced                        95,375             $3.50
               Cancelled                        (21,400)            $6.05
               Exercised                        (13,475)            $5.16
                                               _________           
               Balance - June 30, 1997          205,375             $4.27
                                               _________ 

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

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

(2)     Stock-based compensation:

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

                                                      Year Ended
                                                       June 30,
                                                     ___________
                                              1997               1996
                                           ______________________________

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

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

Notes to Financial Statements
June 30, 1997 and 1996

NOTE H - STOCK PLANS (CONTINUED)

[2]  Stock-based compensation: (continued)

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

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

NOTE I - SEGMENT INFORMATION

     The  Company's  continuing  operations  are  classified  into  two  primary
business segments: substance abuse/psychiatric services and long-term care.

                                                        Year Ended
                                                          June 30,
                                                       _____________       
                                                      1997       1996
                                                  ___________________________
                Revenue:
                  Substance abuse/psychiatric 
                    services                     $20,700,616   $16,525,672
                  Long-term care                   5,306,717     5,043,922
                  Other                              629,761       233,164
                  Management fees                    597,278
                                                ____________   ____________
                                                 $27,234,372   $21,802,758
                                                ____________   ____________
                Income (loss) from operations:
                  Substance abuse/psychiatric
                    services                     $  627,341     $1,024,245
                  Long-term care                 (1,447,468)      (826,463)
                  Other (PDSS)                      305,321         86,757
                  General corporate                (427,272)      (180,966)
                  Interest and other income expense,
                    net                          (1,700,275)      (900,479)
                                                ____________   ____________
                Loss before income taxes        $(2,642,353)   $  (796,906)
                                                ____________   ____________
                Depreciation and amortization:
                  Substance abuse/psychiatric
                    services                     $  449,641    $   349,437
                  Long-term care                    210,130        176,450
                                                ____________   ____________
                  General corporate                  19,477         28,138
                                                 $  679,248    $   554,025
                                                ____________   ____________
                Capital expenditures:
                  Substance abuse/psychiatric 
                    services                     $  729,661   $   233,466
                  Long-term care                    213,489       982,978
                  General corporate                  63,150        16,583
                                                ____________   ____________
                                                 $1,006,300   $ 1,233,027
                                                ____________   ____________
                Identifiable assets:
                  Substance abuse/psychiatric 
                    services                    $18,352,342   $10,877,197
                  Long-term care                  7,437,633     8,619,133
                  General corporate               2,070,834     1,264,205
          
                  Net assets of operations held
                   for sale                                        56,682
                                                ____________   ____________
                                                 27,860,809   $20,817,217
                                                ____________   ____________




                                                                            F-16

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE J - OPERATIONS HELD FOR SALE

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


NOTE K - CERTAIN CAPITAL TRANSACTIONS

     In addition to the  outstanding  options  under the  Company's  stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:
                               Number of          Exercise         Expiration  
  Description                 Units/Shares         Price             Date  
  _____________________________________________________________________________ 
  Bridge warrants                 5,024 units   $4.38 per unit   September 1998
  Unit purchase option          148,171 units   $5.91 per unit   March 1999
  IPO warrants                1,681,832 shares  $6.29 per share  March 1999
  Private placement warrants    715,682 shares  $3.93 per share  January 1999
  Bridge warrants                34,710 shares  $7.39 per share  March 1999
  Warrant for services           25,000 shares  $6.88 per share  October 2001
  Warrant for services            3,093 shares  $3.39 per share  February 2002
  Consultant warrant
    (see below)                 160,000 shares  $2.62 per share  March 2002
  Convertible debenture warrants
  (Note C)                    150,000 shares    $2.00 per share  March 2002
  Preferred stock warrant     50,000 shares     $2.75 per share  June 2000

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

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

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

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

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

                                                                            F-17

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

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

     Subsequent to June 30, 1997,  the Company issued a warrant for the purchase
of 150,000  shares of common stock in exchange for services.  The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.

NOTE L - ACQUISITIONS

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

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

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

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

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

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

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

               Office equipment                          $ 18,000
               Covenants note-to-compete                   20,000
               Goodwill                                   597,746
               Deposits                                    15,072
               Liabilities assumed                        (42,659)
                                                       _____________
                                                         $608,159
                                                       _____________

                                                                            F-18

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE L - ACQUISITIONS (CONTINUED)

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

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

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

     On November 1, 1996,  BSC-NY,  Inc. ("BSC"),  merged with Behavioral Stress
Centers,  Inc.,  a  provider  of  management  and  administrative   services  to
psychotherapy  and  psychological   practices  in  the  greater  New  York  City
Metropolitan  Area. In connection  with the merger,  the Company  issued 150,000
shares of PHC,  Inc.  Class A common  stock to the former  owners of  Behavioral
Stress  Centers,  Inc. Also, in connection  with the merger,  another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices  theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire  those  assets and at June 30, 1997  Perlow owed the Company  $3,063,177
which  includes  in  addition  to   acquisition   costs,   management   fees  of
approximately $511,000 and interest on the advances of approximately  $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly,  most of these  amounts have been  classified  as  noncurrent.  The
Company has no ownership interest in Perlow.

The purchase price of BSC was allocated as follows:

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

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

     BSC also entered into a management  agreement  with Perlow.  The  agreement
requires  Perlow to pay 25% of its practice  expenses to BSC on a monthly  basis
over a five-year  period with an automatic  renewal for an additional  five-year
period.

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

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




                                                                            F-19

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1997 and 1996

NOTE L - ACQUISITIONS (CONTINUED)

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

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

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

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

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

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

NOTE M - SALE OF RECEIVABLES

     The  Company  has  entered  into  a sale  and  purchase  agreement  whereby
third-party  receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month  LIBOR rate which is 11.5% and 11.3% at
June 30,  1997 and 1996,  respectively.  The  amount of  receivables  subject to
recourse at June 30,  1997  totaled  approximately  $577,000  and the  agreement
states  that  total  sales of such  outstanding  receivables  are not to  exceed
$4,000,000.  Proceeds from the sale of these receivables totalled  approximately
$3,000,000  and  $3,500,000  for  the  years  ended  June  30,  1997  and  1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000  and $73,720 for the years ended June 30, 1997 and 1996,  respectively,
and are included in interest expense in the accompanying  consolidated statement
of operations. The agreement expires December 31, 1997.

NOTE N - SUBSEQUENT FINANCING

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

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




                                                                            F-20
 
<PAGE>

                                  SIGNATURES

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

                                           PHC, INC.

Date:  October 29, 1997
                                           By:  /S/ BRUCE A. SHEAR
                                           Bruce A. Shear, President
                                           and Chief Executive Officer