<PAGE>


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

[X] Annual  report under section 13 or 15(d) of the  Securities Exchange Act of
    1934 [FEE REQUIRED] for the fiscal year ended June 30, 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: 0-23524

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

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


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

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

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

                                      NONE.

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

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

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

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act  during the past 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days. Yes 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


<PAGE>

PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

INTRODUCTION

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

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

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

     In May,  1998 the  Company  closed  Good Hope  Center,  a  substance  abuse
treatment  facility  located in West  Greenwich,  Rhode Island ("Good Hope") and
entered  into an agreement  terminating  the lease for the  facility.  Under the
agreement the Company is obligated to pay  approximately  $125,000.  The Company
estimates  that it will incur  aggregate  costs of  closing  this  facility,  in
addition to the lease agreement cost, of approximately  $120,000.  In June, 1998
the  Company's  sub  acute  long-term  care  facility,   Franvale   Nursing  and
Rehabilitation Center ("Franvale"), in Braintree,  Massachusetts was closed in a
State  Receivership  action which was  precipitated  when the Company caused the
owner of the Franvale facility, Quality Care Centers of Massachusetts,  Inc., to
institute a proceeding  under  Chapter 11 of the Federal  Bankruptcy  Code.  All
patients have been  transferred from Franvale and the assets of the facility are
being  liquidated.   For  additional   information  see   'Business-Closed   and
Discontinued Operations-Franvale.'

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

     The Company was organized as a Delaware  corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged into an
inactive  publicly  held   Massachusetts   corporation  and  was  the  surviving
corporation  in the merger.  The Company  changed its name to "PHC,  Inc." as of
November 24, 1992.  The Company is based in  Massachusetts  and is  unaffiliated
with an  inactive  Minnesota  corporation  of the same name.  The  Company  does
business  under the trade name  "Pioneer  Healthcare"  and  "Pioneer  Behavioral
Health."  With the  exception of the services  provided  directly by the Company
under the name Pioneer Development  Support Services,  the Company operates as a
holding company, providing administrative, legal and programmatic support to its
subsidiaries.  The Company's  executive  offices are located at 200 Lake Street,
Suite  102,  Peabody,  Massachusetts,  01960 and its  telephone  number is (978)
536-2777.

PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

      Industry Background

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

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

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

      Company Operations

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

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

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

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

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

      HIGHLAND RIDGE

     Highland Ridge is a 34-bed  alcohol and drug  treatment  hospital which the
Company has been operating since 1984. It is the oldest free-standing  substance
abuse hospital in Utah.  Highland Ridge is accredited by the Joint Commission on
Accreditation of Healthcare  Organizations ("JCAHO") and is licensed by the Utah
Department of Health. Highland Ridge is recognized nationally for its excellence
in treating substance abuse disorders.
 
     Most patients are from Utah and surrounding states.  Individuals  typically
access Highland Ridge's services through professional referrals, family members,
employers,  employee  assistance  programs or contracts  between the Company and
health maintenance organizations located in Utah.

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

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

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

SPECIALIZED TREATMENT SERVICE

     In the  spring of 1994,  the  Company  began to  operate  a crisis  hotline
service under contract with a major transportation client. The hotline,  Pioneer
Development Support Services, or PDS2 ("PDS2"), is a national, 24-hour telephone
service  which  supplements  the  services  provided  by the  client's  Employee
Assistance  Programs.   The  services  provided  include   information,   crisis
intervention,  critical  incidents  coordination,  employee  counselor  support,
client monitoring,  case management and health promotion. The hotline is staffed
by counselors who refer callers to the  appropriate  professional  resources for
assistance  with  personal  problems.   Five  major   transportation   companies
subscribed to these  services as of June 30, 1998.  This operation is physically
located in Highland Ridge Hospital, but services are provided by staff dedicated
to PDS2. PDS2 is currently operated by the parent entity, PHC, Inc.

      MOUNT REGIS

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

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

General Psychiatric Facilities

Introduction

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

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

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

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

     HARBOR OAKS

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

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

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

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

     Harmony Healthcare

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

     Total Concept EAP

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

     North Point-Pioneer, Inc.

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

     Pioneer Counseling of Virginia, Inc.

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

     BSC-NY, Inc.

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

<PAGE>
     Operating Statistics

     The following table reflects selected financial and statistical information
for all psychiatric services.
                                               Year Ended June 30,
                                        1998           1997            1996
                                        ____            ____            ____
Inpatient*
Net patient service revenues       $ 13,640,801    $ 13,557,703    $13,000,822

Net revenues per patient day(1)    $        476    $        414    $       385

Average occupancy rate(2)                 51.7%           58.8%          63.4%

Total number of licensed beds               123             172            172
at end of period

Source of Revenues:
   Private(3)                             86.9%           91.6%          90.0%
  
   Government(4)                          13.1%            8.4%          10.0%

Partial Hospitalization and Outpatient

Net Revenues:*

   Individual                      $  4,705,454     $ 5,629,760    $ 3,021,486

   Contract                        $  1,423,098     $ 1,459,580    $   503,365
Sources of revenues:
   Private                                94.0%           98.4%          93.9%
  
   Government                              6.0%            1.6%           6.1%

      Other 
 Psychiatric services

                 PDSS(5)           $    763,086   $     629,761    $   233,164

  Practice Management(6)           $    713,750   $     650,852    $         0

* Includes Good Hope Center revenue of:

    Inpatient                       $ 1,012,679       1,300,745    $ 2,119,052
    Outpatient                      $   331,057   $     457,018    $   451,265

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

Closed and Discontinued Operations

     Franvale
 
     The Company engaged Oasis Management  Company ("Oasis") on November 1, 1996
to June 30, 1997 to provide  management  services to  Franvale.  On February 19,
1997, the Company's Franvale Nursing and Rehabilitation  Center ("Franvale") was
cited for serious  patient  care and safety  deficiencies  by the  Massachusetts
Department of Public Health as the result of a routine  survey.  A civil penalty
of $3,050 per day was  imposed  which was reduced to $2,250 per day on March 12,
1997.  After an appeal the fine was reduced to $90,545 in total.  At the time of
the  original  citation,  the Company was notified by the  Department  of Public
Health and by the federal  agency,  HCFA, that Franvale would be terminated from
the Medicare and Medicaid programs unless Franvale was in substantial compliance
with  regulatory  requirements by March 14, 1997.  Franvale  submitted a plan of
correction  to the  Department  of Public  Health and on March 12, 1997,  as the
result of a resurvey by the  Department  of Public  Health,  a new  statement of
deficiencies was issued,  which contained a significant number of violations but
recharacterized  the level of seriousness of the  deficiencies to a lower degree
of violation and which extended the threatened  date of termination to April 30,
1997.

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

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

     The  Company   replaced  the  management  team  at  Franvale  and  expended
significant  sums for staffing and  programmatic  improvements in order to bring
the facility into  substantial  compliance at the earliest  possible  date.  The
Company   conducted  an  intensive  staff  review  which  resulted  in  a  total
reorganization. The new staff was provided with in-service training.

     On January 29, 1998  Franvale  was again cited for patient  care and safety
deficiencies by the  Massachusetts  Department of Public Health as a result of a
routine  survey.  A civil penalty of $224,250 was imposed for the period of time
that the facility was not in compliance. At the time of the citation the Company
was notified by the Department of Public Health and by the federal agency, HCFA,
that Franvale would be terminated from the Medicare and Medicaid programs if the
facility was not in  substantial  compliance  with  regulatory  requirements  by
February 21, 1998. As a result of this  statement of  deficiencies  Franvale was
precluded from  readmitting  patients or admitting new patients.  As of February
13, 1998 the ban from  readmission  was  removed,  however,  Franvale  was still
unable to admit new  patients  until after the resurvey  was  completed  and the
facility was found to be in substantial compliance with Federal requirements.

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

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

     On February 12, 1998, the Company entered into an Asset Purchase  Agreement
with Lexington  Healthcare Group, Inc. to sell  substantially all the assets and
liabilities  of Franvale  Nursing and  Rehabilitation  Center.  The inability of
Franvale to admit new patients and the State's pending  license  revocation made
completion of the sale an impossibility.

     As a result of the  decrease  in census  resulting  from the  inability  of
Franvale to admit new  patients and the  limitations  on its ability to re-admit
patients, the monetary penalties and the expenses that have been incurred by the
Company in  correcting  the cited  deficiencies,  continued  facility  cash flow
deficit of approximately  $80,000 monthly, the stall of the sale of Franvale and
the  probability  that the  State  would  not lift the  admission  freeze on the
facility the Company  concluded that it should file for protection under Chapter
11 of the United States Bankruptcy Code for the wholly owned subsidiary  Quality
Care  Centers  of  Massachusetts,  Inc.  which  operates  Franvale  Nursing  and
Rehabilitation Center.

     On May 26, 1998  Franvale  Nursing  and  Rehabilitation  Center,  filed for
reorganization  under  Chapter 11 of the United  States  bankruptcy  Code in the
Eastern Division of the District of Massachusetts at Boston, Massachusetts.  The
case was  assigned  to C J Kenner.  On May 27, 1998 on motion of  Franvale,  the
court authorized the appointment of a Trustee and appointed Joseph Braunstein as
the Chapter 11 Trustee.  On May 29, 1998,  the Bankruptcy  Court  terminated the
Chapter 11 proceeding determining that there was no likelihood of reorganization
since the  prospective  acquirer of the facility was now imposing  certain terms
unacceptable  to all  interested  parties and that the  transfer of patients and
liquidation  of  assets  could  be  as  readily  effectuated  in a  state  court
receivership  under the aegis of the  Massachusetts  Health  Care  Statutes  and
accordingly  dismissed  the Chapter 11 case. On June 1, 1998, on the Petition of
the  Attorney  General of the  Commonwealth  of  Massachusetts  on behalf of the
Department of Public Health with the  acquiescence  of Franvale,  Robert Griffin
was  appointed by J. Kottmyer as Receiver to transfer the patients and close the
facility expeditiously.
 
     Subsequent to year end the Company's  Bankruptcy Attorney was notified that
effective  September  30, 1998 the patient  care  receivership  for Quality Care
Centers of  Massachusetts,  Inc.  had been  terminated.  On October 5, 1998,  in
response to the  termination  of the State  Receivership,  the Company filed for
protection  under Chapter 7 of the United States  bankruptcy Code in the Eastern
Division of the District of Massachusetts at Boston,  Massachusetts.  On October
7, 1998 the court appointed Mark G. DeGiacomo as the Chapter 7 Trustee.

     As a consequence of Franvale's  bankruptcy and subsequent  receivership,  a
number of claims  have been  asserted  against  the  Company or may be  asserted
against the Company in the future. To date, such claims are as follows:

     The Commonwealth of Massachusetts  may institute a claim seeking to recover
any expenses  incurred but not recovered by the Commonwealth as a consequence of
Franvale's receivership. The Commonwealth has a receivership statute that allows
the  Commonwealth  to  seek  indemnification  for  receivership   expenses  from
"licensee[s],  persons  responsible  for the  affairs  of the  licensee,  or the
owner." Under  Commonwealth law, the Commonwealth could seek to hold the Company
liable as a "licensee" or "a person  responsible for the affairs of the licensee
[Franvale]."  Management  believes that there are defenses to any such claim. At
this time this does not appear to be a material issue, however, since Franvale's
collectible  accounts receivable are far in excess of the operating expenses and
the  receiver's  fees  that  will  be  incurred  during  the  receivership.  The
Commonwealth  may also seek to recover the penalties  assessed  against Franvale
for the licensing problems referred to above.
 
     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.

     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.

Good Hope Center
 
     Good Hope Center is a 49-bed substance abuse treatment  facility located in
West  Greenwich,  Rhode  Island  which,  until  May,  1998 was  operated  by the
Company's subsidiary PHC of Rhode Island, Inc.
 
     The Good Hope Center operated at a loss for the past two years because of a
decline  in census,  length of stay and lower  reimbursements  from third  party
payors.  Efforts  to  increase  length of stay and  improve  market  share  were
unsuccessful requiring the close of the facility.

     In May,  1998 the  Company  closed  Good Hope  Center and  entered  into an
agreement  terminating the lease for the facility.  This agreement releases PHRI
from the remaining 16 years on the Good Hope Center  property  lease in exchange
for  approximately  $35,000 of the PHRI net fixed assets and a total  payment of
approximately $125,000 over the next seven months. The Company estimates that it
will incur  aggregate  costs of closing this facility,  in addition to the lease
agreement  cost, of  approximately  $120,000  which has been provided for in the
Company's June 30, 1998 results of operations.

Blacksburg Clinic

     Subsequent to year end the Company  decided to close the Blacksburg  Clinic
and  consolidate  the Blacksburg  resources and operations with the Salem Clinic
operations to enhance profitability of Pioneer Counseling of Virginia,  Inc. The
write  down of assets  and  anticipated  costs  related  to the  closing  of the
Blacksburg  clinic are  reflected in the  accompanying  June 30, 1998  Financial
Statements.

Operating Statistics

The following table reflects closed and discontinued operations:


                                           For the Year Ended
                                               June 30,
                                  1998           1997           1996
                                  ____           ____           ____
    Discontinued Operations-
      Franvale:
        Income (Loss) from     $(2,220,296)  $(1,958,756)   $(1,216,832)
                operations
    Closed Operations
    
    Good Hope Center:
        Income (Loss) from     $(1,540,772)  $  (642,119)   $  (661,645)
                operations
    Blacksburg Clinic
        Income (Loss) from     $  (122,806)           --             --
                operations                  

     The  Company  expects  that  approximately   $245,000  in  additional  cash
expenditure  will be  incurred  through the  closure of Good Hope  Center.  This
amount  includes  approximately  $125,000  to  terminate  the lease,  $50,000 in
payment to former  employees  for earned time and  severance  pay and $70,000 in
collection  and  miscellaneous  expenses  which  has  been  provided  for in the
Company's June 30, 1998 results of operations.
 
Business Strategy

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

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

 Marketing And Customers

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

     The  Company  employs 10  individuals  dedicated  to  marketing  among  the
Company's  facilities.  Each facility performs marketing activities in its local
region. The National Marketing Director of the Company, coordinates the majority
of the Company's national marketing efforts.  In addition,  employees at certain
facilities  perform national  marketing  activities  independent of the National
Marketing  Director.  The  Company,  with the  support  of its owned  integrated
outpatient  systems  and  management  services,  plans to  pursue  more  at-risk
contracts and  outpatient,  managed health care  fee-for-service  contracts.  In
addition to providing  excellent  services and treatment  outcomes,  the Company
will continue to negotiate  pricing  policies to attract  patients for long-term
intensive  treatment  which  meet  length  of  stay  and  clinical  requirements
established  by insurers,  managed health care  organizations  and the Company's
internal professional standards.

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

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

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

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

Revenue Sources And Contracts

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

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

Quality Assurance And Utilization Review

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

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

Government Regulation

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

     In  addition,  both the  Medicare  and  Medicaid  programs  are  subject to
statutory and regulatory  changes,  administrative  rulings,  interpretations of
policy, intermediary  determinations and governmental funding restrictions,  all
of which may  materially  increase or decrease  the rate of program  payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
likely continue to do so.  Additionally,  congressional  spending reductions for
the Medicaid program  involving the issuance of block grants to states is likely
to hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid  program.  As a result of this reform  activity the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such  patients.  In  addition,  many  states,   including  the  Commonwealth  of
Massachusetts  and the State of Michigan,  are  considering  reductions in state
Medicaid budgets.

   Health Planning Requirements

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

   Licensure and Certification

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

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

Medicare Reimbursement

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

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

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

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

   Medicaid Reimbursement

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

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

   Fraud and Abuse Laws

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

     As of September  15, 1998,  the Company had 329  employees of which 10 were
dedicated  to marketing,  104 (19 part time) to finance and  administration  and
215 (73 part time) to patient  care.  All of the  Company's  329  employees  are
leased from International Personnel Resources, LTD. ("IPR"), a national employee
leasing  firm.  The Company has elected to lease its  employees  to provide more
favorable  employee health benefits at lower cost than would be available to the
Company as a single employer and to eliminate certain administrative tasks which
otherwise  would be imposed on the  management  of the  Company.  The  agreement
provides that IPR will administer payroll,  provide for compliance with workers'
compensation laws, including procurement of workers' compensation  insurance and
administering claims, and procure and provide designated employee benefits.  The
Company  retains the right to reject the services of any leased employee and IPR
has the right to increase its fees at any time upon thirty days' written  notice
or  immediately  upon any  increase  in  payroll  taxes,  workers'  compensation
insurance  premiums  or the cost of  employee  benefits  provided  to the leased
employees.

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

INSURANCE

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

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

ITEM 2.           DESCRIPTION OF PROPERTY.

Executive Offices

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

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

Mount Regis Center

     The Company owns the Mount Regis  facility  which consists of a three-story
wooden  building  located on an  approximately  two-acre  site in a  residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a  mortgage  in the  approximate  amount of  $500,000.  Until  July,  1998 Mount
Regis/Changes  occupied  approximately  1,750 square feet of office space leased
from Pioneer Counseling of Virginia,  Inc. in Salem, Virginia. In July the Mount
Regis/Changes  operations were moved to Mount Regis Center. The Company believes
that these premises are adequate for its current and anticipated needs.

Psychiatric Facilities

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

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

     The Company owns the Pioneer Counseling of Virginia building which consists
of 7,500  square  feet of  office  space  located  in Salem,  Virginia.  Pioneer
currently leases 1,500 square feet to Blankenship Opticians,  an unrelated party
and until July 1998 leased 1,750 square feet to Mount Regis/Changes. The Pioneer
Counseling of Virginia  property is subject to an outstanding  mortgage in favor
of Dillon & Dillon Associates with an outstanding  balance of $521,000 at fiscal
year ended June 30,  1998.  Since  October 1, 1997 the company also leases 3,188
square  feet of space in  Blacksburg,  Virginia  at an annual  rent of  $66,700.
Subsequent to year end the Company decided to combine the Blacksburg  operations
with the Salem operations to enhance profitability.

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


ITEM 3.           LEGAL PROCEEDINGS.

     For  information  regarding the bankruptcy and subsequent  receivership  of
Franvale   and   litigation   that  has   arisen  as  a  result   thereof,   see
'Business-Closed and Discontinued Operations--Franvale.'


<PAGE>


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

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended June 30, 1998.


DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  directors  and  officers  of the  Company  as of June 30,  1998 are as
follows:

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

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

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

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

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

     ROBERT H. BOSWELL has served as the Executive Vice President of the Company
since  1992.  From 1989  until  the  spring  of 1994 Mr.  Boswell  served as the
Administrator  of the Company's  Highland  Ridge  Hospital  facility where he is
based.  Mr. Boswell is principally  involved with the Company's  substance abuse
facilities.  From 1981 until 1989, he served as the Associate  Administrator  at
the Prevention  Education  Outpatient  Treatment  Program--the  Cottage Program,
International.  Mr. Boswell  graduated from Fresno State  University in 1975 and
from 1976 until 1978 attended Rice University's  doctoral program in philosophy.
Mr. Boswell is a Board Member of the National  Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.
 
     PAULA C. WURTS has served as the  Controller  of the Company since 1989 and
as Assistant  Treasurer since 1993 and as Assistant  Clerk since January,  1996.
Ms. Wurts served as the Company's  Accounting  Manager from 1985 until 1989. Ms.
Wurts received an Associate's  degree in Accounting from the University of South
Carolina in 1980, a B.S. in Accounting from Northeastern  University in 1989 and
passed the examination for Certified Public Accountants. She received a Master's
Degree in Accounting from Western New England College in 1996.
 
     GERALD M. PERLOW,  M.D.  has served as a Director of the Company  since May
1993 and as Clerk since February,  1996. Dr. Perlow is a cardiologist in private
practice in Lynn,  Massachusetts,  and has been Associate  Clinical Professor of
Cardiology at the Tufts University  School of Medicine since 1972. Dr. Perlow is
a Diplomat of the National Board of Medical  Examiners and the American Board of
Internal Medicine (with a subspecialty in  cardiovascular  disease) and a Fellow
of the American  Heart  Association,  the American  College of  Cardiology,  the
American College of Physicians and the Massachusetts  Medical Center.  From 1987
to  1990,  Dr.  Perlow  served  as the  Director,  Division  of  Cardiology,  at
AtlantiCare  Medical  Center in Lynn,  Massachusetts.  From  October 30, 1996 to
March 1, 1997,  Dr.  Perlow  served as  President  and  Director of  Shliselberg
Physician Services, P.C. formerly Perlow Physicians, P.C. which has a management
contract  with  BSC.  Dr.  Perlow  currently  holds  no  ownership  interest  in
Shliselberg Physician Services,  P.C. Dr. Perlow received compensation of $8,333
for the period.  Dr. Perlow  received a B.A. from Harvard College in 1959 and an
M.D. from Tufts University School of Medicine in 1963.

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

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

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


<PAGE>

PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

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

1999
    First Quarter (through September
       15, 1998)................          $ 2               $    5/8


     On September  15, 1998,  the last reported sale price of the Class A Common
Stock was $ .938 On  September  15, 1998 there were 450 holders of record of the
Company's  Class A Common Stock and 314 holders of record of the Company's Class
B Common Stock.  Since the Company failed to meet earnings targets as stipulated
in its March 1994  prospectus,  The Company's  Class C Common Stock was canceled
and retired on September 28, 1997.

DIVIDEND POLICY

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

<PAGE>

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,
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  which has  begun to  produce
results.

     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 the 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 8% to
$9,341,013  for the year ended June 30, 1998 from  $8,622,946 for the year ended
June 30,  1997.  Approximately  50% of this  increase  is due to the  accrual of
employee earned time benefits,  approximately 14% of this increase is due to the
costs related to the closing of the Blacksburg  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  which 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.

     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.

     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.

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:
<PAGE>

  DATE  TRANSACTION TYPE  NUMBER  PROCEEDS   MATURITY   TERMS         STATUS
                            OF                 DATE
                          SHARES
  11/96 Warrant issued    25,000            10/7/2001   $2.00       outstanding
        as payment of                                   exercise
        commission on                                   price as
        on                                              adjusted
        Convertible                                     7/97
        Debentures                                      issued for
                                                        services
  11/96 Convertible              $3,125,000  12/31/98   7%            Converted
        Debentures                                      Interest         8/97
                                                        per Yr.
  2/97  Warrant issued     3,000            2/18/2002   $2.80 per   outstanding
        in exchange for                                 1.25
        investor                                        shares
        relations                                       adjusted
        services                                        for
                                                        dilution
                                                        issued for
                                                        services
  3/97  Warrant issued   160,000            3/31/2002   exercise    outstanding
        in exchange for                                 price
        Investor                                        $2.62
        Relations                                       issued for
        services                                        services
  3/97  Warrants issued  150,000            3/31/2002   $2.00       outstanding
        in lieu of cash                                 exercise
        for a penalty                                   price
        on the late                                     issued in
        registration                                    lieu of
        of Convertible                                  payment of
        Debentures                                     penalty
        Preferred Stock
  5/97  Convertible        1,000 $1,000,000  05/31/99   6% Interest   Converted
        Preferred Stock                                 per Yr.          6/97
                                                        convertible    through
                                                        at 80% of 5      8/97
                                                        day average
                                                        bid price.

<PAGE>

  DATE  TRANSACTION TYPE  NUMBER    PROCEEDS   MATURITY    TERMS     STATUS
                           OF                    DATE
                          SHARES

 6/97  Warrant  issued    50,000           06/04/2000   exercise    outstanding
       in conjunction                                   price $2.75
       with 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% Sold
                                                        discount
  9/97 Warrant issued     86,207           09/30/2002   exercise    outstanding
       as part of the                                   price $2.90
       units in the
       Private
       Placement of
       Common Stock
  9/97 Warrant issued    150,000           05/31/2002   exercise    outstanding
       in exchange for                                  price $2.50
       cash and
       financial
       advisory
       services
 12/97 Mortgage advance           $500,000 10/31/2001   Prime       outstanding
                                                        Plus 5%
  3/98 Warrant issued      3,000           03/10/2003   exercise    outstanding
       as a penalty                                     price $2.90
       for late
       registration
       of Private
       Placement
       Common Stock
  3/98 Note Payable                $350,000  11/10/98   Prime       outstanding
                                                as      Plus 3.5 %
                                             extended
  3/98  Warrants issued   52,500  03/10/2003            exercise    outstanding
        as                                              price 
        additional                                      $2.38
        interest on
        3/98 debt
  3/98  Common Stock     227,347   $534,265      N/A    N/A            N/A
        issued to the
        former owners
        of BSC-NY, Inc.
        for the earn
        out agreement
        in lieu of cash
  3/98  Convertible          950   $950,000 03/18/2000  6%          outstanding
        Preferred Stock                                 Interest
                                                        per Yr.
                                                        convertible
                                                        at 80% of 5
                                                        day average
                                                        bid price.
  3/98  Warrants issued   49,990           03/18/2001   exercise    outstanding
        in                                              price $2.31
        connection with
        the Private
        Placement of
        Convertible
        Preferred Stock
        on
        3/98
  5/98  Note  Payable  -            $50,000        on   12%         outstanding
        Related Party                            demand annual
                                                        interest
                                                        rate
  6/98  Note  Payable  -            $50,000        on   12%         outstanding
        Related Party                            demand annual
                                                        interest
                                                        rate

     Subsequent to year end the Company met its cash flow needs through accounts
receivable financing and by issuing debt and equity securities as follows:

  7/98  Warrants          52,500            07/10/2003  exercise    outstanding
        issued                                          price $1.81
        as
        additional
        interest
        on
        extension of
        3/98 debt
  7/98  Warrants          20,000            07/10/2003  exercise    outstanding
        issued                                          price $1.81
        as
        additional
        interest
        on
        extension of
        3/98 debt
  8/98  Warrants          50,000             8/15/2001  exercise    outstanding
        issued for                                      price $1.75
        services
  8/98  Note Payable -              $100,000      on    12%         outstanding
        Related Party                           demand  annual 
                                                        interest
                                                        rate

     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.
                                                           AT PAGE

Index.................................................      F-1
Independent auditors' reports.........................    F-2, F-3
Consolidated balance sheets...........................      F-4
Consolidated statements of operations.................      F-5
Consolidated statements of changes in stockholders'          
equity................................................      F-6
Consolidated statements of cash flows.................      F-7
Consolidated notes to financial statements............      F-8


 
                                    PART III

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

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

Compliance With Section 16(A) Of  The Exchange Act

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


ITEM 10.    Executive compensation.  Employment agreements

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

Executive Compensation

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


                         Summary Compensation Table
                                                          Long Term 
                                                         Compensation
                                 Annual Compensation        Awards              
         (a)         (b)    (c)     (d)       (e)          (g)        (i)
      Name and                              Other      Securities    All Other
     Principal     Year   Salary   Bonus   Annual     Underlying  Compensation
      Position                ($)    ($)  Compensation Options/SARs     ($)
                                              ($)         (#)
Bruce A. Shear    1998   $309,167(1)  --    $8,363(2)   50,000       $51,256
  President and   1997   $294,167(1)  --   $12,633(3)       --            --
Chief Executive   1996   $294,063(1)  --   $10,818(4)       --            --
Officer

Robert H. Boswell 1998   $102,750    --     $6,931(5)   15,000       $14,149
  Executive Vice  1997   $ 92,750    --     $6,000(6)    5,000        $6,821
  President       1996   $ 80,667 $1,000   $23,750(7)    5,000       $11,250
                                                                      

     (1) The last Board  approved  increase was effective July 1, 1995 to a base
salary of $310,000.

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

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

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

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

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

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

COMPENSATION OF DIRECTORS

     Directors  who are  employees of the Company  receive no  compensation  for
services as members of the Board. Directors who are not employees of the Company
receive  $2,500  stipend per year and $1,000 for each Board meeting they attend.
In  addition,  directors of the Company are  entitled to receive  certain  stock
option grants under the Company's  Non-Employee  Director Stock Option Plan (the
"Director  Plan").  In fiscal year 1998 two members of the board of directors of
the Company served on a board of directors of another entity.  Mr. Phillips is a
member of the Board of Directors of Food Court Entertainment  Network,  Inc., an
operator  of  shopping  mall  television   networks,   and  Telechips  Corp.,  a
manufacturer  of  visual  phones  and Mr.  Grieco  is a member  of the  Board of
Directors of Fresenius  National Medical Core Holdings,  Inc. No other executive
officers or directors of the Company served on a board of directors of any other
entity.

COMPENSATION COMMITTEE

     The  Compensation  Committee  consists of Mr.  Donald Robar and Dr.  Gerald
Perlow.  The  compensation  Committee did not meet during fiscal 1998. Mr. Shear
does not participate in discussions concerning, or vote to approve, his salary.

Stock Plan

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

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

     During the fiscal year ended June 30, 1998, the Company  issued  additional
options to purchase  204,000 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share  ranging from $2.00 to $5.63.  Generally,  options are
exercisable  upon grant for 25% of the shares  covered  with an  additional  25%
becoming  exercisable  on each of the first three  anniversaries  of the date of
grant.

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

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

Employee Stock Purchase Plan

     On October 18, 1995, the Board of Directors voted to provide  employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to  participate  in an Employee  Stock  Purchase  Plan (the "Plan")  which
became  effective  February 1, 1996.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan period.  An offering  period under the plan began on
February 1, 1996 and ended on January 31, 1997. Seventeen employees purchased an
aggregate of 9,452 shares of Class A Common Stock.  The second  offering  period
commenced  on  February  1, 1997 and ended on  January  31,  1998.  Twenty  four
employees purchased an aggregate of 14,743 shares of Class A Common Stock. A new
offering  commenced on February 1, 1998 and will end on January 31, 1999.  There
are twenty-one employees participating in the third offering under this plan.

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

Non-Employee Director Stock Plan

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

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

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

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

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


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

     The following  table provides  information  about options  exercised by the
named executive  officers during fiscal 1998 and the number and value of options
held at the end of fiscal 1998.

         (a)                (b)       (c)           (d)             (e)
                                                 Number of        Value of
                                                Securities      Unexercised
                        Shares                  Underlying      In-the-Money
                       Acquired     Value       Unexercised     Options/SARs at
         Name         on Exercise  Realized     Options/SARs    at FY-End ($)
                         (#)         ($)        FY-End (#)      Exercisable/
                                                Exercisable/    Unexercisable
                                                Unexercisable
_______________________________________________________________________________
Bruce A. Shear........      --          --      12,500/37,500      $0/$0
Robert H. Boswell.....      --          --      47,600/34,000      $0/$0

ISSUANCE OF RESTRICTED STOCK

     On December 17, 1993,  the Company  issued  11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers of the Company,
respectively,  at a purchase price of $4.00 per share.  The shares of restricted
stock were issued  pursuant to the Company's  Stock Plan. Each purchaser paid to
the Company  25% of the  purchase  price for his or her shares in cash,  and the
balance with a  non-recourse  note.  The notes bear interest at 6% per year, are
payable  quarterly  in  arrears,  and became due March 31,  1997.  To secure the
payment  obligation  under the  non-recourse  notes,  shares paid for with these
notes have been pledged to the Company.  See "Certain  Transactions."  The notes
reached  maturity on March 31, 1997. Two employees were in default.  Mark Cowell
forfeited  6,925 shares and Joan  Chamberlain  forfeited  1,731 shares which are
currently held as treasury stock. In March, 1998 the Company issued 5,880 shares
of treasury  stock to employees.  The company  still holds the  remaining  2,776
shares as treasury stock.

                    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:


                        Name and Address        Amount and         Percent
    Title of Class      of Beneficial Owner        Nature             of
                                               of Beneficial        Class 
                                                   Owner             (11)
Class A Common Stock... Gerald M. Perlow         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
                        All Directors and       240,420(8)            4.9%
                        Officers as a Group
                        (8 persons)
Class B Common Stock    Bruce A. Shear          671,259(10)           92.3%
(9)...................  c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        All Directors and       671,259               92.3%
                        Officers as a Group
                        (8 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 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).
(9)  Each share of Class B Common Stock is convertible into one share of Class A
     Common Stock automatically upon any sale or transfer thereof or at any time
     at the option of the holder.  (10) Includes 56,369 shares of Class B Common
     Stock pledged to Steven J. Shear of 2 Addison Avenue,  Lynn,  Massachusetts
     01902, Bruce A. Shear's brother, to secure the purchase price obligation of
     Bruce A. Shear in connection  with his purchase of his  brother's  stock in
     the Company in  December  1988.  In the  absence of any default  under this
     obligation,  Bruce A. Shear retains full voting power with respect to these
     shares. (11) Represents  percentage of equity of class, based on numbers of
     shares  listed  under the column  headed  "Amount and Nature of  Beneficial
     Ownership".  Each share of Class A Common Stock is entitled to one vote per
     share and each share of Class B Common  Stock is entitled to five votes per
     share on all  matters  on which  stockholders  may  vote  (except  that the
     holders of the Class A Common  Stock are  entitled  to elect two members of
     the  Company's  Board of Directors  and holders of the Class B Common Stock
     are entitled to elect all the remaining  members of the Company's  Board of
     Directors).

     Based on the number of shares  listed under the column  headed  "Amount and
Nature of  Beneficial  Ownership,"  the  following  persons  or groups  held the
following  percentages  of voting rights for all shares of common stock combined
as of August 15, 1998:

                  Bruce A. Shear ...........................39.28%
                  J. Owen Todd..............................  0.7%
                  William F. Grieco.........................  0.7%
                  All Directors and Officers as a Group
                      (8 persons)...........................40.23%


<PAGE>


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Related Party Indebtedness

     For  approximately  the last ten years,  Bruce A. Shear, a director and the
President and Chief Executive Officer of the Company, and persons affiliated and
associated with him have made a series of unsecured loans to the Company and its
subsidiaries  to  enable  them  to  meet  ongoing  financial  commitments.   The
borrowings  generally  were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company,  were entered
into at market rates given the financial  condition of the Company and the risks
of repayment at the time the loans were made.  As of June 30, 1998,  the Company
owed an aggregate of $159,496 to related parties.
 
     During the period  ended June 30,  1998,  the  Company  paid Mr.  Shear and
affiliates  approximately  $126,950  in  principal  and accrued  interest  under
various notes. As of June 30, 1998, the Company owed Bruce A. Shear $39,496 on a
promissory note, which is dated March 31, 1994, matures on December 31, 1998 and
bears  interest at the rate of 8% per year,  payable  quarterly in arrears,  and
requires  repayments of principal  quarterly in equal installments and Tot Care,
Inc., an affiliate of Bruce A. Shear, $100,000 on promissory notes dated May 28,
1998 and June 9, 1998  which bear  interest  at the rate of 12% per year and are
payable on demand.

<PAGE>

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

      (a)   EXHIBITS.

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


Exhibits Index

Exhibit No.                              Description

         3.1 Restated  Articles of Organization  of the Registrant,  as amended.
             (Filed as exhibit 3.1 to the  Company's  Registration  Statement on
             March 2, 1994).
       3.1.1 Articles of Amendment filed with the  Commonwealth of Massachusetts
             on  January  28,  1997.  (Filed as exhibit  3.1.1 to the  Company's
             Quarterly  Report on form  10QSB,  filed  with the  Securities  and
             Exchange  Commission  on  May  15,  1997.  Commission  file  number
             0-23524).
         3.2 By-laws of the  Registrant,  as  amended.  (Filed as exhibit 3.2 to
             the  Company's  Post-Effective  Amendment  No.  2 on  Form  S-3  to
             Registration  Statement  on Form SB-2 under the  Securities  Act of
             1933 dated November 13, 1995. Commission file number 333-71418).
         3.3 Certificate  of Vote of Directors  establishing a Series of a Class
             of  stock  dated  June  3,  1997.  (Filed  as  exhibit  3.3  to the
             Company's  Registration Statement  Pre-Effective  Amendment on form
             SB2A,  filed with the  Securities  and Exchange  Commission on June
             12, 1998.  Commission file number 333-25231).
         4.1 Form of Warrant  Agreement.  (Filed as exhibit 4.1 to the Company's
             Registration Statement on March 2, 1994).
         4.2 Form  of  Unit  Purchase  Option.  (Filed  as  exhibit  4.4  to the
             Company's Registration Statement on March 2, 1994).
         4.3 Form of warrant issued to Robert A. Naify,  Marshall  Naify,  Sarah
             M.  Hassanein and Whitney  Gettinger.  (Filed as exhibit 4.6 to the
             Company's  Registration  Statement  on Form 3 dated March 12, 1996.
             Commission file number 333-71418).
         4.4 Form of Warrant Agreement by and among the Company,  American Stock
             Transfer & Trust Company and AmeriCorp  Securities,  Inc.  executed
             in connection with the Private Placement.  (Filed as exhibit 4.8 to
             the  Company's  Registration  Statement  on Form 3 dated  March 12,
             1996. Commission file number 333-71418).
         4.5 Form of Warrant Agreement issued to Alpine Capital  Partners,  Inc.
             to purchase  25,000 Class A Common  shares  dated  October 7, 1996.
             (Filed as  exhibit  4.15 to the  Company's  Current  Report on Form
             8-K, filed with the Securities and Exchange  Commission November 5,
             1996. Commission file number 0-23524).
         4.6 Form of Warrant  Agreement issued to Barrow Street  Research,  Inc.
             to purchase  3,000 Class A Common  shares dated  February 18, 1997.
             (Filed as exhibit 4.17 to the Company's  Registration  Statement on
             Form SB-2 dated April 15, 1997. Commission file number 333-25231).
         4.7 Form of Consultant  Warrant Agreement by and between PHC, Inc., and
             C.C.R.I.  Corporation  dated  March  3,  1997 to  purchase  160,000
             shares Class A Common  Stock.  Filed as an exhibit to the Company's
             Registration   Statement   on  Form  SB-2  dated  April  15,  1997.
             Commission file number 333-25231).
         4.8 Warrant  Agreement by and between PHC, Inc. and ProFutures  Special
             Equities  Fund,  L.P.  for  50,000  shares of Class A Common  Stock
             dated 6/4/97. (Filed as exhibit 4.22 to the Company's  Registration
             Statement  on Form SB-2  dated  April  15,  1997.  Commission  file
             number 333-25231).
         4.9 Warrant  Agreement by and between PHC, Inc. and ProFutures  Special
             Equities  Fund,  L.P.  for up to  86,207  shares  of Class A Common
             Stock  dated  09/19/97.  (Filed as  exhibit  4.25 to the  Company's
             report  on Form  10KSB,  filed  with the  Securities  and  Exchange
             Commission on October 14, 1997.  Commission file number 0-23524).
        4.10 Transfer  from  Seacrest  Capital   Securities  of  PHC,  Inc.  and
             securities  to Summit  Capital  Limited dated  12/19/97.  (Filed as
             exhibit 4.26 to the Company's report on Form 10KSB,  filed with the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
        4.11 Warrant  Agreement by and between PHC, Inc. and ProFutures  Special
             Equities Fund, LP for 3,000 shares of Class A Common Stock.  (Filed
             as exhibit 4.27 to the Company's  Current Report on Form 8-K, filed
             with the  Securities  and  Exchange  Commission  on April 29, 1998.
             Commission file number 0-23524).
        4.12 Subscription  Agreements  and  Warrants  for  Series B  Convertible
             Preferred Shares and Warrants by and between PHC, Inc.,  ProFutures
             Special Equities Fund,  L.P., Gary D. Halbert,  John F. Mauldin and
             Augustine Fund,  L.P. dated March 16, 1998.  (Filed as exhibit 4.28
             to the  Company's  Current  Report  on Form  8-K,  filed  with  the
             Securities  and Exchange  Commission on April 29, 1998.  Commission
             file number 0-23524).
        4.13 Notice  and  Agreement  of  Termination  of  Lease  and  Option  to
             Purchase;  Bill of Sale;  Assignment of Licenses;  Promissory Note;
             and  Guaranty  by and between  NMI  Realty,  Inc.  and PHC of Rhode
             Island,  Inc.  dated May 31,  1998.  (Filed as exhibit  4.28 to the
             Company's  Current Report on Form 8-K/A,  filed with the Securities
             and Exchange  Commission  on June 5, 1998.  Commission  file number
             0-23524).
        4.14 Warrant to purchase up to 52,500  shares of Class A Common Stock by
             and between PHC,  Inc.,  and HealthCare  Financial  Partners,  Inc.
             dated  March  10,  1998.  (Filed  as an  exhibit  to the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
        4.15 Warrant to purchase up to 52,500  shares of Class A Common Stock by
             and between PHC,  Inc.,  and HealthCare  Financial  Partners,  Inc.
             dated  July  10,  1998.  (Filed  as an  exhibit  to  the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
       *4.16 Warrant  Agreement  by and between  Joan  Finsilver  and PHC,  Inc.
             dated  07/31/98 for 60,000 shares common stock.  (Replaces  exhibit
             4.23  to  the  Company's  report  on  Form  10KSB  filed  with  the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
       *4.17 Warrant  Agreement  by and  between  Brean  Murray & Co.,  and PHC,
             Inc.  dated  07/31/98 for 90,000  shares  common  stock.  (Replaces
             exhibit 4.23 to the  Company's  report on Form 10KSB filed with the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
       *4.18 Warrant  Agreement by and between  HealthCare  Financial  Partners,
             Inc. and its subsidiaries (collectively "HCFP") and PHC, Inc. dated
             July 10, 1998 - Warrant  No. 3 for 20,000  shares of Class A Common
             Stock.
       *4.19 Warrant  Guaranty  Agreement  for Common  Stock  Purchase  Warrants
             issuable by PHC,  Inc.  dated August 14, 1998 for Warrants No 2 and
             No. 3.
        10.1 1993  Stock  Purchase  and  Option  Plan of PHC,  Inc.,  as amended
             December  26,  1997.  (Filed  as  exhibit  10.1  to  the  Company's
             Post-Effective   Amendment  No.  2  on  Form  S-3  to  Registration
             Statement  on Form SB-2  under  the  Securities  Act of 1933  dated
             November 13, 1995.  Commission file number 333-71418).
        10.2 Form of Warrant  Agreement for Bridge financing with List of bridge
             investors holding warrant  agreements and corresponding  numbers of
             bridge units for which  warrant is  exercisable.  (Filed as exhibit
             10.6 to the  Company's  Registration  Statement  on Form SB-2 dated
             March 2, 1994. Commission file number 33-71418).
       10.3 Lease  Agreement  between  Palmer-Wells  Enterprises and AIHS, Inc.
             and Edwin G. Brown,  dated  September 23, 1983, with Addendum dated
             March 23,  1989,  and  Renewal  of  Addendum  dated  April 7, 1992.
             (Filed as exhibit 10.14 to the Company's  Registration Statement on
             Form SB-2 dated March 2, 1994. Commission file number 33-71418).
        10.4 Note of PHC of  Virginia,  Inc.  in favor of  Himanshu S. Patel and
             Anna H.  Patel,  dated  April 1, 1995,  in the  amount of  $10,000.
             Filed as  exhibit  10.29 to the  Company's  annual  report  on Form
             10KSB,  filed with the  Securities and Exchange on October 2, 1995.
             Commission file number 0-23524).
        10.5 Note of PHC of  Virginia,  Inc.  in favor of  Mukesh  P.  Patel and
             Falguni M. Patel,  dated  April 1, 1993,  in the amount of $10,000.
             (Filed as exhibit 10.30 to the Company's  Registration Statement on
             Form SB-2 dated March 2, 1994.  Commission file number 333-71418).
        10.6 Deed of Trust Note of Mount Regis  Center  Limited  Partnership  in
             favor of Douglas M. Roberts,  dated July 28, 1987, in the amount of
             $560,000,  guaranteed by PHC, Inc.,  with Deed of Trust executed by
             Mount  Regis  Center,  Limited  Partnership  of even date (filed as
             exhibit  10.33 to Form SB-2 dated  March 2, 1994).  Assignment  and
             Assumption of Limited Partnership  Interest,  by and between PHC of
             Virginia Inc. and each assignor  dated as of June 30, 1994.  (Filed
             as exhibit 10.57 to Form 10KSB on September 28, 1994).
        10.7 Security Agreement Note of PHC of Virginia,  Inc. in favor of Mount
             Regis Center,  Inc., dated July 28, 1987, in the amount of $90,000,
             guaranteed by PHC, Inc., with Security Agreement,  dated July 1987.
             (Filed as exhibit 10.34 to the Company's  Registration Statement on
             Form SB-2 dated March 2, 1994.  Commission file number 333-71418).
        10.8 Copy of Note of Bruce A. Shear in favor of Steven J.  Shear,  dated
             December 1988, in the amount of $195,695;  Pledge  Agreement by and
             between  Bruce A. Shear and Steven J.  Shear,  dated  December  15,
             1988;  Stock Purchase  Agreement by and between Steven J. Shear and
             Bruce A. Shear,  dated December 1, 1988. (Filed as exhibit 10.52 to
             the  Company's  Registration  Statement on Form SB-2 dated March 2,
             1994.  Commission file number 333-71418).
        10.9 Note of PHC,  Inc.  in favor of Bruce A.  Shear,  dated  March  31,
             1994,  in the amount of  $110,596.  (Filed as exhibit  10.56 to the
             Company's  annual report on Form 10KSB,  filed with the  Securities
             and Exchange  Commission  on September  28, 1994.  Commission  file
             number 0-23524).
       10.10 Regulatory  Agreement  for  Multifamily  Housing  Projects,  by and
             between Quality Care Centers of  Massachusetts,  Inc. and Secretary
             of  Housing  and  Urban  Development,   dated  September  8,  1994;
             Mortgage of Quality  Care Centers of  Massachusetts,  Inc. in favor
             of Charles River Mortgage,  dated September 8, 1994;  Mortgage Note
             of Quality Care Centers of Massachusetts,  Inc. in favor of Charles
             River Mortgage  Company,  Inc., in the amount of $6,926,700,  dated
             September 8, 1994;  Security  Agreement by and between Quality Care
             Centers of Massachusetts,  Inc. and Charles River Mortgage Company,
             Inc.,  dated  September 8, 1994;  Standard Form  Agreement  Between
             Owner and Architect for Housing  Services,  by and between  Quality
             Care Centers of Massachusetts,  Inc. and David H Dunlap Associates,
             Inc., dated November 5, 1992;  Construction Contract by and between
             Quality Care Centers of  Massachusetts,  Inc. and Corcoran Jennison
             Construction  Co.,  Inc.,  dated  September  8, 1994,  and  related
             documents.  (Filed as exhibit 10.61 to the Company's  annual report
             on Form 10KSB,  filed with the Securities  and Exchange  Commission
             on September 28, 1994. Commission file number 0-23524).
       10.11 Lease and Option  Agreement,  by and between NMI Realty,  Inc.  and
             PHC of Rhode  Island,  Inc.,  dated  March  16,  1994  (Filed as an
             exhibit to the Company's  annual  report on Form 10KSB,  filed with
             the  Securities  and Exchange  Commission  on  September  28, 1994.
             (Commission  file number  0-23524 as amended on May 31, 1998, - see
             exhibit 10.64 filed herewith).
       10.12 Secured  Promissory  Note of PHC of Rhode Island,  Inc. in favor of
             Good Hope  Center,  Inc.,  dated March 16,  1994,  in the amount of
             $116,000.  (Filed as exhibit 10.67 to the  Company's  annual report
             on Form 10KSB,  filed with the Securities  and Exchange  Commission
             on September 28, 1994.  Commission  file number 0-23524) as amended
             on May 31, 1998 (see exhibit 10.64 filed herewith).
       10.13 Lease  Agreement  by and between  Conestoga  Corp.  and PHC,  Inc.,
             dated  July 11,  1994.  (Filed as  exhibit  10.69 to the  Company's
             annual  report  on  Form  10KSB,  filed  with  the  Securities  and
             Exchange  Commission on September 28, 1994.  Commission file number
             0-23524).
       10.14 Renewal of Lease Addendum between Palmer Wells  Enterprises and PHC
             of Utah, Inc.,  executed February 20, 1995. (Filed as exhibit 10.73
             to the  Company's  annual  report  on Form  10KSB,  filed  with the
             Securities and Exchange on October 2, 1995.  Commission file number
             0-23524).
       10.15 1995 Employee Stock  Purchase Plan.  (Filed as exhibit 10.74 to the
             Company's   Post-Effective   Amendment   No.   2  on  Form  S-3  to
             Registration  Statement  on Form SB-2 under the  Securities  Act of
             1933 dated November 13, 1995.  Commission file number 333-71418).
       10.16 1995   Non-Employee  Director  Stock Option Plan.  Filed as exhibit
             10.75 to the Company's  Post-Effective  Amendment No. 2 on Form S-3
             to Registration  Statement on Form SB-2 under the Securities Act of
             1933 dated November 13, 1995.  Commission file number 333-71418).
       10.17 Note of PHC of Nevada,  Inc., in favor of LINC Anthem Corporation,
             dated  November 7, 1995;  Security  Agreement of PHC,  Inc., PHC of
             Rhode  Island,  Inc.,  and PHC of Virginia,  Inc., in favor of LINC
             Anthem  Corporation,  dated  November  7, 1995;  Loan and  Security
             Agreement  of  PHC  of  Nevada,  Inc.,  in  favor  of  LINC  Anthem
             Corporation,  dated  November 7, 1995;  Guaranty of PHC,  Inc.,  in
             favor of LINC Anthem  Corporation,  dated  November 7, 1995;  Stock
             Pledge  and  Security  Agreement  of PHC,  Inc.,  in  favor of LINC
             Anthem  Corporation,  dated  November  7,  1995.  (Filed as exhibit
             10.76 to the Company's  Post-Effective  Amendment No. 2 on Form S-3
             to Registration  Statement on Form SB-2 under the Securities Act of
             1933 dated November 13, 1995.  Commission file number 333-71418).
       10.18 Secured  Promissory  Note in the amount of  $750,000 by and between
             PHC of Nevada,  Inc. and LINC Anthem Corp.  (Filed as exhibit 10.77
             to the  Company's  Post-Effective  Amendment  No.  2 on Form S-3 to
             Registration  Statement  on Form SB-2 under the  Securities  Act of
             1933 dated November 13, 1995.  Commission file number 333-71418).
       10.19 Stock Pledge by and between PHC,  Inc. and Linc Anthem  Corporation
             (Filed as  exhibit  10.81 to the  Company's  report on Form  10KSB,
             filed with the Securities and Exchange  Commission on September 28,
             1994).
       10.20 Custodial  Agreement  by and between  LINC Anthem  Corporation  and
             PHC,  Inc.  and  Choate,  Hall and  Stewart  dated  July 25,  1996.
             (Filed as exhibit 10.85 to the Company's  quarterly  report on Form
             10QSB,  filed  with  the  Securities  and  Exchange  Commission  on
             February 25, 1997.  Commission file number 0-23524).
       10.21 Loan and Security Agreement by and between  Northpoint-Pioneer Inc.
             and  LINC  Anthem  Corporation  dated  July  25,  1996.  (Filed  as
             exhibit  10.86 to the  Company's  quarterly  report on Form  10QSB,
             filed with the  Securities  and Exchange  Commission on December 5,
             1996. Commission file number 0-23524).
       10.22 Corporate Guaranty by PHC, Inc., PHC of Rhode Island,  Inc., PHC of
             Virginia,  Inc.,  PHC of Nevada,  Inc. and LINC Anthem  Corporation
             dated  July 25,  1996  for  North  Point-Pioneer,  Inc.  (Filed  as
             exhibit  10.87 to the  Company's  quarterly  report on Form  10QSB,
             filed with the  Securities  and Exchange  Commission on December 5,
             1996. Commission file number 0-23524).
       10.23 Stock  Pledge and Security  Agreement by and between PHC,  Inc. and
             LINC Anthem  Corporation.  (Filed as exhibit 10.88 to the Company's
             quarterly  report on Form  10QSB,  filed  with the  Securities  and
             Exchange  Commission  on December 5, 1996.  Commission  file number
             0-23524).
       10.24 Secured  Promissory Note of North  Point-Pioneer,  Inc. in favor of
             LINC  Anthem  Corporation  dated  July 25,  1996 in the  amount  of
             $500,000.  (Filed  as  exhibit  10.89  to the  Company's  quarterly
             report  on Form  10QSB,  filed  with the  Securities  and  Exchange
             Commission on December 5, 1996. Commission file number 0-23524).
       10.25 Lease  Agreement  by and between  PHC,  Inc.  and 94-19  Associates
             dated October 31, 1996 for BSC-NY,  Inc. (Filed as exhibit 10.90 to
             the  Company's  quarterly  report  on Form  10QSB,  filed  with the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.26 Note by and  between PHC Inc.  and Yakov  Burstein in the amount of
             $180,000.  (Filed  as  exhibit  10.91  to the  Company's  quarterly
             report  on Form  10QSB,  filed  with the  Securities  and  Exchange
             Commission on December 5, 1996. Commission file number 0-23524).
       10.27 Note by and between PHC,  Inc. and Irwin  Mansdorf in the amount of
             $570,000.  (Filed  as  exhibit  10.92  to the  Company's  quarterly
             report  on Form  10QSB,  filed  with the  Securities  and  Exchange
             Commission on December 5, 1996. Commission file number 0-23524).
       10.28 Employment   Agreement  by  and  between  BSC-NY,  Inc.  and  Yakov
             Burstein  dated  November 1, 1996.  (Filed as exhibit  10.93 to the
             Company's   quarterly   report  on  Form  10QSB,   filed  with  the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.29 Consulting   Agreement  by  and  between  BSC-NY,  Inc.  and  Irwin
             Mansdorf  dated  November 1, 1996.  (Filed as exhibit  10.94 to the
             Company's   quarterly   report  on  Form  10QSB,   filed  with  the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.30 Agreement and Plan of Merger by and among PHC, Inc., BSC-NY,  Inc.,
             Behavioral  Stress  Centers,   Inc.,  Irwin  Mansdorf,   and  Yakov
             Burstein  dated  October 31, 1996.  (Filed as exhibit  10.95 to the
             Company's   quarterly   report  on  Form  10QSB,   filed  with  the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.31 Employment  Agreement by and between  Perlow  Physicians,  P.C. and
             Yakov Burstein  dated November 1, 1996.  (Filed as exhibit 10.98 to
             the  Company's  quarterly  report  on Form  10QSB,  filed  with the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.32 Agreement  for Purchase and Sale of Assets by and between  Clinical
             Associates and Clinical  Diagnostics and PHC, Inc.,  BSC-NY,  Inc.,
             Perlow Physicians,  P.C., Irwin Mansdorf,  and Yakov Burstein dated
             October  31,  1996.  (Filed  as  exhibit  10.99  to  the  Company's
             quarterly  report on Form  10QSB,  filed  with the  Securities  and
             Exchange  Commission  on December 5, 1996.  Commission  file number
             0-23524).
       10.33 Consulting  Agreement by and between  Perlow  Physicians,  P.C. and
             Irwin Mansdorf dated November 1, 1996.  (Filed as exhibit 10.100 to
             the  Company's  quarterly  report  on Form  10QSB,  filed  with the
             Securities and Exchange Commission on December 5, 1996.  Commission
             file number 0-23524).
       10.34 First  Amendment  to Lease  Agreement  and Option  Agreement by and
             between  NMI  Realty,  Inc.  and PHC of Rhode  Island,  Inc.  dated
             December  20,  1996.   (Filed  as  an  exhibit  to  the   Company's
             Post-Effective   Amendment  No.  2  on  Form  S-3  to  Registration
             Statement  on Form SB-2  under  the  Securities  Act of 1933  dated
             November 13, 1995.  Commission  file number 333-71418).  As amended
             on  May 31, 1998.    (Filed  as  exhibit 10.64  to  the   Company's
             Registration Statement on Form SB-2 dated July 24, 1998. Commission
             file number 333-59927).
       10.35 Mortgage by and  between PHC of  Michigan,  Inc.  and HCFP  Funding
             Inc. dated January 13, 1997 in the amount of $2,000,000.  (Filed as
             exhibit  10.106 to the  Company's  quarterly  report on Form 10QSB,
             filed with the Securities  and Exchange  Commission on February 25,
             1997 Commission file number 0-23524).
       10.36 Employment  Agreement for Dr. Himanshu Patel;  Employment Agreement
             for Dr. Mukesh Patel;  and Fringe  Benefit  Exhibit for both of the
             Patels'  Employment  Agreements.  (Filed as  exhibit  10.107 to the
             Company's   quarterly   report  on  Form  10QSB,   filed  with  the
             Securities   and   Exchange   Commission   on  February  25,  1997.
             Commission file number 0-23524).
       10.37 Unconditional  Guaranty of Payment and  performance  by and between
             PHC,  Inc.  in favor of  HCFP.  (Filed  as  exhibit  10.112  to the
             Company's   quarterly   report  on  Form  10QSB,   filed  with  the
             Securities   and   Exchange   Commission   on  February  25,  1997.
             Commission file number 0-23524).
       10.38 Amendment  number 1 to Loan and  Security  Agreement  dated May 21,
             1996 by and between PHC, of Utah,  Inc. and HCFP Funding  providing
             collateral  for  the  PHC  of  Michigan,  Inc.  Loan  and  Security
             Agreement.  (Filed as  exhibit  10.113 to the  Company's  quarterly
             report  on Form  10QSB,  filed  with the  Securities  and  Exchange
             Commission on February 25, 1997 Commission file number 0-23524).
       10.39 Employment  Agreement  by and between  Perlow  Physicians  P.C. and
             Nissan  Shliselberg,  M.D dated  March,  1997.  (Filed  as  exhibit
             10.114 to the Company's  Registration  Statement on Form SB-2 dated
             April 15, 1997.  Commission file number 333-25231).
       10.40 Option and Indemnity  Agreement by and between PHC, Inc. and Nissan
             Shliselberg,  M.D dated February, 1997. (Filed as exhibit 10.115 to
             the Company's  Registration  Statement on Form SB-2 dated April 15,
             1997.  Commission file number 333-25231).
       10.41 Secured  Term  Note  by and  between  PHC  of  Michigan,  Inc.  and
             Healthcare  Financial  Partners - Funding II, L.P. in the amount of
             $1,100,000  dated  March,  1997.  (Filed as  exhibit  10.116 to the
             Company's  Registration  Statement  on Form  SB-2  dated  April 15,
             1997.  Commission file number 333-25231).
       10.42 Mortgage  between PHC of Michigan,  Inc. and  Healthcare  Financial
             Partners  - Funding  II,  L.P.  in the amount of  $1,100,000  dated
             March,  1997 for Secured Term Note. (Filed as exhibit 10.117 to the
             Company's  Registration  Statement  on Form  SB-2  dated  April 15,
             1997.  Commission file number 333-25231).
       10.43 Submission of Lease  between PHC,  Inc. and  Conestoga  Corporation
             dated 11/09/95 for space at 200 Lake Street,  Suite 101b,  Peabody,
             MA 01960.  (Filed as exhibit  10.119 to the Company's  Registration
             Statement  on Form SB-2  dated  April  15,  1997.  Commission  file
             number 333-25231).
       10.44 Master  Equipment Lease Agreement by and between PHC, Inc. and LINC
             Capital  Partners  dated March 18, 1997 in the amount of  $200,000.
             (Filed as exhibit  10.121 to the Company's  Registration  Statement
             on  Form  SB-2  dated  April  15,  1997.   Commission  file  number
             333-25231).
       10.45 Agreement  between  Family  Independence  Agency  and  Harbor  Oaks
             Hospital  effective  January 1, 1997.  (Filed as exhibit  10.122 to
             the Company's  report on Form 10KSB,  filed with the Securities and
             Exchange  Commission  on October 14, 1997.  Commission  file number
             0-23524).
       10.46 Master  Contract  by and  between  Family  Independence  Agency and
             Harbor Oaks Hospital  effective  January 1, 1997. (Filed as exhibit
             10.122  to the  Company's  report  on Form  10KSB,  filed  with the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
       10.47 Deed,  Deed of Trust and Deed Trust Note in the amount of  $540,000
             by and between Dillon and Dillon Associates and Pioneer  Counseling
             of  Virginia,  Inc.  (Filed  as  exhibit  10.124  to the  Company's
             report  on Form  10KSB,  filed  with the  Securities  and  Exchange
             Commission on October 14, 1997.  Commission file number 0-23524).
       10.48 Financial Advisory  Agreement,  Indemnification  Agreement and Form
             of Warrant by and  between  Brean  Murray & Company  and PHC,  Inc.
             dated  06/01/97.  (Filed as exhibit 10.125 to the Company's  report
             on Form 10KSB,  filed with the Securities  and Exchange  Commission
             on October 14, 1997.  Commission file number 0-23524).
       10.49 Secured Term Note;  Mortgage;  Environmental  Indemnity;  Agreement
             Guaranty  by PHC,  Inc.;  and  Amendment  No. 2 Loan  and  Security
             Agreement by and between  Healthcare  Financial;  and PHC,  Inc. of
             Michigan  dated  December,  1997.  (Filed as exhibit  10.129 to the
             Company's  Registration  Statement  on Form SB-2  dated  January 8,
             1997.  Commission file number 333-25231).
       10.51 Promissory  Note of Quality Care Center of  Massachusetts,  Inc. in
             favor of CMS  Therapies  dated  December  17, 1997 in the amount of
             $312,468.94.  (Filed as exhibit 10.131 to the Company's 10QSB dated
             February 17, 1998).
       10.52 First Amendment to Sale and Purchase  Agreement by and between LINC
             Financial  Services,  Inc., LINC Finance Corporation VII and PHC of
             Rhode  Island  dated   January  20,  1995  and  Sale  and  Purchase
             Agreement  dated  March 6, 1995.  (Filed as  exhibit  10.132 to the
             Company's 10QSB dated February 17, 1998).
       10.55 Agreement by and between PHC,  Inc.,  and Irwin  Mansdorf and Yakov
             Burstein  dated  March 2,  1998.  (Filed as  exhibit  10.135 to the
             Company's  Current  Report on Form 8-K,  filed with the  Securities
             and Exchange  Commission.  Commission  file number 0-23524 on April
             29, 1998).
       10.56 Secured  Bridge Loan to be made to PHC,  Inc.  by HCFP  Funding II,
             Inc. in the amount of  $350,000  dated  March 10,  1998.  (Filed as
             exhibit  10.136 to the Company's  Current Report on Form 8-K, filed
             with  the  Securities  and  Exchange  Commission.  Commission  file
             number 0-23524) on April 29, 1998).
       10.57 First Amendment to Mortgage between PHC of Michigan,  Inc. and HCFP
             Funding,  Inc.  (Filed as  Exhibit  10.137 to the  Company's  10QSB
             filed on May 15, 1998).
       10.58 Secured  Unconditional  Guaranty of Payment and  performance by and
             between  BSC-NY,  Inc.  and HCFP  Funding II, Inc. in the amount of
             $350,000.  (Filed  as an  exhibit  to  the  Company's  Registration
             Statement  on Form  SB-2  dated  July  24,  1998.  Commission  file
             number 333-59927).
       10.59 Loan and Security  Agreement by and among HCFP Funding,  Inc.,  and
             PHC of Michigan,  Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc.,
             PHC of Rhode  Island,  Inc.,  and Pioneer  Counseling  of Virginia,
             Inc.  dated as of February  18,  1998.  (Filed as an exhibit to the
             Company's  Registration  Statement  on Form  SB-2  dated  July  24,
             1998.  Commission file number 333-59927).
       10.60 Credit  Line Deed of Trust by and between  PHC of  Virginia,  Inc.,
             and HCFP Funding II, Inc.  dated July,  1998.  (Filed as an exhibit
             to the  Company's  Registration  Statement  on Form SB-2 dated July
             24, 1998.  Commission file number 333-59927).
       10.61 Amendment  No. 1 to Secured  Bridge Note dated July 10, 1998 by and
             between PHC,  Inc.  and HCFP Funding II, Inc.  (Filed as an exhibit
             to the  Company's  Registration  Statement  on Form SB-2 dated July
             24, 1998.  Commission file number 333-59927).
       10.62 Promissory  Note for $50,000 dated May 18, 1998 by and between PHC,
             Inc. and Tot Care, Inc. (Filed as an  exhibit  to the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
       10.63 Promissory  Note for $50,000 dated June 9, 1998 by and between PHC,
             Inc.  and Tot Care,  Inc.  (Filed as an  exhibit  to the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
       10.64 Letter  Agreement  dated May 31,  1998 by and  between  NMI Realty,
             Inc.  and PHC of Rhode  Island,  Inc.  to  terminate  the Lease and
             Option Agreement  entered into March 16, 1994. (Filed as an exhibit
             to the  Company's  Registration  Statement  on Form SB-2 dated July
             24, 1998.  Commission file number 333-59927).
      *10.65 Amendment  No. 1 to Loan and  Security  Agreement  in the amount of
             $4,000,000.00  by  and  among  HCFP  Funding,   Inc.,  and  PHC  of
             Michigan,  Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc., PHC of
             Rhode Island, Inc., and Pioneer Counseling of Virginia,  Inc. dated
             as of February 18, 1998.
        16.1 Letter on Change in Independent  Public  Accountants.  (Filed as an
             exhibit  to the  Company's  report on Form  10KSB,  filed  with the
             Securities  and Exchange  Commission  on September  28, 1994 and as
             exhibit 16.1 in the  Company's  Current  Report on Form 8-K,  filed
             with the  Securities  and  Exchange  Commission.  (Commission  file
             number 0-23524 on April 29, 1998).
        21.1 List  of  Subsidiaries.  (Filed  as an  exhibit  to  the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
        99.1 Cautionary  Statement for Purposes of the "Safe Harbor" Provisions
             of the Private Securities  Litigation Reform Act of 1995.


(b)   REPORTS ON FORM 8-K.

     A Report on Form 8-K was  filed by the  Company  on June 5, 1998  reporting
that the Company's subsidiary Quality Care Centers of Massachusetts,  Inc. which
operates the Franvale  Nursing and  Rehabilitation  Center filed for  protection
under Chapter 11 and Chapter 7 of the Bankruptcy Code. The Court dismissed these
filing's  and  subsequently  placed  the  facility  into State  Receivership  to
facilitate the orderly closing of the facility.

<PAGE>
                                   SIGNATURES


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


                                                  PHC, INC.




Date: October 13, 1998                       By: /S/ BRUCE A. SHEAR
                                                     Bruce A. Shear,
                                                     President
                                                     and Chief Executive Officer


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


          SIGNATURE                   TITLE(S)                    DATE


/s/ BRUCE A. SHEAR              President, Chief              October 13. 1998
    Bruce A. Shear              Executive  Officer  and
                                Director  (principal
                                executive officer)

/s/ PAULA C. WURTS              Controller and Assistant     October 13. 1998
    Paula C. Wurts              Treasurer (principal
                                financial and accounting
                                officer)

/s/ GERALD M. PERLOW            Director                     October 13. 1998
    Gerald M. Perlow


/s/ DONALD E. ROBAR             Director                     October 13, 1998
    Donald E. Robar



/s/ HOWARD PHILLIPS             Director                     October 13, 1998
    Howard Phillips


/s/ WILLIAM F. GRIECO           Director                     October 13, 1998
    William F. Grieco






PHC, INC. AND SUBSIDIARIES

         Contents

         Consolidated 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'   F-6
             equity

             Consolidated statements of cash flows                 F-7

             Consolidated notes to financial statements            F-8

 
 
                                                                           F-1



<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.



/s/  BDO Seidman, LLP

BDO Seidman, LLP

Boston, Massachusetts
September 18, 1998

                                                                          F-2


<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


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets
 
                                                            June 30, 
                                                        1998          1997
                                                        ____          ____
ASSETS (Notes C and D)
 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)                                   167,004        214,150
                                                     __________     __________
      Total assets                                  $17,099,968    $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)                         1,232,394        334,349
                                                      __________     __________
       
      Total current liabilities                       8,330,177      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)                                    1,409,143      1,145,285
                                                     __________      __________
      Total noncurrent liabilities                    4,352,979      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 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 shares issued and outstanding
   June 30, 1997                                              --         1,998
Additional  paid-in capital                           15,295,895    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                                  (10,923,597)   (4,674,316)
                                                     ____________   ___________ 
      Total stockholders' equity                       4,416,812     5,724,581
      Total liabilities and stockholders' equity     $17,099,968   $20,423,176
                                                     ____________   ___________
See notes to financial statements
                                                                           F-4
<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                9,341,013            8,622,946
                                       ____________          ___________

      Total operating expenses           24,199,169           21,887,070
                                       ____________          ___________

Income (loss) from operations            (2,952,980)              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                 (3,792,686)            (683,597)
Income taxes (Note F)                       219,239              197,311
                                       ____________          ___________

Loss from continuing operations          (4,011,925)            (880,908)

Loss from discontinued operations     
(Notes A and I)                          (2,220,296)          (1,958,756)
                                       ____________          ___________
             Net loss                  $ (6,232,221)        $ (2,839,664)
                                       ____________          ___________
Basic and Diluted Loss per common
share:
    Continuing Operations              $       (.77)        $       (.27)
    Discontinued Operations                    (.42)                (.60)
      Total                            $      (1.19)        $       (.87)
                                       ____________          ___________
Basic and Diluted Weighted average
number of shares outstanding              5,237,168            3,270,175
 
See notes to financial statements.                                          F-5
<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
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,
  Series A                                                                        1,000     $10
Adjustment related
  to beneficial
  conversion
  feature of
  convertible
  preferred
  stock and
  convertible
  debentures
Conversion of          
  preferred
  stock Series A       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
Costs related to
  private placements
Conversion of debt   1,331,696     13,317
Conversion of         
  preferred
  stock  Series  A     246,305      2,463                                          (500)     (5)
Issuance of shares    
  with acquisition      41,024        410
Issuance private       
  placement shares     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
Issuance of shares
  with consulting                 
  agreement             20,870        209 
Issuance of Shares
  with earn out                 
  agreement            227,347      2,274
Issuance of
  employee stock      
  purchase plan
  shares                14,743        147
Issuance of                                                                 
  preferred stock
  Series B                                                                          950      10
Warrant issued with
  debt
Treasury stock
  issued to employees
Dividends on
  preferred stock
Net Loss - year
  ended June 30, 1998


Balance - June 30,  
  1998               4,935,267    $49,353  727,328   $7,273         0        $0     950     $10
                      ________   ________  _______   _______  ________  ________   ______   ______
 
See notes to financial statements.


<PAGE>

PHC, INC.  AND SUBSIDIARIES (con't)

Consolidated Statements of Changes In Stockholders' Equity

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

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
 stock purchase                 
 plan  shares             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 Series A         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 Series A          (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)   5,724,581
Costs related to        
  private placements    (164,257)                                                   (164,257)
Conversion of debt     2,696,789                                                   2,710,106
Conversion of             
  preferred stock
  Series A                (2,458)                                                          0
Issuance of shares         
  with acquisition        79,605                                                      80,015
Issuance Private         
  Placement shares       498,276                                                      500,000
Conversion of Shares                                                                       -0-
Cancel Class C Common       
  Stock                    1,998                                                           -0-
Issue warrants for       
  services               184,523                                                      184,523
Issuance of shares
  with consulting                    
  agreement               36,249                                                       36,458
Issuance of shares
  with earn out                     
  agreement              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
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)
Net Loss-year ended                                              
  June 30, 1998                                                      (6,232,221)   (6,232,221)

Balance - June 30,     
  1998               $15,295,895    $    -0-       2,776  $(12,122)$(10,923,597)  $ 4,416,812
                       ___________  ___________   _________  ________  _________    _________

See notes to financial statements

</TABLE>

                                                                      F-6
<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                                   $(6,232,221)      $(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                            (405,559)          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 increase (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
                                               


<PAGE>

 Supplemental disclosures of noncash
   investing and financing activities:
   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                                            0             200,000
    Warrant Valuations                           233,332                   0
    Conversion of Debt to Common Stock         2,710,106                   0




          See notes to financial statements                                F-7
<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 are recorded at  established  billing rates or at the
amount realizable under agreements with third-party  payors,  including Medicaid
and  Medicare.  Revenues  under  third-party  payor  agreements  are  subject to
examination  and adjustment,  and amounts  realizable may change due to periodic
changes in the  regulatory  environment.  Provisions  for estimated  third party
payor  settlements are provided in the period the related services are rendered.
Differences between the amounts accrued and subsequent  settlements are recorded
in operations in the year of settlement.

     Medicaid  reimbursements are currently based on established rates depending
on  the  level  of  care  provided  and  are  adjusted  prospectively.  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


<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  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                  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.

                                                                          F-9


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 to improve
profitability.  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.

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.
                                                                          F-10
<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

Long-term debt is summarized as follows:
                                                               June 30,
                                                           1998       1997
                                                           ____       ____

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  obligation  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
                                                               
 

<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.

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
<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


<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
                                                                June 30, 
                                                          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
                                                                June 30, 
                                                          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.

                                                                          F-14


<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
<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:
 
                                                               Weighted-Average
                                                     Number         Exercise
                                                       of            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
<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  compensation
     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)
                            Discontinue 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

<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:

                                 Number of       Exercise          Expiration
      Description               Units/Shares      Price               Date    
      ___________             ______________   ______________    ______________
  Bridge warrants                5,946 units   $3.70 per unit    September 1998
  Unit purchase option         156,271 units   $5.60 per unit    March 1999
  IPO warrants              1,772,073 shares  $5.97 per share    March 1999
  Private placement warrants  737,170 shares  $3.76 per share    January 2001
  Bridge warrants              36,573 shares  $7.02 per share    February 2001
  Warrant for services         25,000 shares  $2.00 per share    October 2001
  Warrant for services          3,753 shares  $2.80 per share    February 2002
  Consultant warrant          160,000 shares  $2.62 per share    March 2002
  Convertible debenture 
    warrants                  150,000 shares  $2.00 per share    March 2002
  Preferred stock warrant      50,000 shares  $2.75 per share    June 2000
  Warrant for services        150,000 shares  $2.50 per share    May 2002
  Private Placement            86,207 shares  $2.90 per share    September 2002
  Private Placement             3,000 shares  $2.90 per share    March 2003
  Debt Service                 52,500 shares  $2.38 per share    March 2003
  Private Placement            49,990 shares  $2.31 per share    March 2001


                                                                          F-18
<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.

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


                                                                        F-19
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1998 and 1997

NOTE K - ACQUISITIONS

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  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,  Shliselberg Physician Services,  P.C. formerly 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, 1998 Perlow owed the Company  $3,292,428  which includes in addition to
acquisition costs,  management fees of approximately  $1,491,730 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.

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.

 

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

Notes to Financial Statements
June 30, 1998 and 1997

NOTE K - ACQUISITIONS (CONTINUED)

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.

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
                                        ________
                                                                          F-21
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1998 and 1997

NOTE K - ACQUISITIONS (CONTINUED)
 
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.

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.
                                                                          F-22
<PAGE>
EXHIBIT INDEX

       *4.16 Warrant  Agreement  by and between  Joan  Finsilver  and PHC,  Inc.
             dated  07/31/98 for 60,000 shares common stock.  (Replaces  exhibit
             4.23  to  the  Company's  report  on  Form  10KSB  filed  with  the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
       *4.17 Warrant  Agreement  by and  between  Brean  Murray & Co.,  and PHC,
             Inc.  dated  07/31/98 for 90,000  shares  common  stock.  (Replaces
             exhibit 4.23 to the  Company's  report on Form 10KSB filed with the
             Securities   and   Exchange   Commission   on  October  14,   1997.
             Commission file number 0-23524).
       *4.18 Warrant  Agreement by and between  HealthCare  Financial  Partners,
             Inc. and its subsidiaries (collectively "HCFP") and PHC, Inc. dated
             July 10, 1998 - Warrant  No. 3 for 20,000  shares of Class A Common
             Stock.
       *4.19 Warrant  Guaranty  Agreement  for Common  Stock  Purchase  Warrants
             issuable by PHC,  Inc.  dated August 14, 1998 for Warrants No 2 and
             No. 3.
      *10.65 Amendment  No. 1 to Loan and  Security  Agreement  in the amount of
             $4,000,000.00  by  and  among  HCFP  Funding,   Inc.,  and  PHC  of
             Michigan,  Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc., PHC of
             Rhode Island, Inc., and Pioneer Counseling of Virginia,  Inc. dated
             as of February 18, 1998.
        21.1 List  of  Subsidiaries.  (Filed  as an  exhibit  to  the  Company's
             Registration   Statement   on  Form  SB-2  dated  July  24,   1998.
             Commission file number 333-59927).
        99.1 Cautionary  Statement for Purposes of the "Safe Harbor" Provisions
             of the Private Securities  Litigation Reform Act of 1995.

        

<PAGE>

Exhibit 4.16

REPLACES WARRANT FOR 150,000 SHARES DATED JULY 31, 1997              APPENDIX B


           FORM OF WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK


No. 1

                                                                 60,000 Shares

FOR VALUE RECEIVED,  PHC, Inc. (the "Company"),  hereby certifies that Joan M.
Finsilver,  or a permitted  assign  thereof,  is entitled to purchase from the
Company,  at any time or from time to time  commencing June 1, 1997, and prior
to 5:00 P.M.,  New York City time, on May 31, 2002,  sixty  thousand  (60,000)
fully paid and  nonassessable  shares of the common stock,  of the Company for
an  aggregate  purchase  price of $150,000  (computed on the basis of US $2.50
per  share).  Upon  issuance,  16,000  shares  shall be fully  vested  and the
balance  shall be 4,000  per  month on the 1st of each  month  for the next 11
months  beginning with the month of July 1997 provided that agreement  between
Brean  Murray and the  Company  dated  June 1, 1997  remains in full force and
effect  and has not been  terminated  by  either  party  as of an  application
vesting date.  (Hereinafter,  (i) said common  stock,  together with any other
equity  securities  which may be issued by the Company with respect thereto or
in  substitution  therefore,  is referred to as the "Common  Stock,"  (ii) the
shares of the Common Stock  purchasable  hereunder or under any other  Warrant
(as  hereinafter  defined) are referred to as the "Warrant  Shares," (iii) the
aggregate  purchase price payable hereunder for the Warrant Shares is referred
to as the  "Aggregate  Warrant  Price," (iv) the price  payable  hereunder for
each of the Warrant  Shares is referred to as the "Per Share  Warrant  Price,"
(v) this  Warrant,  all identical  warrants  issued on the date hereof and all
warrants  hereafter  issued in exchange or  substitution  for this  Warrant or
such other  warrants are referred to as the  "Warrants" and (vi) the holder of
this  Warrant is referred to as the  "Holder"  and the holder of this  Warrant
and all other  Warrants  are  referred  to as the  "Holders").  The  Aggregate
Warrant  Price is not subject to  adjustment.  The Per Share  Warrant Price is
subject  to  adjustment  as  hereinafter  provided;  in the  event of any such
adjustment,  the number of Warrant  Shares  shall be adjusted by dividing  the
Aggregate  Warrant Price by the Per Share Warrant Price in effect  immediately
after such adjustment.

I.          Exercise of Warrant.

      A.    Cashless Exercise

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

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

II    Reservation of Warrant Shares; Listing.

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

III.  Protection Against Dilution.

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

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

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

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

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

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

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

IV.   Fully Paid Stock, Taxes.

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

V.    Registration Under Securities Act of 1933.

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

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

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

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

VI.   Limited Transferability.

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

VII.  Loss, etc., of Warrant.

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

VIII. Warrant Holder Not Shareholders.

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

IX.   Communication.

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

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

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

X.    Headings.

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

XI.   Applicable Law.

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


IN WITNESS  WHEREOF,  the Company has caused this  Warrant to be signed by its
Chief Executive  Officer and its corporate seal to be hereunto  affixed by its
Secretary this 31st day of July, 1998.

                                          PHC, INC.

                                          By:  /s/  Bruce Shear
                                                    Chief Executive Officer
ATTEST:

/s/  Paula C. Wurts
Assistant Clerk

[Corporate Seal]


<PAGE>

                                  SUBSCRIPTION


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

Dated:  ___________________________       Signature:  ________________________

                                          Address:  _________________________

                                                    _________________________
                                   
ASSIGNMENT

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

Dated:  ___________________________       Signature:  ________________________

                                          Address:    ________________________

 

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

Dated:  ___________________________       Signature:  ________________________

                                          Address:  _________________________

 

                         CASHLESS EXERCISE SUBSCRIPTION


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

Dated:  _______________________     Signature:
                                    ________________________________

                                    Address:
                                    ________________________________


<PAGE>

Exhibit 4.17

REPLACES WARRANT FOR 150,000 SHARES DATED JULY 31, 1997              APPENDIX B


           FORM OF WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK


No. 1

                                                                 90,000 Shares

FOR VALUE RECEIVED,  PHC, Inc. (the  "Company"),  hereby  certifies that Brean
Murray & Co.,  Inc., or a permitted  assign  thereof,  is entitled to purchase
from the Company,  at any time or from time to time  commencing  June 1, 1997,
and prior to 5:00 P.M., New York City time, on May 31, 2002,  ninety  thousand
(90,000)  fully  paid and  nonassessable  shares of the common  stock,  of the
Company for an aggregate  purchase price of $225,000 (computed on the basis of
US $2.50 per share).  Upon  issuance,  24,000 shares shall be fully vested and
the balance  shall be 6,000 per month on the 1st of each month for the next 11
months  beginning with the month of July 1997 provided that agreement  between
Brean  Murray and the  Company  dated  June 1, 1997  remains in full force and
effect  and has not been  terminated  by  either  party  as of an  application
vesting date.  (Hereinafter,  (i) said common  stock,  together with any other
equity  securities  which may be issued by the Company with respect thereto or
in  substitution  therefore,  is referred to as the "Common  Stock,"  (ii) the
shares of the Common Stock  purchasable  hereunder or under any other  Warrant
(as  hereinafter  defined) are referred to as the "Warrant  Shares," (iii) the
aggregate  purchase price payable hereunder for the Warrant Shares is referred
to as the  "Aggregate  Warrant  Price," (iv) the price  payable  hereunder for
each of the Warrant  Shares is referred to as the "Per Share  Warrant  Price,"
(v) this  Warrant,  all identical  warrants  issued on the date hereof and all
warrants  hereafter  issued in exchange or  substitution  for this  Warrant or
such other  warrants are referred to as the  "Warrants" and (vi) the holder of
this  Warrant is referred to as the  "Holder"  and the holder of this  Warrant
and all other  Warrants  are  referred  to as the  "Holders").  The  Aggregate
Warrant  Price is not subject to  adjustment.  The Per Share  Warrant Price is
subject  to  adjustment  as  hereinafter  provided;  in the  event of any such
adjustment,  the number of Warrant  Shares  shall be adjusted by dividing  the
Aggregate  Warrant Price by the Per Share Warrant Price in effect  immediately
after such adjustment.

I.          Exercise of Warrant.

      A.    Cashless Exercise

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

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

II    Reservation of Warrant Shares; Listing.

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

III.  Protection Against Dilution.

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

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

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

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

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

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

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

IV.   Fully Paid Stock, Taxes.

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

V.    Registration Under Securities Act of 1933.

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

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

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

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

VI.   Limited Transferability.

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

VII.  Loss, etc., of Warrant.

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

VIII. Warrant Holder Not Shareholders.

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

IX.   Communication.

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

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

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

X.    Headings.

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

XI.   Applicable Law.

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


IN WITNESS  WHEREOF,  the Company has caused this  Warrant to be signed by its
Chief Executive  Officer and its corporate seal to be hereunto  affixed by its
Secretary this 31st day of July, 1998.

                                     PHC, INC.

                                     By:  /s/  Bruce Shear
                                               Chief Executive Officer
ATTEST:

/s/  Paula C. Wurts
      Assistant Clerk

[Corporate Seal]




                                  SUBSCRIPTION


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

Dated:  ___________________________       Signature:  ________________________

                                          Address:   _________________________

                                                     _________________________

                                   ASSIGNMENT

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

Dated:  ___________________________       Signature:  ________________________

                                          Address:    ________________________

 


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

Dated:  ___________________________       Signature:  ________________________

                                          Address:  _________________________

 


                         CASHLESS EXERCISE SUBSCRIPTION


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

Dated:  _______________________     Signature: ________________________________

                                    Address:   ________________________________



<PAGE>

Exhibit 4.18


THE SECURITIES  REPRESENTED BY THIS WARRANT (AND THE SECURITIES  ISSUABLE UPON
EXERCISE OF THIS WARRANT) HAVE NOT BEEN  REGISTERED  UNDER THE  SECURITIES ACT
OF 1933, OR ANY STATE  SECURITIES  STATUTE.  THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION  OR RESALE,  AND MAY NOT BE
SOLD,  MORTGAGED,  PLEDGED,  HYPOTHECATED OR OTHERWISE  TRANSFERRED WITHOUT AN
EFFECTIVE  REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT
OF 1933 AND ANY APPLICABLE  STATE SECURITIES  STATUTE,  OR UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE THEREUNDER.


      Shares Issuable Upon Exercise:      Up to  20,000  shares of the Class A
                                          Common Stock, $.01 par value, of PHC,
                                          Inc.

                               WARRANT TO PURCHASE
                         SHARES OF CLASS A COMMON STOCK
                              Expires July 10, 2003


            THIS CERTIFIES  THAT,  for value  received,  HealthCare  Financial
Partners,  Inc. is  entitled  to  subscribe  for and  purchase  that number of
shares  (the  "Shares")  of the fully  paid and  nonassessable  Class A Common
Stock,  $.01  par  value,  (the  "Class  A  Common  Stock")  of PHC,  Inc.,  a
Massachusetts  corporation  (the  "Company"),  for a price of $1.50  per Share
(the  "Warrant  Price"),  subject  to the  provisions  and upon the  terms and
conditions  hereinafter  set forth.  As used herein,  the term "Shares"  shall
mean the Company's  Class A Common Stock,  or any stock into or for which such
Class A  Common  Stock  shall  have  been or may  hereafter  be  converted  or
exchanged  pursuant to the  Articles of  Incorporation  of the Company as from
time to time amended as provided by law and in such Articles  (hereinafter the
"Charter"), and the term "Grant Date" shall mean July 10, 1998.

      1     Term.  Subject to the  provisions  of this  Warrant,  the purchase
right represented by this Warrant is exercisable,  in whole or in part, at any
time and from time to time  from and  after  the Grant  Date and prior to July
10, 2003.

            Notwithstanding   anything  to  the  contrary   contained  herein,
neither this Warrant nor any rights  hereunder may be  transferred or assigned
except to an Assignee who is an  "accredited  investor"  within the meaning of
Regulation D of the General Rules and  Regulations  of the  Securities  Act of
1933.

      2     Method  of  Exercise.  The  purchase  right  represented  by  this
Warrant may be  exercised by the holder  hereof,  in whole or in part and from
time to time, by either, at the election of this holder,  (a) the surrender of
the Warrant (with the notice of exercise  form attached  hereto as Exhibit A-1
duly  executed) at the  principal  office of the Company and by the payment to
the  Company  by  certified  or bank check or by wire  transfer,  of an amount
equal to the then applicable  Warrant Price multiplied by the number of shares
then  being  purchased  or  (b) if in  connection  with  a  registered  public
offering of the Company's  securities  (provided  that such offering  includes
the shares),  the  surrender of this Warrant (with the notice of exercise form
attached  hereto as Exhibit A-2 duly executed) at the principal  office of the
Company  together with notice of arrangements  reasonably  satisfactory to the
Company and any underwriter,  in the case of an underwritten registered public
offering,  for payment to the Company  either by certified or bank check or by
wire  transfer  of from the  proceeds  of the sale of Shares to be sold by the
holder  in such  public  offering  of an amount  equal to the then  applicable
Warrant  Price per  Share  multiplied  by the  number  of  Shares  then  being
purchased.   The  person  or  persons  in  whose  name(s)  any  certificate(s)
representing  Shares  which shall be issuable  upon  exercise of this  Warrant
shall be deemed to have  become  the  holder(s)  of  record  of,  and shall be
treated for all purposes as the record  holder(s)  of, the shares  represented
thereby  (and such  shares  shall be deemed to have been  issued)  immediately
prior to the close of  business  on the date or dates upon which this  Warrant
is exercised and the then  applicable  Warrant Price paid. In the event of any
exercise  of the rights  represented  by this  Warrant,  certificates  for the
shares of stock so purchased  shall be delivered to the holder  hereof as soon
as  possible  and in any event  within ten (10) days of receipt of such notice
and payment of the then applicable  Warrant Price and, unless this Warrant has
been fully  exercised or expired,  a new Warrant  representing  the portion of
the Shares,  if any,  with respect to which this  Warrant  shall not then have
been  exercised  shall also be issued to the holder hereof as soon as possible
and in any event within such ten-day period.

      3     Stock Fully Paid;  Reservation  of Shares.  All shares that may be
issued upon the exercise of the rights  represented  by this Warrant will upon
issuance, be fully paid and nonassessable,  and free from all taxes, liens and
charges  with  respect to the issue  thereof.  During the period  within which
the rights  represented  by the Warrant may be exercised,  the Company will at
all times have  authorized  and  reserved  for the  purpose of  issuance  upon
exercise of the  purchase  rights  evidenced  by this  Warrant,  a  sufficient
number of shares of Class A Common  Stock to provide  for the  exercise of the
rights represented by this Warrant.

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

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

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

            4.3   Stock  Dividends.  If the  Company  at any time  while  this
Warrant is outstanding  and unexpired  shall pay a dividend  payable in shares
of Class A Common Stock (except any distribution  specifically provided for in
the  foregoing  Sections  4.1 and  4.2),  then  the  Warrant  Price  shall  be
adjusted,  from and after the date of determination  of shareholders  entitled
to  receive  such  dividend  or  distribution,  to that  price  determined  by
multiplying  the  Warrant  Price in effect  immediately  prior to such date of
determination  by a fraction  (a) the  numerator  of which  shall be the total
number of  shares of Class A Common  Stock  outstanding  immediately  prior to
such dividend or  distribution,  and (b) the denominator of which shall be the
total number of shares of Class A Common Stock  outstanding  immediately after
such  dividend  or  distribution  and the  number  of Shares  subject  to this
Warrant shall be appropriately adjusted.

            4.4   No  Impairment.  The Company  will not, by  amendment of its
Charter or through any reorganization,  recapitalization,  transfer of assets,
consolidation,  merger, dissolution,  issue or sale of securities or any other
voluntary action,  avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed  hereunder  by the Company,  but will
at all times in good faith assist in the  carrying  out of all the  provisions
of this  Article 4 and in the taking of all such action as may be necessary or
appropriate  in order to  protect  the  rights of the  Holder of this  Warrant
Agreement against impairment.

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

            4.6   Adjustment  to Number of Shares and Warrant  Price Based on 
Dilutive  Issuance If and  whenever  the Company  should  issue  shares of its
Class A Common  Stock at a price  per  share  less  than  the  average  of the
closing  of the bid and asked  prices  for such  Class A Common  Stock for the
last trading day immediately  prior to the issuance of such shares (other than
shares issued  pursuant to an employee  benefit plan including  Class A Common
Stock  issued or issuable to the  officers or  employees  or  directors  of or
consultants  to the Company and  approved by a  disinterested  majority of the
directors  of the  Company),  then the  Warrant  Price  shall be  adjusted  by
dividing  (1) the sum of (A) the  total  number  of  shares  of Class A Common
Stock outstanding  immediately  prior to such issuance  multiplied by the then
effective  Warrant  Price and (B) the value of the  consideration  received by
the Company  upon such  issuances as  determined  by the Board of Directors by
(2)  the  total  number  of  shares  of  Class  A  Common  Stock   outstanding
immediately  after such issuance.  The holder of the Warrant shall  thereafter
be entitled to purchase,  at the Warrant Price resulting from such adjustment,
the number of Shares  (calculated  to the  nearest  whole  share)  obtained by
multiplying the Warrant Price in effect  immediately  prior to such adjustment
by the number of shares  issuable upon the exercise hereof  immediately  prior
to such  adjustment  and  dividing  the product  thereof by the Warrant  Price
resulting  from such  adjustment.  For the purpose of this  paragraph  (d) the
issuance of securities  convertible into or exercisable for the Class A Common
Stock  shall be deemed the  issuance of the number of shares of Class A Common
Stock into which such  securities are convertible or for which such securities
are exercisable,  and the consideration  received for such securities shall be
deemed to include the minimum  aggregate  amount  payable upon  conversion  or
exercise of such securities  expire  unexercised,  the Warrant Price of Shares
issuable upon the exercise hereof shall be readjusted accordingly.

      5.    Notice of  Adjustments.  Whenever  the Warrant  Price or number of
Shares shall be adjusted pursuant to the provisions  hereof, the Company shall
within thirty (30) days of such  adjustments  deliver a certificate  signed by
its chief financial  officer to the registered  holder(s) hereof setting forth
in reasonable  detail,  the event requiring the adjustment,  the amount of the
adjustment,  the  method by which  such  adjustment  was  calculated,  and the
Warrant Price after giving effect to such adjustment.

      6.    Fractional   Shares.  No  fractional  Shares  will  be  issued  in
connection with any exercise hereunder,  but in lieu of such fractional shares
the Company  shall make a cash payment  therefor upon the basis of the Warrant
Price then in effect.

      7.    Compliance with Securities Act, Disposition of Shares.

            7.1   Compliance   with   Securities   Act.  The  holder  of  this
Warrant,  by acceptance  hereof,  reconfirms the  representations  made by the
Purchaser  in a letter  agreement  with the Company as of the date hereof (the
"Letter  Agreement")  and agrees to the  placement of a  restrictive  transfer
legend on this Warrant and the certificates representing the shares.

            7.2   Disposition  of  Warrants  and Shares.  With  respect to any
offer,  sale or other  disposition  of this  Warrant  or any  Shares  acquired
pursuant  to the  exercise  of this  Warrant  prior  to  registration  of this
Warrant or such Shares,  the holder hereof and each subsequent  holder of this
Warrant   agrees  to  give  written  notice  to  the  Company  prior  thereto,
describing  briefly the manner  thereof,  together  with a written  opinion of
such holder's  counsel,  if reasonably  requested by the Company (and, in such
case, such counsel and opinion must be reasonably  acceptable to the Company),
to the  effect  that such  offer,  sale or other  disposition  my be  effected
without  registration or qualification  (under the Securities Act of 1933 (the
"Act") as then in  effect or any  federal  or state  law then in  effect)  and
indicating  whether or not under the Act certificates for this Warrant or such
Shares to be sold or otherwise  disposed of require any restrictive  legend as
to applicable  restrictions on  transferability  in order to insure compliance
with the Act. Each  certificate  representing  this Warrant or the Shares thus
transferred  (except a transfer  pursuant  to Rule 144) shall bear a legend as
to  the  applicable   restrictions  on  transferability  in  order  to  ensure
compliance  with the Act,  unless in the aforesaid  opinion of counsel for the
holder,   such legend is not required in order to ensure  compliance  with the
Act. The Company may issue stop transfer  instructions  to its transfer  agent
in connection with the foregoing restrictions.

      8.    Rights as Shareholders.  No holder of the Warrant,  as such, shall
be entitled to vote or receive  dividends or be deemed the holder of Shares or
any other  securities  of the Company which may at any time be issuable on the
exercise  thereof for any purpose,  nor shall anything  contained  herein,  be
construed  to  confer  upon the  holder  of this  Warrant,  as such any of the
rights of a  shareholder  of the Company or any right to vote for the election
of  directors  or upon any matter  submitted  to  shareholders  at any meeting
thereof,  or to receive  notice of meetings  (except as otherwise  provided in
Section 4.5 of this warrant),  or to receive dividends or subscription  rights
or  otherwise  until this  Warrant  shall have been  exercised  and the Shares
purchasable  upon the  exercise  hereof  shall  have  become  deliverable,  as
provided herein.

      9.    Representations  and  Warranties.   This  Warrant  is  issued  and
delivered on the basis of the following:

                  9.1   Authorization  and  Delivery.  This  Warrant  has been
duly  authorized  and executed by the Company and when delivered will be valid
and binding  obligation  of the Company  enforceable  in  accordance  with its
terms; and

                  9.2   Shares.  The  Shares  have  been duly  authorized  and
reserved  for  issuance  by the  Company  and  when  issued  and  paid  for in
accordance  with the terms  hereof,  will be  validly  issued,  fully paid and
nonassessable.

      10.   Modification  and Waiver.  This Warrant and any  provision  hereof
may be changed,  waived,  discharged  or  terminated  only by an instrument in
writing signed by the party against which enforcement of the same is sought.

      11    Notices.  Any  notice,  request  or  other  document  required  or
permitted to be given or delivered to the holder  hereof or the Company  shall
be delivered in the manner set forth in the Letter Agreement.

      12.   Binding Effect of  Successors.  This Warrant shall be binding upon
any corporation succeeding the Company by merger of consolidation,  and all of
the  obligations  of the  Company  relating  to the Shares  issuable  upon the
exercise of this Warrant  shall be as set forth in the Letter  Agreement,  the
Company's  Charter and the  Company's  by-laws  (each as amended  from time to
time) and shall survive the exercise and  termination  of this Warrant and all
of the  covenants  and  agreements  herein  and in such  other  documents  and
instruments  of the Company shall inure to the benefit of the  successors  and
assigns of the holder  hereof.  The Company  will, at the time of the exercise
of this  Warrant,  in whole or in part,  upon request of the holder hereof but
at the Company's expense,  acknowledge in writing its continuing obligation to
the holder hereof in respect of any rights (including without limitation,  any
right  to  registration  of the  Shares)  to which  the  holder  hereof  shall
continue to be entitled  after such exercise in accordance  with this Warrant;
provided  that the failure of the holder hereof to make any such request shall
not affect the  continuing  obligation  of the Company to the holder hereof in
respect of such rights.

      13.   Lost  Warrants or Stock  Certificates.  The Company  covenants  to
the holder  hereof that upon receipt of evidence  reasonable  satisfactory  to
the Company of the loss, theft, destruction,  or mutilation of this Warrant or
any  stock  certificates  and,  in  the  case  of  any  such  loss,  theft  or
destruction,  upon  receipt of an  indemnity  reasonable  satisfactory  to the
Company,   or  in  the  case  of  any  such   mutilation  upon  surrender  and
cancellation of such Warrant or stock  certificate,  the Company will make and
deliver a new  Warrant or stock  certificate,  or like  tenor,  in lieu of the
lost, stolen, destroyed or mutilated Warrant or stock certificate.

      14.   Descriptive  Headings.  The  descriptive  headings  of the several
paragraphs  of this  Warrant  are  inserted  for  convenience  only and do not
constitute a part of this Warrant.

      15.   Governing  Law.  This Warrant  shall be construed  and enforced in
accordance  with, and the rights of the parties shall be governed by, the laws
of the Commonwealth of Massachusetts.



                                PHC, INC.


                                By:  /s/  Bruce A. Shear
                                          President
                                Date:     July 10, 1998 (signed August 4, 1998)





                                   Exhibit A-1

                               Notice of Exercise

To:

      1.    The undersigned  hereby elects to purchase  _______ Shares of PHC,
Inc.  pursuant to the terms of the  attached  Warrant,  and  tenders  herewith
payment of the purchase price of such Shares in full.

      2.    Please  issue  a  certificate  or  certificates  representing  the
Shares  deliverable  upon the exercise set forth in paragraph 1 in the name of
the undersigned  or, subject to compliance  with the  restrictions on transfer
set forth in  Section 7 of the  Warrant,  in such  other  name or names as are
specified below:

                     ____________________________________
                                    (Name)


                    _____________________________________

                    _____________________________________

                    _____________________________________
                                  (Address)

      3.    The  undersigned  represents that the  aforesaid shares  are being
acquired for the account of  the undersigned for  investment and  not  with  a
view to, or for resale in connection with,  the distribution  thereof and that
the undersigned has  not present  intention of  distributing or reselling such
shares.

 

 
_______________________________
                                                Signature


                                                _________________
                                                Date






                                   Exhibit A-1

                               Notice of Exercise

To:

      1.    Contingent  upon and  effective  immediately  prior to the closing
(the  "Closing")  of  the  Company's  public  offering   contemplated  by  the
Registration   Statement  of  Form  S  _____________,   filed  ______________,
______ the  undersigned  hereby  elects to purchase  Shares of the Company (or
such lesser  number of Shares as may be sold on behalf of the  undersigned  at
the Closing) pursuant to the terms of the attached Warrant.

      2,    Please  deliver to the  custodian for the selling  shareholders  a
certificate representing the Shares being so purchased.

      3.    The  undersigned  has  instructed  the  custodian  for the selling
shareholders  to deliver to the Company $  _________________  of, if less, the
net proceeds  due the  undersigned  from the sales of Shares in the  aforesaid
public  offering.  If such net proceeds  are less than the purchase  price for
such Shares,  the undersigned  agrees to deliver the difference to the Company
prior to the Closing.

 

 
_______________________________
                                                Signature


                                                _________________
                                                Date



warrants.dot
<PAGE>

Exhibit 4.19

(On Letterhead)



September 2, 1998


Attention: Ethan D. Leder, President
HCFP Funding, Inc.
Two Wisconsin Circle, 4th Floor
Chevy Chase MD  20815


RE:   Common Stock  Purchase  Warrants  issuable by PHC, Inc. (the
      "Company") to HealthCare  Financial  Partners,  Inc. and its
      subsidiaries  (collectively, "HCFP"  REPLACES  ALL  PREVIOUS
      CORRESPONDENCE  REGARDING THE JULY 10, 1998  WARRANTS  PRICE
      PROTECTION.


Dear Mr. Leder:

This letter  confirms  the  agreement  entered into by the Company and HCFP to
the effect that the Company will provide  certain price  protection to HCFP at
the time HCFP exercises  Warrant No. 2, issued July 10, 1998,  covering 52,500
shares  of Class A Common  Stock and  Warrant  No. 3,  issued  July 10,  1998,
covering 20,000 shares of Class A Common Stock.

The Company hereby agrees with HCFP as follows:

(a)   If on the date that HCFP  exercises  all of  Warrant  No. 2 the  closing
price of the  Common  Stock is less than  $3.26 per  share,  then the  Company
shall pay to you,  in cash (or shares of common  stock  having a market  value
equal to or greater than such cash amount on the date of exercise),  an amount
equal to the lesser of (i) the  difference  between the  closing  price of the
Common  Stock on the date of exercise and $3.26,  or (ii) $1.45,  which amount
shall be multiplied by the number of Warrants.

(b)   If on the date that HCFP  exercises  all of  Warrant  No. 3 the  closing
price of the  Common  Stock is less than  $2.95 per  share,  then the  Company
shall pay to you,  in cash (or shares of common  stock  having a market  value
equal to or greater than such cash amount on the date of exercise),  an amount
equal to the lesser of (i) the  difference  between the  closing  price of the
Common  Stock on the date of exercise and $2.95,  or (ii) $1.45,  which amount
shall be multiplied by the number of Warrants.

The  provision  described  clause (a) above  applies  to all of Warrant  No. 2
without  regard to any prior  exercise of Warrant No. 3 under  paragraph  (b).
The  provision  described in clause (b) above  applies to all of Warrant No. 3
without  regard to any prior  exercise of Warrant No. 2 under  paragraph  (a).
HCFP agrees not to exercise the Warrants  less than six months  following  the
repayment of the secured term debt of the Company to HCFP.

The effect of this  Letter  Agreement  shall be to insure  that HCFP  receives
value (in cash or stock as  applicable,  or as  specified  herein) of at least
$105,125.00  from the  exercise  of the  Warrants.  If pursuant to this Letter
Agreement,  the  Company is  required  to pay cash or issue stock to HCFP upon
HCFP's  exercise of a Warrant,  the Company will make the required  payment of
cash or issue stock at such time as the Common  Stock  underlying  the Warrant
is sold by HCFP at a price less than  $3.26 (in the case of Warrant  No. 2) or
$2.95 (in the case of Warrant No. 3).


<PAGE>

HealthCare Financial Partners, Inc.
September 2,1998
Page 2


The execution,  delivery and effectiveness of this Letter Agreement shall not,
except as expressly provided in this Letter Agreement,  operate as a waiver of
any  right,  power or  remedy  of  Lender,  nor  constitute  a  waiver  of any
provision  of  the  any  of  the  notes  made  by  the  Company  or any of its
subsidiaries or affiliates,  or any of the loan agreements by and between HCFP
or any of its subsidiaries or affiliates, or any other documents,  instruments
and agreements executed or delivered in connection therewith.

This Letter  Agreement  shall be governed by and construed in accordance  with
the laws of the State of Maryland.

This Letter Agreement may be executed in counterparts,  and both  counterparts
taken together shall be deemed to constitute one and the same instrument.

If these  conditions  are  acceptable to Lender,  please so signify by signing
below where indicated.

Very truly yours,
PHC, INC.
a Massachusetts corporation



By:_____________________________
      Bruce A. Shear
      President



THE  FOREGOING  IS  ACKNOWLEDGED  AND  AGREED  TO AS OF  THE  ________  DAY OF
SEPTEMBER, 1998.

HEALTHCARE FINANCIAL
PARTNERS, INC.,
a Delaware corporation


By:____________________________

Name:__________________________

Title:___________________________



<PAGE>

<PAGE>
EXHIBIT 21.1

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

PHC, Inc.                  Pioneer Behavioral Health    Massachusetts
                           Pioneer Healthcare
                           PDSS

PHC of Utah, Inc.          Highland Ridge Hospital      Massachusetts

PHC of Virginia, Inc.      Mount Regis                  Massachusetts
                           Center
                           Changes

PHC of  Rhode Island, Inc. Good Hope Center             Massachusetts

PHC of Michigan, Inc.      Harbor Oaks Hospital         Massachusetts

PHC of  Nevada, Inc.       Harmony Healthcare           Massachusetts

Harmony Behavioral                                      Nevada
Healthcare

Northpoint-Pioneer, Inc.   Pioneer Counseling Center    Massachusetts

PHC of Kansas, Inc.        Total Concept EAP            Massachusetts

Quality Care Centers of    Franvale Nursing and         Massachusetts
Massachusetts, Inc.        Rehabilitation Center

PHC of California, Inc.    Marin Grove                  Massachusetts

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

BSC-NY, Inc.               Behavioral Stress Center     New York

STL, Inc.                                               Massachusetts

Professional Health                                     New York
Associates, Inc.
 
<PAGE>

                                                                   
Exhibit 10.65

                                  $4,000,000.00





                           LOAN AND SECURITY AGREEMENT

                                 by and between

                              PHC OF MICHIGAN, INC.
                                PHC OF UTAH, INC.
                              PHC OF VIRGINIA, INC.
                            PHC OF RHODE ISLAND, INC.
                      PIONEER COUNSELING OF VIRGINIA, INC.

                                  ("Borrower")

                                       and

                               HCFP FUNDING, INC.

                                   ("Lender")






                               February ____, 1998



<PAGE>

                           LOAN AND SECURITY AGREEMENT


     THIS  LOAN  AND  SECURITY  AGREEMENT  (the  "Agreement")  is  made  as of
February  ____,  1998,  by and among PHC OF MICHIGAN,  INC.,  a  Massachusetts
corporation  ("PHCM"),   PHC  OF  UTAH,  INC.,  a  Massachusetts   corporation
("PHCU"),  and PHC OF VIRGINIA,  INC.,  a  Massachusetts  corporation,  PHC OF
RHODE  ISLAND,  INC.,  a  Massachusetts  corporation,  PIONEER  COUNSELING  OF
VIRGINIA,  INC., a Massachusetts  corporation  (collectively,  "New Borrower")
and HCFP FUNDING, INC., a Delaware corporation ("Lender").

                                    RECITALS

     A.     Lender and PHCM entered into a Loan and Security  Agreement  dated
as of February 3, 1997, as amended (the "PHCM Loan  Agreement"),  establishing
a financing  arrangement  in the maximum  amount of One Million  Five  Hundred
Thousand and No/100 Dollars ($1,500,000.00).

     B.     Lender and PHCU entered into a Loan and Security  Agreement  dated
as of May 21, 1996,  as amended (the "PHCU Loan  Agreement"),  establishing  a
financing  arrangement in the maximum amount of One Million and No/100 Dollars
($1,000,000.00).

     C.     New Borrowers now desire to establish financing  arrangements with
and  borrow  funds from  Lender,  and  Lender is  willing  to  establish  such
arrangements  for make loans and  extensions  of credit to New  Borrowers,  on
substantially  the same terms as those  contained  in the PHCM Loan  Agreement
and the PHCU Loan Agreement.

     D.     Lender,  PHCM and PHCU believe it is in the best interests of each
of them to  amend  and  restate  the PHCM  Loan  Agreement  and the PHCU  Loan
Agreement by combining those  agreements  into one agreement,  and to have New
Borrowers added to such combined agreement.

     E.     This  Agreement  shall be serve as an Amended  and  Restated  Loan
Agreement for each of the PHCM Loan  Agreement and for the PHCU Loan Agreement
and as a new Loan and Security Agreement for New Borrowers.

     F.     PHCM, PHCU and New Borrowers hereafter shall be collectively
referred to as "Borrower."

     NOW, THEREFORE,  in consideration of the promises and covenants contained
in this Agreement,  and for other  consideration,  the receipt and sufficiency
of which are acknowledged, the parties agree as follows:


                                    ARTICLE I

                                   DEFINITIONS

      As used in this Agreement, the following terms shall have the following
meanings:

      Section 1.1.      Account.  "Account"  means  any right to  payment  for
goods sold or leased or  services  rendered,  whether or not  evidenced  by an
instrument  or  chattel  paper,  and  whether  or not  earned by  performance,
including, without limitation, the right to payment of management fees.

      Section 1.2.      Account  Debtor.  "Account  Debtor"  means any  Person
obligated  on any  Account of  Borrower,  including  without  limitation,  any
Insurer and any Medicaid/Medicare Account Debtor.

      Section 1.3.      Affiliate.   "Affiliate"  means,  with  respect  to  a
specified Person,  any Person directly or indirectly  controlling,  controlled
by, or under  common  control with the  specified  Person,  including  without
limitation their  stockholders and any Affiliates  thereof.  A Person shall be
deemed  to  control  a  corporation  if  the  Person  possesses,  directly  or
indirectly,  the power to direct or cause the direction of the  management and
business  of  the   corporation   whether  through  the  ownership  of  voting
securities, by contract, or otherwise.

      Section 1.4.      Agreement.  "Agreement"  means this Loan and  Security
Agreement, as it may be amended or supplemented from time to time.

      Section 1.5.      Base  Rate.  "Base  Rate"  means  a rate  of  interest
equal  to two and  one  quarter  percent  (2.25%)  above  the  "Prime  Rate of
Interest".

      Section 1.6.      Borrowed Money.  "Borrowed Money" means any obligation
to repay money,  any  indebtedness  evidenced by notes,  bonds,  debentures or
similar  obligations,  any obligation  under a conditional sale or other title
retention  agreement and the net aggregate rentals under any lease which under
GAAP  would  be  capitalized  on the  books  of the  Borrower  or which is the
substantial equivalent of the financing of the property so leased.

      Section 1.7.      Borrower.  "Borrower"  has the  meaning  set  forth in
the Preamble.

      Section 1.8.      Borrowing  Base.  "Borrowing  Base has the meaning set
forth in Section 2.1 (d).

      Section 1.9.      Business  Day.  "Business  Day" means any day on which
financial  institutions  are  open for  business  in the  State  of  Maryland,
excluding Saturdays and Sundays.

      Section 1.10.     Closing Date.  "Closing"  and "Closing  Date" have the
meanings set forth in Section 5.3.

      Section 1.11.     Commitment Fee.  "Commitment  Fee" has the meaning set
forth in Section 2.4(a).

      Section 1.12.     Collateral. "Collateral" has the meaning set forth in
Section 3.1.

      Section 1.13.     Controlled   Group.   "Controlled   Group"   means   a
"controlled group" within the meaning of Section 4001(b) of ERISA.

      Section 1.14.     Cost   Report   Settlement   Account.   "Cost   Report
Settlement   Account"   means   an   "Account"   owed   to   Borrower   by   a
Medicaid/Medicare  Account Debtor pursuant to any cost report, either interim,
filed or audited, as the context may require.

      Section 1.15.     Default  Rate.  "Default  Rate" means a rate per annum
equal to two percent (2%) above the Base Rate.

      Section 1.16.     Concentration  Account.  "Concentration  Account"  has
the meaning set forth in Section 2.3(a).

      Section 1.17.     ERISA.  "ERISA"  has the  meaning set forth in Section
4.12.

      Section 1.18.     Event of Default.  "Event of  Default"  and "Events of
Default" have the meanings set forth in Section 8. 1.

      Section 1.19.     GAAP.  "GAAP"  means  generally  accepted   accounting
principles  applied  in a  matter  consistent  with the  financial  statements
referred to in Section 4.7.

      Section 1.20.     Governmental   Authority.   "Governmental   Authority"
means  and  includes  any  federal,  state,  District  of  Columbia,   county,
municipal, or other government and any department,  commission, board, bureau,
agency or instrumentality thereof, whether domestic or foreign.

      Section 1.21.     Hazardous  Material.  "Hazardous  Material"  means any
substances  defined or  designated  as hazardous or toxic waste,  hazardous or
toxic  material,  hazardous  or  toxic  substance,  or  similar  term,  by any
environmental statute, rule or regulation or any Governmental Authority.

      Section 1.22.     Highest Lawful Rate.  "Highest  Lawful Rate" means the
maximum  lawful  rate of  interest  referred to in Section 2.7 that may accrue
pursuant to this Agreement.

      Section 1.23.     Insurer.  A Person  that  insures  a  Patient  against
certain  of the costs  incurred  in the  receipt  by such  Patient  of Medical
Services,  or that has an agreement  with Borrower to compensate  Borrower for
providing services to a Patient.

      Section 1.24.     Lender.  "Lender"  has the  meaning  set  forth in the
Preamble.

      Section 1.25.     Loan.  "Loan"  has the  meaning  set forth in  Section
2.1(a).

      Section 1.26.     Loan Documents.  "Loan  Documents"  means and includes
this  Agreement,  the Note, and each and every other document now or hereafter
delivered in connection  therewith,  as any of them may be amended,  modified,
or supplemented from time to time.

      Section 1.27.     Loan  Management  Fee. "Loan  Management  Fee" has the
meaning set forth in Section 2.4(c).

      Section 1.28.     Lock  Box.  "Lockbox"  has the  meaning  set  forth in
Section 2.3(a).

      Section 1.29.     Lockbox  Bank.  "Lockbox  Bank"  has the  meaning  set
forth in Section 2.3(a).

      Section 1.30.     Maximum  Loan  Amount.  "Maximum  Loan Amount" has the
meaning set forth in Section 2. 1 (a).

      Section 1.31.     Medicaid/Medicare  Account Debtor.  "Medicaid/Medicare
Account  Debtor"  means any Account  Debtor which is (i) the United  States of
America acting under the  Medicaid/Medicare  program  established  pursuant to
the Social  Security  Act,  (ii) any state or the District of Columbia  acting
pursuant  to a  health  plan  adopted  pursuant  to  Title  XIX of the  Social
Security Act or (iii) any agent,  carrier,  administrator  or intermediary for
any of the foregoing.

      Section 1.32.     Medical  Services.  Medical and health  care  services
provided to a Patient,  including, but not limited to, medical and health care
services  provided to a Patient and performed by Borrower which are covered by
a policy of insurance issued by an Insurer,  and includes physician  services,
nurse and therapist  services,  dental services,  hospital  services,  skilled
nursing facility services,  comprehensive outpatient  rehabilitation services,
home health care services,  residential and out-patient  behavioral healthcare
services,  and  medicine  or health care  equipment  provided by Borrower to a
Patient for a necessary or specifically  requested valid and proper medical or
health purpose.

      Section 1.33.     Note.   "Note" has  the  meaning set forth in Section
2.1(c).

      Section 1.34.     Obligations.  "Obligations" has  the meaning set forth
in Section 3.1.

      Section 1.35.     Patient.  Any  Person receiving  Medical Services from
Borrower  and all Persons  legally  liable to pay  Borrower  for such  Medical
Services other than Insurers.

      Section 1.36.     Permitted  Liens.  "Permitted  Liens" means: (a) liens
for taxes not  delinquent,  or which are being  contested in good faith and by
appropriate  proceedings  which suspend the collection  thereof and in respect
of which adequate  reserves have been made (provided that such  proceedings do
not, in Lender's sole discretion,  involve any substantial danger of the sale,
loss or forfeiture of such  property or assets or any interest  therein);  (b)
deposits  or  pledges  to secure  obligations  under  workmen's  compensation,
social  security  or  similar  laws,  or  under  unemployment  insurance;  (c)
deposits or pledges to secure bids,  tenders,  contracts (other than contracts
for the payment of money), leases,  statutory  obligations,  surety and appeal
bonds and other  obligations of like nature arising in the ordinary  course of
business;  (d)  mechanic's,  workmen's,  materialmen's  or  other  like  liens
arising in the ordinary  course of business with respect to obligations  which
are not  due,  or which  are  being  contested  in good  faith by  appropriate
proceedings  which  suspend the  collection  thereof and in respect of which '
adequate  reserves have been made (provided  that such  proceedings do not, in
Lender's sole discretion,  involve any substantial danger of the sale, loss or
forfeiture of such property or assets or any interest therein);  (e) liens and
encumbrances  in favor of Lender;  (f) liens  granted in  connection  with the
lease or purchase of property or assets  financed by  borrowings  permitted by
Section 7.1 (provided,  however,  that no such borrowings permitted by Section
7.1 may be  secured  by liens on any of the  Collateral);  and (g)  liens  set
forth on Schedule 1.36.

      Section 1.37.     Person.  "Person"  means an  individual,  partnership,
corporation,  trust,  joint venture,  joint stock company,  limited  liability
company, association,  unincorporated organization, Governmental Authority, or
any other entity.

      Section 1.38.     Plan. "Plan" has the meaning set forth in Section 4.12.

      Section 1.39.     Premises.   "Premises"  has  the  meaning set forth in
Section 4.14.

      Section 1.40.     Prime  Rate of  Interest.  "Prime  Rate  of  Interest"
means that rate of interest  quoted by Shawmut  Bank,  N.A.,  or any successor
thereto, as the same may from time to time fluctuate.

      Section 1.41.     Prohibited   Transaction.   "Prohibited   Transaction"
means a  "prohibited  transaction"  within the meaning of Section 406 of ERISA
or Section 4975(c)(1) of the Internal Revenue Code.

      Section 1.42.     Qualified  Account.   "Qualified   Account"  means  an
Account of Borrower  generated in the ordinary  course of Borrower's  business
from the sale of goods or rendition of medical  services which Lender,  in its
sole credit judgment,  deems to be a Qualified  Account.  Without limiting the
generality of the foregoing,  no Account shall be a Qualified  Account if: (a)
the Account or any portion  thereof is payable by an  individual  beneficiary,
recipient  or  subscriber  individually  and not  directly  to  Borrower  by a
Medicaid/Medicare  Account  Debtor or  commercial  medical  insurance  carrier
acceptable to Lender in its sole  discretion;  (b) the Account  remains unpaid
more than one  hundred  fifty (150) days past the claim or invoice  date;  (c)
the  Account is  subject to any  defense,  set-off,  counterclaim,  deduction,
discount, credit,  chargeback,  freight claim, allowance, or adjustment of any
kind;  (d) any  part of any  goods  the sale of which  has  given  rise to the
Account has been  returned,  rejected,  lost,  or damaged;  (e) if the Account
arises from the sale of goods by Borrower,  such sale was not an absolute sale
or on  consignment or on approval or on a  sale-or-return  basis or subject to
any other repurchase or return agreement,  or such goods have not been shipped
to the Account  Debtor or its  designee;  (f) if the  Account  arises from the
performance  of services,  such services have not been actually been performed
or were  undertaken  in  violation of any law; (g) the Account is subject to a
lien other than a Permitted  Lien; (h) the Borrower knows or should have known
of the bankruptcy, receivership,  reorganization, or insolvency of the Account
Debtor;  (i) the Account is evidenced by chattel paper or an instrument of any
kind,  or has been  reduced to  judgment;  (j) the Account is an Account of an
Account  Debtor  having its  principal  place of business or executive  office
outside  the  United  States;  (k)  the  Account  Debtor  is an  Affiliate  or
Subsidiary  of  Borrower;  (l) more than ten  percent  (10%) of the  aggregate
balance  of all  Accounts  owing  from the  Account  Debtor  obligated  on the
Account are  outstanding  more than one hundred  eighty  (180) days past their
invoice  date;  (m)  fifty  percent  (50%)  or more of the  Accounts  from the
Account  Debtor are not deemed  Qualified  Accounts  hereunder;  (n) the total
unpaid Accounts of the Account Debtor, except for a Medicaid/Medicare  Account
Debtor,  exceed  twenty  percent  (20%)  of the net  amount  of all  Qualified
Accounts;  (o) any covenant,  representation or warranty contained in the Loan
Documents with respect to such Account has been  breached;  or (p) the Account
fails to meet such other  specifications  and requirements which may from time
to time be reasonably established by Lender.

      Section 1.43.     Reportable   Event.   "Reportable   Event"   means   a
"reportable event" as defined in Section 403 (b) of ERISA.

      Section 1.44.     Revolving  Credit  Loan.  "Revolving  Credit Loan" has
the meaning set forth in Section 2.1 (b).

      Section 1.45.     Term.  "Term" has the meaning set forth in Section 2.8.


                                   ARTICLE II

                                      LOAN

        Section 2.1. Terms.

      (a)   The  maximum  aggregate  principal  amount of credit  extended  by
Lender to Borrower  hereunder  (the  "Loan") that will be  outstanding  at any
time is Four Million and No/100  Dollars  ($4,000,000.00)  (the  "Maximum Loan
Amount").

      (b)   The Loan  shall be in the  nature of a  revolving  line of credit,
and shall include sums advanced and other credit  extended by Lender to or for
the benefit of the  Borrower  from time to time under this  Article II (each a
"Revolving  Credit  Loan") up to the Maximum  Loan Amount  depending  upon the
availability in the Borrowing  Base, the requests of Borrower  pursuant to the
terms and  conditions of Section 2.2 below,  and on such other basis as Lender
may reasonably  determine.  The outstanding  principal balance of the Loan may
fluctuate  from time to time,  to be reduced by  repayments  made by  Borrower
(which may be made without penalty or premium),  and to be increased by future
Revolving Credit Loans,  advances and other extensions of credit to or for the
benefit of Borrower,  and shall be due and payable in full upon the expiration
of the Term. For purposes of this Agreement,  any  determination as to whether
there is ability  within the  Borrowing  Base for  advances or  extensions  of
credit  shall be made by  Lender  in its  sole  discretion  and is  final  and
binding upon Borrower.

      (c)   At  Closing,  Borrower  shall  execute  and  deliver  to  Lender a
promissory  note evidencing the Borrower's  unconditional  obligation to repay
Lender for Revolving  Credit Loans,  advances,  and other extensions of credit
made under the Loan, in the form of Exhibit A to this  Agreement (the "Note"),
dated the date hereof,  payable to the order of Lender in accordance  with the
terms  thereof.  The Note  shall bear  interest  from the date  thereof  until
repaid,  with interest payable monthly in arrears on the first Business Day of
each  month,  at a rate per annum (on the basis of the  actual  number of days
elapsed over a year of 360 days) equal to the Base Rate,  provided  that after
an Event of  Default  such  rate  shall be  equal to the  Default  Rate.  Each
Revolving  Credit Loan,  advance and other extension of credit shall be deemed
evidenced by the Note,  which is deemed  incorporated by reference  herein and
made a part hereof.

      (d)   Subject to the terms and  conditions of this  Agreement,  advances
under the Loan  shall be made  against a  borrowing  base  equal to (i) eighty
percent  (80%) of  Qualified  Accounts  that remain  unpaid for fewer than one
hundred twenty (120) days, and (ii) sixty percent (60%) of Qualified  Accounts
that remain unpaid for between one hundred  twenty (120) and one hundred fifty
(150) days, in either case due and owing from any  Medicaid/Medicare,  Insurer
or other Account  Debtor,  including,  without  limitation,  Accounts  payable
pursuant to Cost Report Settlement  Accounts or in the form of management fees
(the "Borrowing  Base"). At the option of Borrower,  a separate Borrowing Base
may be prepared for each entity constituting Borrower.

     Section 2.2.      Loan  Administration.  Borrowings  under the Loan shall
be as follows:

      (a)   A request for a Revolving  Credit Loan shall be made,  or shall be
deemed to be made, in the  following  manner:  (i)  Borrower,  may give Lender
notice of its intention to borrow,  in which notice Borrower shall specify the
amount of the proposed  borrowing and the proposed  borrowing  date, not later
than  2:00  p.m.  Eastern  time one (1)  Business  Day  prior to the  proposed
borrowing date; provided,  however, that no such request may be made at a time
when  there  exists  an Event of  Default;  and (ii) the  becoming  due of any
amount  required to be paid under this  Agreement,  whether as interest or for
any other  Obligation,  shall be  deemed  irrevocably  to be a  request  for a
Revolving  Credit  Loan on the due  date in the  amount  required  to pay such
interest or other Obligation.

      (b)   Borrower  hereby  irrevocably  authorizes  Lender to disburse  the
proceeds of each Revolving  Credit Loan requested,  or deemed to be requested,
as follows:  (i) the proceeds of each Revolving  Credit Loan  requested  under
subsection  2.2(a)(i)  shall be disbursed  by Lender by wire  transfer to such
bank  account as may be agreed upon by Borrower or Lender from time to time or
elsewhere  if  pursuant  to  written  direction  from  Borrower;  and (ii) the
proceeds of each Revolving Credit Loan requested under  subsection  2.2(a)(ii)
shall  be  disbursed  by  Lender  by way of  direct  payment  of the  relevant
interest or other Obligation.

      (c)   All  Revolving  Credit  Loans,  advances and other  extensions  of
credit  to or for  the  benefit  of  Borrower  shall  constitute  one  general
Obligation of Borrower,  and shall be secured by Lender's lien upon all of the
Collateral.

      (d)   Lender shall enter all Revolving  Credit Loans as debits to a loan
account in the name of  Borrower  and shall also  record in said loan  account
all  payments  made  by  Borrower  on any  Obligations  and  all  proceeds  of
Collateral which are indefeasibly paid to Lender,  and may record therein,  in
accordance  with  customary  accounting  practice,  other  debits and credits,
including  interest  and all  charges  and  expenses  properly  chargeable  to
Borrower.

      (e)   Lender  will  account to  Borrower  monthly  with a  statement  of
Revolving Credit Loans,  charges and payments made pursuant to this Agreement,
and such  account  rendered  by Lender  shall be  deemed  final,  binding  and
conclusive  upon Borrower  unless Lender is notified by Borrower in writing to
the contrary  within sixty (60) days of the date each  accounting is mailed to
Borrower.   Such  notice   shall  be  deemed  an   objection  to  those  items
specifically objected to therein.

      Section 2.3.      Collections,  Disbursements,  Borrowing Availability, 
and  Lockbox   Account.   Borrower  shall  maintain  a  lockbox  account  (the
"Lockbox")  as follows:  PHC of Rhode Island,  Inc. and PHC of Virginia,  Inc.
with LaSalle  National Bank, and PHC of Michigan,  Inc., PHC of Utah, Inc. and
Pioneer  Counseling  of  Virginia,  Inc.  with  Bank  One  Arizona,  N.A.  (as
applicable,  the "Lockbox Bank"), subject to the provisions of this Agreement,
and  shall  execute  with the  Lockbox  Bank a Lockbox  Agreement  in the form
attached  to this  Agreement  as Exhibit B or such  other form as the  Lockbox
Bank and Lender may  require,  and such other  agreements  related  thereto as
Lender may require.  Borrower  shall ensure that all  collections  of Accounts
are paid  directly from Account  Debtors into the Lockbox,  and that all funds
paid into the Lockbox are immediately  transferred  into a depository  account
maintained  by  Lender at Bank One  Arizona,  N.A., or First  Bank,  N.A.,  as
determined by Lender in its sole discretion and  communicated to Borrower (the
"Concentration  Account").  Lender  shall apply,  on a daily basis,  all funds
transferred  into the  Concentration  Account  pursuant to this Section 2.3 to
reduce  the  outstanding  indebtedness  under the Loan with  future  Revolving
Credit  Loans,  advances and other  extensions  of credit to be made by Lender
under the  conditions  set forth in this  Article  II. To the extent  that any
collections of Accounts or proceeds of other  Collateral are not sent directly
to the Lockbox but are received by Borrower,  such  collections  shall be held
in trust for the  benefit  of Lender  and  immediately  remitted,  in the form
received,  to the  Lockbox  Bank for  transfer  to the  Concentration  Account
immediately  upon  receipt  by  Borrower.   All  funds  transferred  from  the
Concentration  Account for  application  to Borrowees  indebtedness  to Lender
shall be applied to reduce the Loan balance,  but for purposes of  calculating
interest,  shall be subject to a five (5) Business Day  clearance  period.  If
as the result of collections of Accounts  pursuant to the terms and conditions
of this Section 2.3 a credit balance exists with respect to the  Concentration
Account,  such credit balance shall not accrue  interest in favor of Borrower,
but  shall be  available  to  Borrower  at any time or times for so long as no
Event of Default exists.

      Section 2.4.      Fees.

      (a)   At  Closing,  Borrower  shall  unconditionally  pay  to  Lender  a
commitment  fee (the  "Commitment  Fee") equal to Fifteen  Thousand and No/100
Dollars ($15,000.00),  which is one percent (1%) of the difference between (i)
the Maximum  Loan Amount set forth in this  Agreement  and (ii) the  aggregate
respective  Maximum Loan Amounts  under the PHCM Loan  Agreement  and the PHCU
Loan Agreement.

      (b)   For so  long  as the  Loan  is  available  to  Borrower,  Borrower
unconditionally  shall pay to Lender a monthly loan  management fee (the "Loan
Management  Fee") equal to  twenty-seven  and one-half one  hundredths  of one
percent  (0.275%) of the average amount of the outstanding  principal  balance
of  the  Revolving   Credit  Loans  during  the  preceding   month.  The  Loan
Management  Fee shall be  payable  monthly in arrears on the final day of each
successive calendar month.

      (c)   Borrower  shall  pay  to  Lender  all   out-of-pocket   audit  and
appropriate  fees in connection with audits and appraisals of Borrower's books
and records and such other  matters as Lender  shall deem  appropriate,  which
shall be due and payable on the first Business Day of the month  following the
date of  issuance  by Lender of a request  for  payment  thereof to  Borrower.
Notwithstanding  anything  herein to the  contrary,  Lender  acknowledges  and
agrees  that,  absent  the  occurrence  of  an  Event  of  Default  hereunder,
Borrower's  maximum  obligation  for the  payment of  out-of-pocket  audit and
appraisal  fees in any calendar year shall be Seven  Thousand Five Hundred and
No/100 Dollars  ($7,500.00) for each entity constituting  Borrower.  Following
the  occurrence  of  an  Event  of  Default,  such  limitation  shall  not  be
applicable.

      (d)     Borrower  shall  pay to  Lender,  on  demand,  any and all fees,
costs or  expenses  which  Lender or any  participant  pays to a bank or other
similar institution  (including,  without limitation,  any fees paid by Lender
to any  participant)  arising out of or in connection  with (i) the forwarding
to Borrower or any other Person on behalf of Borrower,  by Lender, of proceeds
of  Revolving  Credit  Loans  made by  Lender  to  Borrower  pursuant  to this
Agreement,  and  (ii)  the  depositing  for  collection,   by  Lender  or  any
participant,  of any check or item of payment  received or delivered to Lender
or any participant on account of Obligations.

      Section 2.5.      Payments.  Principal  payable on account of  Revolving
Credit  Loans  shall be payable by  Borrower  to Lender  immediately  upon the
earliest  of  (i)  the  receipt  by  Borrower  of any  proceeds  of any of the
Collateral,  to the extent of such  proceeds,  (ii) the occurrence of an Event
of Default in  consequence  of which the Loan and the  maturity of the payment
of  the  Obligations  are  accelerated,  or  (iii)  the  termination  of  this
Agreement  pursuant  to Section  2.8 hereof;  provided,  however,  that if any
advance  made by Lender in excess of the  Borrowing  Base  shall  exist at any
time,  Borrower  shall,  immediately  upon  demand,  repay  such  overadvance.
Interest  accrued on the  Revolving  Credit Loans shall be due on the earliest
of (i) the first  Business  Day of each month (for the  immediately  preceding
month),  computed on the last  calendar day of the preceding  month,  (ii) the
occurrence  of an Event of  Default in  consequence  of which the Loan and the
maturity  of the  payment of the  Obligations  are  accelerated,  or (iii) the
termination  of this Agreement  pursuant to Section 2.8 hereof.  Except to the
extent  otherwise set forth in this  Agreement,  all payments of principal and
of  interest  on the Loan,  all other  charges  and any other  obligations  of
Borrower hereunder,  shall be made to Lender to the Concentration  Account, in
immediately available funds.

      Section 2.6.      Use  of  Proceeds.   Except  as  otherwise   expressly
permitted  under this Agreement,  the proceeds of Lender's  advances under the
Loan  shall be used  solely  for  working  capital  and for  other  costs  and
expenses of Borrower arising in the ordinary course of Borrower's business.

      Section 2.7.      Interest  Rate  Limitation.   The  parties  intend  to
conform  strictly  to the  applicable  usury laws in effect  from time to time
during  the term of the Loan.  Accordingly,  if any  transaction  contemplated
hereby  would be  usurious  under such laws,  then  notwithstanding  any other
provision  hereof.  (a) the aggregate of all interest that is contracted  for,
charged,  or received  under this  Agreement or under any other Loan  Document
shall not exceed the maximum  amount of  interest  allowed by  applicable  law
(the  "Highest  Lawful  Rate"),  and any excess shall be promptly  credited to
Borrower by Lender (or, to the extent that such consideration  shall have been
paid,  such  excess  shall be promptly  refunded  to Borrower by Lender);  (b)
neither  Borrower nor any other Person now or hereafter liable hereunder shall
be  obligated  to pay the amount of such  interest to the extent that it is in
excess of the Highest  Lawful  Rate;  and (c) the  effective  rate of interest
shall be reduced to the Highest  Lawful Rate.  All sums paid,  or agreed to be
paid,  to  Lender  for the  use,  forbearance,  and  detention  of the debt of
Borrower  to Lender  shall,  to the extent  permitted  by  applicable  law, be
allocated  throughout  the full term of the Note until payment is made in full
so that the actual  rate of interest  does not exceed the Highest  Lawful Rate
in effect at any  particular  time  during  the full term  thereof.  If at any
time the rate of interest  under the Note exceeds the Highest Lawful Rate, the
rate of  interest  to accrue  pursuant  to this  Agreement  shall be  limited,
notwithstanding  anything to the contrary herein,  to the Highest Lawful Rate,
but any  subsequent  reductions in the Base Rate shall not reduce the interest
to accrue  pursuant to this Agreement  below the Highest Lawful Rate until the
total  amount of interest  accrued  equals the amount of  interest  that would
have accrued if a varying rate per annum equal to the interest  rate under the
Note had at all times been in effect.  If the total  amount of  interest  paid
or accrued  pursuant to this Agreement under the foregoing  provisions is less
than the total  amount of interest  that would have  accrued if a varying rate
per annum equal to the interest  rate under the Note had been in effect,  then
Borrower  agrees to pay to Lender an amount  equal to the  difference  between
(a) the lesser of (i) the amount of  interest  that would have  accrued if the
Highest  Lawful  Rate had at all times been in  effect,  or (ii) the amount of
interest  that would have  accrued  if a varying  rate per annum  equal to the
interest  rate  under the Note had at all times  been in  effect,  and (b) the
amount of interest  accrued in  accordance  with the other  provisions of this
Agreement.

      Section 2.8.      Term.

      (a)   Subject to Lender's right to cease making  Revolving  Credit Loans
to Borrower  upon or after any Event of Default,  this  Agreement  shall be in
effect  for a  period  of two (2)  years  from  the  Closing  Date,  and  this
Agreement shall  automatically  renew itself for one-year periods  thereafter,
unless terminated as provided in this Section 2.8 (the "Term").

      (b)     Upon  at  least  thirty  (30)  days  prior  written   notice  to
Borrower,  Lender may terminate this Agreement as of the day of the second and
each  subsequent  annual  anniversary  of the Closing Date,  and may terminate
this  Agreement  without  notice upon or after the  occurrence  of an Event of
Default.

      (c)   Upon at least  thirty  (30) days prior  written  notice to Lender,
Borrower may terminate  this  Agreement  effective as of the day of the second
or any subsequent  annual  anniversary  of the Closing Date without  incurring
the liquidated  damages  described  below.  In addition,  upon at least thirty
(30) days  prior  written  notice  to  Lender,  Borrower  may  terminate  this
Agreement  prior to the second or any  subsequent  annual  anniversary  of the
Closing Date,  provided that, at the effective date of such termination  prior
to the second  anniversary,  Borrower  shall pay to Lender (in addition to the
then  outstanding  principal,  accrued  interest and other  Obligations  owing
under the terms of this Agreement and any other Loan  Documents) as liquidated
damages for the loss of bargain and not as a penalty,  an amount  equal to two
percent (2%) of the Maximum Loan Amount.

      (d)   All of the  Obligations  shall be immediately due and payable upon
the  termination  date stated in any notice of termination of this  Agreement.
All undertakings,  agreements, covenants, warranties, and representations,  of
Borrower  contained in the Loan Documents  shall survive any such  termination
and Lender shall retain its liens in the  Collateral and all of its rights and
remedies  under the Loan  Documents  notwithstanding  such  termination  until
Borrower  has  paid  the  Obligations  to  Lender,  in  full,  in  immediately
available funds.

      Section  2.9.  Joint  and  Several   Liability;   Binding   Obligations.
Each entity  comprising  Borrower and  executing  this  Agreement on behalf of
Borrower  shall be jointly and  severally  liable for all of the  Obligations.
In addition,  each entity comprising  Borrower hereby  acknowledges and agrees
that  all  of  the  representations,   warranties,   covenants,   obligations,
conditions,  agreements and other terms  contained in this Agreement  shall be
applicable  to and shall be binding  upon each  individual  entity  comprising
Borrower, and shall be binding upon all such entities when taken together.

                                   ARTICLE III

                                   COLLATERAL

     Section 3.1. Generally.  As security  for the payment of all  liabilities
of  Borrower  to  Lender,  including  without  limitation:   (i)  indebtedness
evidenced under the Note,  repayment of Revolving  Credit Loans,  advances and
other  extensions of credit,  all fees and charges owing by Borrower,  and all
other  liabilities  and  obligations  of every  kind or nature  whatsoever  of
Borrower to Lender,  whether  now  existing or  hereafter  incurred,  joint or
several,  matured or  unmatured,  direct or  indirect,  primary or  secondary,
related or unrelated,  due or to become due,  including but not limited to any
extensions,  modifications,  substitutions,  increases  and renewals  thereof,
(ii) the  payment of all  amounts  advanced  by Lender to  preserve,  protect,
defend,  and enforce its rights  hereunder  and in the  following  property in
accordance  with the terms of this  Agreement,  and (iii) the  payment  of all
expenses  incurred  by  Lender  in  connection  therewith  (collectively,  the
"Obligations"),  Borrower  hereby  assigns  and grants to Lender a  continuing
first  priority lien on and security  interest in, upon,  and to the following
property (the "Collateral"):

      (a)   All of  Borrower's  now-owned  and  hereafter  acquired or arising
Accounts,  accounts  receivable  and  rights  to  payment  of  every  kind and
description,   and  any  contract   rights,   chattel  paper,   documents  and
instruments with respect thereto;

      (b)   All of  Borrower's  now owned and  hereafter  acquired  or arising
general intangibles of every kind and description  pertaining to its Accounts,
accounts  receivable and other rights to payment,  including,  but not limited
to, all existing and future customer lists, choses in action,  claims,  books,
records,  contracts,  licenses,  formulae,  tax and  other  types of  refunds,
returned and unearned  insurance  premiums,  rights and claims under insurance
policies, and computer information, software, records, and data;

      (c)   All of Borrower's now or hereafter  acquired deposit accounts into
which Accounts are deposited, including the Lockbox Account;

      (d)   All of  Borrower's  monies  and other  property  of every kind and
nature now or at any time or times  hereafter  in the  possession  of or under
the control of Lender or a bailee or Affiliate of Lender; and

      (e)   The proceeds (including,  without limitation,  insurance proceeds)
of all of the foregoing.

      Section 3.2.      Lien  Documents.  At Closing and  thereafter as Lender
deems necessary in its sole discretion,  Borrower shall execute and deliver to
Lender,   or  have  executed  and   delivered   (all  in  form  and  substance
satisfactory to Lender in its sole discretion):

      (a)   UCC-1 Financing statements pursuant to the Uniform Commercial Code
in effect in the jurisdiction(s) in which Borrower operates,  which Lender may
file in any jurisdiction  where any Collateral is or may be located and in any
other  jurisdiction  that Lender deems  appropriate;  provided  that a carbon,
photographic,  or other  reproduction  or other copy of this Agreement or of a
financing  statement is  sufficient as and may be filed in lieu of a financing
statement; and

      (b)   Any other agreements,  documents, instruments, and writings deemed
necessary  by Lender or as Lender may  otherwise  request from time to time in
its sole  discretion  to  evidence,  perfect,  or  protect  Lender's  lien and
security interest in the Collateral required hereunder.

      Section 3.3.      Collateral Administration.

      (a)   All  Collateral  (except  deposit  accounts)  will at all times be
kept by Borrower at its  principal  office(s) as set forth on Exhibit D hereto
and shall  not,  without  the  prior  written  approval  of  Lender,  be moved
therefrom.

      (b)   Borrower shall keep accurate and complete  records of its Accounts
and all  payments and  collections  thereon and shall submit to Lender on such
periodic basis as Lender shall request a sales and collections  report for the
preceding period,  in form  satisfactory to Lender.  In addition,  if Accounts
in an aggregate face amount in excess of $50,000.00 become ineligible  because
they fall within one of the specified  categories of  ineligibility  set forth
in the  definition of Qualified  Accounts or otherwise,  Borrower shall notify
Lender of such  occurrence on the first Business Day following such occurrence
and  the  Borrowing   Base  shall   thereupon  be  adjusted  to  reflect  such
occurrence.  If requested  by Lender,  Borrower  shall  execute and deliver to
Lender  formal  written  assignments  of all of its Accounts  weekly or daily,
which shall  include all Accounts that have been created since the date of the
last   assignment,   together  with  copies  of  claims,   invoices  or  other
information related thereto.

      (c)   Whether or not an Event of Default has  occurred,  any of Lender's
officers,  employees  or agents  shall  have the  right,  at any time or times
hereafter,  in the name of Lender,  any  designee  of Lender or  Borrower,  to
verify the  validity,  amount or any other matter  relating to any Accounts by
mail, telephone,  telegraph or otherwise.  Absent an Event of Default,  Lender
shall  notify  Borrower  prior to  commencing  such  verification  process and
Borrower  shall  cooperate  fully with Lender in an effort to  facilitate  and
promptly conclude such verification process.

      (d)   To  expedite  collection,  Borrower  shall  endeavor  in the first
instance to make  collection  of its Accounts for Lender.  Lender  retains the
right at all times after the  occurrence  of an Event of  Default,  subject to
applicable law regarding  Medicaid/Medicare Account Debtors, to notify Account
Debtors that  Accounts  have been  assigned to Lender and to collect  Accounts
directly  in its own name and to charge  the  collection  costs and  expenses,
including reasonable attorneys' fees, to Borrower.

      Section 3.4.      Other   Actions.   In  addition   to  the   foregoing,
Borrower (i) shall provide prompt  written  notice to each private  indemnity,
managed care or other  Insurer who either is  currently  an Account  Debtor or
becomes an  Account  Debtor at any time  following  the date  hereof  that the
Lender has been granted a first  priority lien and security  interest in, upon
and to all Accounts  applicable to such  Insurer,  and Lender may from time to
time  require  Borrower  to create any and all similar  notices  which will be
forwarded to such Insurers by Lender,  and (ii) shall do anything further that
may be  lawfully  required  by Lender  to secure  Lender  and  effectuate  the
intentions  and objects of this  Agreement,  including  but not limited to the
execution  and  delivery  of  lockbox  agreements,   continuation  statements,
amendments  to  financing   statements,   and  any  other  documents  required
hereunder.  At Lender's  request,  Borrower shall also immediately  deliver to
Lender  all  items  for  which  Lender  must  receive  possession  to obtain a
perfected  security interest.  Borrower shall, on Lender's demand,  deliver to
Lender  all  notes,  certificates,  and  documents  of title,  chattel  paper,
warehouse   receipts,   instruments,   and  any  other   similar   instruments
constituting Collateral.

      Section 3.5.      Searches.  Prior to Closing,  and  thereafter  (as and
when  requested by Lender in its sole  discretion),  Borrower shall obtain and
deliver to Lender the  following  searches  against  Borrower  (the results of
which are to be consistent  with  Borrower's  representations  and  warranties
under this Agreement), all at its own expense:

      (a)   Uniform  Commercial  Code searches with the Secretary of State and
local  filing  offices  of each  jurisdiction  where  Borrower  maintains  its
executive offices, a place of business, or assets;

      (b)   Judgment,  federal tax lien and  corporate tax lien  searches,  in
each jurisdiction searched under clause (a) above; and

      (c)   Good standing certificates showing Borrower to be in good standing
in its state of  formation and in each  other  state  in which it is doing and 
presently intends to do business for which qualification is required.

      Section 3.6.      Power of  Attorney.  Each of the officers of Lender is
hereby  irrevocably  made,  constituted  and  appointed  the true  and  lawful
attorney  for  Borrower  (without  requiring  any of them to act as such) with
full  power of  substitution  to do the  following:  (a)  endorse  the name of
Borrower upon any and all checks,  drafts, money orders, and other instruments
for the  payment  of  money  that  are  payable  to  Borrower  and  constitute
collections  on Borrower's  Accounts;  (b) execute in the name of Borrower any
financing statements,  schedules,  assignments,  instruments,  documents,  and
statements  that  Borrower is obligated to give Lender  hereunder;  and (c) do
such other and further acts and deeds in the name of Borrower  that Lender may
deem  necessary  or desirable  to enforce any Account or other  Collateral  or
perfect Lender's security interest or lien in any Collateral.


                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

      Each entity  constituting  Borrower  represents  and warrants to Lender,
and  shall be  deemed  to  represent  and  warrant on each  day on which  any
Obligations shall be outstanding hereunder, that:

      Section 4.1.      Subsidiaries.  Except  as set  forth in Schedule  4.1.
Borrower has no subsidiaries.

      Section 4.2.      Organization   and  Good   Standing.   Borrower  is  a
corporation duly organized,  validly existing,  and in good standing under the
laws  of  its  state  of  incorporation,  is in  good  standing  as a  foreign
corporation  in each  jurisdiction  in which the  character of the  properties
owned or  leased  by it  therein  or the  nature of its  business  makes  such
qualification  necessary,  has the  corporate  power and  authority to own its
assets and transact the business in which it is engaged,  and has obtained all
certificates,   licenses   and   qualifications   required   under  all  laws,
regulations,  ordinances,  or orders of public  authorities  necessary for the
ownership and operation of all of its  properties  and  transaction  of all of
its business.

      Section 4.3.      Authority.  Borrower  has  full  corporate  power  and
authority to enter into,  execute,  and deliver this  Agreement and to perform
its  obligations  hereunder,  to borrow the Loan,  to execute  and deliver the
Note,  and to incur  and  perform  the  obligations  provided  for in the Loan
Documents,  all of which have been duly authorized by all necessary  corporate
action.  No consent or approval of  shareholders  of, or lenders to,  Borrower
and no  consent,  approval,  filing  or  registration  with  any  Governmental
Authority is required as a condition to the validity of the Loan  Documents or
the performance by Borrower of its obligations thereunder.

      Section 4.4.      Binding  Agreement.  This Agreement and all other Loan
Documents constitute,  and the Note, when issued and delivered pursuant hereto
for  value  received,   will   constitute,   the  valid  and  legally  binding
obligations  of Borrower,  enforceable  against  Borrower in  accordance  with
their respective terms.

      Section 4.5.       Litigation.  Except as  disclosed  in  Schedule  4.5,
there are no actions, suits,  proceedings or investigations pending or, to the
best of the  Borrowers'  knowledge,  threatened  against  Borrower  before any
court or arbitrator or before or by any  Governmental  Authority which, in any
one case or in the aggregate,  if determined adversely to the interests of the
Borrower,  could have a material  adverse effect on the business,  properties,
condition (financial or otherwise) or operations,  present or prospective,  of
Borrower,  or upon its  ability  to  perform  its  obligations  under the Loan
Documents.  Borrower  is not in  default  with  respect  to any  order  of any
court,  arbitrator,  or Governmental  Authority  applicable to Borrower or its
properties.

      Section 4.6.      No Conflict.  The  execution  and delivery by Borrower
of this Agreement and the other Loan Documents do not, and the  performance of
its obligations  thereunder  will not,  violate,  conflict with,  constitute a
default  under,  or result in the creation of a lien or  encumbrance  upon the
property  of Borrower  under:  (a) any  provision  of  Borrower's  articles of
incorporation  or  its  bylaws,  (b)  any  provision  of  any  law,  rule,  or
regulation  applicable  to  Borrower,  or (c)  any of the  following:  (i) any
indenture or other  agreement or instrument to which Borrower is a party or by
which  Borrower  or its  property  is bound;  or (ii) any  judgment,  order or
decree of any court,  arbitration tribunal,  or Governmental  Authority having
jurisdiction over Borrower which is applicable to Borrower.

      Section 4.7.     Financial  Condition.  The audited financial statements
of PHC,  Inc. and its  subsidiaries  (including  each  entity  comprising  the
Borrower)  (collectively,  the  "Consolidated  Company")  as of June 30, 1997,
certified  by  Richard  A.  Eisner & Co.,  LLP,  and the  unaudited  financial
statements of the Consolidated  Company as of December 31, 1997,  certified by
the chief  financial  officer  of the  Consolidated  Company,  which have been
delivered  to  Lender,   fairly   present  the  financial   condition  of  the
Consolidated  Company  and  the  results  of its  operations  and  changes  in
financial  condition as of the dates and for the periods referred to, and have
been prepared in  accordance  with GAAP.  There are no material  unrealized or
anticipated  liabilities,  direct or  indirect,  fixed or  contingent,  of the
Consolidated  Company as of the dates of such financial  statements  which are
not  reflected  therein  or in the notes  thereto.  There has been no  adverse
change in the  business,  properties,  condition  (financial  or otherwise) or
operations  (present  or  prospective)  of  any  of  the  entities  comprising
Borrower  since  December 31, 1997.  The  Consolidated  Company's  fiscal year
ends  on June  30.  The  federal  tax  identification  number  of each  entity
constituting Borrower is listed on Schedule 4.7.

      Section 4.8.      No  Default.  Borrower  is not  in  default  under  or
with respect to any  obligation  in any respect  which could be adverse to its
business,  operations,   property  or  financial  condition,  or  which  could
materially   adversely   affect  the   ability  of  Borrower  to  perform  its
obligations  under the Loan  Documents.  No Event of Default  or event  which,
with the giving of notice or lapse of time, or both,  could become an Event of
Default, has occurred and is continuing.

      Section 4.9.      Title   to   Properties.   Borrower   has   good   and
marketable  title to its properties  and assets,  including the Collateral and
the properties and assets reflected in the financial  statements  described in
Section 4.7, subject to no lien,  mortgage,  pledge,  encumbrance or charge of
any kind,  other than  Permitted  Liens.  Borrower has not agreed or consented
to cause any of its  properties  or  assets  whether  owned  now or  hereafter
acquired to be subject in the future (upon the happening of a  contingency  or
otherwise) to any lien,  mortgage,  pledge,  encumbrance or charge of any kind
other than Permitted Liens.

      Section 4.10.     Taxes.   Borrower   has   filed,   or   has   obtained
extensions  for the filing of, all federal,  state and other tax returns which
are  required  to be  filed,  and has  paid  all  taxes  shown as due on those
returns  and all  assessments,  fees  and  other  amounts  due as of the  date
hereof.  All tax  liabilities  of Borrower were, as of September 30, 1996, and
are now,  adequately  provided for on Borrower's  books.  No tax liability has
been  asserted  by the  Internal  Revenue  Service or other  taxing  authority
against  Borrower  for  taxes  in  excess  of those  already  paid  except  as
described in Schedule 4.10.

      Section 4.11.     Securities and Banking Laws and Regulations.

      (a)   The use of the  proceeds  of the Loan and  Borrower's  issuance of
the Note will not directly or  indirectly  violate or result in a violation of
the  Securities  Act of  1933  or the  Securities  Exchange  Act of  1934,  as
amended,  or  any  regulations  issued  pursuant  thereto,  including  without
limitation  Regulations U, T, G, or X of the Board of Governors of the Federal
Reserve  System.  Borrower is not engaged in the business of extending  credit
for the  purpose of the  purchasing  or  carrying  "margin  stock"  within the
meaning of those  regulations.  No part of the proceeds of the Loan  hereunder
will be used to  purchase  or carry any  margin  stock or to extend  credit to
others for such purpose.

      (b)   Borrower is not an  investment  company  within the meaning of the
Investment  Company  Act  of  1940,  as  amended,   nor  is  it,  directly  or
indirectly,  controlled  by or  acting on  behalf  of any  Person  which is an
investment company within the meaning of that Act.

      Section 4.12.     ERISA.  No employee  benefit  plan (a "Plan")  subject
to  the  Employee  Retirement  Income  Security  Act  of  1974  ("ERISA")  and
regulations  issued  pursuant  thereto that is maintained by Borrower or under
which  Borrower  could have any  liability  under ERISA (a) has failed to meet
minimum funding standards  established in Section 302 of ERISA, (b) has failed
to  comply  with all  applicable  requirements  of ERISA  and of the  Internal
Revenue Code,  including all applicable  rulings and  regulations  thereunder,
(c) has engaged in or been  involved in a prohibited  transaction  (as defined
in ERISA)  under ERISA or under the  Internal  Revenue  Code,  or (d) has been
terminated.  Borrower has not assumed,  or received notice of a claim asserted
against Borrower for,  withdrawal  liability (as defined in the Multi-Employer
Pension  Plan  Amendments  Act  of  1980,  as  amended)  with  respect  to any
multi-employer  pension plan and is not a member of any  Controlled  Group (as
defined in ERISA).  Borrower has timely made when due all  contributions  with
respect to any  multi-employer  pension plan in which it  participates  and no
event  has  occurred  triggering  a  claim  against  Borrower  for  withdrawal
liability  with respect to any  multi-employer  pension plan in which Borrower
participates.

      Section 4.13.     Compliance  with Law. Except as described in Schedule 
4.13,  Borrower  is  not  in  material  violation  of  any  statute,  rule  or
regulation of any Governmental Authority (including,  without limitation,  any
statute,   rule  or  regulation   relating  to  employment   practices  or  to
environmental,  occupational and health standards and controls).  Borrower has
obtained  all   licenses,   permits,   franchises,   and  other   Governmental
authorizations  necessary for the ownership of its  properties and the conduct
of its business.  Borrower is current with all reports and documents  required
to be filed  with any  state or  federal  securities  commission  or  similar.
Governmental  Authority and is in full  compliance  with all applicable  rules
and regulations of such commissions.

      Section 4.14.     Environmental  Matters.  No  use,  exposure,  release,
generation,  manufacture,  storage,  treatment,  transportation or disposal of
Hazardous  Material has occurred or is occurring on or from any real  property
on which the  Collateral  is  located or which is owned,  leased or  otherwise
occupied by Borrower (the "Premises"),  or off the Premises as a result of any
action of  Borrower,  except as  described  in Schedule  4,14.  All  Hazardous
Material used, treated,  stored,  transported to or from, generated or handled
on the Premises,  or off the Premises by Borrower,  has been disposed of on or
off the  Premises by or on behalf of Borrower  in a lawful  manner.  There are
no underground  storage tanks present on or under the Premises owned or leased
by Borrower.  No other  environmental,  public health or safety  hazards exist
with respect to the Premises.

      Section 4.15.     Places of  Business.  The only  places of  business of
Borrower,  and the places  where it keeps and  intends to keep the  Collateral
and records  concerning  the  Collateral,  are at the  addresses  set forth in
Schedule  4.15.  Schedule  4.15  also  lists  the owner of record of each such
property.

      Section 4.16.     Intellectual  Property.  Borrower  exclusively owns or
possesses  all  the  patents,   patent   applications   trademarks   trademark
applications,  service marks, trade names, copyrights,  franchises,  licenses,
and rights  with  respect  to the  foregoing  necessary  for the  present  and
planned future  conduct of its business,  without any conflict with the rights
of others.  A list of all such  intellectual  property  (indicating the nature
of Borrower's  interest),  as well as all outstanding  franchises and licenses
given by or held by Borrower,  is attached as Schedule  4.16.  Borrower is not
in default of any obligation or undertaking with respect to such  intellectual
property or rights.

      Section 4.17.     Stock  Ownership.  The identity of the stockholders of
all  classes  of  the  outstanding  stock  of  Borrower,   together  with  the
respective ownership  percentages held by such stockholders,  are as set forth
on Schedule 4.17.

      Section 4.18.     Material  Facts.  Neither this Agreement nor any other
Loan Document nor any other  agreement,  document,  certificate,  or statement
furnished  to  Lender  by or on  behalf of  Borrower  in  connection  with the
transactions  contemplated  hereby  contains any untrue  statement of material
fact or  omits  to  state a  material  fact  necessary  in  order  to make the
statements  contained  herein  or  therein  not  misleading.  There is no fact
known to Borrower that adversely  affects or in the future (so far as Borrower
can  reasonably  foresee)  may  adversely  affect  the  business,  operations,
affairs or  financial  condition  of  Borrower,  or any of its  properties  or
assets.

      Section 4.19.     Investments,   Guarantees,   and  Certain   Contracts.
Borrower  does not own or hold any equity or long-term  debt  investments  in,
have any  outstanding  advances to, have any  outstanding  guarantees  for the
obligations of, or have any outstanding  borrowings  from, any Person,  except
as  described  on Schedule  4.19.  Borrower is not a party to any  contract or
agreement,  or subject to any charter or other  corporate  restriction,  which
materially adversely affects its business.

      Section 4.20.     Business  Interruptions.  Within  five years  prior to
the date hereof,  neither the business,  property or assets,  or operations of
Borrower has been  materially  adversely  affected in any way by any casualty,
strike,  lockout,  combination  of workers,  or order of the United  States of
America or other  Governmental  Authority,  directed against  Borrower.  There
are no  pending  or, to the best of  Borrower's  knowledge,  threatened  labor
disputes,  strikes,  lockouts,  or similar  occurrences or grievances  against
Borrower or its business.

      Section 4.21.     Names.  Within  five years  prior to the date  hereof,
Borrower  has not  conducted  business  under or used any other name  (whether
corporate or assumed)  other than as shown on Schedule  4.21.  Borrower is the
sole owner of all names listed on that  Schedule and any and all business done
and  invoices  issued  in such  names  are  Borrower's  sales,  business,  and
invoices.  Each trade name of Borrower  represents a division or trading style
of Borrower and not a separate corporate subsidiary or independent Affiliate.

      Section 4.22.      Joint  Ventures.  Borrower  is  not  engaged  in  any
joint venture or  partnership  with any other  Person,  except as set forth on
Schedule 4.22.

      Section 4.23.     Accounts.   Lender  may  rely,  in  determining  which
Accounts are Qualified Accounts,  on all statements and  representations  made
by  Borrower  with  respect  to any  Account  or  Accounts.  Unless  otherwise
indicated in writing to Lender, with respect to each Account:

            (a)   It is genuine  and in all  respects  what it purports to be,
and is not evidenced by a judgment;

            (b)   It arises out of a  completed,  bona fide sale and  delivery
of goods or rendition  of services by Borrower in the  ordinary  course of its
business  and in  accordance  with the terms and  conditions  of all  purchase
orders,  contracts,  certification,  participation,  certificate  of need,  or
other documents  relating  thereto and forming a part of the contract  between
Borrower and the Account Debtor;

            (c)   It is  for a  liquidated  amount  maturing  as  stated  in a
duplicate  claim or invoice  covering  such sale or rendition  of services,  a
copy of which has been furnished or is available to Lender;

            (d)   Such Account,  and Lender's security  interest  therein,  is
not,  and will not (by  voluntary  act or  omission  by  Borrower),  be in the
future,   subject  to  any  offset,   lien,   deduction,   defense,   dispute,
counterclaim  or any  other  adverse  condition,  and  each  such  Account  is
absolutely  owing to Borrower and is not  contingent in any respect or for any
reason;

            (e)   There are no facts,  events or occurrences  which in any way
impair the  validity or  enforceability  of any Accounts or tend to reduce the
amount  payable  thereunder  from the face  amount of the claim or invoice and
statements delivered to Lender with respect thereto;

            (f)   To the best of Borrower's knowledge,  (i) the Account Debtor
thereunder  had the  capacity to  contract  at the time any  contract or other
document  giving rise to the Account was executed and (ii) such Account Debtor
is solvent;

            (g)   To  the  best  of   Borrower's   knowledge,   there  are  no
proceedings  or actions which are  threatened  or pending  against any Account
Debt  thereunder  which might  result in any material  adverse  change in such
Account Debtor's financial condition or the collectibility of such Account;

            (h)   It has been billed and  forwarded to the Account  Debtor for
payment in accordance  with  applicable  laws and compliance  and  conformance
with any and requisite  procedures,  requirements  and  regulations  governing
payment by such Account Debtor with respect to such Account,  and such Account
if due from a  Medicaid/Medicare  Account Debtor is properly  payable directly
to Borrower; and

            (i)   Borrower has obtained and currently has all  certificates of
need,   Medicaid  and  Medicare  provider  numbers,   licenses,   permits  and
authorizations as necessary in the generation of such Accounts.


                                    ARTICLE V

                        CLOSING AND CONDITIONS OF LENDING


      Section 5.1.      Conditions  Precedent to Agreement.  The obligation of
Lender to enter into and perform this Agreement and to make  Revolving  Credit
Loans is subject to the following conditions precedent:

      (a)   Lender  shall have  received two (2)  originals of this  Agreement
and all other Loan  Documents  required to be  executed  and  delivered  at or
prior to Closing  (other than the Note,  as to which Lender shall receive only
one  original),  executed  by  Borrower  and any other  required  Persons,  as
applicable.

      (b)   Lender  shall  have   received  all  searches  and  good  standing
certificates required by Section 3.5.

      (c)   Borrower shall have complied and shall then be in compliance  with
all the terms, covenants and conditions of the Loan Documents.

      (d)   There shall have  occurred no Event of Default and no event which,
with the  giving of notice or the  lapse of time,  or both,  could  constitute
such an Event of Default.
      (e)   The representations  and warranties  contained in Article IV shall
be true and correct.

      (f)   Lender  shall  have  received  copies  of all  board of  directors
resolutions  and other  corporate  action taken by Borrower to  authorize  the
execution,  delivery and  performance  of the Loan Documents and the borrowing
of the Loan  thereunder,  as well as the names and  signatures of the officers
of  Borrower  authorized  to execute  documents  on its  behalf in  connection
herewith,  all as also  certified  as of the date hereof by  Borrower's  chief
financial officer, and such other papers as Lender may require.

      (g)   Lender shall have received copies,  certified as true, correct and
complete by a corporate officer of Borrower,  of the articles of incorporation
and bylaws of Borrower,  with any amendments thereto,  and all other documents
necessary for  performance of the obligations of Borrower under this Agreement
and the other Loan Documents.

      (h)   Lender  shall  have  received a written  opinion  of  counsel  for
Borrower, dated the date hereof, in the form of Exhibit D.

      (i)   Lender shall have received  such  financial  statements,  reports,
certifications,  and other  operational  information  required to be delivered
hereunder,  including without limitation an initial borrowing base certificate
calculating the Borrowing Base.

      0)    Lender  shall have  received  the  portion of the  Commitment  Fee
payable at Closing in accordance with Section 2.4(a) of this Agreement.

      (k)   The  Lockbox  and  the  Concentration   Account  shall  have  been
established.

      (1)   Lender  shall have  received  a  certificate  of  Borrower's chief
financial  officer,  dated  the  Closing  Date,  certifying  that  all  of the
conditions specified in this Section have been fulfilled.

      Section 5.2.      Conditions  Precedent  to  Advances.   Notwithstanding
any other  provision of this  Agreement,  no Loan proceeds,  Revolving  Credit
Loans,  advances  or other  extensions  of  credit  under  the  Loan  shall be
disbursed  hereunder  unless the following  conditions  have been satisfied or
waived immediately prior to such disbursement:

      (a)   The  representations  and  warranties  on  the  part  of  Borrower
contained  in Article IV of this  Agreement  shall be true and  correct in all
respects at and as of the date of disbursement  or advance,  as though made on
and as of such  date  (except  to the  extent  that such  representations  and
warranties  expressly  relate  solely to an earlier  date and except  that the
references  in Section  4.7 to  financial  statements  shall be deemed to be a
reference to the then most recent annual and interim  financial  statements of
Borrower furnished to Lender pursuant to Section 6.1 hereof).

      (b)   No Event of Default or event  which,  with the giving of notice of
the lapse of time,  or both,  could  become  an Event of  Default  shall  have
occurred  and  be   continuing   or  would  result  from  the  making  of  the
disbursement or advance.

      (c)   No  adverse  change in the  condition  (financial  or  otherwise),
properties,  business,  or operations  of Borrower  shall have occurred and be
continuing with respect to Borrower since the date hereof.

      Section 5.3.      Closing.  Subject to the  conditions  of this  Article
V, the Loan shall be made  available on the date as is mutually  agreed by the
parties (the "Closing Date") at such time as may by mutually  agreeable to the
parties  upon the  execution  hereof (the  "Closing")  at such place as may be
requested by Lender.

      Section 5.4.      Waiver  of   Rights.   By   completing   the   Closing
hereunder,  or by making  advances  under the  Loan,  Lender  does not waive a
breach of any  representation  or warranty of Borrower  hereunder or under any
other Loan Document,  and all of Lender's claims and rights resulting from any
breach or misrepresentation by Borrower are specifically reserved by Lender.


                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS


      Each entity constituting  Borrower covenants and agrees that for so long
as Borrower  may borrow  hereunder  and until  payment in full of the Note and
performance of all other obligations of Borrower under the Loan Documents:

      Section 6.1.      Financial    Statements   and   Collateral    Reports.
Borrower  will  furnish  to Lender  (a) a sales  and  collections  report  and
accounts  receivable  aging  schedule on a form  acceptable  to Lender  within
fifteen (15) days after the end of each calendar  month,  which shall include,
but not be limited  to, a report of sales,  credits  issued,  and  collections
received;  (b) payable aging schedules  within fifteen (15) days after the end
of each calendar month; (c) internally  prepared monthly financial  statements
for  Borrower,  certified  by  Borrower's  chief  financial  officer  to be in
accordance  with GAAP to the best of his or her knowledge,  within  forty-five
(45) days of the end of each calendar month (provided,  however, that Borrower
reserves the right to make reasonable  accounting  adjustments to such monthly
financial  statements  within  a  reasonable  period  of  time  following  the
delivery  thereof to Lender);  (d)  internally  prepared  quarterly  financial
statements for the  Consolidated  Company  (accompanied by detailed  financial
information pertaining to Borrower),  to be furnished to Lender simultaneously
with the  filing by the  Consolidated  Company  with the U.S.  Securities  and
Exchange  Commission of quarterly  financial  statements on Form 10-Q;  (e) to
the  extent  prepared  by  Borrower,  annual  projections,   profit  and  loss
statements,  balance  sheets,  and cash flow  reports  (prepared  on a monthly
basis) for the  succeeding  fiscal year within thirty (30) days before the end
of each of Borrower's  fiscal years; (f) annual audited  financial  statements
for the  Consolidated  Company  (as  such  term is  defined  in  Section  4.7)
prepared  by  Richard A.  Eisner & Co.,  LLP or a firm of  independent  public
accountants  reasonably  satisfactory  to Lender,  to be  furnished  to Lender
simultaneous  with  the  filing  by the  Consolidated  Company  with  the U.S.
Securities  and Exchange  Commission  of annual  financial  statements on Form
10-K; (g) promptly upon receipt  thereof,  copies of any reports  submitted to
Borrower by independent  accountants  in connection  with any interim audit of
the books of Borrower and copies of each  management  control letter  provided
to Borrower by independent  accountants;  (h) as soon as available,  copies of
all  financial  statements  and  notices  provided  by  Borrower to all of its
stockholders;  and (i) such additional  information,  reports or statements as
Lender may from time to time request.  Annual  financial  statements shall set
forth in comparative form figures for the  corresponding  periods in the prior
fiscal  year.  All  financial  statements  shall  include a balance  sheet and
statement of earnings and shall be prepared in accordance with GAAP.

      Section 6.2.      Payments  Hereunder.  Borrower  will make all payments
of principal,  interest,  fees,  and all other  payments  required  hereunder,
under the Loan, and under any other  agreements  with Lender to which Borrower
is a party, as and when due.

      Section 6.3.      Existence,  Good Standing,  and Compliance  with Laws.
Borrower  will do or cause to be done all things  necessary  (a) to obtain and
keep in full force and  effect  all  corporate  existence,  rights,  licenses,
privileges,  and  franchises  of Borrower  necessary  to the  ownership of its
property  or the  conduct  of its  business,  and comply  with all  applicable
present and future laws, ordinances,  rules,  regulations,  orders and decrees
of any Governmental  Authority having or claiming  jurisdiction over Borrower;
and (b) to maintain and protect the  properties  used or useful in the conduct
of  the  operations  of  Borrower,  in a  prudent  manner,  including  without
limitation  the  maintenance at all times of such insurance upon its insurable
property and operations as required by law or by Section 6.7 hereof.

      Section 6.4.      Legally.   The   making   of   the   Loan   and   each
disbursement  or advance under the Loan shall not be subject to any penalty or
special tax, shall not be prohibited by any  governmental  order or regulation
applicable  to Borrower,  and shall not violate any rule or  regulation of any
Governmental Authority,  and necessary consents,  approvals and authorizations
of any Governmental  Authority to or of any such disbursement or advance shall
have been obtained.

      Section 6.5.      Lender's  Satisfaction.   All  instruments  and  legal
documents and proceedings in connection with the transactions  contemplated by
this Agreement  shall be  satisfactory in form and substance to Lender and its
counsel,  and Lender shall have received all documents,  including  records of
corporate  proceedings  and  opinions  of  counsel,   which  Lender  may  have
requested in connection therewith.

      Section 6.6.      Taxes and Charges.  Borrower  will timely file all tax
reports and pay and discharge all taxes,  assessments and governmental charges
or  levies  imposed  upon  Borrower,  or its  income  or  profits  or upon its
properties or any part thereof,  before the same shall be in default and prior
to the date on which penalties  attach  thereto,  as well as all lawful claims
for labor,  material,  supplies or otherwise which, if unpaid,  might become a
lien or charge upon the properties or any part thereof of Borrower;  provided 
however,  that the  Borrower  shall not be  required to pay and  discharge  or
cause to be paid and  discharged  any such tax,  assessment,  charge,  levy or
claim so long as the  validity or amount  thereof  shall be  contested in good
faith and by appropriate  proceedings by Borrower, and the Borrower shall have
set aside on their books  adequate  reserve  therefor;  and provided  however,
that such  deferment  of payment  is  permissible  only so long as  Borrower's
title to,  and its right to use,  the  Collateral  is not  adversely  affected
thereby and Lender's  lien and priority on the  Collateral  are not  adversely
affected, altered or impaired thereby.

      Section 6.7.      Insurance.   Borrower  will  carry   adequate   public
liability and  professional  liability  insurance with  responsible  companies
satisfactory  to  Lender  in  such  amounts  and  against  such  risks  as  is
customarily  maintained  by  similar  businesses  and  by  owners  of  similar
property in the same general area.

      Section 6.8.      General  Information.  Borrower will furnish to Lender
such  information  as Lender may,  from time to time,  request with respect to
the business or financial  affairs of Borrower,  and,  upon  reasonable  prior
notice,  permit any officer,  employee or agent of Lender to visit and inspect
Borrower's  corporate  headquarters  or any of Borrower's  facilities at which
Accounts are generated,  to meet with appropriate personnel and to examine the
minute  books,  books of  account  and  other  records,  including  management
letters prepared by Borrower's auditors,  of Borrower, and make copies thereof
or  extracts  therefrom,  and to  discuss  its  and  their  business  affairs,
finances and accounts with, and be advised as to the same by, the  accountants
and officers of Borrower,  all at such reasonable times and as often as Lender
may require.

      Section 6.9.      Maintenance of Property.  Borrower will maintain, keep
and  preserve  all of  its  properties  in  good  repair,  working  order  and
condition  and  from  time  to time  make  all  needful  and  proper  repairs,
renewals,  replacements,  betterments and  improvements  thereto,  so that the
business   carried  on  in   connection   therewith   may  be   properly   and
advantageously conducted at all times.

      Section 6.10.     Notification   of  Events  of  Default  and  Adverse  
Developments.  Borrower  promptly will notify Lender upon the  occurrence  of:
(i) any Event of Default;  (ii) any event which,  with the giving of notice or
lapse of time,  or both,  could  constitute  an Event of  Default;  (iii)  any
event,   development  or   circumstance   whereby  the  financial   statements
previously  furnished  to  Lender  fail in any  material  respect  to  present
fairly,  in  accordance  with GAAP,  the financial  condition and  operational
results  of  Borrower;  (iv)  any  judicial,   administrative  or  arbitration
proceeding  pending  against  Borrower,  and any  judicial  or  administrative
proceeding  known by Borrower to be threatened  against it which, if adversely
decided,  could  adversely  affect its  condition  (financial or otherwise) or
operations  (present or prospective) or which may expose Borrower to uninsured
liability  of  $25,000.00  or  more;  (v) any  default  claimed  by any  other
creditor for Borrowed Money of Borrower other than Lender;  and (vi) any other
development  in the business or affairs of Borrower  which may be adverse;  in
each case  describing  the  nature  thereof  and (in the case of  notification
under clauses (i) and (ii)) the action Borrower  proposes to take with respect
thereto.

      Section 6.11.     Employee  Benefit  Plans.  Borrower  will  (a)  comply
with the  funding  requirements  of ERISA  with  respect  to the Plans for its
employees,  or will promptly satisfy any accumulated  funding  deficiency that
arises under Section 302 of ERISA;  (b) furnish Lender,  promptly after filing
the same,  with  copies of all  reports  or other  statements  filed  with the
United States  Department of Labor, the Pension Benefit Guaranty  Corporation,
or the Internal  Revenue Service with respect to all Plans, or which Borrower,
or any  member of a  Controlled  Group,  may  receive  from such  Governmental
Authority  with respect to any such Plans,  and (c) promptly  advise Lender of
the occurrence of any Reportable Event or Prohibited  Transaction with respect
to any such Plan and the action which  Borrower  proposes to take with respect
thereto.  Borrower  will make all  contributions  when due with respect to any
multi-employer  pension plan in which it participates and will promptly advise
Lender:  (a) upon its receipt of notice of the assertion against Borrower of a
claim for  withdrawal  liability;  (b) upon the  occurrence of any event which
could  trigger  the  assertion  of a claim for  withdrawal  liability  against
Borrower;  and (c) upon the occurrence of any event which would place Borrower
in a  Controlled  Group as a result of which any member  (including  Borrower)
thereof  may  be  subject  to  a  claim  for  withdrawal  liability,   whether
liquidated or contingent.

      Section 6.12.     Financing   Statements.   Borrower  shall  provide  to
Lender evidence  satisfactory to Lender as to the due recording of termination
statements,  releases of  collateral,  and Forms UCC-3,  and shall cause to be
recorded  financing  statements  on Form UCC-1,  duly executed by Borrower and
Lender,  in all places  necessary to release all existing  security  interests
and other  liens in the  Collateral  (other than as  permitted  hereby) and to
perfect and protect Lender's first priority lien and security  interest in the
Collateral, as Lender may request.

      Section 6.13.     Financial  Records.  Borrower  shall keep  current and
accurate books of records and accounts in which full and correct  entries will
be  made  of  all  of its  business  transactions,  and  will  reflect  in its
financial statements adequate accruals and appropriations to reserves,  all in
accordance with GAAP.

      Section 6.14.     Collection  of Accounts.  Borrower  shall  continue to
collect its Accounts in the ordinary course of business.

      Section 6.15.     Places of  Business.  Borrower  shall give thirty (30)
days' prior  written  notice to Lender of any change in the location of any of
its  places of  business,  of the  places  where its  records  concerning  its
Accounts  are kept,  of the places  where the  Collateral  is kept,  or of the
establishment  of any new, or the  discontinuance  of any existing,  places of
business.

      Section 6.16.     Business  Conducted.  Borrower  shall  continue in the
business  presently  conducted  by it using its best  efforts to maintain  its
customers and goodwill.  Borrower  shall not engage,  directly or  indirectly,
in any line of business  substantially  different from the business  conducted
by it  immediately  prior to the Closing  Date, or engage in business or lines
of business which are not reasonably related thereto.

      Section 6.17.     Litigation  and  Other  Proceedings.   Borrower  shall
give  prompt  notice  to  Lender  of any  litigation,  arbitration,  or  other
proceeding before any Governmental  Authority against or affecting Borrower if
the amount claimed is more than $25,000.00

      Section 6.18.     Bank  Accounts.  Borrower  shall  assign  all  of  its
depository accounts to Lender.

      Section 6.19.     Submission of  Collateral  Documents.  Borrower  will,
on demand of Lender,  make available to Lender copies of shipping and delivery
receipts  evidencing  the  shipment  of goods  that gave  rise to an  Account,
medical  records,   insurance  verification  forms,  assignment  of  benefits.
in-take forms or other proof of the satisfactory  performance of services that
gave rise to an Account,  a copy of the claim or invoice for each  Account and
copies  of any  written  contract  or order  from  which  the  Account  arose.
Borrower  shall  promptly  notify  Lender if an Account  becomes  evidenced or
secured by an  instrument  or chattel  paper and upon request of Lender,  will
promptly deliver any such instrument or chattel paper to Lender.

      Section 6.20.     Licensure,  Medicaid/Medicare  Cost  Report.  Borrower
will  maintain  all  certificates  of  need,  provider  numbers  and  licenses
necessary to conduct its business as presently  conducted,  and take any steps
required to comply with any such new or  additional  requirements  that may be
imposed on  providers  of medical  products and  services.  If  required,  all
Medicaid/Medicare costs reports will be properly filed.

      Section 6.21.     Officer's  Certificates.  Together  with  the  monthly
financial  statements  delivered  pursuant to clause (iii) of Section 6.1. and
together with the audited annual financial  statements  delivered  pursuant to
clause (g) of that Section,  Borrower shall deliver to Lender a certificate of
its chief  financial  officer  in form and  substance  satisfactory  to Lender
setting forth:

      (a)   The  information  (including  detailed  calculations)  required in
order to establish  whether Borrower is in compliance with the requirements of
Articles  VI and  VII as of the end of the  period  covered  by the  financial
statements then being furnished; and

      (b)   That  the  signer  has  reviewed   the  relevant   terms  of  this
Agreement,  and has made (or caused to be made under his supervision) a review
of the  transactions  and  conditions  of Borrower  from the  beginning of the
accounting  period  covered by the income  statements  being  delivered to the
date of the certificate,  and that such review has not disclosed the existence
during such period of any  condition  or event which  constitutes  an Event of
Default or which is then,  or with the  passage of time or giving of notice or
both,  could  become an Event of Default,  and if any such  condition or event
existed during such period or now exists,  specifying the nature and period of
existence  thereof and what action Borrower has taken or proposes to take with
respect thereto.

      Section 6.22.     Visits  and  Inspections.  Borrower  agrees  to permit
representatives  of Lender,  from time to time,  as often as may be reasonably
requested upon at least twenty-four (24) hours' prior notice,  but only during
normal business  hours,  to visit and inspect the properties of Borrower,  and
to inspect,  audit and make extracts  from its books and records,  and discuss
with its President or  Controller,  or other  persons  designated by either of
them,  and  its  independent   accountants,   Borrower's   business,   assets,
liabilities,   financial   condition,   business   prospects  and  results  of
operations.


                                   ARTICLE VII

                               NEGATIVE COVENANTS

      Each entity  constituting  Borrower covenants and agrees that so long as
Borrower  may  borrow  hereunder  and  until  payment  in full of the Note and
performance of all other obligations of the Borrower under the Loan documents:

        Section 7.1.    Borrowing.  Borrower  will not create,  incur,  assume
or suffer to exist any liability for Borrowed Money except:  (a)  indebtedness
to Lender; (b) indebtedness of Borrower secured by mortgages,  encumbrances or
liens  expressly  permitted  by Section 7.3 hereof,  (c)  accounts  payable to
trade  creditors  and current  operating  expenses  (other  than for  borrowed
money)  which are not aged more than one  hundred  twenty  (120) days from the
billing  date or more than  thirty  (30) days from the due date,  in each case
incurred in the ordinary  course of business and paid within such time period,
unless  the same are being  contested  in good  faith and by  appropriate  and
lawful proceedings,  and Borrower shall have set aside such reserves,  if any,
with respect  thereto as are required by GAAP and deemed  adequate by Borrower
and its  independent  accountants;  (d)  borrowings  incurred in the  ordinary
course  of  its  business  and  not  exceeding  $50,000.00  in  the  aggregate
outstanding  at any one time;  or (e)  indebtedness  incurred  to finance  the
acquisition  of fee simple  ownership of the facility  identified in Schedule 
4,15,  with such  indebtedness  to be  secured  solely by a  mortgage  on such
facility.  Borrower  will not  make  prepayments  on any  existing  or  future
indebtedness  for  Borrowed  Money to any Person  (other than  Lender,  to the
extent  permitted  by  this  Agreement  or any  subsequent  agreement  between
Borrower and Lender).

        Section 7.2.    Joint  Ventures.  Borrower will not invest directly or
indirectly  in any joint  venture  for any purpose  without the prior  written
notice to, and the express  written  consent of, Lender,  which consent may be
withheld in Lender's sole discretion.

        Section 73.     Liens  and  Encumbrances.  Borrower  will not  create,
incur,  assume  or  suffer  to  exist  any  mortgage,  pledge,  lien or  other
encumbrance of any kind (including the charge upon property  purchased under a
conditional  sale or other title  retention  agreement)  upon, or any security
interest in, any of its Collateral,  whether now owned or hereafter  acquired,
except for Permitted Liens.

        Section 7.4.    Merger,  Acquisition,  or  Sale  of  Assets.  Borrower
will not  enter  into any  merger  or  consolidation  with or  acquire  all or
substantially  all of the assets of any Person,  and will not sell,  lease, or
otherwise  dispose of any of its assets  except in the ordinary  course of its
business.

        Section 7.5.    Sale and  Leaseback.  Borrower  will not,  directly or
indirectly,  enter into any  arrangement  whereby  Borrower sells or transfers
all or any part of its assets  and  thereupon  and within one year  thereafter
rents or leases the assets so sold or  transferred  without the prior  written
notice to, and the express  written  consent of, Lender,  which consent may be
withheld in Lender's sole discretion;  provided,  however,  that in any fiscal
year Borrower shall be permitted to enter into any  transactions  described in
this Section 7.5 without  obtaining  Lender's prior written consent so long as
the aggregate amount involved in such transactions  during such fiscal year is
lower than Fifty Thousand and No/100 Dollars ($50,000.00).

        Section 7.6.    Dividends  and  Management  Fees.  Borrower  will  not
declare or pay any dividends,  purchase, redeem or otherwise acquire for value
any of its outstanding  stock, or return any capital of its stockholders,  nor
shall  Borrower pay or become  obligated to pay  management  fees or fees of a
similar nature to any Person;  provided,  however, that so long as no Event of
Default  has  occurred  hereunder,  Borrower  may make any such  dividends  or
purchase,  redeem or otherwise acquire such outstanding stock, return any such
capital,  or pay any such  management  fees,  so long as  doing  so would  not
violate any of the other terms and conditions of this Agreement.

        Section 7.7.    Loans.  Borrower  will not make loans or  advances  to
any Person,  other than (i) trade credit  extended in the  ordinary  course of
its  business,  and (ii)  advances for business  travel and similar  temporary
advances  in the  ordinary  course  of  business  to  officers,  stockholders,
directors, and employees.

        Section 7.8.    Contingent  Liabilities.  Borrower  will  not  assume,
guarantee,  endorse, contingently agree to purchase or otherwise become liable
upon the  obligation of any Person,  except by the  endorsement  of negotiable
instruments for deposit or collection or similar  transactions in the ordinary
course of business.

        Section 7.9.    Subsidiaries.  Borrower will not form any  subsidiary,
or make any  investment in or any loan in the nature of an investment  to, any
other Person.

        Section 7.10.   Compliance  with ERISA.  Borrower will not permit with
respect to any Plan  covered by Title IV of ERISA any  Prohibited  Transaction
or any Reportable Event.

        Section 7.11.   Certificates  of  Need.  Amend,  alter or  suspend  or
terminate or make provisional in any material way, any  certificate of need or
provider number without the prior written consent of Lender.

        Section 7.12.   Transactions with Affiliates.  Borrower will not enter
into any transaction,  including  without  limitation the  purchase,  sale, or
exchange of property,  or the loaning or  giving of funds  to any Affiliate or
subsidiary,  except in  the  ordinary  course of  business and pursuant to the
reasonable  requirements of Borrower's  business and upon  terms substantially
the same and no less favorable to Borrower as it would obtain  in a comparable
arm's  length  transaction with an Person not an  Affiliate or subsidiary, and
so long as the transaction is not otherwise prohibited hereunder. For purposes
of the foregoing, Lender  consents  to the transactions described  on Schedule
7.12.

      Section 7.13.     Use of Lender's  Name.  Borrower will not use Lender's
name (or the name of any of Lender's  affiliates)  in  connection  with any of
its  business  operations.   Borrower  may  disclose  to  third  parties  that
Borrower has a borrowing  relationship  with Lender.  Nothing herein contained
is intended to permit or authorize  Borrower to make any contract on behalf of
Lender.

      Section 7.14.     Change in  Capital  Structure.  There  shall  occur no
change in Borrower's capital structure as set forth in Schedule 4.17.

      Section 7.15.     Contracts  and  Agreements.  Borrower  will not become
or be a party to any contract or agreement  which would breach this Agreement,
or breach any other instrument,  agreement, or document to which Borrower is a
party or by which it is or may be bound.

      Section 7.16.     Margin  Stock.  Borrower  will not  carry or  purchase
any "margin  security"  within the meaning of  Regulations U, G, T or X of the
Board of Governors of the Federal Reserve System.

      Section 7.17.     Truth of Statements  and  Certificates.  Borrower will
not furnish to Lender any  certificate  or other  document  that  contains any
untrue  statement  of a material  fact or that omits to state a material  fact
necessary to make it not misleading in light of the circumstances  under which
it was furnished.


                                  ARTICLE VIII

                                EVENTS OF DEFAULT

      Section 8.1.      Events   of   Default.    Each   of   the    following
(individually,  an  "Event  of  Default"  and  collectively,  the  "Events  of
Default") shall constitute an event of default hereunder:

      (a)   A default in the payment of any  installment  of principal  of, or
interest  upon,  the  Note  when  due and  payable,  whether  at  maturity  or
otherwise,  which default shall have continued unremedied for a period of five
(5) days after written notice thereof from Lender to Borrower;

      (b)   A default in the  payment  of any other  charges,  fees,  or other
monetary  obligations owing to Lender arising out of or incurred in connection
with this  Agreement,  when such  payment is due and  payable,  which  default
shall have  continued  unremedied  for a period of five (5) days after written
notice from Lender;

      (c)   A default in the due  observance or performance by Borrower of any
other term,  covenant or  agreement  contained  in any of the Loan  Documents,
which  default  shall have  continued  unremedied  for a period of thirty (30)
days after written notice from Lender;

      (d)   If any  representation  or warranty made by Borrower  herein or in
any of the other Loan Documents,  any financial statement, or any statement or
representation  made in any other certificate,  report or opinion delivered in
connection  herewith or therewith  proves to have been incorrect or misleading
in any  material  respect  when  made,  which  default  shall  have  continued
unremedied for a period of ten (10) days after written notice from Lender;

      (e)     If any  obligation  of  Borrower  (other  than  its  Obligations
hereunder)  for the payment of  Borrowed  Money is not paid when due or within
any applicable grace period,  or such obligation  becomes or is declared to be
due and payable prior to the expressed  maturity thereof,  or there shall have
occurred an event which,  with the giving of notice or lapse of time, or both,
would cause any such obligation to become,  or allow any such obligation to be
declared to be, due and payable;

      (f)     If Borrower  makes an  assignment  for the benefit of creditors,
offers a composition  or extension to  creditors,  or makes or sends notice of
an intended bulk sale of any business or assets now or hereafter  conducted by
Borrower;

      (g)     If  Borrower  files a petition  in  bankruptcy,  is  adjudicated
insolvent or  bankrupt,  petitions or applies to any tribunal for any receiver
of or  any  trustee  for  itself  or any  substantial  part  of its  property,
commences  any  proceeding   relating  to  itself  under  any  reorganization,
arrangement,  readjustment or debt,  dissolution or liquidation law or statute
of  any  jurisdiction,  whether  now or  hereafter  in  effect,  or  there  is
commenced  against Borrower any such proceeding which remains  undismissed for
a period of sixty (60) days,  or any Borrower by any act indicates its consent
to,  approval of, or  acquiescence  in, any such proceeding or the appointment
of any  receiver of or any trustee for a Borrower or any  substantial  part of
its property,  or suffers any such  receivership  or  trusteeship  to continue
undischarged for a period of sixty (60) days;

      (h)     If one or more final judgments  against  Borrower or attachments
against its property not fully and unconditionally  covered by insurance shall
be rendered by a court of record and shall remain unpaid,  unstayed on appeal,
undischarged, unbonded and undismissed for a period of ten (10) days;

      (i)     A   Reportable   Event  which  might   constitute   grounds  for
termination  of any Plan  covered by Title IV of ERISA or for the  appointment
by the  appropriate  United States  District  Court of a trustee to administer
any  such  Plan or for  the  entry  of a lien or  encumbrance  to  secure  any
deficiency,  has  occurred  and is  continuing  thirty  (30)  days  after  its
occurrence,  or any such Plan is  terminated,  or a trustee is appointed by an
appropriate  United States  District Court to administer any such Plan, or the
Pension Benefit Guaranty Corporation  institutes  proceedings to terminate any
such Plan or to appoint a trustee to  administer  any such Plan,  or a lien or
encumbrance is entered to secure any deficiency or claim;

      0)    If  any  outstanding  stock  of  Borrower  is  sold  or  otherwise
transferred by the Person owning such stock on the date hereof,

      (k)   If there shall  occur any  uninsured  damage to or loss,  theft or
destruction of any portion of the Collateral;

      (1)   If Borrower  breaches of violates the terms of, or if a default or
an event which  could,  whether  with notice or the passage of time,  or both,
constitute  a default,  occurs  under any other  existing or future  agreement
(related or unrelated) between Borrower and Lender;

      (m)   Upon the issuance of any  execution or distraint  process  against
Borrower or any of its property or assets;

      (n)   If  Borrower   ceases  any   material   portion  of  its  business
operations as presently conducted;

      (o)   If any  indication or evidence is received by Lender that Borrower
may have  directly or indirectly  been engaged in any type of activity  which,
in Lender's  discretion,  might  result in the  forfeiture  of any property of
Borrower to any  Governmental  Authority,  which default shall have  continued
unremedied for a period of ten (10) days after written notice from Lender;

      (p)   Borrower  or  any  Affiliate  of  Borrower,   shall  challenge  or
contest, in any action, suit or proceeding,  the validity or enforceability of
this  Agreement,  or any of the other  Loan  Documents,  the  legality  or the
enforceability  of any of the Obligations or the perfection or priority of any
Lien granted to Lender;

      (q)   Borrower shall be criminally  indicted or convicted  under any law
that could lead to a forfeiture of any Collateral.

      (r)   There  shall  occur a  material  adverse  change in the  financial
condition or business prospects of Borrower,  or if Lender in good faith deems
itself  insecure  as a result of acts or  events  bearing  upon the  financial
condition of Borrower or the  repayment of the Note,  which default shall have
continued  unremedied  for a period of ten (10) days after written notice from
Lender.

      (s)   PHC,  Inc.  shall  have  breached  any  of  its   representations,
warranties  or covenants  contained in the  Unconditional  Guaranty of Payment
and Performance of even date with this Agreement, executed in favor of Lender.

      (t)   An Event of Default  shall have  occurred  under the Secured  Term
Note dated March 12, 1997 in the original  principal  amount of  $1,100,000.00
(as  such  Secured  Term  Note  has  been or may be  amended  (by  Allonge  or
otherwise),  replaced or modified), executed by PHC of Michigan, Inc. in favor
of Lender.

      (u)   An Event of Default  shall have  occurred  under the Secured  Term
Note dated  December 9, 1997 in the original  principal  amount of $500,000.00
(as  such  Secured  Term  Note  has  been or may be  amended  (by  Allonge  or
otherwise),  replaced or modified), executed by PHC of Michigan, Inc. in favor
of Lender.

      Section 8.2.      Acceleration.  Upon  the  occurrence  of  any  of  the
foregoing Events of Default,  the Note shall become and be immediately due and
payable  upon  declaration  to that effect  delivered  by Lender to  Borrower;
provided that,  upon the happening of any event  specified in Section  8.1.(g)
hereof,  the Note shall be immediately due and payable without  declaration or
other notice to Borrower.

      Section 8.3.      Remedies.

      (a)   In addition to all other rights,  options, and remedies granted to
Lender  under  this  Agreement,  upon the  occurrence  of an Event of  Default
Lender may (i)  terminate  the Loan,  whereupon  all  outstanding  Obligations
shall be immediately  due and payable,  (ii) exercise all other rights granted
to it hereunder and all rights under the Uniform  Commercial Code in effect in
the applicable  jurisdiction(s)  and under any other applicable law, and (iii)
exercise all rights and remedies  under all Loan Documents now or hereafter in
effect,  including the following  rights and remedies  (which list is given by
way of  example  and is not  intended  to be an  exhaustive  list of all  such
rights and remedies):

            (i)   The right to take  possession  of, send  notices  regarding,
and collect directly the Collateral,  with or without judicial process, and to
exercise  all rights and  remedies  available  to Lender  with  respect to the
Collateral under the Uniform Commercial Code in effect in the  jurisdiction(s)
in which such Collateral is located;

            (ii)  The right to (by its own means or with judicial  assistance)
enter any of Borrower's  premises and take  possession of the  Collateral,  or
render  it  unusable,  or  dispose  of the  Collateral  on  such  premises  in
compliance  with  subsection  (b),  without any liability  for rent,  storage,
utilities,  or other sums,  and Borrower  shall not resist or  interfere  with
such action;

            (iii) The  right to require   Borrower  at  Borrower's  expense to
assemble all or any part of the  Collateral and make it available to Lender T
any place designated by Lender;

            (iv)  The right to reduce the  Maximum  Loan  Amount or to use the
Collateral  and/or  funds in the  Concentration  Account  in amounts up to the
Maximum Loan Amount for any reason; and

            (v)   The right to  relinquish  or abandon any  Collateral  or any
security interest therein.

      (b)   Borrower  agrees  that a notice  received  by it at least five (5)
days before the time of any intended  public sale, or the time after which any
private sale or other  disposition of the  Collateral is to be made,  shall be
deemed  to be  reasonable  notice  of  such  sale  or  other  disposition.  If
permitted by applicable  law, any  perishable  Collateral  which  threatens to
speedily decline in value or which is sold on a recognized  marked may be sold
immediately  by  Lender  without  prior  notice  to  Borrower.  At any sale or
disposition of Collateral,  Lender may (to the extent  permitted by applicable
law)  purchase  all or any part of the  Collateral,  free  from  any  right of
redemption  by Borrower,  which right is hereby  waived and  released.  At any
sale or  disposition  of  Collateral,  Lender may (to the extent  permitted by
applicable  law)  purchase  all or any part of the  Collateral,  free from any
right of  redemption  by Borrower,  which right is hereby waived and released.
Borrower  covenants and agrees not to interfere with or impose any obstacle to
Lender's exercise of its rights and remedies with respect to the Collateral.

      Section 8.4.      Nature of  Remedies.  Lender  shall  have the right to
proceed  against  all or any  portion of the  Collateral  to  satisfy,  in any
order, (a) the liabilities and Obligations of Borrower to Lender,  or (b) upon
the  occurrence  of an Event of  Default  under the March  Secured  Note,  the
liabilities and obligations of Borrower to Lender thereunder,  or (c) upon the
occurrence  of an Event of  Default  under  the  December  Secured  Note,  the
liabilities  and  obligations of PHC of Michigan,  Inc. to Lender  thereunder.
All rights and  remedies  granted  Lender  hereunder  and under any  agreement
referred  to herein,  or  otherwise  available  at law or in equity,  shall be
deemed  concurrent and cumulative,  and not alternative  remedies,  and Lender
may proceed  with any number of remedies at the same time until the Loan,  and
all other existing and future  liabilities and obligations of Borrower and PHC
Utah to  Lender,  are  satisfied  in full.  The  exercise  of any one right or
remedy  shall not be deemed a waiver or release of any other  right or remedy,
and Lender,  upon the occurrence of an Event of Default,  may proceed  against
Borrower,  and/or the Collateral,  at any time, under any agreement,  with any
available remedy and in any order."

                                   ARTICLE IX

                                  MISCELLANEOUS

      Section 9.1.      Expenses and Taxes.

      (a)   Borrower  agrees to pay,  whether or not the Closing  occurs,  all
out-of-pocket  charges  and  expenses  incurred by Lender  (including  without
limitation  the  reasonable   fees  and  expenses  of  Lender's   counsel)  in
connection  with the  negotiation,  preparation  and  execution of each of the
Loan Documents;  provided, however that with respect to the period through and
including  the  Closing,  Borrower  shall in no event be  required to pay more
than the  following  amounts  incurred by Lender:  (i) Six Thousand and No/100
Dollars  ($6,000.00)  in  legal  fees  plus  (ii)  out-of-pocket  charges  and
expenses.  Borrower also agrees to pay all out-of-pocket  charges and expenses
incurred by Lender  (including  the  reasonable  fees and expenses of Lender's
counsel) in connection  with the  enforcement,  protection or  preservation of
any right or claim of Lender and the  collection  of any amounts due under the
Loan Documents.

      (b)   Borrower  shall pay all taxes  (other  than  taxes  based  upon or
measured by Lender's  income or revenues or any  personal  property  tax),  if
any, in  connection  with the  issuance of the Note and the  recording  of the
security  documents  therefor.  The  obligations of Borrower under this clause
(b) shall  survive the payment of  Borrowees  indebtedness  hereunder  and the
termination of this Agreement.

      Section 9.2.      Entire Agreement:  Amendments.  This Agreement and the
other  Loan  Documents  constitute  the  full  and  entire  understanding  and
agreement  among the parties with regard to their subject matter and supersede
all prior  written or oral  agreements,  understandings,  representations  and
warranties   made  with  respect   thereto.   No   amendment,   supplement  or
modification  of this Agreement nor any waiver of any provision  thereof shall
be made except in writing  executed by the party against whom  enforcement  is
sought.

      Section 9.3.      No Waiver,  Cumulative  Rights. No waiver by any party
hereto of any one or more  defaults by the other party in the  performance  of
any of the  provisions  of this  Agreement  shall operate or be construed as a
waiver of any future  default  or  defaults,  whether  of a like or  different
nature.  No  failure  or  delay on the part of any  party  in  exercising  any
right, power or remedy hereunder shall operate as a waiver thereof,  nor shall
any single or partial  exercise  of any such right,  power or remedy  preclude
any other or further  exercise  thereof or the  exercise  of any other  right,
power or remedy.  The remedies  provided for herein are cumulative and are not
exclusive  of any  remedies  that may be available to any party hereto at law,
in equity or otherwise.

      Section 9.4.      Notices.  Any notice or other  communication  required
or permitted  hereunder shall be in writing and personally  delivered,  mailed
by  registered  or  certified  mail  (return  receipt  requested  and  postage
prepaid),  sent by telecopier  (with a confirming  copy sent by regular mail),
or sent by prepaid  overnight  courier service,  and addressed to the relevant
party at its address set forth below,  or at such other  address as such party
may,  by written  notice,  designate  as its  address  for  purposes of notice
hereunder:

      (a)   If to Lender, at:

            HCFP Funding, Inc.
            2 Wisconsin Circle, Fourth Floor
            Chevy Chase, MD 20814
            Attn:   Ethan Leder, President
            Telephone:  (301) 961-1640
            Telecopier:  (301) 664-9860

      (b)   If to Borrower, at:

            200 Lake Street, Suite 102
            Peabody, MA 01960
            Attn:      Ms. Paula Wurts, Chief Financial Officer
            Telephone:  (978) 536-2777
            Telecopier:  (978) 536-2677

            With a copy to:
            Willie J. Washington, Esq.
            Choate, Hall & Stewart
            Exchange Place
            53 State Street
            Boston, MA 02109
            Telephone:  (617) 248-5000
            Telecopier:  (617) 248-4000

If mailed,  notice shall be deemed to be given five (5) days after being sent,
if sent by  personal  delivery  or  telecopier,  notice  shall be deemed to be
given when delivered,  and if sent by prepaid courier,  notice shall be deemed
to be given on the next Business Day following deposit with the courier.

      Section 9.5.      Severability.  If any term,  covenant or  condition of
this Agreement,  or the application of such term, covenant or condition to any
party or circumstance  shall be found by a court of competent  jurisdiction to
be, to any extent,  invalid or unenforceable,  the remainder of this Agreement
and the  application  of such  term,  covenant,  or  condition  to  parties or
circumstances   other  than   those  as  to  which  it  is  held   invalid  or
unenforceable,  shall not be  affected  thereby,  and each term,  covenant  or
condition  shall be valid and  enforced to the  fullest  extent  permitted  by
law.  Upon   determination   that  any  such  term  is  invalid,   illegal  or
unenforceable,  the parties  hereto shall amend this Agreement so as to effect
the  original  intent of the parties as closely as  possible in an  acceptable
manner.

      Section 9.6.      Successors and Assigns. This Agreement,  the Note, and
the other Loan  Documents  shall be binding  upon and inure to the  benefit of
Borrower   and   Lender  and  their   respective   successors   and   assigns.
Notwithstanding  the  foregoing,  Borrower may not assign any of its rights or
delegate any of its  obligations  hereunder  without the prior written consent
of Lender,  which may be  withheld  in its sole  discretion.  Lender may sell,
assign,  transfer,  or  participate  any or all of its  rights or  obligations
hereunder without notice to or consent of Borrower.

      Section 9.7.      Counterparts.     This  Agreement  may be  executed in
any number of  counterparts,  each of which shall be deemed an  original,  but
all of which together shall constitute but one instrument.

      Section 9.8.      Interpretation.  No  provision  of this  Agreement  or
any other Loan Document shall be  interpreted  or construed  against any party
because that party or its legal  representative  drafted that  provision.  The
titles of the  paragraphs of this  Agreement are for  convenience of reference
only and are not to be considered in construing  this  Agreement.  Any pronoun
used in this  Agreement  shall be deemed to  include  singular  and plural and
masculine,  feminine  and  neuter  gender  as  the  case  may  be.  The  words
"herein,"  "hereof," and  "hereunder"  shall be deemed to refer to this entire
Agreement, except as the context otherwise requires.

      Section 9.9.      Survival   of  Terms.   All   covenants,   agreements,
representations  and  warranties  made  in  this  Agreement,  any  other  Loan
Document,   and  in  any  certificates  and  other  instruments  delivered  in
connection  therewith  shall be  considered to have been relied upon by Lender
and shall  survive the making by Lender of the Loans herein  contemplated  and
the execution and delivery to Lender of the Note,  and shall  continue in full
force and effect until all  liabilities  and obligations of Borrower to Lender
are satisfied in full.

      Section 9.10.     Release  of  Lender.  Borrower  releases  Lender,  its
officers,  employees,  and  agents,  of and from any claims for loss or damage
resulting  from  acts or  conduct  of any or all of  them,  unless  caused  by
Lender's recklessness, gross negligence, or willful misconduct.

      Section 9.11.     Time.  Whenever  Borrower  is  required  to  make  any
payment or perform any act on a Saturday,  Sunday,  or a legal  holiday  under
the laws of the State of Maryland  (or other  jurisdiction  where  Borrower is
required to make the  payment or perform the act),  the payment may be made or
the  act  performed  on the  next  Business  Day.  Time is of the  essence  in
Borrower's performance under this Agreement and all other Loan Documents.

      Section 9.12.     Commissions.  The  transaction  contemplated  by  this
Agreement  was brought about by Lender and Borrower  acting as principals  and
without any brokers,  agents, or finders being the effective  procuring cause.
Borrower  represents  that it has not  committed  Lender to the payment of any
brokerage fee, commission,  or charge in connection with this transaction.  If
any such  claim is made on Lender  by any  broker,  finder,  or agent or other
person,  Borrower will  indemnify,  defend,  and hold Lender harmless from and
against  the claim and will  defend any action to  recover on that  claim,  at
Borrowees  cost  and  expense,   including  Lender's  counsel  fees.  Borrower
further  agrees that until any such claim or demand is adjudicated in Lender's
favor,  the amount  demanded will be deemed a liability of Borrower under this
Agreement, secured by the Collateral.

      Section 9.13.     Third  Parties.  No rights are  intended to be created
hereunder or under any other Loan  Document for the benefit of any third party
donee, creditor, or incidental  beneficiary of Borrower.  Nothing contained in
this  Agreement  shall be construed as a  delegation  to Lender of  Borrower's
duty of performance,  including without limitation Borrower's duties under any
account or contract in which Lender has a security interest.

      Section 9.14.     Discharge of  Borrower's  Obligations.  Lender,  shall
have the right,  if Borrower has previously  failed to do so, upon  reasonable
notice to  Borrower,  to: (a) obtain insurance covering  any of the Collateral
as  required  hereunder;  (b)  pay for the  performance  of any of  Borrower's
obligations  hereunder;  (c) discharge taxes, liens,  security  interests,  or
other  encumbrances  at any time levied or placed on any of the  Collateral in
violation  of this  Agreement  unless  Borrower  is in  good  faith  with  due
diligence by appropriate  proceedings  contesting those items; and (d) pay for
the  maintenance  and  preservation  of any of the  Collateral.  Expenses  and
advances shall be added to the Loan,  until  reimbursed to Lender and shall be
secured by the  Collateral.  Such payments and advances by Lender shall not be
construed as a waiver by Lender of an Event of Default.

      Section 9.15.     Information  to  Participants.  Lender may  divulge to
any  participant  it may  obtain  in the Loan,  or any  portion  thereof,  all
information,  and furnish to such  participant  copies of  reports,  financial
statements,  certificates,  and documents obtained under any provision of this
Agreement or any other Loan Document.

      Section 9.16.     Indemnity.  Borrower  hereby  agrees to indemnify  and
hold  harmless   Lender,   its  partners,   officers,   agents  and  employees
(collectively,  "Indemnitee")  from and against  any  liability,  loss,  cost,
expense,  claim,  damage, suit, action or proceeding ever suffered or incurred
by Lender  (including  reasonable  attorneys' fees and expenses)  arising from
Borrower's  failure to observe,  perform or  discharge  any of its  covenants,
obligations,  agreements or duties hereunder, or from the breach of any of the
representations  or  warranties  contained in Article IV hereof.  In addition,
Borrower shall defend Indemnitee  against and save it harmless from all claims
of any Person with  respect to the  Collateral.  Notwithstanding  any contrary
provision in this  Agreement,  the  obligation of Borrower  under this Section
9.16 shall survive the payment in full of the  Obligations and the termination
of this Agreement.

      Section 9.17.     Choice  of  Law:   Consent   to   Jurisdiction.   THIS
AGREEMENT  AND THE NOTES SHALL BE GOVERNED  BY, AND  CONSTRUED  IN  ACCORDANCE
WITH,  THE LAWS OF THE STATE OF  MARYLAND,  WITHOUT  REGARD  TO ANY  OTHERWISE
APPLICABLE  PRINCIPLES  OF  CONFLICTS  OF LAWS.  IF ANY ACTION  ARISING OUT OF
THIS  AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE OF MARYLAND OR
FEDERAL COURT LOCATED IN THE STATE OF MARYLAND,  BORROWER  HEREBY  CONSENTS TO
THE  JURISDICTION  OF ANY SUCH  COURT IN ANY SUCH  ACTION AND TO THE LAYING OF
VENUE IN THE STATE OF  MARYLAND.  ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY
SERVED IF MAILED BY REGISTERED MAIL,  POSTAGE PREPAID,  TO THE BORROWER AT ITS
ADDRESS DESCRIBED IN SECTION 9.4 HEREOF.

      Section 9.18.     Waiver  of  Trial  by  Jury.   BORROWER   HEREBY   (A)
COVENANTS  AND  AGREES  NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE  TRIABLE  OF
RIGHT BY A JURY,  AND (B)  WAIVES  ANY  RIGHT  TO  TRIAL BY JURY  FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST.  THIS WAIVER OF RIGHT
TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY,  BY BORROWER,
AND THIS WAIVER IS INTENDED TO ENCOMPASS  INDIVIDUALLY  EACH INSTANCE AND EACH
ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL  WOULD  OTHERWISE  ACCRUE.  LENDER
IS HEREBY  AUTHORIZED  AND  REQUESTED  TO SUBMIT THIS  AGREEMENT  TO ANY COURT
HAVING  JURISDICTION  OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO
SERVE  AS  CONCLUSIVE  EVIDENCE  OF  BORROWER'S  WAIVER  OF THE  RIGHT TO JURY
TRIAL.  FURTHER,  BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF
LENDER (INCLUDING  LENDER'S COUNSEL) HAS REPRESENTED,  EXPRESSLY OR OTHERWISE,
TO BORROWER  THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY
TRIAL PROVISION.


H:\WP\LEGAL\CLIENTS\PHCINC\LNSECAGT.WPD




     IN WITNESS  WHEREOF,  the parties have caused this Agreement to be executed
as of the date first written above.

     ATTEST:                          HCFP FUNDING, INC.
                                      a Delaware corporation


     By:  _________________________   By:  ________________[SEAL]
     Name:                            Name:
     Title:                           Title:

     ATTEST:                          PHC OF MICHIGAN, INC.
                                      a Massachusetts corporation


     By:  /s/ Paula C. Wurts          By:  /s/ Bruce A. Shear  [SEAL]
     Name:    Paula C. Wurts          Name:    Bruce A. Shear
     Title:   CFO                     Title:   President


     ATTEST:                          PHC OF UTAH, INC.
                                      a Massachusetts corporation


     By:  /s/ Paula C. Wurts          By:  /s/ Bruce A. Shear  [SEAL]
     Name:    Paula C. Wurts          Name:    Bruce A. Shear
     Title:   CFO                     Title:   President


     ATTEST:                          PHC OF VIRGINIA, INC.
                                      a Massachusetts corporation


    By:  /s/ Paula C. Wurts           By:  /s/ Bruce A. Shear  [SEAL]
    Name:    Paula C. Wurts           Name:    Bruce A. Shear
    Title:   CFO                      Title:   President


                       (SIGNATURES CONTINUED ON NEXT PAGE)

H:\WP\LEGAL\CLIENTS\PHCINC\LNSECAGT.WPD




<PAGE>

    ATTEST:                           PHC OF RHODE ISLAND, INC.
                                      a Massachusetts corporation



    By:  /s/ Paula C. Wurts           By:  /s/ Bruce A. Shear  [SEAL]
    Name:    Paula C. Wurts           Name:    Bruce A. Shear
    Title:   CFO                      Title:   President


    ATTEST:                           PIONEER COUNSELING OF VIRGINIA, INC.
                                      a Massachusetts corporation



    By:  /s/ Paula C. Wurts           By:  /s/ Bruce A. Shear  [SEAL]
    Name:    Paula C. Wurts           Name:    Bruce A. Shear
    Title:   CFO                      Title:   President






H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD


<PAGE>

                                LIST OF EXHIBITS

               Exhibit A - Form of Revolving Credit Note
               Exhibit B - Form of Lockbox Agreement
               Exhibit C - Form of Concentration Account Agreement
               Exhibit D - Locations of Collateral
               Exhibit E - Form of Legal Opinion



H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD


<PAGE>

                            LIST OF SCHEDULES

              Schedule 1.36   - Permitted Liens
              Schedule 4.1    - Subsidiaries
              Schedule 4.5    - Litigation
              Schedule 4.7    - Tax Identification Numbers
              Schedule 4.10   - Taxes
              Schedule 4.13   - Non-Compliance with Law
              Schedule 4.14   - Environmental Matters
              Schedule 4.15   - Places of Business
              Schedule 4.16   - Licenses
              Schedule 4.17   - Stock Ownership
              Schedule 4.19   - Borrowings and Guarantees
              Schedule 4.21   - Trade Names
              Schedule 4.22   - Joint Ventures
              Schedule 7.12   - Transactions with Affiliates


H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD



<PAGE>

                             CERTIFICATE OF VALIDITY

                                                  February _____, 1998
TO:   HCFP Funding, Inc.
      Wisconsin Circle
      Suite 320
      Chevy Chase, Maryland 20815


      The  undersigned is an officer and/or member and/or party  interested in
PHC of Michigan,  Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode
Island,   Inc.  and  Pioneer  Counseling  of  Virginia,   Inc.   collectively,
"Borrower").  Please  refer  to  that  certain  Loan  and  Security  Agreement
between   you  and   Borrower  of  even  date  with  this   Certificate   (the
"Agreement").  Capitalized  terms  used but not  defined  in this  Certificate
shall have the meanings ascribed to them in the Agreement.

      To  induce  you  to  enter  into  the  Agreement  with   Borrower,   the
undersigned,  in his or her individual capacity,  hereby warrants,  covenants,
certifies  and  guarantees  to you,  and will be  deemed to  further  warrant,
covenant,  certify and guarantee as of the date of each  borrowing by Borrower
under the  Agreement,  as follows with respect to the Qualified  Accounts that
will be financed by you under the Agreement:

      1.    Each such  Qualified  Account  included in the Borrowing Base will
be genuine and in all  respects  what it purports to be, and will  represent a
bona fide  obligation of Borrower's  Patients or other Persons  arising out of
the delivery of Medical Services.

      2.    Borrower  will not finance any  Qualified  Accounts with you as to
which there are any offsets,  contra-accounts  or  counterclaims of any nature
whatsoever,  and Borrower  will comply fully with the lockbox  procedures  and
requirements  set  forth  in the  Agreement  (including,  without  limitation,
Section  2.3 of the  Agreement)  and will  otherwise  do  nothing to impede or
interfere  with the normal  collection  and payment of the Qualified  Accounts
financed by you

      3.    Each  Qualified  Account will arise out of a completed,  bona fide
sale and  delivery  of goods or  rendition  of  services  by  Borrower  in the
ordinary  course  of its  business  and  in  accordance  with  the  terms  and
conditions of all purchase orders, contracts, certifications,  participations,
certificates  of need,  or other  documents  relating to and forming a part of
the contract between Borrower and the account debtor.

      4.    Each Qualified  Account will be for a liquidated  amount  maturing
as stated in a duplicate  claim or invoice  covering such sale or rendition of
services, a copy of which has been furnished or shall be available to Lender.



<PAGE>

HCFP Funding, Inc.
February _, 1998
Page 2

      5.    No  Qualified  Account  will,  by  voluntary  act or  omission  of
Borrower,  be  subject  to any  offset,  lien,  deduction,  defense,  dispute,
counterclaim or any other adverse  condition,  and each Qualified Account will
be  absolutely  owing to Borrower and will not be contingent in any respect or
for any reason.

      6.    Each  Qualified  Account  shall have been billed and  forwarded to
the  Account  Debtor for payment in  accordance  with  applicable  laws and in
compliance and conformity with any and requisite procedures,  requirements and
regulations  governing  payment by such  Account  Debtor  with  respect to the
Qualified Account,  and the Qualified Account if due from a  Medicaid/Medicare
Account Debtor shall be properly payable directly to Borrower.

      7.     Borrower  shall have obtained and currently has all  certificates
of need,  Medicaid  and  Medicare  provider  numbers,  licenses,  permits  and
authorizations as necessary in the generation of such Qualified Accounts.

      8.    If a Qualified Account is owed by an Insurer,  the insurance claim
related  to the  Qualified  Account  shall  have  been  verified  by a process
approved  by the Lender  and shall  have been  forwarded  to the  Insurer  for
payment.

      9.    As of the date of this Certificate, Borrower is solvent.

      10.   As of the date of this  Certificate,  the  Qualified  Accounts are
free  and  clear  of  liens,  security  interests  or  claims  of  any  nature
whatsoever, other than any  lien  or  security  interest  to  you  or to  your
affiliate, HCFP Funding II, Inc.

      The undersigned  hereby further undertakes to save you free and harmless
from any  damage  or loss  that you may  sustain  as a result  of any  willful
breach  by any  officer  or  director  of  Borrower  of  any of the  foregoing
warranties,  covenants or guarantees  or any fraud,  deceit or criminal act on
the part of any officer or director of Borrower in its dealings with you.

      Nothing  contained in this  Certificate  shall be in any way impaired or
affected  by any  change  in or  amendment  of any  of  the  Agreement  or the
documents  ancillary to the Agreement,  and this Certificate  shall be binding
upon the undersigned and his heirs, personal  representatives,  successors and
assigns.  The liability of the  undersigned  under the  Certificate  is direct
and  unconditional,  and may be enforced without requiring you first to resort
to any other right,  remedy or security.  It is not  necessary for you to give
the undersigned  notice of any changes in any of the Agreement,  the documents
ancillary to the Agreement or your financial  arrangements  with Borrower,  to
all of which the undersigned now hereby consents.


WITNESS:                              

 /s/ Paula C. Wurts                          /s/  Bruce A. Shear
                                                  Bruce A. Shear




H:\WP\LEGAL\CLIENTS\PHCINC\LNCRVAL.WPD



<PAGE>

2-14-98


                             February ____, 1998


PHC, Inc.
PHC of Michigan, Inc.
PHC of Utah, Inc.
200 Lake Street, Suite 102
Peabody, Massachusetts 01960
Attention:  Mr. Bruce Shear
            Ms. Paula Wurts

      Re:   Loan and  Security  Agreement  (the  "New Loan  Agreement")  to be
            entered  by  and  among  HCFP  Funding,  Inc.  ("Lender"),  PHC of
            Michigan,  Inc.  and  PHC  of  Utah,  Inc.   (collectively,   "Old
            Borrowers"),  and PHC of Virginia, Inc., PHC of Rhode Island, Inc.
            and Pioneer  Counseling  of  Virginia,  Inc.  (collectively,  "New
            Borrowers")

Ladies and Gentlemen:

        Lender  and Old  Borrowers  have  agreed  to  enter  into the New Loan
Agreement whereby New Borrowers will be eligible for financing from Lender and
the aggregate Maximum Loan Amount for both Old Borrowers and New Borrowers will
be increased to Four Million and No/100 Dollars ($4,000,000.00).  In connection
with  entering  into  the New Loan Agreement, Lender and Old  Borrower agree as
follows:

      1.    The New  Loan  Agreement  will  serve  to amend  and  restate  the
respective  former Loan  and Security  Agreements  with each Old Borrower (the
"Old Loan Agreements").

      2.    The  New  Loan  Agreement  will  serve  as the  initial  Loan  and
Security Agreement with each New Borrower.

      3.    Upon  the  closing  of  and  first  funding  under  the  New  Loan
Agreement,  the Revolving Credit  Notes  executed by Old Borrowers pursuant to
the Old Loan  Agreements  will be cancelled  and  replaced by  the  Revolving
Credit Note executed pursuant to the New Loan Agreement.

      4.     The Certificates of Validity  executed by Bruce Shear pursuant to
the Old Loan Agreement will be cancelled and  replaced  by the  Certificate of
Validity executed pursuant to the New Loan Agreement.



<PAGE>

PHC, Inc.
PHC of Michigan, Inc.
PHC of Utah, Inc.
February _, 1998
Page 2

      5.    The Unconditional  Guaranty of Payment and Performance executed by
PHC, Inc. in  connection  with the Old Loan  Agreements  will be cancelled and
replaced by the  Unconditional  Guaranty of Payment and  Performance  executed
pursuant to the New Loan Agreement.

      6.    The Unconditional  Guaranty of Payment and Performance executed by
PHC,  Inc. in  connection  with the Secured Term Note of December  ____,  1997
made by PHC of Michigan,  Inc. in favor of HCFP  Funding II, Inc.  will remain
in full force and effect.

      7.    The Mortgage currently securing the payment of the obligations of
Old Borrowers under the Old Loan Agreements will be amended to include the
obligations of both Old Borrowers and New Borrowers under the New Loan
Agreement.

      If the  foregoing  correctly  states the  understanding  of the parties,
please sign below where indicated.

                                 Very truly yours,

                                 HCFP FUNDING, INC.


                                 By:  __________________________
                                     Name:
                                     Title:

THE FOREGOING  CORRECTLY STATES THE UNDERSTANDING OF THE PARTIES AS OF THE DAY
OF FEBRUARY _____, 1998.
PHC, INC.                           PHC OF MICHIGAN, INC.

By:  /s/  Bruce A. Shear            Name:  Bruce A. Shear
Title:    President                 Title:  President


                                    PHC OF UTAH, INC.

By:  /s/  Paula C. Wurts            Name:  Bruce A. Shear
Title:    CFO                       Title: President


  H:\WP\LEGAL\CLIENTS\PHCINC\Sideletter.wpd



<PAGE>

                              REVOLVING CREDIT NOTE


$4,000,000.00
February _, 1998

      FOR  VALUE  RECEIVED,  the  undersigned,   PHC  OF  MICHIGAN,   INC.,  a
Massachusetts  corporation,  PHC OF UTAH,  INC., a Massachusetts  corporation,
PHC OF  VIRGINIA,  INC., a  Massachusetts  corporation,  PHC OF RHODE  ISLAND,
INC., a Massachusetts  corporation,  and PIONEER COUNSELING OF VIRGINIA, INC.,
a  Massachusetts   corporation,   (collectively,   "Borrower"),   jointly  and
severally,  promise to pay, in lawful money of the United States, to the order
of HCFP FUNDING,  INC., a Delaware corporation  ("Lender"),  the principal sum
of Four  Million and No/100  Dollars  ($4,000,000.00),  or so much  thereof as
shall be  advanced  or  readvanced  and  shall  remain  unpaid  under the Loan
established  pursuant to that certain Loan and Security Agreement of even date
with  this  Note  by  and  among  the   undersigned   and  Lender  (the  "Loan
Agreement"),  plus  interest  on the unpaid  balance  thereof,  computed  on a
360-day   basis,  at the  rate  per  annum  that  is  set  forth  in the  Loan
Agreement.   All  capitalized  terms  used,  and  not  otherwise  specifically
defined,  in this  Revolving  Credit  Note  ("Note")  shall have the  meanings
ascribed to them in the Loan Agreement.

        This Note amends,  restates and replaces in its entirety the Revolving
Credit Note dated May 21,  1996 made by PHC of Utah,  Inc.  and the  Revolving
Credit Note dated February 3, 1997 made by PHC of Michigan, Inc.

        This Note shall  evidence the  undersigned's  obligation  to repay all
sums  advanced by Lender from time to time under and as part of the Loan.  The
actual  amount  due and owing  from  time to time  under  this  Note  shall be
evidenced by Lender's  records of receipts and  disbursements  with respect to
the Loan, which shall be conclusive  evidence of that amount,  absent manifest
error.

        Interest  hereon shall be payable  monthly,  in arrears,  on the first
Business Day of each month  hereafter (for the previous  month).  For purposes
of this Note, a "Business  Day" shall mean any day on which banks are open for
business in Maryland, excluding Saturdays and Sundays.

        This Note shall  become due and  payable  upon the earlier to occur of
(i) the  expiration  of the Term,  or (ii) any Event of Default under the Loan
Agreement,  or any other  event  under any other Loan  Documents  which  would
result in this  Note  becoming  due and  payable.  At such  time,  the  entire
principal  balance of this Note and all other  fees,  costs and  expenses,  if
any,  shall be due and payable in full.  Lender  shall then have the option at
any time and from time to time to exercise  all of the rights and remedies set
forth in this Note and in the other Loan Documents,  as well as all rights and
remedies  otherwise  available  to Lender at law or in equity,  to collect the
unpaid  indebtedness  under this Note and the other Loan Documents.  This Note
is  secured  by the  Collateral,  as  defined  in and  described  in the  Loan
Agreement.

        Whenever  any  principal  and/or  interest  and/or fee under this Note
shall  not  be  paid  when  due,   whether  at  the  stated   maturity  or  by
acceleration,  interest on such unpaid amounts shall  thereafter be payable at
a rate per annum  equal to five  percentage  points  above the stated  rate of
interest on this Note until such amounts shall be paid.

        The  undersigned  and  Lender  intend  to  conform   strictly  to  the
applicable  usury  laws in  effect  from time to time  during  the term of the
Loan.  Accordingly,  if any transaction  contemplated hereby would be usurious
under such laws,  then  notwithstanding  any other provision  hereof:  (a) the
aggregate of all interest that is contracted for,  charged,  or received under
this Note or under any other  Loan  Document  shall  not  exceed  the  maximum
amount  of  interest  allowed  by  applicable  law,  and any  excess  shall be
promptly  credited to the  undersigned  by Lender (or, to the extent that such
consideration  shall have been paid, such excess shall be promptly refunded to
the  undersigned by Lender);  (b) neither the undersigned nor any other Person
(as defined in the Loan Agreement) now or hereafter  liable hereunder shall be
obligated  to pay the  amount of such  interest  to the  extent  that it is in
excess of the  maximum  interest  permitted  by  applicable  law;  and (c) the
effective  rate of interest  shall be reduced to the  Highest  Lawful Rate (as
defined  in the Loan  Agreement).  All sums  paid,  or agreed  to be paid,  to
Lender for the use,  forbearance,  and  detention  of the debt of  Borrower to
Lender  shall,  to the  extent  permitted  by  applicable  law,  be  allocated
throughout  the full term of this Note  until  payment is made in full so that
the actual rate of interest does not exceed the Highest  Lawful Rate in effect
at any particular  time during the full term thereof.  If at any time the rate
of  interest  under the Note  exceeds  the Highest  Lawful  Rate,  the rate of
interest to accrue  pursuant  to this Note shall be  limited,  notwithstanding
anything  to the  contrary  herein,  to  the  Highest  Lawful  Rate,  but  any
subsequent  reductions  in the Base Rate  shall not  reduce  the  interest  to
accrue  pursuant  to this Note below the  Highest  Lawful Rate until the total
amount of  interest  accrued  equals  the amount of  interest  that would have
accrued if a varying rate per annum equal to the interest  rate under the Note
had at all times  been in  effect.  If the total  amount of  interest  paid or
accrued pursuant to this Note under the foregoing  provisions is less than the
total  amount of interest  that would have accrued if a varying rate per annum
equal to the  interest  rate  under  this  Note had been in  effect,  then the
undersigned  agrees to pay to Lender an amount equal to the difference between
(a) the lesser of (i) the amount of  interest  that would have  accrued if the
Highest  Lawful  Rate had at all times been in  effect,  or (ii) the amount of
interest  that would have  accrued  if a varying  rate per annum  equal to the
interest  rate  under the Note had at all times  been in  effect,  and (b) the
amount of interest  accrued in  accordance  with the other  provisions of this
Note and the Loan Agreement.

      This  Note is the  "Note"  referred  to in the  Loan  Agreement,  and is
issued  pursuant  thereto.  Reference  is made  to the  Loan  Agreement  for a
statement of the  additional  rights and  obligations of the  undersigned  and
Lender.  In the event of any  conflict  between the terms hereof and the terms
of the Loan Agreement,  the terms of the Loan Agreement shall prevail.  All of
the terms,  covenants,  provisions,  conditions,  stipulations,  promises  and
agreements  contained  in the  Loan  Documents  to be  kept,  observed  and/or
performed  by  the   undersigned  are  made  a  part  of  this  Note  and  are
incorporated  herein by this  reference  to the same  extent and with the same
force and effect as if they were fully set forth herein,  and the  undersigned
promises  and agrees to keep,  observe  and  perform  them or cause them to be
kept,  observed  and  performed,  strictly  in  accordance  with the terms and
provisions thereof

      Each party liable  hereon in any capacity,  whether as maker,  endorser,
surety,  guarantor or otherwise,  (i) waives presentment for payment,  demand,
protest and notice of  presentment,  notice of protest,  notice of non-payment
and notice of  dishonor  of this debt and each and every  other  notice of any
kind  respecting  this Note and all lack of diligence or delays in  collection
or enforcement  hereof,  (ii) agrees that Lender and any subsequent  holder of
this Note,  at any time or times,  without  notice to the  undersigned  or its
consent,  may grant extensions of time,  without limit as to the number of the
aggregate  period  of such  extensions,  for  the  payment  of any  principal,
interest or other sums due  hereunder,  (iii) to the extent  permitted by law,
waives  all  exemptions  under the laws of the State of  Maryland  and/or  any
state or territory of the United States,  (iv) to the extent permitted by law,
waives the benefit of any law or rule of law  intended  for its  advantage  or
protection  as an obligor  hereunder or providing for its release or discharge
from  liability  hereon,  in whole  or in part,  on  account  of any  facts or
circumstances  other  than  full  and  complete  payment  of all  amounts  due
hereunder,  and (v) agrees to pay, in addition to all other sums of money due,
all cost of collection  and attorney's  fees,  whether suit be brought or not,
if this Note is not paid in full when due,  whether at the stated  maturity or
by acceleration.

      No waiver by Lender or any subsequent  holder of this Note of any one or
more defaults by the  undersigned in the performance of any of its obligations
hereunder  shall operate or be construed as a waiver of any future  default or
defaults,  whether of a like or different  nature.  No failure or delay on the
part of Lender in  exercising  any  right,  power or  remedy  under  this Note
(including,  without  limitation,  the  right  to  declare  this  Note due and
payable)  shall operate as a waiver  thereof,  nor shall any single or partial
exercise  of any such  right,  power or remedy  preclude  any other or further
exercise thereof or the exercise of any other right, power or remedy.

      If any term,  covenant or condition of this Note, or the  application of
such term,  covenant or condition to any party or circumstance  shall be found
by a  court  of  competent  jurisdiction  to be,  to any  extent,  invalid  or
unenforceable,  the remainder of this Note and the  application  of such term,
covenant,  or  condition  to parties or  circumstances  other than those as to
which it is held invalid or unenforceable,  shall not be affected thereby, and
each term,  covenant or  condition  shall be valid and enforced to the fullest
extent  permitted by law.  Upon  determination  that any such term is invalid,
illegal or  unenforceable,  the  undersigned  shall  cooperate  with Lender to
amend this Note so as to effect the original  intent of the parties as closely
as possible in an acceptable manner.

      No amendment,  supplement or modification of this Note nor any waiver of
any  provision  hereof  shall be made except in writing  executed by the party
against whom enforcement is sought.

      This Note shall be binding upon the  undersigned  and its successors and
assigns.  Notwithstanding  the foregoing,  the  undersigned may not assign any
of its rights or delegate any of its obligations  hereunder  without the prior
written consent of Lender, which may be withheld in its sole discretion.

      THIS NOTE IS TO BE  GOVERNED BY AND  CONSTRUED  IN  ACCORDANCE  WITH THE
LAWS OF THE STATE OF  MARYLAND  WITHOUT  RESPECT TO ANY  OTHERWISE  APPLICABLE
CONFLICTS-OF-LAWS  PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE,  AND
THE PARTIES EXPRESSLY  CONSENT AND AGREE TO THE NON-EXCLUSIVE  JURISDICTION OF
THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES  DISTRICT  COURT FOR
THE  DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND,
WAIVING  ALL  CLAIMS  OR  DEFENSES  BASED  ON LACK OF  PERSONAL  JURISDICTION,
IMPROPER VENUE,  INCONVENIENT  FORUM OR THE LIKE.  BORROWER HEREBY CONSENTS TO
SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER,  BY CERTIFIED
OR  REGISTERED  MAIL,  POSTAGE  PREPAID,  TO  BORROWER'S  ADDRESS SET FORTH IN
SECTION  9.4 OF THE LOAN  AGREEMENT.  BORROWER  FURTHER  WAIVES  ANY CLAIM FOR
CONSEQUENTIAL  DAMAGES IN  RESPECT OF ANY ACTION  TAKEN OR OMITTED TO BE TAKEN
BY LENDER IN GOOD FAITH.

      THE UNDERSIGNED  HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE  TRIABLE  OF RIGHT BY A JURY,  AND (B)  WAIVES  ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT  SHALL NOW OR  HEREAFTER
EXIST.  THIS  WAIVER  OF  RIGHT  TO  TRIAL  BY JURY  IS  GIVEN  KNOWINGLY  AND
VOLUNTARILY  BY THE  UNDERSIGNED,  AND THIS WAIVER IS  INTENDED  TO  ENCOMPASS
INDIVIDUALLY  EACH  INSTANCE  AND EACH  ISSUE AS TO WHICH  THE RIGHT TO A JURY
TRIAL WOULD  OTHERWISE  ACCRUE.  LENDER IS HEREBY  AUTHORIZED AND REQUESTED TO
SUBMIT THIS NOTE TO ANY COURT HAVING  JURISDICTION OVER THE SUBJECT MATTER AND
THE  PARTIES   HERETO,   SO  AS  TO  SERVE  AS  CONCLUSIVE   EVIDENCE  OF  THE
UNDERSIGNED'S  WAIVER OF THE RIGHT TO JURY  TRIAL.  FURTHER,  THE  UNDERSIGNED
HEREBY  CERTIFIES  THAT  NO  REPRESENTATIVE  OR  AGENT  OF  LENDER  (INCLUDING
LENDER'S  COUNSEL) HAS  REPRESENTED,  EXPRESSLY OR OTHERWISE,  TO ANY BORROWER
THAT  LENDER  WILL NOT SEEK TO  ENFORCE  THIS  WAIVER  OF RIGHT TO JURY  TRIAL
PROVISION.

H:\WP\LEGAL\CLIENTS\PHCINC\LNNOTEJT.wpd





     IN WITNESS THEREOF,  the undersigned have executed this Note as of the date
fire above written.

                                          BORROWER:

            ATTEST:                       PHC OF MICHIGAN, INC.
                                          a Massachusetts corporation

            By:  /s/  Paula C. Wurts      By:  /s/  Bruce A. Shear      (SEAL]
            Name:     Paula C. Wurts      Name:     Bruce A. Shear
            Title:    CFO                 Title:   President

            ATTEST:                       PHC OF UTAH, INC.
                                          a Massachusetts corporation

            By:  /s/  Paula C. Wurts      By:  /s/  Bruce A. Shear      (SEAL]
            Name:     Paula C. Wurts      Name:     Bruce A. Shear
            Title:    CFO                 Title:    President


            ATTEST:                       PHC OF VIRGINIA, INC.
                                          a Massachusetts corporation

            By:  /s/  Paula C. Wurts      By:  /s/  Bruce A. Shear      (SEAL]
            Name:     Paula C. Wurts      Name:     Bruce A. Shear
            Title:    CFO                 Title:    President


            ATTEST:                       PHC OF RHODE ISLAND, INC.
                                          a Massachusetts corporation

            By:  /s/  Paula C. Wurts      By:  /s/  Bruce A. Shear      (SEAL]
            Name:     Paula C. Wurts      Name:     Bruce A. Shear
            Title:    CFO                 Title:    President


            ATTEST:                       PIONEER COUNSELING OF VIRGINIA, INC.
                                          a Massachusetts corporation

 
            By:  /s/  Paula C. Wurts      By:  /s/  Bruce A. Shear      (SEAL]
            Name:     Paula C. Wurts      Name:     Bruce A. Shear
            Title:    CFO                 Title:    President


H:\WP\LEGAL\CLIENTS\PHCINC\LNNOTEJT.wpd

 


<PAGE>

                  THIS GUARANTY CONTAINS PROVISIONS FOR WAIVER
                                  OF JURY TRIAL

                UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE


      THIS UNCONDITIONAL  GUARANTY OF PAYMENT AND PERFORMANCE (the "Guaranty")
is dated as of  February , 1998 and is made  by  PHC,  INC.,  a  Massachusetts
corporation  ("Guarantor"),  in favor of HCFP  FUNDING  II,  INC.,  a Delaware
corporation (Lender).

                                    RECITALS

      A.    Pursuant to a certain  Loan and  Security  Agreement  of even date
with  this  Guaranty  (as the  agreement  may  from  time to time be  amended,
modified  or  supplemented,  the  "Loan  Agreement"),  by  and  among  PHC  OF
MICHIGAN,   INC.,  a  Massachusetts   corporation,   PHC  OF  UTAH,   INC.,  a
Massachusetts   corporation,   PHC  OF   VIRGINIA,   INC.,   a   Massachusetts
corporation,  PHC OF RHODE  ISLAND,  INC., a  Massachusetts  corporation,  and
PIONEER   COUNSELING   OF  VIRGINIA,   INC.,  a   Massachusetts   corporation,
(collectively,  "Borrower'),  and Lender,  Lender has agreed to make available
to Borrower a  revolving  line of credit in the  maximum  aggregate  principal
amount of Four Million and No/100 Dollars  ($4,000.00),  or so much thereof as
shall be  advanced  or  readvanced  from time to time and remain  unpaid  (the
"Loan"); and

      B.    Lender is willing to make the Loan  under the Loan  Agreement  but
only upon the condition,  among others, that Guarantor shall have executed and
delivered to Lender this Guaranty.

      NOW,  THEREFORE,  in  consideration  of the  premises  and of the mutual
covenants  contained  in  this  Guaranty  and  for  other  good  and  valuable
consideration,  the receipt of which is hereby acknowledged, the parties agree
as follows:

      1.     All  capitalized  terms  used but not  defined  in this  Guaranty
shall have the respective meanings given them in the Loan Agreement.

      2.    To induce Lender to execute and deliver the Loan  Agreement and to
make the Loan upon the terms and conditions  set forth in the Loan  Agreement,
and  in   consideration   thereof.   Guarantor  hereby   unconditionally   and
irrevocably   guarantees  to  Lender,   and  to  its  successors,   endorsees,
transferees  and assigns,  Borrower's  prompt and  complete  payment when due,
whether  at  the  stated  maturity,  by  acceleration  or  otherwise,  of  the
Obligations,  and  Borrower's  prompt and complete  performance  of all of its
other covenants, obligations and agreements contained in the Loan Agreement.

      3.    Guarantor  hereby waives notice of the acceptance of this Guaranty
and  of  the  extending  of  credit  as  above  specified  and  the  state  of
indebtedness of Borrower at any time, and expressly  agrees to any extensions,
renewals,  accelerations  or  modifications of such credit or any of the terms
of such credit, and waives diligence,  presentment, demand of payment, protest
or notice,  whether of  non-payment,  dishonor,  protest or otherwise,  of any
document or documents and notice of any extension,  renewal,  modification  or
default  and  assent  to  the  release,   substitution  or  variation  of  any
collateral  that may at any time be held as security  for any credit  extended
to  Borrower,  all without  relieving  Guarantor of any  liability  under this
Guaranty.  The  obligations  of  Guarantor  under  this  Guaranty  shall be an
unconditional  obligation  to make prompt  payment and  performance  to Lender
irrespective of the genuineness,  validity,  regularity or  enforceability  of
any  indebtedness  or  evidence  of  indebtedness  of Borrower to Lender or of
other  circumstances  that might otherwise under the laws of any  jurisdiction
constitute a legal or equitable  discharge of a surety or a guarantor or a bar
(in the nature of a moratorium or otherwise)  to the  enforcement  of Lender's
rights either (i) against  Borrower on all or any part of its  Obligations  or
(ii) under this Guaranty.

      4.    Notwithstanding  any payment or payments  made by Guarantor  under
this Guaranty or any setoff or  application  of :funds of Guarantor by Lender,
Guarantor  shall not be  entitled  to be  subrogated  to any of the  rights of
Lender against  Borrower or any  collateral  security or guarantee or right of
offset held by Lender for the payment or performance of the  Obligations,  nor
shall  Guarantor seek any  reimbursement  from Borrower in respect of payments
made by Guarantor  under this  Guaranty,  until all amounts then owing and any
other  performance  then due to Lender by  Borrower  for or on  account of the
Obligations   are  paid  and   satisfied  in  full.   Upon  such  payment  and
satisfaction  in full,  Guarantor  shall be subrogated to all rights of Lender
against  Borrower or any  collateral  security or guarantee or right of offset
held by Lender for the payment and performance of the Obligations.

      5.    Any  indebtedness  of Borrower now or hereafter owed to or held by
Guarantor is hereby  subordinated  to the  indebtedness of Borrower to Lender;
and such  indebtedness of Borrower to Guarantor if Lender so requests shall be
collected,  enforced  and  received by  Guarantor as trustee for Lender and be
paid over to Lender on account of the  indebtedness  of Borrower to Lender but
without  reducing or affecting in any manner the liability of Guarantor  under
the other provisions of this Guaranty.

      6.    This is  intended  to be and shall be  construed  as a  continuing
guarantee  and shall  remain in full  force and effect and shall be binding in
accordance  with and to the extent of its terms upon Guarantor and Guarantor's
heirs  and  assigns,  and  shall  inure  to the  benefit  of  Lender,  and its
successors, endorsees, transferees and assigns.

      7.    If all or any part of the  Obligations  of  Borrower to Lender are
not paid when due,  Guarantor  hereby  guarantees that it will pay the same to
Lender, upon demand,  without set-off or counterclaim and without reduction by
reason of any taxes, levies, imposts,  charges and withholdings,  restrictions
or  conditions  of any nature  that are now or may  hereafter  be  imposed,  2
levied or assessed by any country,  political subdivision or taxing authority,
all of which  will be for the  account  of and paid by  Guarantor,  and Lender
need not first  proceed to  preserve,  utilize or exhaust  any other  right or
remedy  against  Borrower or any other  guarantor or any security  that Lender
may  have to  obtain  payment.  The  payment  shall  be  made  in  immediately
available funds to Lender's office at 2 Wisconsin Circle,  Fourth Floor, Chevy
Chase, Maryland 20815, Attention:  Ethan D. Leder, President, or at such other
place as Lender may designate in writing.

      8.    No failure to exercise and no delay in exercising,  on the part of
Lender,  any right,  power or privilege under this Guaranty shall operate as a
waiver of the  right,  power or  privilege,  nor shall any  single or  partial
exercise  of any  right,  power or  privilege  preclude  any other or  further
exercise of the right, power or privilege,  or the exercise of any other power
or right.  The rights and remedies  provided in this  Guaranty are  cumulative
and not exclusive of any rights or remedies provided by law.

      9.    Notice  or  demand  to the  parties  to  this  Guaranty  shall  be
sufficiently  given if in  writing  and  personally  delivered,  or  mailed by
registered or certified  first class mail,  postage  prepaid,  return  receipt
requested,  or  sent by  commercial  courier  against  receipt,  to the  party
intended  and at the address or  addresses  specified  in the preamble to this
Guaranty.  Any party may  designate  a change of  address by notice in writing
to the other parties,  the notice to be effective ten (1 0) days after mailing
or delivery as provided in this Section 9.

      10.   Guarantor  hereby  represents,  warrants,  and covenants to Lender
 that:

            (a)   It is a corporation duly incorporated,  validly existing and
in good standing under the laws of the jurisdiction of its incorporation,  and
has the  corporate  power  and  authority  to own its  property,  conduct  its
business as now being  conducted and to make and perform this Guaranty and the
transactions  contemplated  by  this  Guaranty,  and is duly  qualified  to do
business  and  is  in  good  standing  as  a  foreign   corporation   in  each
jurisdiction  where the nature and extent of the business  conducted by it, or
property owned by it, and applicable  law require such  qualification,  except
where the failure so to qualify  would not have a material  adverse  effect on
the business, operations or financial position of Guarantor.

            (b)   The  execution,  delivery and  performance  of this Guaranty
have been duly  authorized  by all  necessary  corporate  action  and will not
violate any provision of law or any order of any court or governmental  agency
or the  certificate  of  incorporation  or other  incorporating  documents  or
bylaws  of  Guarantor,  or  conflict  with,  or  result  in a  breach  of,  or
constitute  (with or without notice or lapse of time or both) a default under,
or  result  in  the  creation  of  any  security  interest,  lien,  charge  or
encumbrance  upon  any  property  or  assets  of  Guarantor,  pursuant  to any
agreement,  indenture or other  instrument  to which it is a party or by which
it may be bound.

            (c)   Except  as  disclosed  to  Lender  in  writing  prior to the
execution of this Guaranty,  no action,  suit,  investigation or proceeding is
pending or known to be  threatened  against or affecting  Guarantor  that,  if
adversely determined,  would have a material adverse effect upon its financial
condition or operations.

            (d)   Guarantor  is not in  default  under  any  provision  of its
certificate  of  incorporation  or other  incorporating  documents,  bylaws or
stock  provisions  (or any  amendment to such  documents or  provisions),  any
indenture  relating to borrowed money, any agreement to which it is a party or
by which it is bound, any other indenture,  or any order,  regulation,  ruling
or  requirement  of a court or public body or  authority by which it is bound,
which  default  would  have  a  material   adverse  effect  on  the  business,
operations or financial position of Guarantor.

            (e)   No license,  consent or  approval  of, or filing  with,  any
governmental  body or other  regulatory  authority  is required for the making
and  performance  of, or any instrument or transaction  contemplated  by, this
Guaranty.   Guarantor  holds  all  certificates  and   authorizations  of  all
governmental  agencies and authorities  required by law to enable it to engage
in the business  currently  transacted  by it, except those  certificates  and
authorizations  as to  which  the  failure  to  so  hold  would  not,  in  the
aggregate, have a material adverse effect on Guarantor.

      11.   No  provision  of  this  Guaranty  shall  be  waived,  amended  or
supplemented except by a written instrument executed by Lender and Guarantor.

      12.   The  obligations  of Guarantor  under this Guaranty shall continue
in full  force and  effect  and shall  remain  in  operation  until all of the
Obligations  shall have been paid in full or otherwise  fully  satisfied,  and
continue to be effective or be reinstated,  as the case may be, if at any time
payment or other  satisfaction  of any of the Obligations is rescinded or must
otherwise  be  restored  or  returned  upon  the  bankruptcy,  insolvency,  or
reorganization of Borrower, or otherwise,  as though such payment had not been
made  or  other  satisfaction   occurred.   No  invalidity,   irregularity  or
unenforceability by reason of applicable  bankruptcy laws or any other similar
law, or any law or order of any government or government  agency purporting to
reduce, amend or otherwise affect, the Obligations,  shall impair,  affect, be
a  defense  to or claim  against  the  obligations  of  Guarantor  under  this
Guaranty.

      13.   In  addition  to  its  guarantee  of  Borrower's  payment  of  the
Obligations  and  Borrower's  performance of all  covenants,  obligations  and
agreements  contained in the Loan  Documents,  Guarantor  shall pay all actual
costs and expenses (including  reasonable attorney's fees) paid or incurred by
Lender in connection with the enforcement of this Guaranty.

      14.   Guarantor hereby agrees to execute any and all further  documents,
agreements,  and instruments,  and take all further actions, that Lender shall
reasonably  request to effectuate or further  preserve,  evidence,  perfect or
protect  the rights  purported  to be  created  in favor of Lender  under this
Guaranty.

      15.   Guarantor  hereby  assumes   responsibility   for  keeping  itself
informed of the  financial  condition of Borrower,  and any and all  endorsers
and/or other  guarantors of any  instrument or document  evidencing all or any
part of the Obligations,  and of all other circumstances bearing upon the risk
of  nonpayment  of the  Obligations,  or any  part  of the  Obligations,  that
diligent  inquiry would reveal,  and Guarantor hereby agrees that Lender shall
have no duty to advise  Guarantor  of  information  known to Lender  regarding
such condition or any such  circumstances.  If Lender, in its sole discretion,
undertakes  at any time or from time to time to provide  any such  information
to  Guarantor,  Lender  shall be  under no  obligation  (i) to  undertake  any
investigation  not a part of its regular  business  routine,  (ii) to disclose
any information that,  pursuant to accepted or reasonable  commercial  finance
practices, Lender wishes to maintain confidential,  or (iii) to make any other
or  future  disclosures  of  such  information  or any  other  information  to
Guarantor.

      16.   This Guaranty may be executed in one or more  counterpart  copies,
each of which shall be an original and all of which together shall  constitute
one and  the  same  instrument,  and it is not  necessary  that  all  parties'
signatures appear on each counterpart.

      17.   If any  term,  covenant  or  condition  of this  Guaranty,  or the
application of such term,  covenant or condition to any party or circumstance,
shall be found by a court of  competent  jurisdiction  to be,  to any  extent,
invalid or  unenforceable,  the remainder of this Guaranty and the application
of such term,  covenant,  or condition to parties or circumstances  other than
those as to which it is held invalid or  unenforceable,  shall not be affected
thereby,  and each term,  covenant or condition shall be valid and enforced to
the fullest extent  permitted by law. Upon a determination  that any such term
is  invalid,  illegal or  unenforceable,  the parties to this  Guaranty  shall
amend this  Guaranty  so as to effect the  original  intent of the  parties as
closely as possible in an acceptable manner.

      18.   THIS  GUARANTY  SHALL BE GOVERNED BY, AND  CONSTRUED IN ACCORDANCE
WITH,  THE LAWS OF THE STATE OF  MARYLAND,  WITHOUT  REGARD  TO ANY  OTHERWISE
APPLICABLE  PRINCIPLES  OF  CONFLICTS  OF LAWS.  IF ANY ACTION  ARISING OUT OF
THIS  GUARANTY  IS  COMMENCED  BY LENDER  IN THE STATE  COURTS OF THE STATE OF
MARYLAND  OR IN  THE  U.S.  DISTRICT  COURT  FOR  THE  DISTRICT  OF  MARYLAND,
GUARANTOR  HEREBY  CONSENTS TO THE  JURISDICTION OF ANY SUCH COURT IN ANY SUCH
ACTION AND TO THE  LAYING OF VENUE IN THE STATE OF  MARYLAND.  ANY  PROCESS IN
ANY SUCH ACTION  SHALL BE DULY SERVED IF MAILED BY  REGISTERED  MAIL,  POSTAGE
PREPAID,  TO  GUARANTOR  AT ITS  ADDRESS  SET  FORTH IN THE  PREAMBLE  TO THIS
GUARANTY.

      19.   GUARANTOR  HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE  TRIABLE  OF RIGHT BY A JURY,  AND (B)  WAIVES  ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT  SHALL NOW OR  HEREAFTER
EXIST.   THIS  WAIVER   OF  RIGHT  TO   TRIAL  BY  JURY IS  SEPARATELY  GIVEN,
KNOWINGLY  AND  VOLUNTARILY,  BY  GUARANTOR,  AND THIS  WAIVER IS  INTENDED TO
ENCOMPASS  INDIVIDUALLY  EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO
A  JURY  TRIAL  WOULD  OTHERWISE  ACCRUE.  LENDER  IS  HEREBY  AUTHORIZED  AND
REQUESTED TO SUBMIT THIS  GUARANTY TO ANY COURT HAVING  JURISDICTION  OVER THE
SUBJECT MATTER AND THE PARTIES HERETO,  SO AS TO SERVE AS CONCLUSIVE  EVIDENCE
OF GUARANTOR'S  WAIVER OF THE RIGHT TO JURY TRIAL.  FURTHER,  GUARANTOR HEREBY
CERTIFIES  THAT NO  REPRESENTATIVE  OR AGENT  OF  LENDER  (INCLUDING  LENDER'S
COUNSEL) HAS  REPRESENTED,  EXPRESSLY OR OTHERWISE,  TO GUARANTOR  THAT LENDER
WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.

      20.   AFTER AN EVENT  OF  DEFAULT,  GUARANTOR  AUTHORIZES  ANY  ATTORNEY
ADMITTED  TO PRACTICE  BEFORE ANY COURT OF RECORD IN THE UNITED  STATES OR THE
CLERK OF SUCH  COURT TO APPEAR ON BEHALF OF  GUARANTOR  IN ANY COURT IN ONE OR
MORE  PROCEEDINGS,  OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT
OFFICIAL,  AND TO CONFESS JUDGMENT AGAINST GUARANTOR IN FAVOR OF LENDER IN THE
FULL AMOUNT DUE ON THIS GUARANTY  (INCLUDING  PRINCIPAL,  ACCRUED INTEREST AND
ANY AND ALL CHARGES,  FEES AND COSTS) PLUS  REASONABLE  ATTORNEYS'  FEES, PLUS
COURT COSTS,  ALL WITHOUT  PRIOR NOTICE OR  OPPORTUNITY  OF BORROWER FOR PRIOR
HEARING.  GUARANTOR AGREES AND CONSENTS THAT VENUE AND  JURISDICTION  SHALL BE
PROPER IN THE  CIRCUIT  COURT OF ANY  COUNTY OF THE  STATE OF  MARYLAND  OR OF
BALTIMORE  CITY,  MARYLAND,  OR IN THE UNITED  STATES  DISTRICT  COURT FOR THE
DISTRICT OF MARYLAND.  GUARANTOR  WAIVES THE BENEFIT OF ANY AND EVERY STATUTE,
ORDINANCE,  OR RULE OF COURT  WHICH MAY BE  LAWFULLY  WAIVED  CONFERRING  UPON
GUARANTOR  ANY RIGHT OR  PRIVILEGE OF  EXEMPTION,  HOMESTEAD  RIGHTS,  STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS,  OR OTHER RELIEF FROM THE ENFORCEMENT
OR IMMEDIATE  ENFORCEMENT OF A JUDGMENT OR RELATED  PROCEEDINGS ON A JUDGMENT.
THE AUTHORITY  AND POWER TO APPEAR FOR AND ENTER  JUDGMENT  AGAINST  GUARANTOR
SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES  THEREOF,  OR BY ANY IMPERFECT
EXERCISE  THEREOF,  AND  SHALL NOT BE  EXTINGUISHED  BY ANY  JUDGMENT  ENTERED
PURSUANT  THERETO;  SUCH  AUTHORITY  AND POWER MAY BE EXERCISED ON ONE OR MORE
OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS,  AS OFTEN
AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.

H:\WP\LEGAL\CLIENTS\PHCINC\Guarcorp.wpd






     IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed as of
the date first written above.

     ATTEST:                                PHC, INC.
                                            a Massachusetts corporation

     By:  /s/  Paula C. Wurts               By:  /s/  Bruce A. Shear     (SEAL]
     Name:     Paula C. Wurts               Name:     Bruce A. Shear
     Title:    CFO                          Title:    President






H:\WP\LEGAL\CLIENTS\PHCINC\Guarcorp.wpd





<PAGE>

                  THIS GUARANTY CONTAINS PROVISIONS FOR WAIVER
                                  OF JURY TRIAL

                UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE


      THIS UNCONDITIONAL  GUARANTY OF PAYMENT AND PERFORMANCE (the "Guaranty")
is dated as of June 8,  1998 and is made by  Bruce  A.  Shear,  an  individual
("Guarantor"),  in  favor  of  HCFP  FUNDING,  INC.,  a  Delaware  corporation
("Lender").

                                    RECITALS

      WHEREAS,  pursuant to a certain Loan and Security  Agreement dated as of
February  18,  1998  (as the  agreement  may  from  time  to time be  amended,
modified  or  supplemented,  the  "Loan  Agreement"),  by  and  among  PHC  OF
MICHIGAN,  INC.,  PHC OF  UTAH,  INC.,  PHC OF  VIRGINIA,  INC.,  PHC OF RHODE
ISLAND,  INC.,  and  PIONEER  COUNSELING  OF  VIRGINIA,   INC.  (collectively,
"Borrower")  and Lender,  the parties  entered into certain  revolving  credit
financing arrangements; and

     WHEREAS,  Lender has agreed to make  available  to  Borrower  an Overline
Loan, in the maximum  aggregate  principal  amount of Two Hundred Thousand and
No/100 Dollars  ($200,000.00) (the "Overline Loan") which shall be treated for
all  purposes as a Revolving  Credit  Loan under the Loan  Agreement,  and all
principal,  interest,  fees and  other  costs  and  expenses  relating  to the
Overline  Loan  ("Overline   Obligations")  shall  be  treated  as  additional
Obligations under the Loan Agreement and the other Loan Documents; and

      WHEREAS,  Lender is willing to make the Overline  Loan but only upon the
condition,  among others,  that Guarantor shall have executed and delivered to
Lender this Guaranty.

      NOW,  THEREFORE,  in  consideration  of the  premises  and of the mutual
covenants  contained  in  this  Guaranty  and  for  other  good  and  valuable
consideration,  the receipt of which is hereby acknowledged, the parties agree
as follows:

      1     All capitalized  terms used but not defined in this Guaranty shall
have the respective meanings given them in the Loan Agreement.

      2.    To induce  Lender to execute and deliver the Overline  Loan and to
make the Overline Loan upon the terms and conditions  set forth  therein,  and
in consideration  thereof,  Guarantor hereby  unconditionally  and irrevocably
guarantees  to  Lender,  and to its  successors,  endorsees,  transferees  and
assigns,  Borrower's  prompt and  complete  payment  when due,  whether at the
stated  maturity,  by acceleration or otherwise,  of the Overline  Obligations
and Borrower's prompt and complete  performance of all of its other covenants,
obligations and agreements related to the Overline Loan.

      3.    Guarantor  hereby waives notice of the acceptance of this Guaranty
and  of  the  extending  of  credit  as  above  specified  and  the  state  of
indebtedness of Borrower at any time, and expressly  agrees to any extensions,
renewals,  accelerations  or  modifications of such credit or any of the terms
of such credit, and waives diligence,  presentment, demand of payment, protest
or notice,  whether of  non-payment,  dishonor,  protest or otherwise,  of any
document or documents and notice of any extension,  renewal,  modification  or
default  and  assent  to  the  release,   substitution  or  variation  of  any
collateral  that may at any time be held as security  for any credit  extended
to  Borrower,  all without  relieving  Guarantor of any  liability  under this
Guaranty.  The  obligations  of  Guarantor  under  this  Guaranty  shall be an
unconditional  obligation  to make prompt  payment and  performance  to Lender
irrespective of the genuineness,  validity,  regularity or  enforceability  of
any  indebtedness  or  evidence  of  indebtedness  of Borrower to Lender or of
other  circumstances  that might otherwise under the laws of any  jurisdiction
constitute a legal or equitable  discharge of a surety or a guarantor or a bar
(in the nature of a moratorium or otherwise)  to the  enforcement  of Lender's
rights  either  (i)  against  Borrower  on  all or any  part  of its  Overline
Obligations or (ii) under this Guaranty.

      4.    Notwithstanding  any payment or payments  made by Guarantor  under
this  Guaranty or any setoff or  application  of funds of Guarantor by Lender,
Guarantor  shall not be  entitled  to be  subrogated  to any of the  rights of
Lender against  Borrower or any  collateral  security or guarantee or right of
offset  held  by  Lender  for  the  payment  or  performance  of the  Overline
Obligations,  nor shall  Guarantor  seek any  reimbursement  from  Borrower in
respect of payments made by Guarantor  under this Guaranty,  until all amounts
then owing and any other  performance then due to Lender by Borrower for or on
account of the  Overline  Obligations  are paid and  satisfied  in full.  Upon
such payment and  satisfaction  in full,  Guarantor shall be subrogated to all
rights of Lender against  Borrower or any collateral  security or guarantee or
right  of  offset  held by  Lender  for the  payment  and  performance  of the
Overline Obligations.

      5.    Any  indebtedness  of Borrower now or hereafter owed to or held by
Guarantor is hereby  subordinated  to the  indebtedness of Borrower to Lender;
and such  indebtedness of Borrower to Guarantor if Lender so requests shall be
collected,  enforced  and  received by  Guarantor as trustee for Lender and be
paid over to Lender on account of the  indebtedness  of Borrower to Lender but
without  reducing or affecting in any manner the liability of Guarantor  under
the other provisions of this Guaranty.

      6.    This is  intended  to be and shall be  construed  as a  continuing
guarantee  and shall  remain in full  force and effect and shall be binding in
accordance  with and to the extent of its terms upon Guarantor and Guarantor's
heirs  and  assigns,  and  shall  inure  to the  benefit  of  Lender,  and its
successors, endorsees, transferees and assigns.

     7.     If  all or any part of  the  Overline  Obligations  of Borrower to
Lender are not  paid  when  due,  and if  collections of  Accounts  under  the
Loan   Agreement  are   not  sufficient  to  pay  the portion of  the Overline
Obligations  that  are  due, Guarantor hereby  guarantees that it will pay the
same to  Lender, upon  demand,  without set-off  or counterclaim  and  without
reduction by reason of any taxes, levies, imposts,  charges  and withholdings,
restrictions or conditions  of any  nature that  are now  or may hereafter  be
imposed,  levied or assessed by any country, political  subdivision or  taxing
authority, all of which will be for the  account of and paid by Guarantor, and
Lender need not first proceed to preserve, utilize or exhaust any other  right
or remedy against  Borrower or any other guarantor or any security that Lender
may have to obtain payment. The payment shall be made in immediately available
funds to  Lender's office  at 2  Wisconsin Circle,  Fourth Floor, Chevy Chase,
Maryland 20815, Attention:  Ethan D. Leder, President, or  at such other place
as Lender may designate in writing.

      8.    No failure to exercise and no delay in exercising,  on the part of
Lender,  any right,  power or privilege under this Guaranty shall operate as a
waiver of the  right,  power or  privilege,  nor shall any  single or  partial
exercise  of any  right,  power or  privilege  preclude  any other or  further
exercise of the right, power or privilege,  or the exercise of any other power
or right.  The rights and remedies  provided in this  Guaranty are  cumulative
and not exclusive of any rights or remedies provided by law.

      9.    Notice  or  demand  to the  parties  to  this  Guaranty  shall  be
sufficiently  given if in  writing  and  personally  delivered,  or  mailed by
registered or certified  first class mail,  postage  prepaid,  return  receipt
requested,  or  sent by  commercial  courier  against  receipt,  to the  party
intended  and at the address or  addresses  specified  in the preamble to this
Guaranty.  Any party may  designate  a change of  address by notice in writing
to the other  parties,  the notice to be effective ten (10) days after mailing
or delivery as provided in this Section 9.

      10.   Guarantor hereby represents, warrants, and covenants to Lender:

            (a)   Guarantor has  the full right, power and authority to enter
into this Guaranty.

            (b)   The  execution,  delivery and  performance  of this Guaranty
will  not  violate  any  provision  of law  or  any  order  of  any  court  or
governmental  agency or conflict with, or result in a breach of, or constitute
(with or without notice or lapse of time or both) a default  under,  or result
in the creation of any security  interest,  lien,  charge or encumbrance  upon
any property or assets of Guarantor,  pursuant to any agreement,  indenture or
other instrument to which it is a party or by which it may be bound.

            (c)   Except  as  disclosed  to  Lender  in  writing  prior to the
execution of this Guaranty,  no action,  suit,  investigation or proceeding is
pending or known to be  threatened  against or affecting  Guarantor  that,  if
adversely determined,  would have a material adverse effect upon its financial
condition.

            (d)   Guarantor  is not in  default  under  any  provision  of any
indenture  relating to borrowed money, any agreement to which it is a party or
by which it is bound, any other indenture,  or any order,  regulation,  ruling
or  requirement  of a court or public body or  authority by which it is bound,
which default would have a material  adverse effect on the financial  position
of Guarantor.

            (e)   No license,  consent or  approval  of, or filing  with,  any
governmental  body or other  regulatory  authority  is required for the making
and  performance  of, or any instrument or transaction  contemplated  by, this
Guaranty.   Guarantor  holds  all  certificates  and   authorizations  of  all
governmental  agencies and authorities  required by law to enable it to engage
in the business  currently  transacted  by it, except those  certificates  and
authorizations  as to  which  the  failure  to  so  hold  would  not,  in  the
aggregate, have a material adverse effect on Guarantor.

      11.   No  provision  of  this  Guaranty  shall  be  waived,  amended  or
supplemented except by a written instrument executed by Lender.

      12.   The  obligations  of Guarantor  under this Guaranty shall continue
in full  force and  effect  and shall  remain  in  operation  until all of the
Overline  Obligations  shall  have  been  paid  in  full  or  otherwise  fully
satisfied, and continue to be effective or be reinstated,  as the case may be,
if at  any  time  payment  or  other  satisfaction  of  any  of  the  Overline
Obligations  is rescinded or must  otherwise be restored or returned  upon the
bankruptcy,  insolvency,  or  reorganization  of Borrower,  or  otherwise,  as
though  such  payment  had not been made or other  satisfaction  occurred.  No
invalidity,   irregularity  or   unenforceability   by  reason  of  applicable
bankruptcy  laws  or any  other  similar  law,  or any  law  or  order  of any
government  or  government  agency  purporting  to reduce,  amend or otherwise
affect,  the Overline  Obligations,  shall impair,  affect, be a defense to or
claim against the obligations of Guarantor under this Guaranty.

      13.   In  addition  to  its  guarantee  of  Borrower's  payment  of  the
Overline Obligations and Borrower's performance of all covenants,  obligations
and  agreements  contained  in the  Loan  Documents  related  to the  Overline
Obligations,  Guarantor  shall pay all actual  costs and  expenses  (including
reasonable  attorney's fees) paid or incurred by Lender in connection with the
enforcement of this Guaranty.

      14.   Guarantor hereby agrees to execute any and all further  documents,
agreements,  and instruments,  and take all further actions, that Lender shall
reasonably  request to effectuate or further  preserve,  evidence,  perfect or
protect  the rights  purported  to be  created  in favor of Lender  under this
Guaranty.

      15.   Guarantor  hereby  assumes   responsibility   for  keeping  itself
informed of the  financial  condition of Borrower,  and any and all  endorsers
and/or other  guarantors of any  instrument or document  evidencing all or any
part of the Overline Obligations,  and of all other circumstances bearing upon
the  risk  of  nonpayment  of the  Overline  Obligations,  or any  part of the
Overline  Obligations,  that  diligent  inquiry  would  reveal,  and Guarantor
hereby  agrees  that  Lender  shall  have  no  duty  to  advise  Guarantor  of
information   known  to  Lender   regarding   such   condition   or  any  such
circumstances.  If Lender,  in its sole discretion,  undertakes at any time or
from time to time to provide any such  information to Guarantor,  Lender shall
be under no obligation  (i) to undertake any  investigation  not a part of its
regular business routine,  (ii) to disclose any information that,  pursuant to
accepted  or  reasonable  commercial  finance  practices,   Lender  wishes  to
maintain  confidential,  or (iii) to make any other or future  disclosures  of
such information or any other information to Guarantor.

      16.   This Guaranty may be executed in one or more  counterpart  copies,
each of which shall be an original and all of which together shall  constitute
one and  the  same  instrument,  and it is not  necessary  that  all  parties'
signatures appear on each counterpart.

      17.   If any  term,  covenant  or  condition  of this  Guaranty,  or the
application of such term,  covenant or condition to any party or circumstance,
shall be found by a court of  competent  jurisdiction  to be,  to any  extent,
invalid or  unenforceable,  the remainder of this Guaranty and the application
of such term,  covenant,  or condition to parties or circumstances  other than
those as to which it is held invalid or  unenforceable,  shall not be affected
thereby,  and each term,  covenant or condition shall be valid and enforced to
the fullest  extent  permitted by law. Upon  determination  that any such term
is  invalid,  illegal or  unenforceable,  the parties to this  Guaranty  shall
amend this  Guaranty  so as to effect the  original  intent of the  parties as
closely as possible in an acceptable manner.

      18.   THIS  GUARANTY  SHALL BE GOVERNED BY, AND  CONSTRUED IN ACCORDANCE
WITH,  THE LAWS OF THE STATE OF  MARYLAND,  WITHOUT  REGARD  TO ANY  OTHERWISE
APPLICABLE  PRINCIPLES  OF  CONFLICTS  OF LAWS.  IF ANY ACTION  ARISING OUT OF
THIS  GUARANTY  IS  COMMENCED  BY LENDER  IN THE STATE  COURTS OF THE STATE OF
MARYLAND  OR IN  THE  U.S.  DISTRICT  COURT  FOR  THE  DISTRICT  OF  MARYLAND,
GUARANTOR  HEREBY  CONSENTS TO THE  JURISDICTION OF ANY SUCH COURT IN ANY SUCH
ACTION AND TO THE  LAYING OF VENUE IN THE STATE OF  MARYLAND.  ANY  PROCESS IN
ANY SUCH ACTION  SHALL BE DULY SERVED IF MAILED BY  REGISTERED  MAIL,  POSTAGE
PREPAID,  TO  GUARANTOR  AT ITS  ADDRESS  SET  FORTH IN THE  PREAMBLE  TO THIS
GUARANTY.

      19.   GUARANTOR  HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE  TRIABLE  OF RIGHT BY A JURY,  AND (B)  WAIVES  ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT  SHALL NOW OR  HEREAFTER
EXIST.  THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY  GIVEN,  KNOWINGLY
AND  VOLUNTARILY,  BY  GUARANTOR,  AND THIS WAIVER IS  INTENDED  TO  ENCOMPASS
INDIVIDUALLY  EACH  INSTANCE  AND EACH  ISSUE AS TO WHICH  THE RIGHT TO A JURY
TRIAL WOULD  OTHERWISE  ACCRUE.  LENDER IS HEREBY  AUTHORIZED AND REQUESTED TO
SUBMIT THIS GUARANTY TO ANY COURT HAVING  JURISDICTION OVER THE SUBJECT MATTER
AND THE PARTIES HERETO,  SO AS TO SERVE AS CONCLUSIVE  EVIDENCE OF GUARANTOR'S
WAIVER OF THE RIGHT TO JURY TRIAL.  FURTHER,  GUARANTOR  HEREBY CERTIFIES THAT
NO  REPRESENTATIVE  OR  AGENT  OF  LENDER  (INCLUDING  LENDER'S  COUNSEL)  HAS
REPRESENTED,  EXPRESSLY OR OTHERWISE,  TO GUARANTOR  THAT LENDER WILL NOT SEEK
TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.

      20.   GUARANTOR  AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY
COURT OF RECORD IN THE  UNITED  STATES OR THE CLERK OF SUCH COURT TO APPEAR ON
BEHALF OF GUARANTOR IN ANY COURT IN ONE OR MORE  PROCEEDINGS,  OR  BEFORE  ANY
CLERK  THEREOF  OF  PROTHONOTARY  OR  OTHER  COURT  OFFICIAL,  AND TO  CONFESS
JUDGMENT  AGAINST  GUARANTOR IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS
GUARANTY (INCLUDING PRINCIPAL,  ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES
AND COSTS) PLUS  ATTORNEYS'  FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT
DUE,  PLUS COURT COSTS,  ALL WITHOUT PRIOR NOTICE OR  OPPORTUNITY  OF BORROWER
FOR PRIOR HEARING.  GUARANTOR  AGREES AND CONSENTS THAT VENUE AND JURISDICTION
SHALL BE PROPER IN THE  CIRCUIT  COURT OF ANY COUNTY OF THE STATE OF  MARYLAND
OR OF BALTIMORE  CITY,  MARYLAND,  OR IN THE UNITED STATES  DISTRICT COURT FOR
THE  DISTRICT  OF  MARYLAND.  GUARANTOR  WAIVES  THE  BENEFIT OF ANY AND EVERY
STATUTE,  ORDINANCE,  OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING
UPON GUARANTOR ANY RIGHT OR PRIVILEGE OF EXEMPTION,  HOMESTEAD RIGHTS, STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS,  OR OTHER RELIEF FROM THE ENFORCEMENT
OR IMMEDIATE  ENFORCEMENT OF A JUDGMENT OR RELATED  PROCEEDINGS ON A JUDGMENT.
THE AUTHORITY  AND POWER TO APPEAR FOR AND ENTER  JUDGMENT  AGAINST  GUARANTOR
SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES  THEREOF,  OR BY ANY IMPERFECT
EXERCISE  THEREOF,  AND  SHALL NOT BE  EXTINGUISHED  BY ANY  JUDGMENT  ENTERED
PURSUANT  THERETO;  SUCH  AUTHORITY  AND POWER MAY BE EXERCISED ON ONE OR MORE
OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS,  AS OFTEN
AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.





H:\WP\LEGAL\CLIENTS\PHCINC\Guarind 1over.wpd




     IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed as of
the date first written above.


WITNESS:                                              GUARANTOR:



___________________________               ________________________________
                                            Bruce A. Shear





<PAGE>
Exhibit 99.1

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

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

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

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

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

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

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

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

      There can be no assurance that the Company's  existing  facilities  will
continue to meet, or that proposed  facilities will meet, the requirements for
reimbursement by third party or government payors.

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

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

      If  a  growing  number  of  managed  care  organizations  and  insurance
companies  adopt policies  which limit the length of stay for substance  abuse
treatment, the Company's business would be materially adversely affected.

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

      There  can be no  assurance  that  the  Company  will be  successful  in
identifying  appropriate  acquisition  opportunities,  or if it does, that the
Company will be successful in acquiring such  facilities or that such acquired
facilities  will be  profitable.  The failure of the company to implement  its
acquisition  strategy could have a materially  adverse effect an the Company's
financial  performance.  Moreover,  the inherent risks of expansion could also
have a material adverse effect on the Company's business.

      Additionally,  the company's acquisition program will be directed by the
President and Chief Executive  officer of the Company and the Company does not
intend to seek stockholder  approval for any such acquisitions unless required
by   applicable   law  or   regulations.   Accordingly,   investors   will  be
substantially  dependent  upon the business  judgment of  management in making
such acquisitions.  Furthermore,  the company's acquisition strategy is highly
dependent on access to capital, of which there can be no assurance.

      The  Company  and the  healthcare  industry  in general  are  subject to
extensive  federal,  state and local  regulation with respect to licensure and
conduct of  operations.  There can be no  assurance  that the Company  will be
able to obtain new  licenses  to affect its  acquisition  strategy or maintain
its existing licenses and reimbursement program participation approvals.

      It is not  possible  to  accurately  predict  the  content  or impact of
future  legislation  and  regulations  affecting the healthcare  industry.  In
addition,  both the Medicare  and  Medicaid  programs are subject to statutory
and  regulatory  changes and there can be no assurances  that  payments  under
those  programs  to  the  Company  will,  in the  future,  remain  at a  level
comparable to the present  level or be sufficient to cover the cost  allocable
to such patients.

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

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

      The  Company  has  entered  into  relationships  with  large  employers,
healthcare  institutions,  labor  unions  and other  key  clients  to  provide
treatment  for  chemical  dependency  and  substance  abuse  as well as  other
services  and the loss of any of these key clients  would  require the Company
to expend  considerable  effort to replace patient  referrals and would result
in revenue losses to the Company and attendant loss in income.

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

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

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

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

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

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


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