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

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 for the fiscal year ended June 30, 2007

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

Commission file number: 1-33323
                                    PHC, INC.
             (Exact Name of Registrant as Specified in Its Charter)

MASSACHUSETTS                                              04-2601571
(State or other Jurisdiction of            (I.R.S. Employer Identification No.)
Incorporation or Organization)

200 LAKE STREET, SUITE 102, PEABODY, MA                   01960
 (Address of Principal Executive Offices)               (Zip Code)

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

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

                 CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE

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

                                      NONE
                                (Title of Class)

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

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

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

Indicate by check mark if disclosure  of  delinquent  filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

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

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

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

As of December 31, 2006 the aggregate market value of the shares of common stock
of the registrant  held by  non-affiliates  of the registrant was  approximately
$57.2 million.

As of September 24, 2007,  19,272,978 shares of the registrant's  Class A Common
Stock and 775,760 shares of the issuer's Class B Common Stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  Proxy  Statement  for the 2007 Annual  Meeting of
Stockholders  are  incorporated  herein by  reference in Part III of this Annual
Report on Form 10-K to the extent stated herein.


                                       1
<PAGE>
Table of Contents

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

                                       2
<PAGE>
PART I

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


Item 1.    DESCRIPTION OF BUSINESS

INTRODUCTION

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

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

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

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


                                       3
<PAGE>
PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

     Industry Background

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

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

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

     Company Operations

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

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

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


                                       4
<PAGE>
     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,  The Drug Free Workplace Act of 1988 requires employers
who are Federal  contractors or Federal grant  recipients to establish drug free
awareness   programs  to  inform  employees  about  available  drug  counseling,
rehabilitation  and employee  assistance  programs and the  consequences of drug
abuse  violations.  In response to the Drug Free Workplace Act, many  companies,
including many major national  corporations and transportation  companies,  have
adopted  policies  that  provide  for  treatment  options as an  alternative  to
termination of employment.

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

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

     Although  Highland Ridge does provide  services to individuals  from all of
the States through contracts with the Railroads and other major employers,  most
patients at this  facility  are from Utah and  surrounding  states.  Individuals
typically  access Highland  Ridge's  services  through  professional  referrals,
family members, employers, employee assistance programs or contracts between the
Company and health maintenance organizations located in Utah.

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

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

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

     MOUNT  REGIS - Mount  Regis  is a  25-bed,  freestanding  alcohol  and drug
treatment center located in Salem, Virginia,  near Roanoke. The Company acquired
the center in 1987.  It is the oldest of its kind in the Roanoke  Valley.  Mount
Regis is accredited by The Joint Commission  and licensed by the  Department of
Mental  Health,   Mental   Retardation  and  Substance  Abuse  Services  of  the
Commonwealth  of  Virginia.  In  addition,  Mount  Regis  operates  Changes,  an
outpatient clinic, at its Salem, Virginia location.  The Changes clinic provides
structured intensive




                                       5
<PAGE>
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.

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

General Psychiatric Facilities

Introduction

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

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

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

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

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

     Harbor  Oaks  Hospital  also  operates a 20-bed  residential  unit  serving
adolescents  with substance abuse problems and co-existing  mental disorders who



                                       6
<PAGE>
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  regularly
thereafter,  to determine if additional  treatment is required.  In June of 2007
the Company  received State approval to expand the number of beds in the program
to 26. This expansion is expected to be completed in the first quarter of Fiscal
2008.

     In the fourth  quarter of fiscal  2005,  Harbor  Oaks  began  operating  an
outpatient  site  near New  Baltimore,  Michigan.  Its  close  proximity  to the
hospital allows for a continuum of care for patients after discharge.

     DETROIT  BEHAVIORAL  INSTITUTE - Detroit  Behavioral  Institute  operates a
50-bed residential  facility,  located in downtown Detroit,  serving adolescents
with a substance  abuse problem and a co-existing  mental disorder who have been
adjudicated  to have  committed  criminal  acts and who have  been  referred  or
required to undergo  psychiatric  treatment by a court or family service agency.
The facility  includes two Units, a thirty bed male unit that opened in November
2004 and a twenty bed female unit that opened in October  2005.  The patients in
the  program  range  from 12 to 18 years of age,  with a minimum  IQ of 70.  The
program  provides  individual,  group and family therapy sessions for medication
orientation,   anger  management,   impulse  control,  grief  and  loss,  family
interactions,  coping skills, stress management,  substance abuse, discharge and
aftercare  planning  (home  visits  and  community  reintegration),   education,
recreation therapy and sexual/physical abuse counseling as required.  Typically,
a  patient  is  admitted  to the unit for an  initial  period  of 30 days to six
months.  A case  review  is done for any  patient  still in the  program  at six
months,  and each  subsequent  six-month  period  thereafter,  to  determine  if
additional  treatment  is  required.  During the fiscal year ended June 2007 the
Company was  approved by the State to operate a school for the  education of its
residents.  This allows the company to integrate the  residents'  education with
their treatment and provide the best education possible without transporting the
individuals  to another site.  The Company  expects the approval to continue for
the foreseeable future.

     HARMONY HEALTHCARE - Harmony Healthcare, which consists of five psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for  railroads,  health  care  companies  and  several  large  gaming  companies
including Boyd Gaming  Corporation,  the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day and seven days a
week.   Harmony  also  provides   outpatient   psychiatric  care  and  inpatient
psychiatric case management  through capitated rate behavioral health carve-outs
with  Behavioral  Health  Options and PacifiCare  Insurance.  The agreement with
Behavioral Health Options is a significant  contract which began in January 2007
and caused a major  expansion of Harmony from two locations to five locations to
better serve the contract population.

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

Call Center Operations

     WELLPLACE,  INC. - In the spring of 1994,  the  Company  began to operate a
crisis hotline service under contract with a major  transportation  client.  The
hotline,  Wellplace,  formerly known as Pioneer Development Support Services, or
PDS2,  shown as contract  support  services  on the  accompanying  statement  of
operations,  is a national,  24-hour  telephone  service,  which supplements the
services provided by the client's  Employee  Assistance  Programs.  The services
provided  include   information,   crisis   intervention,   critical   incidents
coordination, employee counselor support, client monitoring, case management and
health promotion.  The hotline is staffed by counselors who refer callers to the
appropriate  professional resources for assistance with personal problems. Three
major transportation companies subscribed to these services as of June 30, 2007.
This  operation is physically  located in Highland Ridge  Hospital,  but a staff
dedicated to Wellplace provides the services from a separate  designated area of


                                       7
<PAGE>
the Hospital. Wellplace also contracts with Wayne County Michigan to operate its
call center. This call center is located in downtown Detroit,  Michigan.  In the
second  fiscal   quarter  of  2005,   this  contract  was  expanded  to  provide
credentialing services to Detroit Wayne County Community Mental Health Carve-out
providers and Agency staff.  During fiscal 2006,  Wellplace  signed an agreement
with a major government contractor to operate a smoking cessation quit line with
internet  access.  Wellplace has been  providing  services  under this agreement
since November 2005 and was recently notified that the contract would be renewed
for an  additional  year.  Wellplace's  primary  focus  is now  on  growing  its
operations  to take  advantage of current  opportunities  and  capitalize on the
economies  of  scale in  providing  similar  services  to  other  companies  and
government units.

                                       8
<PAGE>
Research Operations

     PIVOTAL RESEARCH CENTERS,  INC. - Pivotal Research Centers works with major
pharmaceutical  companies  to  assist  in the study of the  effects  of  certain
investigational  medication  in the  treatment of specific  illnesses.  In April
2004, the Company  acquired 100% of the membership  interest in Pivotal Research
Centers,  LLC,  thereby  expanding the Company's  research  operations.  Pivotal
performs all phases of clinical  research for Phase I-IV drugs under development
through three dedicated research sites,  including a psychiatric  research site.
Pivotal  recently  expanded its Phase I capabilities  to a new 15-bed  facility.
Pivotal  currently has  approximately 27 enrolling  studies and an additional 47
ongoing studies with approximately  75-80 percent of Pivotal's research activity
in central nervous system (CNS)  research.  With a current client base including
Amgen,  AstraZeneca,  Bristol Myers Squibb, Cephalon,  Forest,  GlaxoSmithKline,
Hisamitsu,  Lilly,  Merck,  Mylan,  Novartis,  Organon,  Sepracor and Wyeth, the
Company currently has protocols in Alzheimer's disease,  ADHD, Diabetes Type II,
Fibromyalgia, Generalized Anxiety Disorder, Insomnia, Major Depressive Disorder,
Obesity,  Parkinson's  Disease,  Restless leg  syndrome and Diabetic  Peripheral
Neuropathy. Pivotal currently operates at three sites, two in Arizona and one in
Utah.

Internet Operations

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


                                       9
<PAGE>
Operating Statistics

     The following table reflects selected financial and statistical information
for all services.
<TABLE>
<S>                      <C>             <C>             <C>      <C>          <C>
                                                   Year Ended June 30,
                                                   ___________________
                                                      (unaudited)
                              2007          2006          2005         2004           2003
                              ____          ____          ____         ____           ____
   Inpatient
   Net patient service
   revenues
                            $21,508,417   $18,775,198   $18,469,578   $14,845,163   $14,430,069
   Net revenues per
   patient day (1)          $       395   $       382   $       436   $       414   $       417
   Average occupancy rate         83.0%         77.7%         78.8%         76.7%         77.7%
    (2)
   Total number of
     licensed beds at the
     end of the period              180           180           160           130           122
   Source of Revenues:
        Private (3)               50.2%        54.30%        61.79%        61.62%        62.20%
        Government (4)            49.8%        45.70%        38.21%        38.38%        37.80%
   Partial Hospitalization
   and  Outpatient
   Net Revenues:
        Individual          $ 6,518,115   $ 6,734,627   $ 5,557,298   $ 5,647,752   $ 4,865,392
        Contract            $ 7,995,997   $ 2,351,876   $ 2,060,212   $ 1,925,440   $ 1,947,716
   Sources of revenues:
        Private                   98.6%         98.0%         97.2%         97.7%         98.0%
        Government                 1.4%          2.0%          2.8%          2.3%          2.0%
   Other  Services:
   Wellplace(5)             $ 4,540,634   $ 4,351,576   $ 3,466,832    $2,984,477   $ 1,649,374
      Pharmaceutical

            Studies (6)     $ 4,564,314   $ 5,799,815   $ 4,509,338   $ 1,246,013   $   940,772
</TABLE>
(1)  Net revenues per patient day equals net patient service revenues divided by
     total patient days.
(2)  Average  occupancy  rates were  obtained  by dividing  the total  number of
     patient days in each period by the number of beds available in such period.

                                       10
<PAGE>

(3)  Private pay percentage is the percentage of total patient  revenue  derived
     from all payors other than Medicare and Medicaid.
(4)  Government  pay  percentage  is the  percentage  of total  patient  revenue
     derived from the Medicare and Medicaid and other county programs.
(5)  Wellplace, provides clinical support, referrals management and professional
     services for a number of the Company's  national contracts and operates the
     Wayne County Michigan call center.
(6)  Pharmaceutical  Studies  includes  research studies of the Company prior to
     the  acquisition  of 100% of the  membership  interest in Pivotal  Research
     Centers,  LLC on April 30,  2004 and  ongoing  operations  of all  research
     sites.
Business Strategy

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

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

 Marketing and Customers

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

     The Company  employs six  individuals  dedicated to marketing the Company's
facilities,  two of whom are in the research  division.  Each facility  performs
marketing  activities  in its local  region.  The Senior Vice  President  of the
Company  coordinates  the Company's  national  marketing  efforts.  In addition,
employees at certain facilities perform local marketing  activities  independent
of the  Senior  Vice  President.  The  Company,  with the  support  of its owned
integrated outpatient systems and management services,  continues to pursue more
at-risk contracts and outpatient, managed health care fee-for-service contracts.
"At  risk"  contracts  require  that  the  Company  provide  all the  clinically
necessary  behavioral  health  services  for a group of people for a set fee per
person per month.  The Company  currently has two at risk  contracts  with large
insurance  carriers,  which  require  the Company to provide  behavioral  health
services to a large number of its insured for a fixed fee. This at risk contract
represents less than 15% of the Company's  total gross revenues.  In addition to
providing excellent services and treatment  outcomes,  the Company will continue
to  negotiate  pricing  policies to attract  patients  for  long-term  intensive
treatment  which meet length of stay and clinical  requirements  established  by
insurers,   managed  health  care   organizations  and  the  Company's  internal
professional standards.

     The Company's integrated systems of comprehensive  outpatient mental health
programs  complement  the  Company's  inpatient  facilities.   These  outpatient
programs are strategically located in Nevada, Virginia, Michigan, and Utah. They
make it possible  for the  Company to offer  wholly  integrated,  comprehensive,
mental health services for  corporations  and managed care  organizations  on an
at-risk or exclusive fee-for-service basis.  Additionally,  the Company operates
Wellplace  located in the Highland Ridge facility in Salt Lake City, Utah and in
Detroit, Michigan.  Wellplace provides clinical support,  referrals,  management
and professional  services for a number of the Company's national contracts.  It
gives the Company the capacity to provide a complete  range of fully  integrated
mental health services.

     The Company  provides  services to employees  of a variety of  corporations
including:  Boyd Gaming Corporation,  CSX Corporation,  Cigna Behavioral Health,
MGM Mirage, Union Pacific Railroad,  Union Pacific Railroad Hospital Association
and others.

     In addition to its direct patient care services,  the Company maintains its
web site, Wellplace.com,  which provides articles and information of interest to
the general public as well as the behavioral health professional.  The Company's

                                       11
<PAGE>
internet  company  also  provides  the  added  benefit  of web  availability  of
information for various Employee  Assistance Program contracts held and serviced
by those subsidiaries providing direct treatment services.

Competition

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

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

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

Revenue Sources and Contracts

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

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

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

     The Company's policy is to collect estimated co-payments and deductibles at
the time of admission.  Payments are made by way of cash,  check or credit card.
If  the  patient  does  not  have  sufficient  resources  to pay  the  estimated
co-payment in advance,  the  Company's  policy is to allow payment to be made in
three installments,  one third due upon admission,  one third due upon discharge
and the  balance  due 30 days  after  discharge.  At times  the  patient  is not


                                       12
<PAGE>
physically  or mentally  stable  enough to  comprehend or agree to any financial
arrangement.  In this case the Company will make  arrangements  with the patient
once his or her condition is stabilized.  At times,  this situation will require
the  Company to extend  payment  arrangements  beyond the three  payment  method
previously  outlined.  Whenever  extended  payment  arrangements  are made,  the
patient,  or the individual who is financially  responsible for the patient,  is
required to sign a promissory  note to the Company,  which includes  interest on
the balance due.

     The Company's days sales outstanding  ("DSO") are  significantly  different
for each type of service and each facility based on the payors for each service.
Overall,  the DSO for the combined  operations of the Company was 56, 65, and 90
days for the fiscal years ended June 30, 2007, 2006, and 2005 respectively.  The
change in pharmaceutical studies active in the year caused the day's outstanding
to increase  significantly  in that segment of our  business.  This increase was
offset by the large  decrease  in the DSO for the  treatment  services  division
which resulted from the large capitated contract which started in January and it
paid within 45 days and the  increased  revenue  from  contract  services  which
payment is typically received prior to month end or within thirty days. Contract
Services DSO's fluctuate  dramatically by the delay in payment of a few days for
any of our large contracts.  There was such a delay in payments for the Michigan
call center at the end of fiscal 2005,  artificially inflating the DSO's for the
period.

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

             Fiscal          Treatment       Pharmaceutical           Contract
            Year End         Services           Services              Services
            ________         ________        ______________           ________

           06/30/2007           66                155                    41
           06/30/2006           91                 93                    51
           06/30/2005           89                114                    62


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

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

Quality Assurance and Utilization Review

     The Company has established comprehensive quality assurance programs at all
of its  facilities.  These  programs are  designed to ensure that each  facility
maintains  standards that meet or exceed  requirements  imposed upon the Company
with the objective of providing  high-quality  specialized treatment services to
its  patients.  To this end,  The Joint  Commission  surveys and  accredits  the
Company's inpatient  facilities,  except Detroit Behavioral  Institute,  and the
Company's outpatient facilities comply with the standards of National Commission
on Quality  Assurance  ("NCQA")  although the facilities are not NCQA certified.
The  Company's  outpatient  facilities in Michigan are certified by the American
Osteopathic  Association  ("AOA"),  which is a nationally  accepted  accrediting
body,  recognized by payors as the measure of quality in  outpatient  treatment.
The  Company's  professional  staff,   including  physicians,   social  workers,
psychologists,  nurses,  dietitians,  therapists and  counselors,  must meet the
minimum  requirements  of licensure  related to their  specific  discipline,  in
addition  to  each   facility's  own  internal   quality   assurance   criteria.
Accreditation  for DBI was sought through the Council on Accreditation  ("COA").
The process was initiated in 2006 and final  accreditation is pending with COA's
Accreditation  Commission.  A decision is expected by the first calendar quarter
of 2008. In the interim, the facility adheres to the COA standards and

                                       13
<PAGE>
guidelines format adopted by the facility for operational  purposes and approved
by the Executive  Committee.  The Company participates in the federally mandated
National  Practitioners  Data Bank,  which monitors  professional  accreditation
nationally.  In each facility,  continuing quality improvement (CQI) activity is
reviewed  quarterly  by the  Company's  corporate  compliance  unit and  quality
assurance activities are approved by the executive committee.

     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 affect major
reforms  of the  health  care  system  if  adopted.  Among the  proposals  under
consideration   are  reforms  to  increase  the  availability  of  group  health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance  coverage to their employees.
Some States have already  instituted  laws that mandate  employers  offer health
insurance  plans  to  their  employees.   The  Company  cannot  predict  whether
additional  legislative  proposals will be adopted and, if adopted, what effect,
if any, such proposals would have on the Company's business.

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

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

                                       14
<PAGE>
Health Planning Requirements

     Most of the  states in which the  Company  operates  have  health  planning
statutes which require that prior to the addition or  construction  of new beds,
the addition of new services,  the acquisition of certain  medical  equipment or
certain  capital  expenditures  in  excess of  defined  levels,  a state  health
planning  agency must  determine  that a need exists for such new or  additional
beds,   new   services,   equipment   or  capital   expenditures.   These  state
determinations  of need or certificate of need ("DoN")  programs are designed to
enable  states to  participate  in  certain  federal  and state  health  related
programs and to avoid duplication of health services. DoN's typically are issued
for a specified maximum expenditure, must be implemented within a specified time
frame and  often  include  elaborate  compliance  procedures  for  amendment  or
modification, if needed.

Licensure and Certification

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

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

Medicare Reimbursement

     Currently,  the  only  facility  of  the  Company  that  receives  Medicare
reimbursement  is Harbor Oaks. For the fiscal year ended June 30, 2007, 14.9% of
revenues  for Harbor Oaks were  derived  from  Medicare  programs.  Revenue from
Harbor  Oaks  accounted  for  26.0% of the  Company's  total  net  patient  care
revenues.

     Effective for fiscal years beginning after January 1, 2005, the prospective
payment system ("PPS") was brought into effect for all Psychiatric services paid
through the Medicare program.  For the fiscal year ended June 30, 2007, Medicare
reimbursements  rates were  based 50% on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports  filed by the Company with  Medicare
and 50% on the new prospective  payment rates. The Company will continue to file
cost reports to Medicare to determine  the new TEFRA portion of the rate for the
following  year.  These cost reports are  routinely  audited on an annual basis.
Activity and cost report  expense  differences  are reviewed on an interim basis
and adjustments are made to the net expected  collectable  revenue  accordingly.
The Company  believes  that  adequate  provision  has been made in the financial
statements  for any  adjustments  that might result from the outcome of Medicare
audits.  Approximately  24%,  23%,  and 21% of the  Company's  total  revenue is
derived from  Medicare  and  Medicaid  payors for the years ended June 30, 2007,
2006,  and 2005  respectively.  Differences  between  the amounts  provided  and
subsequent settlements are recorded in operations in the year of the settlement.
To date, settlement adjustments have not been material.

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

                                       15
<PAGE>
Medicaid Reimbursement

     Currently,  the only  facilities of the Company that receive  reimbursement
under  any  state  Medicaid  program  are  Harbor  Oaks and  Detroit  Behavioral
Institute.  A portion of  Medicaid  costs is paid by states  under the  Medicaid
program  and the  federal  matching  payments  are not made  unless the  state's
portion is made.  Accordingly,  the timely  receipt of  Medicaid  payments  by a
facility may be affected by the financial  condition of the relevant state.  For
the period  ended June 30,  2007,  26.5% of total net  patient  revenues  of the
Company were derived from Medicaid programs.

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

Fraud and Abuse Laws

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

     The  Company  has an active  compliance  program in place with a  corporate
compliance  officer and  compliance  liaisons at each  facility  and a toll free
compliance  hotline.  Compliance  in-services  and  trainings are conducted on a
regular basis.  Information on our compliance program and our hot line number is
available  to our  employees on our intranet and to the public on our website at
www.phc-inc.com.

Employees

     As of August 31,  2007,  the  Company had 580  employees  of which six were
dedicated to marketing, 191 (46 part time) to finance and administration and 377
(119 part time and 49 contingent) to patient care.

     The Company believes that it has been successful in attracting  skilled and
experienced personnel.  Competition for such employees is intense,  however, and
there can be no  assurance  that the Company  will be able to attract and retain
necessary  qualified  employees in the future.  On July 31, 2003,  the Company's
largest facility,  Harbor Oaks Hospital,  with  approximately 125 union eligible
nursing and administrative employees,  voted for union (UAW) representation.  In
December  2004,  the  Company  and the  Union  reached a  collective  bargaining
agreement, which was ratified by the employees on December 8, 2004 and signed by
the Union and the Company in January 2005.  This  agreement was renewed and will
expire in December  2010.  As of June 30, 2007,  approximately  88% of the total
number of employees  were covered by the  collective  bargaining  agreement.  In
addition, in January,  2007 the Company's largest out-patient facility,  Harmony
Healthcare,  with  approximately  43 union eligible  employees,  voted for union
(Teamsters)  representation.  In April, 2007 the Company and the Union reached a
collective bargaining Agreement, which was signed by the Union on April 26, 2007
and the Company on April 30, 2007 to be  effective  January 1, 2007 and expiring
on January 1, 2010. As of June 30, 2007,  approximately  36% of the total number
of employees were covered by the collective bargaining agreement.

     The limited  number of healthcare  professionals  in the areas in which the
Company operates may create staffing  shortages.  The Company's success depends,
in large part, on its ability to attract and retain highly qualified  personnel,
particularly  skilled  health care  personnel,  which are in short  supply.  The
Company faces competition for such personnel from governmental agencies,  health


                                       16
<PAGE>
care  providers and other  companies and is constantly  increasing  its employee
benefit  programs,  and related costs,  to maintain  required  levels of skilled
professionals.  As a result of staffing shortages, the Company uses professional
placement  services  to supply  it with a pool of  professionals  from  which to
choose. These individuals generally are higher skilled, seasoned individuals who
require higher salaries,  richer benefit plans,  and in some instances,  require
relocation. The Company has also entered into contracts with agencies to provide
short-term interim staffing in addition to placement services.  These additional
costs impact the Company's profitability.

Insurance

     Each  of  the  Company's   subsidiaries   maintains  separate  professional
liability insurance policies.  Harbor Oaks, Highland Ridge Hospital, Mount Regis
Center,  North Point,  Detroit  Behavioral  Institute,  Harmony  Healthcare  and
Pivotal,  Inc. each have coverage of $1,000,000  per claim and $3,000,000 in the
aggregate. In addition, the Company has maintained the insurance coverage, which
was  in  place  for  Pivotal  Research  Centers,  LLC by its  former  owners  of
$3,000,000  per claim and  $3,000,000  in the  aggregate.  In  addition  to this
coverage,  Wellplace and Highland Ridge maintain a $1,000,000  umbrella  policy,
Harbor Oaks and Detroit Behavioral Institute  collectively maintain a $5,000,000
umbrella policy,  Harmony and Mount Regis Center maintain a $2,000,000  umbrella
policy.  In  addition,  each  of  these  entities  maintains  general  liability
insurance coverage in similar amounts.

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

Acquisition and Expansion

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

Item 1A. RISK FACTORS

OPERATING RISKS

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

     As our accounts  receivable age and become  uncollectible  our cash flow is
negatively  impacted.  Our accounts  receivable  from patient  accounts  (net of
allowance  for bad  debts)  were  $6,559,387  at June  30,  2007  compared  with
$6,995,475 at June 30, 2006.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  Because  the  behavioral  health  industry  is  typically a difficult
collection environment, we have focused on better accounts receivable management
through,  increased  staff,  standardization  of some  procedures for collecting
receivables and a more aggressive  collection policy in order to keep the change
in receivables consistent with the change in revenue. We have also established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected. The following chart represents our Accounts Receivable,  Allowance for
Doubtful  Accounts at June 30, 2007,  2006 and 2005,  respectively  and Bad Debt
Expense for the fiscal years ended June 30, 2007, 2006 and 2005:

                                              Allowance for           Bad Debt
                      Accounts Receivable     doubtful accounts       Expense

   June 30, 2007       $ 10,323,972             $3,764,585          $ 1,933,499
   June 30, 2006         10,096,061               3,100,586           1,912,516
   June 30, 2005         8,287,365                1,956,984           1,272,037

                                       17
<PAGE>
NEGATIVE  CASH FLOW COULD ARISE AS A RESULT OF SLOW  GOVERNMENT  PAYMENTS  WHICH
COULD REQUIRE THE COMPANY TO BORROW  ADDITIONAL  FUNDS AT UNFAVORABLE  RATES AND
AFFECT OUR NET INCOME, WORKING CAPITAL AND LIQUIDITY

     The  concentration of accounts  receivable due from government payors could
create a severe cash flow  problem  should  these  agencies  fail to make timely
payment.   We  had  substantial   receivables  from  Medicaid  and  Medicare  of
approximately $1,811,600 at June 30, 2007 and $1,786,000 at June 30, 2006, which
would create a cash flow problem  should  these  agencies  defer or fail to make
reimbursement  payments as due,  which would require us to borrow at unfavorable
rates or pay additional  interest as overline fees on current debt  instruments.
This would result in lower net income for the same  services  provided and lower
earnings per share.

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

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

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

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

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

     In  December   2004,   the  Company's   largest   facility  voted  for  UAW
representation.  Approximately  75% of the staff of the  facility are members of
the Union and could vote to strike  when the  contract  comes up for  renewal in
December 2010. In April 2007, the Company's largest outpatient  operations voted
for Teamsters representation. Approximately 40% of the staff of the facility are
members of the Union and could  vote to strike  when the  contract  comes up for
renewal in January 2010. A strike vote on the part of either of these operations
would  negatively  impact  profitability  by  requiring  the Company to transfer
patients to competing  facilities  or providers or pay high short term  staffing
rates.  This  could  also  negatively  impact the  Company's  reputation  in the
community.

                                       18
<PAGE>
RELIANCE ON KEY CLIENTS,  THE LOSS OF ANY OF WHICH WOULD REDUCE OUR NET REVENUES
AND OUR NET INCOME

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

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

     Control of the healthcare  industry  exercised by federal,  state and local
regulatory agencies can increase costs,  establish maximum  reimbursement levels
and limit  expansion.  Our Company and the health care  industry  are subject to
rapid  regulatory  change with respect to licensure and conduct of operations at
existing  facilities,  construction of new  facilities,  acquisition of existing
facilities, the addition of new services,  compliance with physical plant safety
and land use  requirements,  implementation  of  certain  capital  expenditures,
reimbursement  for  services  rendered  and  periodic  government   inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in  the  healthcare  industry  including  our  Company.  As a  result  of  these
restrictions we cannot be certain that payments under  government  programs will
remain at a level  comparable to the present level or be sufficient to cover the
costs allocable to such patients. In addition, many states,  including the State
of  Michigan  where the  majority  of our  Medicaid  Revenue is  generated,  are
considering reductions in state Medicaid budgets, which may be reflected through
more  limited  access,   lower  rates,  and  higher  State  imposed  utilization
assessment fees.

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

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

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

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

                                       19
<PAGE>
MANAGEMENT RISKS

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

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

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

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

        In April 2004, the Company acquired Pivotal Research Centers, LLC, which
is engaged in clinical drug testing. Dr. Louis Kirby, the founder and medical
director of Pivotal, has key relationships with the pharmaceutical companies
that provide contracts for the research business. Dr. Kirby signed an employment
and non-compete agreement at the time of the acquisition, which was renewed and
is scheduled to expire on December 31, 2007.

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

MARKET RISKS

THE COMPANY EXPECTS ITS STOCK PRICE TO BE VOLATILE

     The market price of the  Company's  common  stock has been  volatile in the
past. The shares have sold at prices  varying  between a low of $1.75 and a high
of $3.78 from July 2005  through  June 2007.  Trading  prices  may  continue  to
fluctuate  in  response  to a  number  of  events  and  factors,  including  the
following:

o    quarterly variations in operating results;

o    new products, services and strategic developments by us or our competitors;

o    developments in our relationships with our key clients;

o    regulatory developments; and

o    changes in our revenues, expense levels or profitability.


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

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

                                       20
<PAGE>
Item 2.           DESCRIPTION OF PROPERTY

Executive Offices

     The Company's executive offices are located in Peabody, Massachusetts.  The
Company's lease agreement in Peabody covers  approximately 4,800 square feet for
a 60-month  term,  which expires  September 16, 2009. The current annual payment
under the lease is $92,000.  The Company  believes  that this  facility  will be
adequate to satisfy its needs for the foreseeable future.

Highland Ridge Hospital

     The Highland Ridge premises consist of approximately  24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental Health and located in Midvale,  Utah.  The lease is for a six-year
term expiring  December 31, 2009,  which provides for monthly rental payments of
approximately  $22,000.  Changes  in  rental  payments  each  year are  based on
increases or decreases in the Consumer  Price Index.  The Company  believes that
these premises are adequate for its current and  anticipated  needs and does not
anticipate any difficulty in renewing or securing  alternate space on expiration
of the lease.

Mount Regis Center

     The Company owns the Mount Regis facility,  which consists of a three-story
building  located on an  approximately  two-acre  site in Salem,  Virginia.  The
building consists of over 14,000 square feet and is subject to a mortgage in the
approximate  amount of $270,000 as of June 30,  2007.  The  facility is used for
both inpatient and outpatient services. The Company believes that these premises
are adequate for its current and anticipated needs.

Psychiatric Facilities

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

Harbor Oaks Hospital

     The Company  owns the building in which  Harbor Oaks  operates,  which is a
single  story brick and wood frame  structure  comprising  approximately  32,000
square feet  situated  on an  approximately  three acre site.  The Company has a
$289,000  mortgage on this  property as of June 30, 2007.  The Company  believes
that these premises are adequate for its current and anticipated needs.

Item 3.  LEGAL PROCEEDINGS.

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

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


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, 2007.

                                       21
<PAGE>
PART II

Item 5. MARKET FOR REGISTRANT'S  COMMON EQUITY RELATED  STOCKHOLDER  MATTERS AND
     ISSUER PURCHASES OF EQUITY SECURITIES

     Our Class A Common  Stock has been listed on the  American  Stock  Exchange
since February 2007 under the symbol "PHC".  Prior to that date it was quoted on
the  Over-the-Counter  Bulletin Board under the symbol  "PIHC-BB." The following
table sets forth the high and low sales  price of the  Company's  Class A Common
Stock, as reported.
                                                               HIGH       LOW
                                                               ____      ____
2006
        First Quarter (July 1, 2005 - September 30, 2005)      $2.95     $2.26
        Second Quarter (October 1, 2005 - December 31, 2005)   $2.90     $1.90
        Third Quarter (January 1, 2006 - March 31, 2006)       $2.40     $1.75
        Fourth Quarter (April 1, 2006 - June 30, 2006)         $2.39     $1.95
2007
        First Quarter (July 1, 2006 - September 30, 2006)      $2.39     $2.00
        Second Quarter (October 1, 2006 - December 31, 2006)   $3.18     $2.00
        Third Quarter (January 1, 2007 - March 31, 2007)       $3.78     $2.76
        Fourth Quarter (April 1, 2007 - June 30, 2007)         $3.32     $2.77

     On August 15, 2007, there were 683 holders of record of the Company's Class
A Common Stock and 300 holders of record of the Company's  Class B Common Stock.
The Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Act during fiscal 2007.

DIVIDEND POLICY

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

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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

MARKET RISKS

      The market price of the Company's common stock has been volatile in the
past. The shares have sold at prices varying between a low of $1.75 and a high
     of $3.78 from July 2005 through June 2007. Trading prices may continue to
fluctuate in response to changes in the Company's results of operations from
quarter.

     Our right to issue  convertible  preferred  stock may adversely  affect the
rights of the common  stock.  Our Board of Directors  has the right to establish
the preferences for and issue up to 1,000,000  shares of preferred stock without
further  stockholder  action.  The terms of any series of preferred stock, which
may include  priority  claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.
During the twelve month  period  ended June 30, 2007,  the Company did not issue
any preferred stock;  however, it did issue 961,539 shares of unregistered Class
A common  stock in a private  placement  with the  requirement  to register  the
common stock which was done in February 2007. (See the Company's  report on form
8-K filed with the Securities  and Exchange  Commission on December 20, 2007 for
additional details regarding this transaction).


                                       22
<PAGE>
Item 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated  financial data of our
Company. The selected  consolidated  financial data as of June 30, 2007 and 2006
and for each of the three years in the period ended June 30, 2007 should be read
with the  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations"  and have been derived from our  consolidated  financial
statements  which are included  elsewhere in this annual report on Form 10-K and
were  audited by Eisner LLP,  with respect to the period ended June 30, 2007 and
2006 and BDO Seidman, LLP, with respect to June 30, 2005. Each of these firms is
an independent  registered  public  accounting  firm. The selected  consolidated
financial  data as of and for the years  ended June 30,  2004 and 2003 have been
derived from our consolidated  financial  statements not included herein,  which
were audited by BDO Seidman, LLP, independent registered public accounting firm.

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

                                    PHC, Inc.
                             Selected Financial Data
                     As of and for the Years Ended June 30,
<TABLE>
<S>                                    <C>           <C>           <C>            <C>          <C>

                                        2007           2006             2005          2004         2003
                                        ____           ____             ____          ____         ____
                                        (in thousands, except share and per share data)
    Statements of Operations Data:
Revenues                              $    45,127    $   38,013    $   34,063    $   26,649    $    23,833
Cost and Expenses:
   Patient care expenses                   21,965        16,512        14,582        12,422         11,676
   Contract expenses                        3,103         2,676         2,198         2,392          1,399
   Administrative expenses                 15,116        13,727        12,424        10,333          8,204
   Provision for doubtful accounts          1,934         1,913         1,272         1,356          1,108
   Interest expense                          649            607           655           532            542
   Other (income) expenses including
     interest income, net                   (469)         (158)          (150)         (140)          (129)
                                       __________      ________   ___________    ___________   ___________
Total expenses                               42,298      35,278        30,981        26,895         22,801
                                        __________     ________   ___________    ___________   ___________
Income (loss) before income taxes            2,829        2,735         3,082          (246)         1,032

Provision for (benefit from) income
  taxes                                      1,147       (1,310)         (74)            11             54
                                       __________      ________    __________     __________   ____________

Net income (loss)                            1,682        4,045         3,156          (257)           978
                                                --           --            --            --             --
                                        __________     ________    __________     ___________   ___________
Dividends net income (loss
  applicable) to
  common shareholders                  $    1,682    $    4,045    $    3,156    $     (257)   $       978
                                       ==========    ==========    ==========    ===========   ===========

Basic income (loss) per common share   $     0.09    $     0.22    $     0.18    $    (0.02)   $      0.07
                                       ==========    ==========   ===========    ===========   ===========

Basic weighted average number of
   shares outstanding                  19,287,665    18,213,901    17,574,678    14,731,395     13,944,047
                                      ===========    ============  ===========   ===========   ===========

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

Diluted weighted average number of
   shares outstanding                  19,704,697    19,105,193    18,364,076     14,731,395    14,564,078
                                       ==========   ===========    ===========   ===========    ===========


                                       23
<PAGE>

                                        2007           2006             2005          2004         2003
                                        ____           ____             ____          ____         ____

Balance Sheet Data:
Cash and cash equivalents              $    3,395    $    1,820   $       918    $       595   $       495
Working capital                             7,546         7,208         4,106            241           736

Long-term debt and obligations under
   capital leases                           2,398         2,059         2,712          2,285         3,002
Total stockholders' equity                 18,250        13,455         9,102          5,367         1,935
Total assets                               27,290        21,715        17,896         13,312         9,412

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

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

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

     The following is a discussion  and analysis of the financial  condition and
results of operations of the Company for the years ended June 30, 2007, 2006 and
2005. It should be read in conjunction  with the operating  statistics  (Part I,
Item 1) and  selected  financial  data  (Part II,  Item 6) and the  accompanying
consolidated  financial  statements  and related notes thereto  included in this
Annual Report on Form 10-K.

Overview

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

     The healthcare  industry is subject to extensive  federal,  state and local
regulation governing,  among other things, licensure and certification,  conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. In addition, there are on-going debates and initiatives regarding
the  restructuring of the health care system in its entirety.  The extent of any
regulatory  changes and their impact on the Company's  business is unknown.  The
current  administration  has put forth  proposals  to  mandate  equality  in the
benefits  available  to those  individuals  suffering  from mental  illness (The
Parity Act). If passed,  this  legislation  may improve  access to the Company's
programs. Managed care has had a profound impact on the Company's operations, in
the  form of  shorter  lengths  of stay,  extensive  certification  of  benefits
requirements and, in some cases, reduced payment for services.

Critical Accounting Policies

     The  preparation of our financial  statements in accordance with accounting
principles  generally  accepted  in  the  United  States  of  America,  requires
management to make estimates and judgments  that affect the reported  amounts of
assets, liabilities,  revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and  assumptions,  including but not limited to
those related to revenue recognition,  accounts receivable reserves,  income tax

                                       25
<PAGE>
valuation  allowances,  and the  impairment  of  goodwill  and other  intangible
assets.  We base our  estimates  on  historical  experience  and  various  other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

Revenue recognition and accounts receivable:

     Patient care revenues and accounts  receivable  are recorded at established
billing rates or at the amount  realizable  under  agreements  with  third-party
payors,  including  Medicaid and  Medicare.  Revenues  under  third-party  payor
agreements are subject to examination  and contractual  adjustment,  and amounts
realizable  may change due to periodic  changes in the  regulatory  environment.
Provisions  for  estimated  third party payor  settlements  are  provided in the
period the  related  services  are  rendered.  Differences  between  the amounts
provided and  subsequent  settlements  are recorded in operations in the year of
settlement.  Amounts due as a result of cost report  settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables". The
provision for contractual  allowances is deducted  directly from revenue and the
net  revenue  amount is  recorded  as accounts  receivable.  The  allowance  for
doubtful accounts does not include the contractual allowances.

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

     All revenues reported by the Company are shown net of estimated contractual
adjustment and charity care provided.  When payment is made, if the  contractual
adjustment  is  found  to  have  been  understated  or  overstated,  appropriate
adjustments  are made in the period the payment is received in  accordance  with
the AICPA  "Audit and  Accounting  Guide for  Health  Care  Organizations."  Net
contractual  adjustments  recorded in fiscal  2007 for  revenue  booked in prior
years  resulted  in an increase in net  revenue of  approximately  $26,430.  Net
contractual  adjustments  recorded in fiscal  2006 for  revenue  booked in prior
years resulted in an increase in net revenue of approximately $343,700.

     During  the  fiscal  year  ended June 30,  2007,  a  Medicare  cost  report
settlement  of $255,600 was received and in the fiscal year ended June 30, 2006,
a Medicare cost report  settlement of  approximately  $158,100 was received.  No
cost  report  settlements  were  received  during the fiscal year ended June 30,
2005.  For the fiscal years ended June 30, 2007,  2006 and 2005,  no third party
cost report settlements were expected or recorded.

     Our accounts  receivable systems are capable of providing an aging based on
responsible  party or payor.  This  information  is critical in  estimating  our
required  allowance  for bad debts.  Below is revenue by payor and the  accounts
receivable  aging  information  as of June 30, 2007,  June 30, 2006 and June 30,
2005 for our treatment services segment.


                       Net Revenue by Payor (in thousands)
                           For the Twelve Months Ended
                       ____________________________________
                  June 30, 2007         June 30, 2006         June 30, 2005
                  _____________         _____________         ______________
                 Amount    Percent     Amount    Percent     Amount    Percent
                 ______    _______     ______    _______     ______    _______
Private Pay      $ 1,632     5%       $ 1,207       5%      $ 1,212       5%
Commercial        23,477    65%        17,572      63%       17,608      67%
Medicare*          1,379     4%           946       3%          999       4%
Medicaid           9,535    26%         8,137      29%        6,268      24%
                 _______              _______               _______

    Net Revenue  $ 36,023             $ 27,862              $ 26,087
                 ========             ========              ========

       * includes Medicare cost report settlement revenue as noted above

                                       26
<PAGE>
<TABLE>
<S>         <C>     <C>      <C>      <C>      <C>  <C>     <c>   <c>      <c>
    Accounts Receivable Aging (Net of allowance for bad debts- in thousands)

     Fiscal Year Ended June 30, 2007
                        Over    Over    Over    Over   Over   Over   Over
Payor         Current    30      60      90     120    150    270    360     Total
_____        ________   ____    ____    ____    ____   ____   ____   ____    _____

Private Pay   $  102   $ 119    $151    $108    $121   $ 77   $178   $ 36   $  892
Commercial     1,608     974     616     197     105    100    160     96    3,856
Medicare         134      69       4      15      24     28     --     --      274
Medicaid       1,030     143      68      42      24    230     --     --    1,537
               _____   ______   ____    ____    ____   ____    ____  ____   ______
   Total      $2,874  $1,305    $839    $362    $274   $435   $338   $132   $6,559
              ======   ======   ====    ====    ====   =====  ====   ====   ======

     Fiscal Year Ended June 30, 2006
                         Over    Over    Over    Over   Over   Over   Over
Payor         Current    30      60      90      120    150    270    360     Total
_____        ________   ____    ____    ____    ____   ____   ____   ____    _____

Private Pay   $  113   $ 119    $106    $113    $ 84   $593   $ 33   $ 23   $1,184
Commercial     1,499     595     364     284     229    836    126     92    4,025
Medicare         133      38       6      17      18     73     --     --      285
Medicaid         971     152      69      32      34    243     --     --    1,501
               _____   ______   ____    ____    ____   ____    ____  ____  ______
   Total      $2,716   $ 904    $545    $446    $365 $1,745   $159   $115   $6,995
              ======   =====    ====    ====    ==== ======   ====   ====   ======

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

Private Pay   $  247   $  139   $ 98    $ 64    $ 75   $154   $127   $ 32    $ 936
Commercial     1,708      645    389     239     216    379    208     26    3,810
Medicare         121       16      7      --      --      1     --     --      145
Medicaid         556      277     94      74      96    342     --     --    1,439
               _____   ______   ____    ____    ____   ____    ____  ____    _____
   Total      $2,632   $1,077  $588     $377    $387   $876    $335  $ 58   $6,330
              ======   ======  ====     ====    ====   ====    ====  ====   ======
</TABLE>
     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study  criteria and  billable  units of service are  provided.  Where a
contract  requires  completion  of the  study  by the  patient,  no  revenue  is
recognized  until the patient  completes  the study  program.  All  revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.

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

Allowance for doubtful accounts:

     The  provision  for bad debts is  calculated  based on a percentage of each
aged  accounts  receivable  category  beginning at 0-5% on current  accounts and
increasing  incrementally  for  each  additional  30 days  the  account  remains
outstanding  until the account is over 360 days  outstanding,  at which time the
provision  is 80-100% of the  outstanding  balance.  These  percentages  vary by
facility based on each facility's  experience in and expectations for collecting
older  receivables.  The Company  compares this required  reserve  amount to the
current  "Allowance  for doubtful  accounts" to determine  the required bad debt
expense for the period.  This method of determining the required  "Allowance for
doubtful  accounts"  has  historically  resulted in an  allowance  for  doubtful
accounts of 20% or greater of the total outstanding receivables balance.

                                       27
<PAGE>
Income Taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax basis of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against  deferred tax assets  unless it is more likely than not that such assets
will be realized  in future  periods.  During the fourth  quarter of fiscal year
ended June 30, 2006,  the Company  recognized  100% of its federal  deferred tax
benefit  based on past  profitability  and  future  projections.  The  total tax
benefit  recorded  was  $1,638,713.  During  fiscal 2007 the company  recorded a
provision  for tax expense of $1,147,000 a blended state and federal tax rate of
approximately 40.5%.

Valuation of Goodwill and Other Intangible Assets

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

Investment in Seven Hills

     Included in other assets of June 30, 2007 in the  Company's  investment  in
Seven  Hills Psych  Center,  LLC of  $400,000.  This LLC holds the assets of the
Seven Hills  Hospital  currently  being built and expected to be complete in the
early  part of  calendar  year 2008.  Aslo  included  in the  escrow  deposit of
$1,362,000  the  Company  has made  toward  the  leasehold  improvement  for the
anticipated  leasing  arrangement  upon  completion of the  construction  of the
building.

Results of Operations

     During  the  fiscal  year ended June 30,  2007 the  Company  experienced  a
significant  decrease in the revenues in the research  division due to delays in
study starts.  This change in the research  division is not evident in the table
below because of large increases in the Company's core business. The decrease in
the research  division  results are outlined below and detailed in Note I to the
financial statements  accompanying this report under the heading "Pharmaceutical
Study Services".

     The following table illustrates our consolidated  results of operations for
the years ended June 30, 2007, 2006 and 2005 (in thousands):
<TABLE>
<S>                             <C>        <C>       <C>       <C>        <C>      <C>

                                         2007                   2006                2005
                                        _____                   ____                ____
Statements of Operations Data:                            (in thousands)
                                    Amount     %        Amount       %       Amount       %

Revenue                            $45,127    100.0%    $38,013    100.0%    $34,063    100.0%
                                   _______    ______    _______    ______    _______    ______

Costs and expenses:
   Patient care expenses             21,965    48.7%     16,512     43.5%     14,582     42.8%
   Contract expenses                  3,103     6.9%      2,676      7.0%      2,198      6.5%
   Administrative expenses           15,117    33.5%     13,727     36.1%     12,424     36.5%
   Provision for bad debts            1,933     4.3%      1,913      5.0%      1,272      3.7%
   Interest expense                     649     1.4%        607      1.6%        655      1.9%
   Other (income) expenses, net        (469)   -1.0%      (158)     -0.4%      (150)     -0.4%
                                   _______    ______    _______    ______    _______    ______
Total expenses                       42,298    93.7%     35,278     92.8%     30,981     91.0%
                                   _______    ______    _______    ______    _______    ______

Income before income taxes            2,829     6.5%      2,735      7.2%      3,082      9.0%
Benefit from (provision for) income
     taxes                           (1,147)   -2.7%      1,310      3.4%         74      0.2%
                                   _______    ______    _______    ______    _______    ______

Net income                          $ 1,682     3.4%    $ 4,045     10.6%    $ 3,156      9.3%
                                   =======    ======    =======    ======    =======    ======
</TABLE>


                                       28
<PAGE>
Year ended June 30, 2007 as compared to year ended June 30, 2006

     The Company's income from its operations  decreased 5.48% to $3,009,904 for
the fiscal year ended June 30, 2007 from  $3,184,426  the fiscal year ended June
30, 2006.  Net income,  decreased  58.4% to $1,682,283 for the fiscal year ended
June 30,  2007 from  $4,045,482  for the fiscal year ended June 30,  2006.  This
decrease is the result of $1,147,000  in provision  for tax expense  recorded in
fiscal  2007 as  compared to  $1,310,103  in net income tax benefit  recorded in
fiscal 2006.  Income before taxes  increased  3.43% to $2,829,283 for the fiscal
year  ended June 30,  2007 from  $2,735,379  for the fiscal  year ended June 30,
2006.  This increase was primarily due to the two new contracts added during the
year that are projected to increase gross revenues by $10,000,000 annually, once
fully  implemented,  and increased patient census . This increase is significant
since it includes  start-up costs of these contracts of  approximately  $100,000
and  uncapitalizable  costs of the Meditech software  implementation in progress
and  the  construction  in  progress  of  the  Seven  Hills  Hospital.  We  also
experienced  a down-turn  in the  pharmaceutical  revenue as it is  dependent on
unpredictable  study  starts and largely  volatile as shown in "Note I - Segment
Information" in the accompanying  financial statements for the period ended June
30, 2007, 2006 and 2005.

     Total revenues  increased 18.72% to $45,127,477 for the year ended June 30,
2007 from $38,013,092 for the year ended June 30, 2006.

     Total net patient  care  revenue from all  facilities  increased  29.29% to
$36,022,529  for the year ended June 30, 2007 as compared to $27,861,701 for the
year ended June 30, 2006.  Patient days increased over 5,291 days for the fiscal
year ending June 30, 2007 over the fiscal year ended June 30,  2006.  In October
2005 the Company opened 20 additional residential beds, increasing our available
beds  from  160  to  180.   These   additional   available  beds  accounted  for
approximately 74% of the increase in patient days for the fiscal year ended June
30, 2007. The contracted rate for these  residential  beds is lower than that of
our other  facilities,  which  negatively  impacts  our  revenue per patient day
without  positive  changes in our census and payor mix at our other  facilities.
Net inpatient care revenue from inpatient  psychiatric services increased 14.56%
to $21,508,417 for the year ended June 30, 2007 from $18,775,198 the fiscal year
ended June 30,  2006.  This  increase  is due to a change in payor mix to payors
with  more  favorable  approved  rates  and from  the  increase  in  residential
treatment  beds.  Net  partial   hospitalization  and  outpatient  care  revenue
increased  59.7% to $14,514,112 for the year ended June 30, 2007 from $9,086,503
for the year ended June 30,  2006.  This  increase is  primarily  due to the new
capitated contract and high usage of these step-down programs by managed care as
a  treatment  alternative  to  inpatient  care.   Pharmaceutical  study  revenue
decreased  21.3% to $4,564,314 for the year ended June 30, 2007 from  $5,799,815
for the year ended June 30, 2006.  This  decrease is largely due to the delay in
the start of some  significant  studies that were expected to start in the first
quarter of the year but did not start  until the fourth  quarter of fiscal  2007
and a large study that ran in the last half of fiscal 2006.  Revenues  increased
in  our  contract  support  services  division,  Wellplace.  Wellplace  revenues
increased  4.3% to $4,540,634  for the year ended June 30, 2007 from  $4,351,576
for the year ended June 30, 2006.  This  increase in revenue is primarily due to
increases  in  contract  rates.  All  revenues   reported  in  the  accompanying
consolidated  statements  of operations  are shown net of estimated  contractual
adjustments and charity care provided.  When payment is made, if the contractual
adjustment  is  found  to  have  been  understated  or  overstated,  appropriate
adjustments  are made in the period the payment is received in  accordance  with
the AICPA Audit and Accounting Guide for Health Care Organizations.

     Patient care expenses,  excluding  research,  increased by  $5,512,891,  or
38.6%, to $19,782,431 for the year ended June 30, 2007 from  $14,269,540 for the
year ended June 30, 2006 due to the increase in available beds  contributing  to
the increase in patient  census at our  inpatient  facilities  and the increased
utilization  of our  out-patient  services as a result of the new capitated rate
contract.  Inpatient census increased by 5,291 patient days, 10.7%, for the year
ended June 30, 2007 compared to the year ended June 30, 2006.  Contract expense,
which includes the cost of outside service providers for our capitated contracts
increased  650.6% to  $1,785,697  for the year ended June 30, 2007 from $237,899
for the  year  ended  June  30,  2006  due to the new  capitated  rate  contract
effective January 1, 2007. This contract has an expected annual gross revenue of
approximately  $8,000,000 and calls for the Company to provide behavioral health
care for  approximately  325,000  members.  Payroll and payroll related expenses
increased 28.3% to $15,096,827 for the year ended June 30, 2007 from $11,764,978
for the year ended June 30, 2006,  food and dietary  expense  increased  1.0% to
$776,796 for the year ended June 30, 2007 from  $769,367 for the year ended June
30, 2006,  hospital  supplies  expense  increased  30.3% to $93,204 for the year
ended  June 30,  2007 from  $71,539  for the year ended  June 30,  2006,  agency
nursing  expense  increased  138.1% to $395,319 for the year ended June 30, 2007
from  $166,047  for the year  ended  June 30,  2006 and  other  patient  related

                                       29
<PAGE>
expenses  increased  to 7.5% to  $101,277  for the year ended June 30, 2007 from
$94,218 for the year ended June 30, 2006.  All of these  increases were a result
of  increased  patient  census  and  increased  utilization  of our out  patient
services.  We continue to closely monitor the ordering of all hospital supplies,
food and  pharmaceutical  supplies but these expenses all relate directly to the
number of days of  inpatient  services we provide  and are  expected to increase
with higher patient census and out patient visits.  (see "Operating  Statistics"
Part I, Item 1).

     Patient  care  expenses  for  the  research  division   decreased  2.7%  to
$2,182,357  for the year ended June 30, 2007 from  $2,242,900 for the year ended
June 30,  2006.  This  decrease  is due to the  delay in the  start of  studies.
Payroll and related direct care expenses  decreased  17.0% to $1,463,009 for the
year  ended June 30,  2007 from  $1,763,308  for the year  ended June 30,  2006.
Patient supplies expense  decreased 36.0% to $24,830 for the year ended June 30,
2007 from  $38,770  for the year  ended June 30,  2006.  Other  patient  related
expenses  increased  53.0% to  $694,518  for the year ended  June 30,  2007 from
$453,822 for the year ended June 30, 2006. This increase is primarily due to the
increased  advertising  to gear up for the new  studies  started  in the  fourth
quarter of the 2007 fiscal year.

     Cost of contract support  services related to Wellplace  increased 15.9% to
$3,102,551  for the year ended June 30, 2007 from  $2,676,340 for the year ended
June 30, 2006.  This  increase is due to the  increased  staffing to support the
smoking  cessation  contract  which  started in November  2005 and  increases in
related  employee  expenses  and  the  increased  cost  related  to the  smoking
cessation software  maintenance.  Payroll and payroll related expenses increased
23.6% to  $1,576,061  for the year ended June 30, 2007 from  $1,274,937  for the
year ended June 30, 2006.

     Provision for doubtful accounts increased 1.1% to $1,933,499 for the fiscal
year  ended June 30,  2007 from  $1,912,516  for the fiscal  year ended June 30,
2006. This increase is a result of increases in accounts receivable in line with
increases in revenue.  The policy of the Company is to provide an allowance  for
doubtful  accounts based on the age of receivables  resulting in higher bad debt
expense as receivables  age. The goal of the Company,  given this policy,  is to
keep any increase in the provision for doubtful  accounts in line with increases
in revenue.

     The  environment  the  Company   operates  in  today  makes  collection  of
receivables,  particularly  older  receivables,  more difficult than in previous
years.   Accordingly,   the  Company  has  increased  staff,  standardized  some
procedures  for  collecting   receivables   and  instituted  a  more  aggressive
collection  policy,  which has for the most part resulted in an overall decrease
in the age of its accounts  receivable.  The Company's  gross  receivables  from
direct patient care has increased  2.3% to  $10,323,972  for the year ended June
30, 2007 from $10,096,061 for the year ended June 30, 2006, the Company believes
its  reserve  of  approximately  36%  is  sufficient  based  on  the  age of the
receivables.  We continue to reserve for bad debt based on managed  care denials
and past  difficulty in  collections.  The growth of managed care has negatively
impacted  reimbursement for behavioral  health services with higher  contractual
adjustments and a higher rate of denials requiring and higher reserves.

     Total  administrative  expenses,  excluding  research,  increased  13.1% to
$12,677,933 for the year ended June 30, 2007 from $11,210,296 for the year ended
June 30, 2006.  Administrative  salaries  increased  20.6% to $4,232,863 for the
year  ended June 30,  2007 from  $3,508,980  for the year  ended June 30,  2006.
Payroll tax expense increased 16.9% to $354,229 for the year ended June 30, 2007
from  $302,932 for the year ended June 30,  2006.  Employee  benefits  increased
16.1% to $676,464  for the year ended June 30, 2007 from  $582,785  for the year
ended June 30, 2006. Other employee benefits increased 93.1% to $239,555 for the
year ended June 30, 2007 from $124,035 for the year ended June 30, 2006.  All of
these  increases  in payroll and  employee  related  expenses are a result of an
increase  of  approximately  200% in the  staff  at our Las  Vegas  out  patient
location to service the new capitated rate contract and greater  competition for
experienced  health  care  administrative  staff  resulted  in  these  increased
salaries.  General  insurance  expense  increased 17.9% to $760,338 for the year
ended  June 30,  2007 from  $644,882  for the year  ended  June 30,  2006 due to
general increases in property and liability  insurance and the addition of three
additional out patient sites, two in Las Vegas and one in Arizona.  Rent expense
increased  28.9% to $1,440,342 for the year ended June 30, 2007 from  $1,117,098
for the year ended June 30, 2006.  This increase is due to the three  additional
clinics  opened  this year and normal CPI  increases  included  in our  property
leases. Transfer fee expense increased 255.6% to $91,932 for the year ended June
30,  2007  from  $25,856  for the year  ended  June 30,  2006 as a result of the
initial American Stock Exchange listing fee.

     Total  administrative  expenses for the research division decreased 3.1% to
$2,438,802  for the year ended June 30, 2007 from  $2,517,074 for the year ended
June 30, 2006.  Administrative payroll and taxes was the most significant of the


                                       30
<PAGE>

change as it  decreased  5.7% to $974,695  for the year ended June 30, 2007 from
$1,033,160  for the year ended June 30, 2006 due to the closing of the  Michigan
office and the decrease in study activity.  Advertising  expense decreased 25.4%
to $216,953  for the year ended June 30, 2007 from  $290,673  for the year ended
June  30,  2006.  This  decrease  was  also a result  of the  decrease  in study
activity.

     Interest  expense  increased  7.0% to $649,166  for the year ended June 30,
2007 from $606,893 for the year ended June 30, 2006. This increase is due to the
amortization  of $55,728 and the write off of $13,932  debt  discount on the old
debt to interest and  amortization  of $4,868 on the new debt discount as a part
of the debt refinancing in June 2007.

     The Company's  provision for income taxes of $1,147,000  for the year ended
June 30, 2007  represents a blended state and federal tax rate of  approximately
40.5%  compared to the prior years tax  provision  excluding  the tax benefit of
$328,610 for the year ended June 30,  2006,  which was  significantly  below the
Federal  statutory rate of 34% primarily due to the utilization of net operating
loss carry-forwards. In the fiscal year ended June 30, 2006, the Company reduced
the  valuation  allowance  due to its  evaluation  of the future  likelihood  of
realization   based  on  past   profitability   and   future   expectations   of
profitability,  and  recognized  100% of its  available  federal  tax benefit of
$1,638,713 and eliminated the valuation allowance against the deferred tax asset
for federal purposes.

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

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

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

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

     Patient care expenses,  excluding  research,  increased by  $1,364,254,  or
10.6%, to $14,269,540 for the year ended June 30, 2006 from  $12,905,286 for the
year ended June 30, 2005 due to the  increase in  available  beds and  resulting
increase  in  patient  census  at our  inpatient  facilities.  Inpatient  census
increased by 6,861 patient days,  16%, for the year ended June 30, 2006 compared
to the year ended June 30, 2005. Direct patient care payroll and payroll related
expenses  increased  9.7% to  $11,764,978  for the year ended June 30, 2006 from


                                       31
<PAGE>
$10,727,317 for the year ended June 30, 2005, food and dietary expense increased
21.4% to $769,367  for the year ended June 30, 2006 from  $633,869  for the year
ended June 30, 2005,  hospital  supplies expense  increased 37.9% to $71,539 for
the year  ended June 30,  2006 from  $51,863  for the year ended June 30,  2005,
laboratory  fees  increased  36.4% to $219,063  for the year ended June 30, 2006
from $160,603 for the year ended June 30, 2005, agency nursing expense increased
38.8% to $166,047  for the year ended June 30, 2006 from  $119,672  for the year
ended June 30, 2005 and other patient related expenses  increased to $94,218 for
the year ended June 30, 2006 from $45,481 for the year ended June 30, 2005.  All
of these increases were a result of increased patient census and increased needs
of the patients  based on the severity of their  illness and the start up of the
additional  20 bed  residential  unit in October  2005.  We  continue to closely
monitor the ordering of all hospital supplies,  food and pharmaceutical supplies
but these  expenses  all  relate  directly  to the  number of days of  inpatient
services we provide and are  expected to increase  with higher  patient  census.
(see "Operating Statistics" Part I, Item 1).

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

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

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

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

     Total  administrative  expenses,  excluding  research,  increased  16.0% to
$11,210,296  for the year ended June 30, 2006 from $9,667,138 for the year ended
June 30, 2005. Legal expense decreased 39.0% to $156,054 for the year ended June
30, 2006 from  $255,794 for the year ended June 30, 2005,  due to the booking of
some  residual  legal fees last year for the North Point  litigation  settled in
fiscal 2004 and legal fees associated with finalizing the collective  bargaining
agreement for Harbor Oaks Hospital.  Administrative  salaries increased 14.9% to
$3,508,980  for the year ended June 30, 2006 from  $3,054,294 for the year ended
June 30, 2005. Greater  competition for experienced  health care  administrative
staff resulted in these increased salaries.  Insurance expense increased 9.7% to
$644,882 for the year ended June 30, 2006 from  $587,751 for the year ended June
30,  2005  due  to  general  increases  in  property  and  liability  insurance.
Accounting fees, which includes non-audit accounting services, including but not
limited to taxes, cost reports and individual contract audits, provided by firms
other than our principal  audit firm,  increased  45.8% to $336,425 for the year
ended June 30, 2006 from  $230,791  for the year ended June 30,  2005.  Fees and

                                       32
<PAGE>
licenses  expense  increased  19.1% to $294,165 for the year ended June 30, 2006
from  $247,076  for the year ended June 30,  2005.  This  increase is due to the
Michigan quality  assurance  assessment fee, which accounted for the majority of
the increase. Rent expense increased 17.1% to $1,117,098 for the year ended June
30, 2006 from $953,667 for the year ended June 30, 2005. This increase is due to
the opening of the  additional  20  residential  bed unit at Detroit  Behavioral
Institute.

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

     Interest  expense  decreased  7.3% to $606,893  for the year ended June 30,
2006 from $654,871 for the year ended June 30, 2005. This decrease is due to the
decrease in  outstanding  debt of the Company.  The prime rate,  which  remained
relatively  stable over the last fiscal year,  dictates the interest rate on the
majority of the Company's long-term debt,  therefore,  the reduction of interest
is only a result of the decrease in outstanding debt.

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

Liquidity and Capital Resources

     As of June 30,  2007,  the  Company  had  working  capital  of  $7,545,549,
including cash and cash  equivalents of $3,395,173,  compared to working capital
of  $7,208,291,  including  cash and cash  equivalents of $1,820,105 at June 30,
2006.

     Cash provided by operating  activities  was  $3,543,597  for the year ended
June 30, 2007,  compared to  $3,134,306  for the year ended June 30, 2006.  Cash
provided by operations in fiscal 2007 consists of the net income of  $1,682,283,
offset by an increase in total increase in accounts  receivable of $855,237,  an
increase  in prepaid  expenses  of  $197,945,  an  increase  in other  assets of
$229,885 and a decrease in accounts payable of $247,818. These uses of cash from
operations  were  offset by a $735,933  increase in accrued  expenses  and other
liabilities  and further offset by non-cash  items  including  depreciation  and
amortization  of $744,206,  non-cash  interest  expense of  $164,994,  change in
deferred tax expense  asset of $863,000,  a change in allowance  for bad debt of
$663,999 and stock based compensation of $220,067.

     Cash used in investing activities in fiscal 2007 consisted of $1,246,798 in
capital  expenditures  for the  acquisition of property and equipment,  $400,000
investment  in the Seven Hills  Hospital LLC and  $1,719,623  in advances on the
construction in progress for the Seven Hills  Hospital,  compared to $710,638 in
capital  expenditures  for property and  equipment in the fiscal year ended June
30, 2006. Other than Seven Hills related investments, the increase was primarily
due the purchase and  implementation of the Meditech software and the upgrade of
hardware to accommodate the software Company wide.

     Cash provided by financing  activities in fiscal 2007 consisted of $925,451
in net debt  repayments,  $83,664 in deferred  financing  costs,  and $64,783 in
private  placement  costs  offset by  $2,501,798  received  from the issuance of
common stock.


                                       33
<PAGE>
     A  significant  factor in the liquidity and cash flow of the Company is the
timely  collection  of its  accounts  receivable.  As of June 30, 2007  accounts
receivable from patient care, net of allowance for doubtful accounts,  decreased
approximately  6% to  $6,559,387  on June 30, 2007 from  $6,995,475  on June 30,
2006.  This decrease is due to an increase in the allowance for bad debt and the
faster turn around of receivables related to the new capitatated  contract.  The
Company's  goal is to reduce  receivables  or to have any increases  result from
higher revenues and timing of receivables collection. Better accounts receivable
management  due to  increased  staff,  standardization  of some  procedures  for
collecting  receivables  and a more aggressive  collection  policy has made this
possible  in  behavioral  health,  which is  typically  a  difficult  collection
environment.  Increased  staff has allowed the Company to concentrate on current
accounts   receivable   and  resolve  any  problem  issues  before  they  become
uncollectible.  The  Company's  collection  policy calls for early  contact with
insurance  carriers with regard to payment,  use of fax and  registered  mail to
follow-up or resubmit  claims and earlier  employment of collection  agencies to
assist  in the  collection  process.  The  Company's  collectors  will also seek
assistance   through   every  legal  means,   including   the  State   Insurance
Commissioner's  office,  when appropriate,  to collect claims. At the same time,
the  Company  continues  to  closely  monitor  reserves  for bad  debt  based on
potential insurance denials and past difficulty in collections.

     In order to  facilitate  the  equity  component  for the  build-out  of the
Company's Las Vegas  hospital  project,  Seven Hills,  on December 19, 2006, the
Company entered into an agreement  pursuant to which the Company sold $2,000,000
in unregistered Class A Common Stock to a single investor. The agreement allowed
the investor,  Camden Partners Limited  Partnership,  to purchase  $2,000,000 in
PHC, Inc. Class A Common Stock at $2.08 per share,  which is the average selling
price per share  over the 20  trading  days  prior to the sale,  minus 4%.  (For
additional  details  regarding this transaction see the Company's current report
on form 8-K filed with the  Securities  and Exchange  Commission on December 20,
2007.)

     Contractual Obligations

     The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2007 are as
follows (in thousands):

 YEAR
ENDING                                                OPERATING
June 30    TERM NOTES           CAPITAL LEASES        LEASES         TOTAL**
           __________           ______________        _________      ________

       Principal   Interest   Principal   Interest    Payments
  2008   $1,134      $ 25       $206        $ 41      $2,088         $3,494
  2009      625        20        170          25       2,072          2,912
  2010       53        16         45          14       1,764          1,892
  2011       46        12         11           6         721            796
  2012       51         8         --          --         304            363
  2013       57         3         --          --         261            321
         ______      ____       _____       ____      ______        _______
 Total   $1,966      $ 84       $432       $  86      $7,210         $9,778
         ======      ====       =====      =====      ======         =======

*    The Meditech  Lease - The total  Capital  Lease  amount above  includes the
     Meditech Lease,  which was previously  listed  separately  since almost the
     total  amount  on the  lease  has  been  advanced  and we  have  begun  the
     implementation process as of July 1, 2007.

**   Total does not  include the amount due under the  revolving  credit note of
     $1,518,742. This amount represents an accounts receivable funding described
     below and is shown as a current note payable in the accompanying  Financial
     Statements.

     In addition to the above,  the Company is also subject to three  contingent
notes with a total face value of $2,500,000 as part of the Pivotal  acquisition.
Of  these  notes,  two  totaling  $1,500,000,  one  for  $1,000,000  and one for
$500,000,  bear interest at 6% per annum.  These notes are subject to additional
adjustment  based on the earnings of the acquired  operations.  Since adjustment
can be positive or negative  based on  earnings,  with no ceiling or floor,  the
liability for these notes was only recorded after the required  revenue  targets
were  met.  This  treatment  is in  accordance  with  SFAS  No.  141,  "Business
Combinations",  which states that contingent  consideration should be recognized

                                       34
<PAGE>
only when  determinable  beyond a reasonable  doubt.  Payments on the $1,000,000
note began on January 1, 2005. The above table includes the outstanding  balance
on this  note  of  $441,109  which  represents  the  earn  out  for the  Pivotal
acquisition  through  December  31, 2005 net of payments  made  through June 30,
2007. Earn-out requirements have been met on the $500,000 note which resulted in
the  recording of this earn-out  note in the amount of $923,934  which  includes
$80,000 in accrued interest. The above table includes the outstanding balance on
this note of $729,801.  The final note for $1,000,000 does not bear interest, is
also subject to adjustment based on earnings but has a minimum value of $200,000
to be paid in PHC,  Inc.  Class A common stock on March 31,  2009.  This minimum
liability has been recorded with imputed interest of 6% and $180,112 is included
in the schedule  above.  (See Note K to the  consolidated  financial  statements
included in this report for additional details on the Pivotal acquisition)

     In October 2004, the Company entered into a revolving credit, term loan and
security  agreement  with  CapitalSource  Finance,  LLC to replace the Company's
primary lender and provide additional liquidity.  Each of the Company's material
subsidiaries,  other than Pivotal Research Centers,  Inc, is a co-borrower under
the  agreement.  This  agreement  was amended on June 13,  2007 to increase  the
amount  available  under the term loan,  extend the term,  decrease the interest
rates  and  modify  the  covenants  based  on the  Company's  current  financial
position.  The agreement  now includes a term loan in the amount of  $3,000,000,
with a balance of $289,143 at June 30, 2007, and an accounts  receivable funding
revolving  credit  agreement  with a  maximum  loan  amount  of  $3,500,000.  In
conjunction  with this  refinancing  the Company paid $32,500 in commitment fees
and approximately $53,000 in legal fees and issued a warrant to purchase 250,000
shares  of class A common  stock at $3.09  per share  valued  at  $455,000.  The
relative fair value of the warrants was recorded as deferred financing costs and
is being amortized over the period of the loan as additional interest.

     The term loan note carries  interest at prime plus .75%,  but not less than
6.25%,  with twelve monthly  reductions in available credit of $50,000 beginning
July 1, 2007 and  increasing to $62,500 on July 1, 2009 until the  expiration of
the loan.

     The revolving credit note carries interest at prime plus .25%, but not less
than 4.75% paid through lock box  payments of third party  accounts  receivable.
The revolving credit term is three years,  renewable for two additional one-year
terms.  The balance on the  revolving  credit  agreement as of June 30, 2007 was
$1,518,742.  For  additional  information  regarding this  transaction,  see the
Company's  current  report on form 8-K filed with the  Securities  and  Exchange
Commission on October 22, 2004.  The balance  outstanding as of June 30, 2007 is
not included in the above table.

     Off Balance Sheet Arrangements

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

     Aging of accounts  receivables  could  result in our  inability  to collect
receivables.  As our accounts  receivable age and become  uncollectible our cash
flow is negatively impacted.  Our accounts receivable from patient accounts (net
of  allowance  for bad debts) were  $6,559,387  at June 30, 2007  compared  with
$6,995,475 at June 30, 2006.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  We have  focused on better  accounts  receivable  management  through
increased staff,  standardization of some procedures for collecting  receivables
and a more  aggressive  collection  policy  in  order  to  keep  the  change  in
receivables  consistent with the change in revenue.  We have also  established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected.  The following chart represents our Accounts  Receivable and Allowance
for  Doubtful  Accounts  at June 30, 2007 and 2006,  respectively,  and Bad Debt
Expense for the years ended June 30, 2007 and 2006:

                           Accounts       Allowance for           Bad Debt
                           Receivable     doubtful accounts        Expense

      June 30, 2007       $10,323,972       $ 3,764,585           $ 1,933,499
      June 30, 2006        10,096,061         3,100,586             1,912,516

                                       35
<PAGE>
     The  Company  relies on  contracts  with more than ten  clients to maintain
patient census at its inpatient facilities and the loss of any of such contracts
would  impact  our  ability  to meet  our  fixed  costs.  We have  entered  into
relationships with large employers, health care institutions and labor unions to
provide treatment for psychiatric  disorders,  chemical dependency and substance
abuse in conjunction with  employer-sponsored  employee assistance programs. The
employees of such institutions may be referred to us for treatment,  the cost of
which is reimbursed on a per diem or per capita basis.  Approximately 30% of our
total revenue is derived from these  clients.  No one of these large  employers,
health care institutions or labor unions  individually  accounts for 15% or more
of our consolidated revenues, but the loss of any of these clients would require
us to expend  considerable  effort to replace patient referrals and would result
in revenue losses and attendant loss in income.

Recent accounting pronouncements

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

     In September  2006,  the Securities  and Exchange  Commission  (SEC) issued
Staff  Accounting   Bulletin  108,   "Considering  the  Effects  on  Prior  Year
Misstatements   when   Quantifying   Misstatements  in  Current  Year  Financial
Statements," ("SAB 108"). SAB 108 requires  registrants to quantify errors using
both the income  statement  method (i.e.  iron curtain  method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction  in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006.  Upon adoption
SAB 108 did not have a material  effect on our  financial  position,  results of
operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
to define  fair  value,  establish  a  framework  for  measuring  fair  value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value  measurements.  SFAS No. 157 will be effective for fiscal years
beginning  after  November 15, 2007,  the beginning of the Company's 2009 fiscal
year. The Company is assessing the impact the adoption of SFAS No. 157 will have
on the Company's financial position and results of operations.

     In February 2007, the Financial  Accounting Standards Board ("FASB") issued
SFAS No.  159,  The  Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities ("SFAS No. 159"),  including an amendment of FASB Statement No. 115.
SFAS No. 159 allows companies to choose to elect to measure  eligible  financial
instruments  and certain  other items at fair value that are not  required to be
measured at fair value.  SFAS No. 159 requires that unrealized  gains and losses
on items for  which the fair  value  option  has been  elected  be  reported  in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years  beginning  after  November  15, 2007 and is required to be adopted by the
Company  beginning in the first quarter of fiscal 2009. The Company is assessing
the impact the  adoption  of SFAS No. 159 will have on the  Company's  financial
position and results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

o    Differences in actual and estimated earnings and cash flows;
o    Operating results differing from analysts' estimates;
o    Changes in analysts' earnings estimates;
o    Quarter-to-quarter variations in operating results;

                                       36
<PAGE>

o    Changes in market conditions in the behavioral health care industry;
o    Changes in market conditions in the research industry;
o    Changes in general economic conditions; and
o    Fluctuations in securities markets in general.

Financial Risk

o    Our  interest  expense is  sensitive  to changes  in the  general  level of
     interest rates. With respect to our  interest-bearing  liabilities,  all of
     our long-term  debt  outstanding is subject to rates at prime plus .25% and
     prime plus .75%,  which makes interest expense increase with changes in the
     prime rate.  On this debt,  each 25 basis point  increase in the prime rate
     will affect an annual increase in interest expense of approximately $4,460.

o    Failure to meet targeted  revenue  projections  could cause us to be out of
     compliance  with covenants in our debt  agreements  requiring a waiver from
     our  lender.  A waiver of the  covenants  may require our lender to perform
     additional audit procedures to assure the stability of their security which
     could require additional fees.


                                       37
<PAGE>

Item 8.           Financial Statements and Supplementary Data.

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


                                                                    PAGE

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



                                       38
                                                                           F-1

<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
PHC, Inc.

We have audited the  accompanying  consolidated  balance sheets of PHC, Inc. and
subsidiaries as of June 30, 2007 and June 30, 2006, and the related consolidated
statements of income,  changes in stockholders'  equity,  and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits b.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
PHC,  Inc.  and  subsidiaries  at June  30,  2007 and  June  30,  2006,  and the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.





/s/ Eisner LLP


New York, New York
September 27, 2007

                                                                           F-2


                                       39
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
PHC, Inc.:

We have audited the accompanying  consolidated  statements of income, changes in
stockholders'  equity and cash flows of PHC, Inc. and  subsidiaries for the year
ended June 30, 2005. These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We  conducted  our audit in  accordance  with  auditing  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
consideration  of  internal  control  over  financial  reporting  as a basis for
designing audit procedures that are appropriate in the circumstances but not for
the  purpose of  expressing  an opinion on the  effectiveness  of the  Company's
internal  control  over  financial  reporting.  Accordingly,  we express no such
opinion. An audit also includes examining,  on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
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  results of operations and
cash flows of PHC,  Inc.  and  subsidiaries  for the year ended June 30, 2005 in
conformity with accounting principles generally accepted in the United States of
America.





                                                           /s/ BDO Seidman, LLP


Boston, Massachusetts
August 23, 2005





                                                                           F-3

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


June 30,
                                                           2007        2006
                                                           ____        ____
ASSETS (Note A)
 Current assets:
     Cash and cash equivalents
                                                         $3,395,173  $1,820,105
    Accounts receivable, net of allowance for doubtful
     accounts of $3,764,583 and $3,100,586  at June 30,
     2007 and 2006, respectively                          6,524,387   6,955,475
    Pharmaceutical research receivables                   1,942,268   1,470,019
    Prepaid expenses                                        688,600     490,655
    Other receivables and advances                          868,628     751,791
    Deferred tax assets                                   2,015,000   2,841,000
                                                          _________   _________

         Total current assets                            15,434,056  14,329,045
                                                          _________   _________
Accounts receivable, non-current                             35,000      40,000
Other receivables                                            93,697      53,457
Property and equipment, net                               2,121,191   1,799,888
Deferred financing costs, net of amortization of
   $150,124 and $106,422 at June 30, 2007 and 2006,
   respectively                                             613,865     117,023
Customer relationships, net of amortization of
   $380,000 and $260,000 at June 30, 2007 and 2006,
   respectively                                           2,020,000   2,140,000
Goodwill                                                  3,508,576   2,664,643
Other assets                                              3,465,356     571,931
                                                          _________   _________

      Total assets                                      $27,289,741 $21,715,987
                                                       ============ ===========
LIABILITIES
Current liabilities:
    Accounts payable                                    $ 1,261,841  $1,509,659
    Current maturities of long-term debt                  1,134,300     918,013
    Revolving credit note                                 1,518,742   1,603,368
    Deferred revenue                                        433,301     385,742
    Current portion of obligations under capital leases     205,858      57,881
    Accrued payroll, payroll taxes and benefits           1,631,693   1,619,672
    Accrued expenses and other liabilities                1,702,772   1,026,419
                                                          _________   _________
         Total current liabilities                        7,888,507   7,120,754

Long-term debt, less current maturities                     831,387   1,021,546
Obligations under capital leases                            226,706      61,912
Deferred tax liabilities                                     93,000      56,000
                                                          _________   _________
         Total liabilities                                9,039,600   8,260,212

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

STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, none
  issued or outstanding                                          --          --
Class A Common Stock, $.01 par value; 30,000,000
  shares authorized, 19,622,076 and 17,874,966
  shares issued at June 30, 2007 and 2006, respectively     196,221     178,749
Class B common stock, $.01 par value; 2,000,000 shares
  authorized, 775,760 and 775,760 issued and outstanding
  at June 30, 2007 and 2006, respectively, each
  convertible into one share of Class A Common Stock          7,758       7,758
Additional paid-in capital                               26,812,808  23,718,197
Treasury stock, 199,098 and 199,098 class A common
  shares at cost at June 30, 2007 and 2006,
  respectively.                                            (191,700)   (191,700)
Accumulated deficit                                      (8,574,946)(10,257,229)
                                                          _________  ___________

         Total stockholders' equity                      18,250,141  13,455,775
                                                         __________  __________
         Total liabilities and stockholders' equity     $27,289,741 $21,715,987
                                                       =========== ===========


See accompanying notes to consolidated financial statements.              F-4

                                       41
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<S>                                        <C>              <C>                <C>

                                                          For the Years Ended June 30,
                                                  2007              2006             2005
                                                  ____              ____             ____
Revenues:
     Patient care, net                         $36,022,529       $27,861,701      $26,087,088
     Pharmaceutical study                        4,564,314         5,799,815        4,509,338
     Contract support services                   4,540,634         4,351,576        3,466,832
                                               ___________       ___________      ___________
         Total revenues                         45,127,477        38,013,092       34,063,258
                                               ___________       ___________      ___________
Operating expenses:
     Patient care expenses                      19,782,431        14,269,540       12,905,286
     Patient care expenses, pharmaceutical       2,182,357         2,242,900        1,676,749
     Cost of contract support services           3,102,551         2,676,340        2,197,518
     Provision for doubtful accounts             1,933,499         1,912,516        1,272,037
     Administrative expenses                    12,677,933        11,210,296        9,667,138
     Administrative expenses, pharmaceutical     2,438,802         2,517,074        2,757,118
                                               ___________       ___________      ___________

         Total operating expenses               42,117,573        34,828,666       30,475,846
                                               ___________       ___________      ___________

Income from operations                           3,009,904         3,184,426        3,587,412
                                               ___________       ___________      ___________
Other income (expense):
     Interest income                               159,946            68,397           73,176
     Interest expense                             (649,166)         (606,893)        (654,871)
     Other income, net                             308,599            89,449           76,760
                                               ___________       ___________      ___________

              Total other expense, net            (180,621)         (449,047)        (504,935)
                                               ___________       ___________      ___________

Income before income taxes                       2,829,283         2,735,379        3,082,477
Benefit from (provision for) income taxes       (1,147,000)        1,310,103           73,423
                                               ___________       ___________      ___________
              Net income                       $ 1,682,283       $ 4,045,482      $ 3,155,900
                                               ===========       ===========      ===========

Basic net income per common share              $      0.09       $      0.22           $ 0.18
                                               ===========       ===========      ===========
Basic weighted average number of shares
       outstanding                              19,287,665        18,213,901       17,574,678
                                               ===========        ==========      ===========
Fully diluted net income  per common
       share                                   $      0.09            $ 0.21           $ 0.17
                                               ===========        ==========      ===========
Fully diluted weighted average number of
      shares outstanding                        19,704,697        19,105,193       18,364,076
                                               ===========        ==========      ===========

See accompanying notes to consolidated financial statements.                F-5


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

Balance - June 30, 2004              16,744,848  $167,448     776,991  $7,770   $22,791,637
 related to private placements                                                      (30,000)
 Issuance of shares for options
    exercised                           104,750     1,048                           102,365
 Non-cash value of warrant issued
    in connection with long term                                                    167,185
    debt
 Non-cash value of shares issued
    for employee bonuses                  9,472        95                             9,140
 Issuance of shares for warrants
 exercised                              626,768     6,267                           302,337
 Issuance of employee stock
    purchase    plan shares               4,980        50                             7,370
 Purchase of shares from former
    employee
 Value of acceleration of certain
    stock options
 Net income year ended June 30, 2005                                                 27,025
                                     __________   ________    _______   _______   __________
Balance - June 30, 2005              17,490,818   174,908     776,991   7,770    23,377,059

Stock options issued for                                                            116,425
compensation
Purchase of treasury shares from
   former employee
Issuance of shares for warrants
    exercised                            98,473       984                            51,466
Issuance of shares for options
    exercised                           269,827     2,698                            81,379
Common shares issued as
    compensation                          2,000        20                             5,640
Disgorgement                                                                            112
Value of acceleration of certain
   stock options                                                                      9,875
Non-cash value of warrant issued
   in connection with an
   acquisition                                                                        56,180
Conversion from Class B to Class A        1,231        12      (1,231)    (12)
Issuance of employee stock
   purchase plan shares                  12,617       127                             20,061
Net income year ended June 30, 2006
                                     __________   ________    _______   _______ ___________
Balance - June 30, 2006              17,874,966  $ 178,749    775,760   $ 7,758 $23,718,197

Costs related to private                                                           (64,783)
placements
Fair value of options                                                              214,606

Issuance of shares for warrants
    exercised                          543,089         5,431                       330,692
Issuance of shares for options
    exercised                          231,627         2,316                       143,060
Issuance of shares in a private
    placement                          961,539         9,616                     1,990,384
Non-cash value of warrant issued
   in connection with a                                                            456,880
   refinancing
Issuance of employee stock              10,855           109                        23,772
   purchase    plan shares
Net income year ended June 30,
   2007
                                     __________   _________    _______   _______   __________

Balance - June 30, 2007             19,622,076     $ 196,221  775,760   $ 7,758 $ 26,812,808
                                     __________    ________    _______   _______   __________

See accompanying notes to consolidated financial statements.

                                       43
<PAGE>
PHC, INC.  AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity (Notes A, G, H, I and
K)
                                             Class A
                                         Treasury Stock        Accumulated
                                      Shares       Amount        Deficit      Total
                                      ______       ______      ___________    _____

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

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

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

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

Costs related to private                                                        (64,783)
placements
Fair value of options                                                           214,606
Issuance of shares for warrants
    exercised                                                                   336,123
Issuance of shares for options
    exercised                                                                   145,376
Issuance of shares in a private
    placement                                                                 2,000,000
Non-cash value of warrant issued
   in connection with a                                                         456,880
   refinancing
Issuance of employee stock
   purchase    plan shares                                                       23,881
Net income year ended June 30, 2007                            1,682,283      1,682,283
                                    ____________________________________________________

Balance - June 30, 2007                199,098   (191,700)    (8,574,946)    18,250,141
                                       =======  ==========  =============     ===========

See accompanying notes to consolidated financial statements.               F-6

                                       44
</TABLE>
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<S>                                                 <C>           <C>          <C>
                                                           For the Years Ended June 30,
                                                          2007          2006        2005
                                                          ____          ____        ____
Cash flows from operating activities:
   Net income                                          $1,682,283   $4,045,482   $3,155,900
   Adjustments to reconcile net income to net cash
           provided by operating activities:
     Depreciation and amortization                        744,206      777,419      511,211
     Non-cash interest expense                            164,994       65,583       51,080
     Deferred income taxes                                863,000   (1,638,713)    (303,994)
     Stock based compensation                             220,067      134,988      105,681
     Change in allowance for doubtful accounts            663,999    1,143,602      (68,904)
   Changes in operating assets and liabilities:
           Accounts and other receivables                (855,237)  (1,946,547)  (2,183,027)
           Prepaid expenses and other current assets     (197,945)    (343,667)      21,554
           Other assets                                  (229,885)    (186,817)     (92,044)
           Accounts payable                              (247,818)     611,046     (754,011)
           Accrued expenses and other liabilities         735,933      471,930      540,020
                                                      ____________  __________   __________
             Net cash provided by operating
               activities                               3,543,,597   3,134,306      983,466
                                                      ____________  __________   __________
  Cash flows from investing activities:
      Acquisition of property and equipment              (955,459)    (710,638)    (483,462)
      Equity investment in unconsolidated subsidiary     (400,000)          --           --
      Construction in progress ($1,362,000 in escrow
         for improvements)                             (1,719,623)          --           --
 Costs related to business acquisition                          --          --      (62,258)
                                                      ____________  __________   ___________

             Net cash used in investing activities     (3,075,082)    (710,638)    (545,720)
                                                      ____________  __________   __________
Cash flows from financing activities:
      (Repayment) Proceeds on revolving debt, net         (84,626)   (782,261)      671,249
          Proceeds from borrowings on long term debt           --      17,551     1,430,154
          Principal payments on long-term deBT         (1,162,172)   (858,669)   (2,307,709)
       Deferred financing costs                           (83,664)    (15,000)     (208,445)
      Purchase of treasury stock                               --     (36,613)      (13,880)
      Proceeds from issuance of common stock, net       2,437,015     153,799       313,692
                                                      ____________  __________   __________

             Net cash provided by (used in)
               financing activities                     1,106,553  (1,521,193)    (114,939)
                                                      ____________  __________   __________

Net increase in cash and cash equivalents               1,575,068      902,475     322,807
Cash and cash equivalents, beginning of year            1,820,105      917,630     594,823
                                                      ____________  __________   __________

Cash and cash equivalents, end of year                $ 3,395,173  $ 1,820,105   $ 917,630
                                                      ===========   ==========   ==========

Supplemental cash flow information:
    Cash paid during the period for:
           Interest                                   $ 472,169    $  606,893    $ 652,582
           Income taxes                               $ 354,777    $  296,100    $ 123,150

</TABLE>
See accompanying notes to consolidated financial statements.                F-7

                                       45
<PAGE>
 PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
<TABLE>
<S>                                               <C>          <C>           <C>
                                                          For the Years Ended June 30,
                                                          2007          2006        2005
                                                          ____          ____        ____

  Supplemental disclosures of non-cash investing and
       financing activities:
     Conversion of debt into common stock             $     --     $       --    $  14,250
     Issuance of common stock in cashless exercise of
        options                                            299            186           --
     Issuance of common stock in cashless exercise
        of warrants                                      2,239            380        3,229
     Pivotal Acquisition Note A earn out adjustments
        recorded                                       843,934        (39,746)   1,169,832
     Value of warrants issued with debt recorded as
        deferred financing costs                       456,880             --      167,185
     Value of warrants issued in connection with the
        Pivotal Acquisition                                 --         56,180           --
     Obligations under capital leases                  497,014        154,069           --
     Dispoal of fully depreciated equipment             15,928             --           --

</TABLE>
See accompanying notes to consolidated financial statements.               F-8

                                       46
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

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

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

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

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

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

 Principles of consolidation:

     The consolidated  financial  statements include the accounts of the Company
and its wholly  owned  subsidiaries.  All  material  intercompany  accounts  and
transactions have been eliminated in consolidation. In January 2007, the Company
purchased a 15.24% membership interest in the Seven Hills Psych Center, LLC, the
entity that will be the landlord of the Seven Hills Hospital subsidiary once the
facility  is  built.  This  investment  is  included  in  other  assets  on  the
consolidated balance sheet as this is an unconsolidated subsidiary. (Note D)

Revenues and accounts receivable:

     Patient care revenues and accounts  receivable  are recorded at established
billing rates or at the amount  realizable  under  agreements  with  third-party
payors,  including  Medicaid  and  Medicare.  Revenues  under  third party payor

                                                                           F-9

                                       47
<PAGE>
PHC, INC. AND
SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued):

agreements are subject to examination  and contractual  adjustment,  and amounts
realizable  may change due to periodic  changes in the  regulatory  environment.
Provisions  for  estimated  third party payor  settlements  are  provided in the
period the  related  services  are  rendered.  Differences  between  the amounts
provided and subsequent  settlements are recorded in operations in the period of
settlement.  The provision for contractual  allowances is deducted directly from
revenue and the net revenue  amount is  recorded  as  accounts  receivable.  The
allowance for doubtful accounts does not include the contractual allowances.

     Medicaid  reimbursements  are based on established  rates  depending on the
level of care  provided and are  adjusted  prospectively.  Effective  for fiscal
years beginning  after January 1, 2005, the  prospective  payment system ("PPS")
was brought into effect for all  Psychiatric  services paid through the Medicare
program.  The  new  system  changed  the  TEFRA-based  (Tax  Equity  and  Fiscal
Responsibility  Act of 1982) system to the new variable per  diem-based  system.
The new rates are based on a  statistical  model that relates per diem  resource
use for  beneficiaries  to patient and facility  characteristics  available from
"Center for Medicare and Medicaid Services, ("CMS's"),  administrative data base
(cost reports and claims data).  Patient-specific  characteristics  include, but
are not limited to, principal diagnoses,  comorbid conditions, and age. Facility
specific variables include an area wage index, rural setting,  and the extent of
teaching activity. This change is being phased in over three fiscal years with a
percentage  of payments  being made at the old rates and a percentage at the new
rates,  75/25,  50/50,  and  25/75,  respectively.  During  fiscal  2007 we were
operating in the second stage at 50/50. In the current fiscal year we are in the
third and final phase of the conversion to PPS.

     For the fiscal year ended June 30, 2007, Medicare reimbursements rates were
based 25% on provisional rates that are adjusted  retroactively  based on annual
cost reports filed by the Company with  Medicare and 75% on the new  prospective
payment  rates.  The Company  will  continue to file cost reports to Medicare to
determine the new TEFRA portion of the rate for the following  year.  These cost
reports  are  routinely  audited on an annual  basis.  Activity  and cost report
expense differences are reviewed on an interim basis and adjustments are made to
the net expected  collectable  revenue  accordingly.  The Company  believes that
adequate provision has been made in the financial statements for any adjustments
that might result from the outcome of Medicare audits.  Approximately  24%, 23%,
and 21% of the  Company's  total  revenue is derived from  Medicare and Medicaid
payors  for the  years  ended  June  30,  2007,  2006  and  2005,  respectively.
Differences between the amounts provided and subsequent settlements are recorded
in operations in the year of the  settlement.  The Company is unable to estimate
any future  adjustment at this time but past  adjustments have not been material
to the financial statement.

     Patient care revenue is recognized as services are rendered, provided there
exists persuasive  evidence of an arrangement,  the fee is fixed or determinable
and  collectability  of  the  related  receivable  is  reasonably  assured.  Pre
-admission  screening of  financial  responsibility  of the  patient,  insurance
carrier or other  contractually  obligated  payor,  provides the Company the net
expected  collectable  patient  revenue  to be  recorded  based  on  contractual
arrangements  with  the  payor or  pre-admission  agreements  with the  patient.
Revenue is not  recognized  for  emergency  provision  of services  for indigent
patients until  authorization  for the services can be obtained.  As of June 30,
2007,  the Company has no  outstanding  balance in other  receivables,  due as a
result of cost report settlements.

     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study criteria and billable  units of service are provided.  Each study
calls for a  participant  to  complete a  specific  number of visits in order to
validate the study.  While some studies require all visits to be complete before
any services can be billed,  most studies will allow billing for each visit once
the participant is randomized, or identified as meeting all study criteria, even
if the  participant  does not  complete  the study.  Where a  contract  requires

                                                                          F-10

                                       48
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Revenues and accounts receivable (continued):

completion  of the study by the  patient,  no  revenue is  recognized  until the
patient   completes  the  study  program.   Advance  payment   provided  by  the
pharmaceutical companies is recorded as deferred revenue until study receivables
are produced based on the above  criteria.  The Company  expects to complete the
studies related to the deferred revenue within the next fiscal year.

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

     Long-term assets include accounts receivable non-current, other receivables
and other assets. Accounts receivable,  non-current consists of amounts due from
former  patients  for  service.   This  amount   represents   estimated  amounts
collectable under supplemental  payment  agreements,  arranged by the Company or
its collection agencies,  entered into because of the patients' inability to pay
under normal payment terms.  All of these  receivables have been extended beyond
their original due date.  Reserves are provided for accounts of former  patients
that do not comply with these  supplemental  payment agreements and accounts are
written off when deemed  unrecoverable.  Other receivables included as long-term
assets  include  the  non-current  portion of loans  provided to  employees  and
amounts due on a contractual  agreement.  Charity care amounted to approximately
$231,702,  $150,511,  and $242,385  for the years ended June 30, 2007,  2006 and
2005, respectively. Patient care revenue is presented net of charity care in the
accompanying consolidated statements of operations.

     The  Company  had  accounts   receivable  from  Medicaid  and  Medicare  of
approximately  $1,811,000  at June 30,  2007 and  $1,786,000  at June 30,  2006.
Included  in accounts  receivable  in  approximately  $450,000  and  $284,000 in
unbilled receivables at June 30, 2007 and 2006, respectively.

Allowance for doubtful accounts

     The Company records an allowance for  uncollectible  accounts which reduces
the  stated  value of  receivables  on the  balance  sheet.  This  allowance  is
calculated  based on a  percentage  of each aged  accounts  receivable  category
beginning at 0-5% on current  accounts  and  increasing  incrementally  for each
additional 30 days the account remains outstanding until the account is over 360
days  outstanding,  at which time the  provision  is 80-100% of the  outstanding
balance.  These percentages vary by facility based on each facility's experience
in and expectations for collecting older receivables.  The Company compares this
required  reserve  amount to the current  "Allowance  for doubtful  accounts" to
determine  the  required  bad  debt  expense  for the  period.  This  method  of
determining  the required  "Allowance  for doubtful  accounts" has  historically
resulted in an allowance  for  doubtful  accounts of 20% or greater of the total
outstanding receivables balance.

Estimates and assumptions:

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

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

Notes to Consolidated Financial Statements
June 30, 2007

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

Estimates and assumptions: (continued)

     estimates. Such estimates include patient care billing rates, realizability
of receivables from third-party payors,  rates for Medicare and Medicaid and the
realization of deferred tax benefits,  which represents a significant portion of
the estimates made by management.

Reliance on key clients:

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

Cash equivalents:

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

Property and equipment:

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

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

Other assets:

     Other assets consists of deposits, deferred expenses advances, construction
in progress, investment in Seven Hills LLC, licensure fees, internally developed
and acquired  software which is being  amortized over three to seven years based
on it's estimated useful life.
                                                                           F-12

                                       50
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Long-lived assets:

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144,  "Accounting  for the  Impairment  or Disposal of Long-Lived  Assets",  the
Company  reviews  the  carrying  values of its  long-lived  assets for  possible
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amounts of the assets may not be  recoverable.  Any long-lived  assets
held for disposal are  reported at the lower of their  carrying  amounts or fair
value less costs to sell.  The Company  believes that the carrying  value of its
long-lived assets is fully realizable at June 30, 2007.

Fair value of financial instruments:

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

Basic and diluted income per share:

     Income per share is computed by dividing  the income  applicable  to common
shareholders, by the weighted average number of shares of both classes of common
stock  outstanding  for each fiscal year.  Class B common  stock has  additional
voting rights.  All dilutive common stock  equivalents have been included in the
calculation  of diluted  earnings  per share for the fiscal years ended June 30,
2007, 2006 and 2005 using the treasury stock method.

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

                                                   Years Ended June 30,
                                           2007           2006         2005
                                           ____           ____         ____
 Weighted average shares outstanding -
   basic                                 19,287,665    18,213,901    17,574,678
 Employee stock options                     397,428       510,731       530,896
 Warrants                                    19,604       380,561       258,502
                                          _________    __________    __________
 Weighted average shares outstanding  -
  fully diluted                          19,704,697    19,105,193    18,364,076
                                         ==========    ==========    ==========

     The following table summarizes securities  outstanding as of June 30, 2007,
2006 and 2005,  but not included in the  calculation of diluted net earnings per
share because such shares are antidilutive:

                                                    Years Ended June 30,
                                            2007          2006         2005
                                           ____           ____         ____

 Employee stock options                    190,000        253,500        32,500
 Warrants                                       --             --       471,360
                                          _________     _________      _________
      Total                                190,000        253,500       503,860
                                          =========     =========      =========

     In August  2007,  the  Company  repurchased  150,000  shares of its Class A
common stock (See Note M). If this  transaction had been completed prior to year
end it would not have had an impact on earinings per share.

                                                                           F-13

                                       51
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Income taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax bases of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against deferred tax assets, when the deferred tax asset is not recoverable. The
Company  considers  estimated  future taxable income or loss and other available
evidence when assessing the need for its deferred tax valuation allowance.  As a
result of this  assessment,  during fiscal 2006, the Company  eliminated 100% of
the Federal deferred tax valuation allowance.

Comprehensive income:

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

Stock-based compensation:

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

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

     At June 30, 2005,  the Company  accelerated  the vesting on all  previously
granted options. Therefore, as of the date of adoption there was no unrecognized
expense of these  options  and the  expense  recorded in the year ended June 30,
2006 is for options  issued and vested  during  that  period.  The  unrecognized
expense of awards not yet vested will be recognized in net income in the periods
in which they vest.  Under the  provisions  of SFAS 123R,  the Company  recorded
$214,606 and $126,300 of stock-based compensation on its consolidated statements
of income for the years  ended June 30,  2007 and 2006,  respectively,  which is
included in administrative expenses as follows:

                                          Year ended June     Year ended June
                                             30, 2007             30, 2006
                                          _______________     _______________
              Directors fees                 $ 47,088            $ 21,000
              Employee compensation           167,518             105,300
                                             ________            ________
                  Total                      $214,606            $126,300
                                             ========           =========

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

Notes to Consolidated Financial Statements
June 30, 2007

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

Stock-based compensation: (continued)

     The Company utilized the  Black-Scholes  valuation model for estimating the
fair value of the stock  compensation  granted  after the adoption of SFAS 123R.
The  weighted-average  fair values of the options granted under the stock option
plans for the years ended June 30, 2007, 2006 and 2005 were calculated using the
following assumptions:
<TABLE>
<S>                                        <C>               <C>         <C>

                                                         Year ended June 30,
                                                   2007         2006        2005
                                                   ____         ____        ____

   Risk free interest rate                         4.60%        4.45%        4.00%
   Expected dividend yield                            --             --         --
   Expected lives                                  5-10 years   5-10 years   5-10 years
   Expected volatility                             48.0%        47.27%       45%
   Weighted average value of grants per share      $1.54        $2.42        $.63
   Weighted average remaining contractual life of
    options outstanding (years)                     3.56         3.65        3.70
</TABLE>

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

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

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

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

Notes to Consolidated Financial Statements
June 30, 2007

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

Stock-based compensation: (continued)
                                                              Year Ended
                                                             June 30, 2005
                                                                 ____
   Net income, as reported                                   $ 3,155,900
   Add:  Stock-based employee compensation
      expense included in reported net income, net of
      related tax effects                                        105,681
   Deduct:  Total stock-based employee compensation
      expense determined under fair value based
      method for all awards, net of related taxes               (298,084)
                                                             _____________
   Pro forma net income (loss)                         s      $ 2,963,497

   Earnings (loss) per share:
     Basic - as reported                                     $      0.18
                                                             ===========
     Basic - pro forma                                       $      0.17
                                                             ===========
     Diluted - as reported                                   $      0.17
                                                             ===========
     Diluted - pro forma                                     $      0.16
                                                             ===========

Advertising Expenses:

     Advertising costs are expensed when incurred.  Advertising  expense for the
year ended June 30, 2007,  2006 and 2005 were  $184,678,  $455,806 and $378,899,
respectively.

Reclassifications:

     Certain June 30, 2006 amounts have been  reclassified to be consistent with
the June 30, 2007 presentation.

Recent accounting pronouncements:

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

     In September  2006,  the Securities  and Exchange  Commission  (SEC) issued
Staff  Accounting   Bulletin  108,   "Considering  the  Effects  on  Prior  Year
Misstatements   when   Quantifying   Misstatements  in  Current  Year  Financial
Statements," ("SAB 108"). SAB 108 requires  registrants to quantify errors using
both the income  statement  method (i.e.  iron curtain  method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction  in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after  November 15, 2006.  Adopting SAB
108 did not  have a  material  effect  on our  financial  position,  results  of
operations or cash flows.

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

Notes to Consolidated Financial Statements
June 30, 2007

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

Recent accounting pronouncements: (continued)

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
to define  fair  value,  establish  a  framework  for  measuring  fair  value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value  measurements.  SFAS No. 157 will be effective for fiscal years
beginning  after  November 15, 2007,  the beginning of the Company's 2009 fiscal
year. The Company is assessing the impact the adoption of SFAS No. 157 will have
on the Company's financial position and results of operations.

     In February 2007, the Financial  Accounting Standards Board ("FASB") issued
SFAS No.  159,  The  Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities ("SFAS No. 159"),  including an amendment of FASB Statement No. 115.
SFAS No. 159 allows companies to choose to elect to measure  eligible  financial
instruments  and certain  other items at fair value that are not  required to be
measured at fair value.  SFAS No. 159 requires that unrealized  gains and losses
on items for  which the fair  value  option  has been  elected  be  reported  in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years  beginning  after  November  15, 2007 and is required to be adopted by the
Company  beginning in the first quarter of fiscal 2009. The Company is assessing
the impact the  adoption  of SFAS No. 159 will have on the  Company's  financial
position and results of operations.

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:

                                                          As of June 30,
                                                    2007                2006
                                                    ____                ____

Land                                              $  69,259          $  69,259
Buildings                                         1,136,963          1,136,963
Furniture and equipment                           2,614,274          2,048,006
Motor vehicles                                      178,478            174,302
Leasehold improvements                            1,462,260          1,224,624
                                                  _________          _________
                                                  5,461,234          4,653,154
Less accumulated depreciation and amortization    3,340,043          2,853,266
                                                  _________          _________
Property and equipment, net                     $ 2,121,191        $ 1,799,888
                                                ===========        ===========

Total  depreciation  expense was $502,705,  $580,933 and $314,394 for the fiscal
years ended June 30, 2007, 2006 and 2005, respectively.

                                                                           F-17

                                       55
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS:

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

     Customer  relationships,  acquired as a part of the assets  acquired in the
membership  interest  purchase of Pivotal  Research  Centers,  LLC,  are used to
acquire new studies on an ongoing basis. Since there is no true "consumption" of
the relationship  that can be defined,  the asset is being amortized,  using the
straight-line   method,   over  an  estimated   useful  life  of  twenty  years.
Amortization expense of intangible assets, which amounted to $120,000,  $120,000
and  $120,000  for the  fiscal  years  ended  June  30,  2007,  2006  and  2005,
respectively,  is  included  in  administrative  expenses  in  the  accompanying
consolidated  statement of  operations.  The  following is a summary of expected
amortization  expense of intangible  assets for the succeeding  fiscal years and
thereafter as of June 30, 2007: Year Ending June 30, Amount

                                    2008                 $120,000
                                    2009                  120,000
                                    2010                  120,000
                                    2011                  120,000
                                    2012                  120,000
                                    Thereafter          1,420,000
                                                        _________
                                                       $2,020,000

Goodwill:

     SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other
things,  that  companies  not amortize  goodwill,  but instead test goodwill for
impairment at least  annually.  In addition,  SFAS 142 required that the Company
identify  reporting  units  for  the  purpose  of  assessing   potential  future
impairments of goodwill,  reassess the useful lives of other existing recognized
intangible   assets,  and  cease  amortization  of  intangible  assets  with  an
indefinite useful life.

     The  Company's  goodwill of $969,099  relating  to the  treatment  services
reporting  unit of the  Company and  $2,539,477  related to the  research  study
services  reporting unit of the Company were evaluated  under SFAS No. 142 as of
June 30, 2007. As a result of the  evaluation,  the Company  determined  that no
impairment  exists. The Company will continue to test goodwill for impairment at
least annually in accordance with the guidelines of SFAS No. 142.

     On April 30, 2004,  the Company  acquired  Phoenix-based  Pivotal  Research
Centers,  LLC,  ("Pivotal")   significantly  expanding  the  Company's  clinical
research capabilities and geographic presence.  As part of the acquisition,  one
of the former  owners and CEO signed a  three-year  employment  and  non-compete
agreements.

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


                                                                         F-18
                                       56
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS: (CONTINUED)

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

     Promissory  Note A is a secured note with a face value of $1,000,000,  with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly  installments  beginning  January  2005.  Note A was subject to
adjustment in the first and second years of the note based on adjusted EBITDA as
defined in the agreement. Quarterly payments are then made based on the adjusted
value of the  promissory  notes.  The first  adjustment  of $169,832 was made on
February 1, 2005.  The Company  recorded  the value of Note A of  $1,169,832  as
additional purchase price during fiscal 2005. The second adjustment of ($39,746)
was made on April 1, 2006. As of June 30, 2007, $441,109 is due under Note A.

     Promissory Note B is a secured note with a face value of $500,000,  with an
annual  interest  rate of 6%, a maturity  date of December 31, 2008 and payments
due in quarterly  installments beginning January 2007. This note was recorded in
December 2006 as EBITDA  targets  defined in the agreement were met. An earn-out
of $343,934 was  recorded on February 1, 2007 as  stipulated  in the  agreement.
Eight  quarterly  payments are due on this note with a maturity date of December
31,  2008.  As of June 30,  2007,  the  principal  balance  due on this  note is
$729,801.

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

     Since all but $200,000 of these  promissory  notes is  contingent on future
earnings, only $200,000, less imputed interest, was recorded as of June 30, 2004
as  stipulated  in SFAS No. 141. As of June 30,  2007,  the balance on Note C is
$180,112.

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

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

                                                                          F-19

                                       57
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE D - OTHER ASSETS

     Included in other assets as of June 30, 2007 is the Company's investment in
Seven  Hills  LLC of  $400,000.  This LLC holds  the  assets of the Seven  Hills
Hospital  currently being built and expected to be complete in the early part of
calendar  year 2008.  Also  included  is the escrow  deposit of  $1,362,000  the
Company has made toward the leasehold  improvements for the anticipated  leasing
arrangement upon completion of the constructiuon of the building.

     The following  table lists amounts  included in other assets:

                                                         As of June 30
                                                       2007         2006
         Description

        Construction in progress ($1,362,000 in
         escrow for improvements)                   $1,719,623    $     --
        Licensure fees                                 701,220     158,271
        Investment in unconsolidated subsidiary        400,000          --
        Deferred Expense                               319,842     153,507
        Deposits                                       314,671     250,153
        Excess of cost over book value                  10,000      10,000
                                                     __________   ________
                            Total                   $3,465,356    $571,931


NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt is summarized as follows:

                                                           As of June 30,
                                                          2007          2006
                                                          ____          ____
Pivotal acquisition note (Note A) due in sixteen
   quarterly principal installments, plus interest
   at 6% per annum, beginning January 2005.
   Current quarterly payments are $73,518 plus
   accumulated interest at 6% per annum.  No further
   adjustment to Note A are required.                   $ 441,109     $728,218
Pivotal acquisition note (Note B) due in eight
   quarterly principal installments, plus intrest at
   6% per annum beginning January 2007.  Current
   quarterly payments are $121,633 plus
   accumulated interset at 6% per annum.  No further
   adjustments to Note B are required.                    729,801           --
Pivotal acquisition  note (Note  B) due in eight
   quarterly principal installments, plus interest
   at 6% per annum,  beginning  January  2007.
   Current quarterly  payments are $121,633 plus
   accumulated interest at 6% per annum.                  729,801           --
Note payable (Note C) in conjunction with the
  earn out of the Pivotal Research Centers, LLC
  acquisition. Minimum payment amount $200,000
  in common stock due March 2009 with interest
  imputed at 6%.                                          180,112      169,648
Term mortgage note payable with monthly principal
  installments of $50,000 beginning July 1, 2007
  increasing to $62,500 July 1, 2009 until the
  loan terminates.  The note bears interest at
  prime (8.25% at June 30, 2007) plus 0.75% and
  is collateralized by all of the assets of the
  Company and its material subsidiaries except
  Pivotal Research Centers, Inc.  At June 30,
  2007 the Company had $2,710,857 available
  credit on the term loan.                                289,143       732,500
9% mortgage note due in monthly installments of
  $4,850 including interest through July 1, 2012,
  when the remaining principal balance is payable,
  collarteralized by a first mortgage on the PHC,
  Inc. of Virginia, Inc. Mount Regis Center
  facility.                                               269,986      302,273


                                                                           F-20

                                       58
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Notes payable and long-term debt is summarized as follows:

                                                           As of June 30,
                                                          2007          2006
                                                          ____          ____

Note payable due in monthly  installments  of $578
  including  interest at 5.9% through May 2010.           18,058         23,746
Note payable due in monthly  installments  of $555
  including  interest at 3.9% through March 2010.         17,327         23,180
Note payable due in monthly  installments  of $775
  including  interest at 3.9% through October 2008.       12,061         20,698
Unamortized debt discount in connection with the
  Term loan                                                   --        (69,660)
Insurance installment notes renewed annually               8,090          8,956
                                                       _________    __________

                                    Total              1,965,687      1,939,559
Less current maturities                                1,134,300        918,013

Long-term portion                                      $ 831,387    $ 1,021,546
                                                       =========    ===========

Maturities  of notes  payable and  long-term  debt are as follows as of June 30,
2007:

                           Year Ending
                           June 30,            Amount
                          ___________          ______
                           2008              $ 1,134,300
                           2009                  624,870
                           2010                   52,817
                           2011                   46,244
                           2012                   50,582
                           Thereafter             56,874
                                             ____________
                                              $1,965,687

     In October 2004,  the Company  refinanced  its revolving  credit note under
which a maximum of $3,500,000 may be  outstanding  at any time. The  outstanding
balance on this note was  $1,518,742  and  $1,603,368 at June 30, 2007 and 2006,
respectively. This agreement was amended on June 13, 2007 to modify the terms of
the  agreement.  Advances  are  available  based  on a  percentage  of  accounts
receivable  and the payment of  principal is payable upon receipt of proceeds of
the accounts receivable. Interest is payable monthly at prime (8.25% at June 30,
2007) plus  0.25%,  but not less than 4.75%.  The  average  rate paid during the
fiscal year ended June 30, 2007 was 14.28%  which  icluded the  amoritzation  of
deferred financing costs related to the initial  financing.  The amended term of
the  agreement is for two years,  renewable for two  additional  one year terms.
Upon  expiration,  all  remaining  principal and interest are due. The revolving
credit  note  is  collateralized  by  substantially  all  of the  assets  of the
Company's  subsidiaries except Pivotal Research Centers,  Inc. and guaranteed by
PHC. The Company paid $32,500 in commitment fees and issued a warrant to purchse
250,000 shares of Class A common stock at $3.09 expiring on June 13, 2027.

     As of  June  30,  2008,  the  Company  was in  compliance  with  all of its
financial  covenants  under the revolving line of credit note.  These  covenants
were  modified with the  refinancing  of the debt in June 2007 to include only a
debt converage ratio of 1:1 and a decreased minumum EBITDA.

                                                                          F-21

                                       59
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

     As of  June  30,  2007,  the  Company  was in  compliance  with  all of its
financial  covenants  under the revolving line of credit note.  These  covenants
were  modified with the  refinancing  of the debt in June 2007 to include only a
debt coverage ratio of 1:1 and a decreased minimum EBITDA.

NOTE F - CAPITAL LEASE OBLIGATION

     At June 30, 2007,  the Company was obligated  under various  capital leases
for equipment providing for aggregate monthly payments of approximately  $14,765
and terms expiring from June 2008 through June 2011.

     The carrying value of assets under capital leases  included in property and
equipment and other assets are as follows:

                                                     June 30,
                                               2007           2006
                                               ____           ____

         Equipment and software   s          $  784,114    $ 287,099

         Less accumulated amortization         (225,055)    (168,869)
                                             ___________   __________
                                             $  559,059    $ 118,230
                                             ===========   ==========

     Amortization  expense  for the years  labeled  June 30,  2007 and 2006 over
$56,186 and $73,423, respectively.

     Future  minimum  lease  payments  under  the  terms  of the  capital  lease
agreements are as follows at June 30, 2007:

           Year Ending June 30,
           2008                                         $246,475
           2009                                          195,777
           2010                                           58,483
           2011                                           17,786
                                                        ________
           Future minimum lease payments                 518,521
           Less amount representing interest              85,957
                                                        ________
           Total future principle payments               432,564
           Less current portion                          205,858
                                                        ________
           Long-term obligations under capital leases   $226,706
                                                        ========

NOTE G - ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

                                                           June 30
                                                       2007             2006
                                                       ____             ____

                Accrued professional fees          $  896,874      $  249,260
                Accrued operating expenses            630,898         522,063
                Income tax payable                    175,000         255,096
                                                     ________        ________

                                           Total   $1,702,772      $1,026,419
                                                   ===========     ===========

                                                                          F-22

                                       60
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE H - INCOME TAXES

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

                                                      Years Ended June 30,
                                                      2007           2006
                                                      ____           ____
   Deferred tax asset:
     Allowance for doubtful accounts                $1,430,000     $1,179,000
     Depreciation                                      332,000        261,000
     Difference between book and tax bases of
      intangible assets                                  7,000          8,000
     Operating loss carryforward                       585,000      1,837,000
                                                    __________     __________
     Gross deferred tax asset                        2,354,000      3,285,000
                                                    __________     __________
     Less:
       Valuation allowance                                  --       (175,000)
                                                    __________     __________
       Deferred tax asset                            2,354,000      3,110,000
                                                     __________     __________
       Current portion                               2,015,000      2,841,000
                                                    __________     __________
       Long-term portion                               339,000        269,000
                                                    ==========     ==========

       Deferred tax liability:
         Difference between book and tax bases of
          intangible assets                           (432,000)      (325,000)
                                                    __________     __________
        Net deferred tax liability                  $ ( 93,000)    $ ( 56,000)
                                                    ==========     ==========

     The  components of the income tax  provision  (benefit) for the years ended
June 30, 2007, 2006 and 2005 are as follows:

                                           2007         2006            2005
                                           ____         ____            ____
     Current
      Federal                          $   68,000      $ 78,399       $     --
      State                               216,000       250,211        230,571
                                        _________      ________        _______
                                          284,000       328,610        230,571
                                        _________      ________        _______
     Deferred
      Federal                             811,000    (1,467,302)      (235,595)
      State                                52,000      (171,411)       (68,399)
                                        _________      ________        _______
                                          863,000    (1,638,713)      (303,994)
                                        _________      ________        _______

      Income tax provision (benefit)   $1,147,000   ($1,310,103)     $ (73,423)
                                       ==========   ============      ==========

                                                                           F-23
                                       61
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

     NOTE H - INCOME TAXES (CONTINUED)

     A reconciliation of the federal  statutory rate to the Company's  effective
tax rate for the years ended June 30, 2007, 2006 and 2005 is as follows:

                                                     2007     2006      2005
                                                     ____     ____      ____

   Income tax provision at federal statutory rate    34.0%    34.0%    34.0%
   Increase (decrease) in tax resulting from:
     State tax provision, net of federal benefit     10.4%     4.7%     4.5%
     Non-deductible expenses                          2.6%     1.7%     1.0%
     Other, net                                         --       --     1.5%
     Valuation allowance                             (6.5%)   (88.3%) (43.0%)
                                                     ______   _______ _______
   Effective income tax rate                          40.5%   (47.9%)  (2.0%)
                                                    =======   ======  ======

     At June 30, 2007, the Company had a federal net operating loss carryforward
amounting to approximately $1,181,000.  The Company's Federal net operating loss
carryforwards  are subject to review and  possible  adjustment  by the  Internal
Revenue  Service.  The Federal  carryforward  expires  beginning in 2011 through
2024. The Company's  state net operating loss  carryforwards  of $4,209,841 have
expired.  Realization is dependent on generating sufficient taxable income prior
to expiration of the loss  carryforwards.  Although  realization is not assured,
management  believes  it is more likely  than not that all of the  deferred  tax
asset except as described  above,  will be realized.  The amount of the deferred
tax asset considered  realizable,  however, could be reduced in the near term if
estimates of future taxable income during the  carryforward  period are reduced.
The valuation allowance changed by ($175,000), ($2,416,200) and ($2,076,994) for
the years ended June 30, 2007, 2006 and 2005, respectively.

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

NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

     The Company leases office and treatment facilities, furniture and equipment
under operating  leases expiring on various dates through May 2014. Rent expense
for the years ended June 30, 2007, 2006 and 2005 was  approximately  $2,026,000,
$1,695,000  and  $1,484,000,   respectively.   Rent  expense   includes  certain
short-term  rentals.   Minimum  future  rental  payments  under   non-cancelable
operating  leases,  having  remaining terms in excess of one year as of June 30,
2007 are as follows:

                          Year Ending
                            June 30,             Amount

                          2008                 $ 2,087,819
                          2009                   2,071,512
                          2010                   1,763,949
                          2011                     721,268
                          2012                     304,084
                          Thereafter               260,510
                                              _____________
                                               $ 7,209,142

                                                                          F-24

                                       62
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

     In addition to the above leases, on June 24, 2006, the Company entered into
a lease  agreement  to  lease  the  Seven  Hills  Hospital  property,  a  60-bed
psychiatric hospital located in Las Vegas, Nevada, with initial rent payments of
approximately  $70,000  per month  beginning  upon  completion  of the  building
estimated to be in the quarter ending March 31, 2008. In addition to the 10-year
lease  on the  property,  the  Company  has  also  purchased  approximately  15%
membership interest in the entity that owns the property.

Contingent Notes Payable:

     In conjunction with the acquisition of Pivotal Research Centers,  LLC (Note
C), the Company signed three notes, A, B and C, respectively,  with face amounts
of $1,000,000,  $500,000 and $1,000,000. The ultimate amount payable under these
notes are based on the future  earnings of the  acquired  entity.  Since all but
$200,000 was contingent on future earnings,  only $200,000 less imputed interest
was recorded as a liability as of June 30, 2004 as  stipulated  in SFAS No. 141.
As of June 30, 2007  $180,112 has been  recorded on Note C. In December 2004 the
first  earn-out  period  ended and  resulted  in the  recording  of  $1,209,832,
(including $40,000 in interest),  as a liability on Note A. On April 1, 2006 the
second earn-out  adjustment was made on Note A. This adjustment  resulted in the
net reduction of the  liability of $39,746 as earn-out  targets were not met for
the calendar year ended December 31, 2005.  Note B was recorded in December 2006
at its face value of $500,000 as earnings targets were met for the calendar year
ended  December  31,  2006.  The total  amount  recorded  on February 1, 2007 as
earn-out under this Note B was $343,934.  The earn-outs are recorded as a change
in the purchase  price and affect  goodwill.  (See Note C for  discussion of the
terms of these notes.)

Litigation:

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

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

Other:

     On December  20, 2004,  Harbor Oaks  Hospital  experienced  a loss due to a
flood at the facility.  The physical  damage was repaired  quickly and the claim
for the damage paid.  The Company  subsequently  filed a claim for lost business
income as allowed by the insurance  policy.  During the fourth quarter of fiscal
2007 this claim was settled for $325,000,  which is included in the consolidated
statements of income as other income, net of legal fees of $25,000.

                                                                          F-25

                                       63
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS

Preferred Stock

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

Common Stock

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

Class A Common Stock

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

     The Class A Common Stock is non-redeemable and  non-convertible  and has no
pre-emptive rights.

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

Class B Common Stock

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

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

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

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

                                                                           F-26
                                       64
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)

Private Placement

     On December 19,  2006,  the Company  entered into an agreement  pursuant to
which the Company  sold  $2,000,000  in  unregistered  Class A Common Stock to a
single  investor  to  provide  the equity  component  for the  build-out  of the
Company's Las Vegas hospital project, Seven Hills Behavioral Institute.

     The agreement allowed the investor, Camden Partners Limited Partnership, to
purchase  $2,000,000 in PHC, Inc. Class A Common Stock at $2.08 per share, which
was the average  selling  price per share over the 20 trading  days prior to the
sale,  minus 4%. In addition to providing a certificate  evidencing  the 961,539
unregistered   shares  within  three   business  days  from  the  close  of  the
transaction, the Company is also obligated to file a Registration Statement with
the  Securities  and  Exchange  Commission  within  90 days of the  close of the
transaction  to register  the shares  issued,  to put forth its best  efforts to
cause the Registration  Statement to be brought effective within 120 days of the
close of the transaction and to maintain the  Registration  Statement's  current
status for a period of two years from the date of the close of the transaction.
The Registration Statement was declared effective on April 2, 2007.

Stock Plans

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

     The stock option plan,  dated  December 2003 and expiring in December 2013,
provides  for the  issuance of a maximum of  1,300,000  shares of Class A Common
Stock of the  Company  pursuant  to the  grant of  incentive  stock  options  to
employees or nonqualified stock options to employees, directors, consultants and
others whose efforts are important to the success of the Company. Subject to the
provisions of this plan,  the  compensation  committee of the Board of Directors
has the authority to select the optionees and determine the terms of the options
including:  (i) the number of shares,  (ii)  option  exercise  terms,  (iii) the
exercise or purchase price (which in the case of an incentive  stock option will
not be less than the market  price of the Class A Common Stock as of the date of
grant),  (iv) type and  duration of transfer or other  restrictions  and (v) the
time and form of payment for  restricted  stock upon exercise of options.  As of
June 30, 2007, 744,687 options were granted under this plan.

     On October 18, 1995, the Board of Directors voted to provide  employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to  participate  in an Employee  Stock  Purchase Plan (the "Plan"),  which
became  effective  February 1, 1996.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan period to encourage  stock ownership by all eligible
employees.  The plan was amended on December  19, 2001 and  December 19, 2002 to
allow for a total of 500,000  shares of Class A Common  Stock to be issued under
the plan. On January 31, 2006 the stockholders  approved a replacement  Employee
Stock  Purchase Plan to replace the 1995 plan which expired on October 18, 2005.
A maximum of 500,000  shares may be issued  under the January  2006 plan.  As of
June 30, 2007,  10,855 shares have been issued under this plan.  The new plan is
identical to the old plan and expires on January 31, 2016.  As of June 30, 2007,
a total of 157,034  shares of Class A Common  Stock have been  issued  under the
1995 plan.  Thirteen  employees are participating in the current offering period
under the new plan,  which began on February 1, 2007 and will end on January 31,
2008. There are 489,145 shares available for issue under the January 2006 plan.


                                                                           F-27
                                       65
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)

     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, 2007, options for 145,500 shares were granted under
the 1995 plan.  This plan  expired in August  2005 and,  in  January  2005,  the
shareholders voted to approve a new non-employee  directors' stock plan. The new
plan is  identical  to the plan it  replaced.  Under the new plan a  maximum  of
350,000  shares may be issued.  As of June 30, 2007, a total of 160,000  options
were issued under the new plan.  On January 31,  2006,  this plan was amended to
increase the number of options  issued to each outside  director  each year from
10,000 options to 20,000 options.  Each outside director is granted an option to
purchase  20,000 shares of Class A Common Stock annually at fair market value on
the date of grant,  vesting 25%  immediately  and 25% on each of the first three
anniversaries  of the grant and expiring ten years from the grant date.  The new
plan will  expire  in  January  2015,  ten  years  from the date of  shareholder
approval.

     Under the above plans, at June 30, 2007, 1,234,458 shares were available
for future grant or purchase.

     The Company had the following activity in its stock option plans for fiscal
2007, 2006 and 2005:
<TABLE>
<S>                                    <C>             <C>         <C>       <C>
                                                           Weighted-
                                               Number      Average   Remaining   Aggregate
                                                 of        Exercise  Contractual Intrinsic
                                               Shares      Price       Term       Value

Outstanding balance - June 30, 2004             945,000     $0.64
Granted                                         320,000     $1.30
Exercised                                     (104,750)     $0.33
Expired                                        (22,000)     $0.76
                                              __________    _____
Outstanding balance - June 30, 2005           1,138,250     $0.85
Granted                                         408,750     $2.42
Exercised                                      (277,750)    $0.39
Expired                                         (35,000)    $1.84
                                              __________    _____
Outstanding balance - June 30, 2006           1,234,250     $1.45
Granted                                         177,500     $2.64
Exercised                                      (241,687)    $0.74
Expired                                         (74,063)    $1.94
                                              __________    _____
Outstanding balance - June 30, 2007           1,096,000     $1.76      3.56      $1,413,840
                                              =========     =====      ====      ===========
    Exercisable at June 30, 2007                791,626     $1.46      3.04      $1,258,685
                                              =========     =====      ====      ===========
</TABLE>
     Of the options  granted during the fiscal year ended June 30, 2007,  39,688
were  vested  and the  remaining  options  will vest over the next three to five
years. The fair value of the options vested was $1.50 per option.

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

     In February  2007,  10,855  shares of common  stock were  issued  under the
employee stock purchase plan. The Company  recorded as share based  compensation
expenses of $3,582.

     During the fiscal year ended June 30, 2007, 241,687 options were exercised
resulting in $145,376 in proceeds. Included in the above balance, 40,000 options
were exercised using a cashless exercise feature resulting in the issuance of
29,940 common shares.
                                                                           F-29

                                       66
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)

     The weighted  average  grant-date  fair value of options granted during the
fiscal  years  ended June 30,  2007,  2006 and 2005 was $1.54,  $1.17 and $2.33,
respectively.  The total intrinsic value of options  exercised during the fiscal
years ended June 30, 2007,  2006 and 2005 was  $522,921,  $517,917 and $188,243,
respectively.

     As  of  June  30,  2007  and  2006,   there  were  $323,313  and  $357,459,
respectively, in unrecognized compensation cost related to nonvested share-based
compensation  arrangements  granted under existing stock option plans. This cost
is expected to be recognized over the next four years.

     In addition to the outstanding options under the Company's stock plans, the
Company has the following warrants outstanding at June 30, 2007:
<TABLE>
<S>           <C>                           <C>                  <C>            <C>

   Date of                                            Number of        Exercise     Expiration
  Issuance           Description                        Shares           Price          Date
  ________           ___________                      _________        ________      _________

04/01/2003     Warrants issued for consulting
                services $3,185 charged
                to professional fees.               10,000 shares  $1.00 per share   April 2008
09/22/2003     Warrants issued for consulting
                services $6,261 charged
               to professional fees                 20,000 shares  $ .90 per share   Sept 2008
06/13/2007     Warrants issued in conjunction with
                long-term debt transaction, $456,880
                recorded as deferred financing
                costs.                             250,000 shares  $3.09 per share   June 2017
</TABLE>

     Warrants  issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and accounted for in a
manner consistent with the underlying  reason the warrants were issued.  Charges
to operations in connection with warrants were $1,880 in fiscal 2007. There were
no charges to operations in connection with warrants in fiscal 2006 or 2005. All
of these warrants were fully vested at the grant date.

       The Company had the following warrant activity during fiscal 2007:


                     Outstanding balance - June 30, 2006            708,453
                     Warrants issued                                250,000
                     Exercised                                      675,953
                     Expired                                          2,500
                                                                    _______
                     Outstanding balance - June 30, 2007            280,000
                                                                    =======

     During fiscal 2007, the Company issued warrants to purchase  250,000 shares
of Class A common stock to the Company's  lender as part of the  refinancing  of
its term loan.  The relative  fair value of the warrant of $456,880 was recorded
as deferred  financing costs and will be amortized as non-cash  interest expense
over the period of the loan of two years.

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

     During the fiscal year ended June 30, 2007, 675,953 warrants were exercised
resulting  in  $336,123  in  proceeds.  Included  in the above total are 356,750
warrants  exercised using a cashless  exercise feature resulting in the issuance
of 223,886 common shares.
                                                                           F-30

                                       67
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE K - BUSINESS SEGMENT INFORMATION

     The Company's  behavioral  health treatment  services have similar economic
characteristics,  services,  patients and clients.  Accordingly,  all behavioral
health treatment  services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative  services
segment. The following summarizes the Company's segment data:
<TABLE>
<S>                <C>               <C>           <C>           <C>            <C>              <C>

                          Behavioral
                            Health
                           Treatment   Pharmaceutical  Contract  Administrative
                           Services    Study Services  Services    Services     Eliminations     Total
   For the year ended
     June 30, 2007
Revenues-external
   customers              $36,022,529   $4,564,314   $4,540,634   $       --   $        --    $45,127,477
Revenues - intersegment       182,700           --       79,390    3,696,000    (3,958,090)            --
Segment net income          4,425,346    (232,604)    1,111,787   (3,622,246)           --      1,682,283
(loss)
Total assets               10,624,784    6,792,439      807,361    9,065,157            --     27,289,741
Capital expenditures          522,790       48,402       15,964      368,303            --        955,459
Depreciation &
   amortization               391,960      156,536      106,427       52,328            --        707,251
Goodwill                      969,099    2,539,477           --           --            --      3,508,576
Interest expense              395,445      172,804        4,236       76,681            --        649,166
Income tax expense
(benefit)                     845,156        3,100      368,441      (69,697)           --      1,147,000

   For the year ended
     June 30, 2006
Revenues-external
   customers              $27,861,701   $5,799,815   $4,351,576   $       --   $        --   $38,013,092

Revenues - intersegment        38,750           --       88,875    3,264,000    (3,391,625)           --
Segment net income          3,172,699      972,973    1,636,408   (1,736,598)           --     4,045,482
(loss)
Total assets               10,399,918    5,584,753      844,784    4,886,532            --    21,984,987
Capital expenditures          603,152       51,628      144,636       65,291            --       864,707
Depreciation &
   amortization               436,488      170,167       62,220       61,139            --       730,014
Goodwill                      969,099    1,695,544           --           --            --     2,664,643
Interest expense              485,589       67,528        5,048       48,728            --       606,893
Income tax expense
(benefit)                     210,231        3,840       34,860   (1,559,034)           --    (1,310,103)

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

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

</TABLE>
                                                                           F-31
                                       68
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE K - BUSINESS SEGMENT INFORMATION (CONTINUED)

     All revenues from  contract  services  provided for the treatment  services
segment and  treatment  services  provided to other  facilities  included in the
treatment  services segment are elimated in the  consolidation  and shown on the
table above under the heading "Revenues Intersegment".

     The Company has one customer in its Behavioral  Health  Treatment  Services
segment whose revenues  approximate  26% of its total external  revenues for the
segment or  $9,500,000  for the yaear ended June 30,  2007.  For the years ended
June 30, 2006 and 2005,  the total  revenues  for this payor were 27% and 17% or
$7,661,431 and $4,440,274 respectively.

NOTE L - QUARTERLY INFORMATION (Unaudited)

     The following  presents selected  quarterly  financial data for each of the
quarters in the years ended June 30, 2007 and 2006.
<TABLE>
<S>                         <C>             <C>          <C>           <C>

                                 1st Quarter   2nd Quarter  3rd Quarter    4th Quarter
                                 ___________   ___________  __________     ___________
     2007
     Revenue                     $10,062,206   $9,952,360   $12,318,043   $12,794,868
     Income from operations          553,974      604,994       638,155     1,212,781
     Net income available to
       common shareholders           283,283      261,088       315,779       822,133

     Earnings per share:
        Basic                    $      0.02   $     0.01   $      0.02   $      0.04
        Diluted                  $      0.01   $     0.01   $      0.02   $      0.04

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

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

</TABLE>
NOTE M - SUBSEQUENT EVENT

     In September  2006, the Board approved the  acquisition of up to $2,000,000
in treasury stock without further  communication.  In August,  2007, the Company
purchased  150,000  shares of Class A common  stock at a total price of $394,515
which included $4,515 in broker fees.

                                                                           F-32
                                       69
<PAGE>
Item  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

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

Item 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

     At the  end of the  period  covered  by  this  report,  we  carried  out an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive  officer and chief  financial  officer,  of the  effectiveness  of the
design and  operation  of our  disclosure  controls and  procedures  to meet the
criteria referred to above.  During the preparation of the financial  statements
to be included in the 2007 Form 10-K,  a material  weakness in internal  control
over financial  reporting was identified  relating to timely  reconciliation  of
certain balance sheet items,  primarily cash, accrued expenses and other accouts
receivable,  resulting  from  staffing  turnover in the  accounting  area.  As a
result,  the Chief Executive Officer and Chief Financial Officer concluded that,
as of June 30, 2007,  the  Company's  disclosure  controls and  procedures  were
ineffective due to the identified material weakness.

     Upon  identification  of the  material  weakness  the Audit  Committee  was
advised of the  issues  encountered  and key  decisions  reached  by  management
relating to the remediation efforts.  Under the direction of its Chief Executive
Officer and Chief  Financial  Officer,  PHC  developed a  comprehensive  plan to
remediate  the material  weakness.  The Audit  Committee  reviewed,  advised and
concurred with the plan of remediation.

     Although this material  weakness over  financial  controls  existed at year
end, PHC believes  that the  consolidated  financial  statements  in this Annual
Report on Form 10-K fairly present,  in all material  respects,  PHC's financial
condition as of June 30, 2007 and 2006,  and results of its  operations and cash
flows for the years ended June 30, 2007, 2006 and 2005, in conformity with U. S.
generally accepted accounting principles (GAAP).

     The Company anticipates that this remediation action will represent ongoing
improvement  measures and, although the Company has taken steps to remediate the
material weakness additional measures may be required.  The effectiveness of its
remediation  efforts will not be known until the Company can test those controls
in connection  with the  management  tests of internal  controls over  financial
reporting that will be performed  after the first quarter close at September 30,
2007.

Change in Internal Controls

     During the quarter ended March 31, 2007, the Company became aware of a loss
from a theft of funds by an  individual  at one of our  facilities  that had the
responsibility  for payroll  processing.  The Company  investigated  further and
identified  approximately  $41,000 in misdirected  funds.  Corrections have been
made to the employee  accounts  affected by this theft.  An insurance  claim has
been filed and paid in the amount of  $25,000.  The  Company  has put systems in
place with additional review to prevent recurrence of the problem.

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

                                       70
<PAGE>
PART III

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

      Name                    Age                 Position
      ____                    ___                 _________
Bruce A. Shear                52   Director, President and Chief Executive
                                    Officer
Robert H. Boswell             59   Senior Vice President
Paula C. Wurts                58   Treasurer, Chief Financial Officer and Clerk
Donald E. Robar (1)(2)(3)     70   Director
Howard W. Phillips            77   Director
William F. Grieco (1)(2)(3)   53   Director
David E. Dangerfield (1)(3)   66   Director

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

     Directors may be nominated by the Board of Directors or by  stockholders in
accordance with the Company's Amended and Restated Articles of Incorporation and
Bylaws.   All  of  the  directors  hold  office  until  the  annual  meeting  of
stockholders  next  following  their  election,  or until their  successors  are
elected and qualified. The primary duties of the various committees of the Board
are shown below. The board appoints officers of the Company for undefined terms.
There are no family  relationships among any of the directors or officers of the
Company.

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

     BRUCE A. SHEAR has been President,  Chief Executive  Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February  1996.  From  1976 to 1980,  he  served  as Vice  President,  Financial
Affairs,  of the Company.  Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over fifteen years. Mr. Shear received
an M.B.A.  from Suffolk  University in 1980 and a B.S. in Accounting and Finance
from  Marquette  University in 1976.  Since  November 2003, Mr. Shear has been a
member of the board of directors of Vaso Active Pharmaceuticals,  Inc., a public
company  marketing  and selling  over-the-counter  pharmaceutical  products that
incorporate Vaso's transdermal drug delivery technology.

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

     PAULA C. WURTS has served as the Chief Financial  Officer and Controller of
the Company  since 1989,  as Assistant  Clerk from  January 1996 until  February
2006, when she became Clerk,  as Assistant  Treasurer from 1993 until April 2000
when she became Treasurer.  Ms. Wurts served as the Company's Accounting Manager
from 1985 until 1989.  Ms. Wurts  received an  Associate's  degree in Accounting
from the  University  of South  Carolina  in 1980,  a B.S.  in  Accounting  from

                                       71
<PAGE>
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.

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

     HOWARD W.  PHILLIPS  has served as a Director of the Company  since  August
1996 and has been employed by the Company as a public relations specialist since
August 1995.  From 1982 until 1995,  Mr.  Phillips was the Director of Corporate
Finance for D.H. Blair  Investment  Corp. From 1969 until 1981, Mr. Phillips was
associated  with  Oppenheimer  & Co.  where he was a  partner  and  Director  of
Corporate Finance.

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

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

Meetings of the Board of Directors

     During  fiscal 2007,  the Board of Directors  held a total of four meetings
and took action by written  consent seven times.  Each director  attended all of
the  meetings of the Board and  committees  of the Board on which such  director
served.

Audit Committee

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

o    Hire,  evaluate and, when  appropriate,  replace the Company's  independent
     registered  public accounting firm, whose duty it is to audit the books and
     accounts of the Company and its  subsidiaries  for the fiscal year in which
     it is appointed.
o    Approve all audit fees in advance of work performed.
o    Approve any  accounting  firm and fees to be charged for taxes or any other
     non-audit  accounting  fees.
o    Review  internal  controls over financial  reporting  with the  independent
     accountant and a designated accounting staff member.
o    Review with  managementh and the registered  public  accounting firm:
     o    The  independent  accountant's  audit of and  report on the  financial
          statements. 72
<PAGE>
     o    The auditor's  qualitative  judgments about the  appropriateness,  not
          just  the  acceptability,   of  accounting  principles  and  financial
          disclosures  and  how  aggressive  (or  conservative)  the  accounting
          principles and underlying estimates are.
     o    Any serious  difficulties  or  disputes  with  management  encountered
          during  the  course of the  audit.
     o    Anything  else  about  the  audit  procedures  or  findings  that GAAS
          requires the auditors to discuss with the committee.
o    Consider  and review with  management  and a  designated  accounting  staff
     member:
          o    Any  significant   findings  during  the  year  and  management's
               responses to them.
          o    Any  difficulties an accounting  staff member  encountered  while
               conducting  audits,  including any  restrictions  on the scope of
               their work or access to required information.
          o    Any changes to the planned scope of  management's  internal audit
               plan that the committee thinks advisable.
o    Review  the  annual  filings  with the SEC and  other  published  documents
     containing  the company's  financial  statements  and consider  whether the
     information  in the  filings  is  consistent  with the  information  in the
     financial statements.
o    Review the interim  financial  reports  with  management,  the  independent
     registered public accounting firm and an accounting staff member.
o    Prepare a letter for  inclusion  in the annual  report that  describes  the
     committee's  composition and  responsibilities and how the responsibilities
     were fulfilled.
o    Review the audit committee charter at least annually and modify as needed.

     During fiscal 2007 the Audit Committee  consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco.  As required by the SEC, all members of
the audit  committee  are  "independent"  as such term is  defined  pursuant  to
applicable SEC rules and regulations and as required under AMEX listing standard
Section 121. Dr.  Dangerfield  serves as the chairman and is the audit committee
financial expert. The Company reviewed Dr.  Dangerfield's  extensive  experience
managing the budget and operations for large Behavioral Healthcare organizations
and  determined  that  this  industry  experience  qualifies  him  to act as the
financial  expert in accordance with SEC  requirements.  The Audit Committee met
four times  during  fiscal  2007.  All of the  committee  members  attended  the
meetings.

Nominating and Corporate Governance Committee

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

Compensation Committee

     The Board of  Directors  has  appointed  the  members  of the  Compensation
Committee to review and approve  officer's  compensation,  formulate bonuses for
management  and  administer  the  Company's  equity   compensation   plans.  The
Compensation  Committee is a chartered  committee made up of independent members
of the  Board  of  Directors.  During  fiscal  2007 the  Compensation  Committee
consisted of Mr. Donald Robar and Mr. William Grieco. The Compensation Committee
met once during  fiscal 2007.  Mr.  Shear does not  participate  in  discussions
concerning, or vote to approve, his salary.

Code of Ethics

     The Company maintains a Corporate  Compliance Plan, which  incorporates our
code of ethics that is applicable to all employees,  including all officers. The
Corporate   Compliance  Plan  incorporates  our  guidelines  designed  to  deter
wrongdoing  and to promote  honest  and  ethical  conduct  and  compliance  with
applicable laws and  regulations.  It also  incorporates our expectations of our
employees  that  enable us to  provide  accurate  and timely  disclosure  in our
filings  with  the   Securities   and  Exchange   Commission  and  other  public

                                       73
<PAGE>
communications. In addition, it incorporates our guidelines pertaining to topics
such as health and safety compliance, diversity and non-discrimination,  patient
care and privacy.

     The full text of our Corporate  Compliance Plan is published on our website
at  www.phc-inc.com.  We will post any  amendments to the  Corporate  Compliance
Plan,  as well as any waivers  that are required to be disclosed by the rules of
the SEC, on our website.

Compliance with Section 16(A) of the Exchange Act

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

     Based on the review of the  filings and  written  representations  from the
Company's  directors  and  executive  officers,  the Company  believes  that all
reports  required  to be filed  with the SEC by  Section  16(a)  during the most
recent fiscal year have been filed on a timely basis.

Item 11.    Executive Compensation

Compensation Discussion and Analysis

     The Board of Directors,  the Compensation  Committee and senior  management
share responsibility for establishing,  implementing and continually  monitoring
our   executive   compensation   program,   with  the  Board  making  the  final
determination with respect to executive compensation.  The goal of our executive
compensation  program is to provide a competitive total compensation  package to
our executive  management  team through a combination of base salary,  quarterly
cash incentive bonuses,  long-term equity incentive  compensation in the form of
stock options and benefits programs.  This Compensation  Discussion and Analysis
explains our compensation objectives, policies and practices with respect to our
Chief  Executive  Officer,  Chief  Financial  Officer  and one of our other most
highly-compensated   executive   officers  as  determined  in  accordance   with
applicable SEC rules,  which are collectively  referred to in this report as the
Named Executive Officers.

Objectives of our Executive Compensation Program

     Our  executive  compensation  program is designed to achieve the  following
objectives:

o    to attract and retain  talented  and  experienced  executives  necessary to
     achieve our  strategic  objectives  in the highly  competitive  industry in
     which we compete;
o    to motivate and reward  executives whose knowledge,  skills and performance
     are critical to our success;
o    to align the interest of our  executives  and  stockholders  by  motivating
     executives  to  increase  stockholder  value by  increasing  our  Company's
     long-term profitability;
o    to  provide  a  competitive  compensation  package  in which a  significant
     portion of total  compensation  is  determined  by Company  and  individual
     results and the creation of stockholder value; and,
o    to  foster a shared  commitment  among  executives  by  coordinating  their
     Company and individual goals.

Role of the Compensation Committee

     Our Compensation Committee oversees all aspects of executive  compensation.
The committee plays a critical role in establishing our compensation  philosophy
and in setting and amending elements of the compensation  package offered to our
named executive officers.

     The members of our  Compensation  Committee  during fiscal 2007 were Donald
Robar and William Grieco.  Each current member of our Compensation  Committee is
an  independent,  non-employee  director.  During fiscal 2007, the  Compensation
Committee met one time.

                                       74
<PAGE>
     On an annual  basis,  or in the case of promotion or hiring of an executive
officer,  the Compensation  Committee reviews and makes  recommendations  to the
Board of  Directors  regarding  the  compensation  package to be provided to our
named  executive  officers.  On an  annual  basis,  the  Compensation  Committee
undertakes  a review of the base  salary and bonus  targets of each of our named
executive  officers and evaluates  their  respective  compensation  based on the
committee's  overall  evaluation of their performance  toward the achievement of
our  financial,  strategic  and other goals,  with  consideration  given to each
executive officer's length of service and to comparative executive  compensation
data.  Based on its review,  from time to time the  Compensation  Committee  has
increased the salary and/or potential bonus amounts for our executive officers.

                          COMPENSATION COMMITTEE REPORT

     The compensation  committee  report below is not "soliciting  material," is
not deemed  "filed"  with the  Securities  and  Exchange  Commission  and is not
incorporated by reference in any of our filings under the Securities Act of 1933
as amended,  or the  Securities  Exchange Act of 1934, as amended,  whether made
before or after this  filing and  irrespective  of any  general  language to the
contrary.

     The  Compensation  Committee  comprised  solely of  independent  directors,
reviewed and  discussed  the above  Compensation  Discussion  and Analysis  with
management.  Based on this review and discussions,  the committee recommended to
the Board of  Directors,  and the  Board  has  approved,  the  inclusion  of the
Compensation  Discussion  and Analysis in the  Company's  annual  report on Form
10-K.

Compensation Committee
Donald E. Robar
William F. Grieco

Elements of Executive Compensation

     Compensation  for our named executive  officers  generally  consists of the
following elements:

o    base salary;
o    cash bonuses;
o    stock-based awards;
o    health, dental and life insurance and disability and retirement plans; and
o    severance and change-in-control arrangements.

     The Company  does not have a policy or target for  allocating  compensation
between  long-term  and  short-term   compensation.   Instead  the  Compensation
Committee  determines  subjectively what it believes to be the appropriate level
and  mix  of  various  compensation  components.  The  Compensation  Committee's
objective in allocating  between annual and long-term  compensation is to ensure
adequate base  compensation  to attract and retain  personnel,  while  providing
incentives to maximize long-term value for out Company and its stockholders.

Base Salary

     Salary for our executives is generally set by reviewing compensation levels
for comparable positions in the market and the historical compensation levels of
our  executives.  Salaries  may then be adjusted  from time to time,  based upon
market  changes,  actual  corporate and  individual  performance  and changes in
responsibilities.

Bonuses

     Bonuses are based on actual corporate and individual  performances compared
to targeted  performance criteria and various subjective  performance  criteria.
Targeted  financial   performance  for  the  Company  is  set  annually  by  the
compensation  committee  for each fiscal  quarter.  In  considering  bonuses the
Compensation  Committee does not rely on a formula that assigns a pre-determined
value to each of the criteria,  but instead  evaluates each executive  officer's
contribution in light of all relevant criteria.  Individual  performance targets
are used less frequently but may include completion of specific projects.  There
were no individual  performance targets specified in the prior or current fiscal
years meetings of the compensation committee.

                                       75
<PAGE>
Stock Based Awards

     Compensation for executive officers also includes the long-term  incentives
afforded  by stock  options  and other  equity-based  awards.  Our stock  option
program is designed to align the  long-term  interests of our  employees and our
stockholders and assist in the retention of executives.  The size of stock-based
awards is  generally  intended  to  reflect  the  executive's  position  and the
executive's expected contributions. Although some awards may be provided as part
of the hiring agreement of new executives,  in general these stock-based  awards
follow  the  same  benchmarks  as the  executive  bonus  element  of  the  named
executive's compensation. Options are generally granted with installment-vesting
over a period of three years.

     Because of the direct  relationship  between the value of an option and the
market price of our common stock, the compensation committee believes that stock
options are an effective  method of motivating the named  executive  officers to
manage our  Company in a manner that is  consistent  with the  interests  of our
Company and our Stockholders.

     In addition the named  executives  are also eligible to  participate in the
Company's Employee Stock purchase plan as long as all other criteria of the plan
are met.

Insurance and Other Employee Benefits

     We maintain  insurance  benefits for all  employees  that  include  health,
dental and life insurance.  The company bears one hundred percent of the cost of
these  benefits for the named  executives.  In addition  the company  provides a
company vehicle or an auto allowance, additional supplemental life insurance and
other supplemental taxable fringe benefits for the named executive officers.  In
addition,  the company provides a disability pool for the named executives based
on the  number  of  years  of  service.  The  number  of days of pay  under  the
disability  plan increases  incrementally  until it reaches a maximum accrual of
730  days.  This  disability  pool has no cash  value  and is not  payable  upon
termination  of  employment.  The Company also provides an Executive  Retirement
plan,  which  allows  for  the use of the  accrued  disability  plan  bank to be
distributed  as an  annuity  over a four year  period  at the named  executive's
retirement  providing  the minimum term of employment of twenty years of service
has been met. For the fiscal year ended June 30, 2007,  no accrual has been made
for this retirement plan as each of the named executives have waived their right
to the  retirement  plan based on the Company's  financial  position at the time
that the plan was approved.

Severance and Change-in-Control Arrangement

     The company has not entered into any severance  agreements  with any of the
named executive officers; however, compensation for the named executive officers
does include  change-in-control  arrangements.  These  arrangements,  like other
elements of executive  compensation,  are structured with regard to practices at
comparable  companies for similarly situated officers and in a manner we believe
is likely to attract and retain high quality  executive  talent.  The plan calls
for the  named  executive  officers,  in the event of a change  in  control,  to
receive  payment of their average  annual salary for the past five years times a
multiplier  based on their  number of years of  service in the  position  at the
effective date as shown below.

                  Name and position                             Multiplier

                  Bruce A. Shear, Chief Executive Officer          2.99
                  Robert H. Boswell, Senior Vice President         2.00
                  Paula C. Wurts, Chief Financial Officer          2.00


Changes in Executive Compensation for Fiscal 2007

     In  September  2006,  the   Compensation   Committee  met  to  discuss  the
compensation of the named executive officers. The meeting resulted in a proposal
to the Board of  Directors  to increase  the base salary of the named  executive
officers and change the net earnings targets for the named executive officers to

                                       76
<PAGE>
earn cash and stock based  compensation  for each  quarter of fiscal  2007.  The
Board of Directors  accepted the proposals of the Committee and salary increases
were affected and bonus and stock-based compensation targets were set. The named
executive  officers met the bonus and  stock-based  compensation  targets in the
fourth fiscal quarter of 2007.

Accounting for Executive Compensation

     We account for equity based  compensation  paid to our employees  under the
rules of Statement of Financial Accounting Standards No. 123R (SFAS 123R), which
requires  us to measure  and record an expense  over the  service  period of the
award.  Accounting  rules also  require  us to record  cash  compensation  as an
expense at the time the obligation is incurred.

Employment agreements

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

     Three executive  officers of the Company received  compensation in the 2007
fiscal  year,  which  exceeded  $100,000.  The  following  table  sets forth the
compensation  paid or accrued by the  Company  for  services  rendered  to these
executives in fiscal year 2007, 2006 and 2005:
<TABLE>
<S>                       <C>      <C>      <C>        <C>        <C>         <C>
                                                Summary Compensation Table
    Name and
    Principal                                                         Option       All Other
    Position                 Year    Salary     Bonus       Awards  Compensation     Total
                                       ($)       ($)          ($)        ($)          ($)

            (a)              (b)       (c)        (d)         (f)        (i)         (j)

Bruce A. Shear               2007    $420,957    $40,000    $38,013    $21,833(1)   $520,803
  President and Chief        2006    $393,515    $70,000   $124,800    $27,458(2)   $615,773
  Executive Officer          2005    $383,965    $45,000    $37,050    $62,498(3)   $528,513

Robert H. Boswell            2007    $196,538    $20,000    $11,778    $14,901(4)   $243,217
  Senior Vice President      2006    $176,878    $40,000    $33,488    $14,701(5)   $265,067
                             2005    $164,590    $10,000    $15,750    $29,016(6)   $219,356

Paula C. Wurts               2007    $170,231    $20,000    $11,481    $76,563(7)   $278,275
   Chief Financial Officer,  2006    $152,878    $35,000    $32,300    $15,029(8)   $235,207
   Treasurer and Clerk       2005    $140,586    $10,000    $15,750    $35,009(9)   $201,345
</TABLE>

     * The named executive officers did not forfeit any stock options during any
of the fiscal years presented. For information regarding the assumptions used to
value these stock  options,  see "Note A THE COMPANY AND SUMMARY OF  SIGNIFICANT
ACCOUNTING  POLICIES - Stock-based  compensation"  in the  financial  statements
included in this report.

(1)  This amount represents  $9,019  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $9,152 in premiums
     paid by the Company with respect to life and  disability  insurance for the
     benefit of Mr.  Shear and $3,662  personal use of a Company car held by Mr.
     Shear.

(2)  This amount represents  $8,910  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear, $13,648 in premiums
     paid by the Company with respect to life and  disability  insurance for the

                                       77
<PAGE>
     benefit of Mr. Shear,  $864 in club membership dues paid by the Company for
     the benefit of Mr. Shear,  and $4,036 personal use of a Company car held by
     Mr. Shear.

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

(4)  This amount represents a $6,000 automobile allowance, $8,001 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell and $900 in benefit derived from the purchase of shares through
     the employee stock purchase plan

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

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

(7)  This amount represents a $4,800 automobile allowance, $9,505 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $218 in benefit derived from the purchase of shares through the
     employee  stock  purchase  plan and  $62,040  realized  on the  exercise of
     options.

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

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

COMPENSATION OF DIRECTORS

     Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $10,000 stipend per year and $2,500 for each Board meeting they attend.
The Audit Committee Chairperson receives an annual stipend of $5,000, members of
the audit committee receive an annual stipend of $3,000 and compensation
committee and nominating/governance committee receive an annual stipend of
$2,000. In addition, Directors of the Company are entitled to receive certain
stock option grants under the Company's Non-Employee Director Stock Option Plan
(the "Director Plan"). The following table presents Director compensation for
the fiscal year ended June 30, 2007.

                              DIRECTOR COMPENSATION
                     Fees Earned
                      or Paid       Option        All Other
  Name              in Cash        Awards       Compensation   Total
                        ($)             ($)           ($)         ($)
     (a)                (b)             (d)           (g)         (h)

  Donald Robar          $27,000       $22,525        $    --       $42,696
  William Grieco        $27,000       $22,525        %    --       $42,696
  David Dangerfield     $27,000       $22,525        %    --       $42,696
  Howard W. Phillips*   $    --       $16,550        $50,586       $67,136

                                       78
<PAGE>
*    Mr. Phillips is an employee of the Company,  serving as a Public  Relations
     Specialist.  Other than his salary as an employee he receives no additional
     compensation as a director.

     As of June 30, 2007 each member of the Board of Directors had the following
options  outstanding:  Donald Robar,  117,500 (87,500  vested);  William Grieco,
117,500 (87,500 vested); David Dangerfield,  50,000 (20,000 vested); and, Howard
Phillips, 117,500 (87,500 vested).

Compensation Committee Interlocks and Insider Participation

     During fiscal 2007 the Compensation Committee consisted of Mr. Donald Robar
and Mr.  William  Grieco,  neither of which was an officer  or  employee  of the
Company during the 2007 fiscal year. Mr. Robar served as the Company's Treasurer
from  February 1996 until April 2000.  During the 2007 fiscal year,  none of our
executive  officers served on our  Compensation  Committee (or  equivalent),  or
board of directors,  of another entity whose executive  officer(s) served on our
Compensation Committee or Board of Directors.

OPTION PLANS

Stock Plan

     The Board of  Directors  adopted the  Company's  first stock option plan on
August 26,  1993.  This  stock  option  plan has  expired,  however,  options to
purchase 195,000 shares remain outstanding under the plan. On September 22, 2003
the Board of Directors  adopted the Company's  current stock option plan and the
stockholders  of the Company  approved the plan on December 31, 2003.  The Stock
Plan  provides for the issuance of a maximum of 1,300,000  shares of the Class A
Common Stock of the Company  pursuant to the grant of incentive stock options to
employees and the grant of  nonqualified  stock  options or restricted  stock to
employees, directors,  consultants and others whose efforts are important to the
success of the Company.

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

     During the fiscal year ended June 30, 2007, the Company  issued  additional
options to purchase  177,500 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share  ranging from $2.06 to $3.35.  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.

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

     A total of 157,034  shares of Class A Common  Stock were  issued  under the
1995 plan before it's  expiration  and 10,855  shares have been issued under the
2005 plan.  Thirteen  employees are participating in the current offering period

                                       79
<PAGE>
under the new plan,  which began on February 1, 2007 and will end on January 31,
2008.

Non-Employee Director Stock Plan

     The  non-employee  directors'  stock option plan  provides for the grant of
nonstatutory  stock options  automatically at the time of each annual meeting of
the Board.  Through June 30, 2007, options for 145,500 shares were granted under
the 1995 plan.  This plan  expired in August  2005 and,  in  January  2005,  the
shareholders voted to approve a new non-employee  directors' stock plan. The new
plan is  identical  to the plan it  replaced.  Under the new plan a  maximum  of
350,000  shares may be issued.  On January  31,  2006,  this plan was amended to
increase the number of options  issued to each outside  director  each year from
10,000 options to 20,000 options.  Each outside director is granted an option to
purchase  20,000 shares of Class A Common Stock annually at fair market value on
the date of grant,  vesting 25%  immediately  and 25% on each of the first three
anniversaries  of the grant and expiring ten years from the grant date.  The new
plan will  expire  in  January  2015,  ten  years  from the date of  shareholder
approval. As of June 30, 2007, 160,000 options have been issued under the plan.

     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.

Options Exercised

     During the fiscal year ended June 30, 2007, a total of 241,687 options were
exercised  under the plans,  of which 41,000  options  were  exercised at prices
ranging from $0.22 to $0.45,  152,000  options were  exercised at prices ranging
from $0.55 to $0.81,  42,000 options were exercised at prices ranging from $1.03
to $1.48 and 6,687 options were exercised at prices ranging from $2.01 to 2.53.

     The following table provides information about options granted to the named
executive  officers during fiscal 2007 under the Company's Stock Plan,  Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

                                        GRANTS OF PLAN-BASED AWARDS

                                 All Other Option    Exercise or   Grant Date
                                 Awards Number of    Base Price   Fair Value of
  Name            Grant Date       Securities        of Option     Stock and
                                  Underlying           Awards       Option
                                    Options         ($/Share)*      Awards
______            __________     _________________  ____________   ___________
                                       (#)
  (a)               (b)                (j)              (k)           (l)

Bruce A. Shear     10/31/2006        15,000             $2.06         $16,350

Robert H. Boswell  10/31/2006         7,500             $2.06         $ 8,175

Paula C. Wurts     10/31/2006         7,500             $2.06         $ 8,175


     These  options  were  issued  under the  Executive  bonus plan based on the
Company's  performance  in fiscal 2006. The Company  utilized the  Black-Scholes
valuation  model for  estimating  the Grant Date Value with no  adjustments  for
non-transferability or risk of forfeiture. The assumptions used are as follows:

       Risk free interest rate                  4.60%
       Expected dividend yield                   0.0%
       Expected lives                              5
       Expected volatility                      48.0%

                                       80
<PAGE>
     The following table provides information about options outstanding, held by
the named executive officers at the end of fiscal 2007.

                         OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

                  Number of       Number of
                  Securities      Securities
                  Underlying      Underlying       Option
                  Unexercised     Unexercised     Exercise        Option
                   Options         Options          Price     Expiration Date
  Name            Exerciseable    Unexerciseable
                  ____________    ______________

 (a)                   (b)             (c)            (e)           (f)

Bruce A. Shear       40,000                --      $0.75         09/30/2007
                     15,000                --      $0.69         01/06/2008
                     15,000                --      $1.37         11/04/2009
                     15,000                --      $1.21         11/04/2009
                     15,000                --      $2.38         06/16/2010
                      7,500             7,500      $2.68         09/20/2010
                     37,500            37,500      $2.68         09/20/2010
                     11,250             3,750      $2.20         05/22/2011
                      3,750            11,250      $2.06         10/31/2011
Robert H. Boswell    25,000                --      $0.75         09/30/2007
                     25,000                --      $1.41         12/21/2009
                     10,000            10,000      $2.73         09/22/2010
                        625               625      $1.95         02/16/2011
                      5,625             1,875      $2.20         05/22/2011
                      1,875             5,625      $2.06         10/31/2011
Paula C. Wurts       25,000                --      $0.75         09/30/2007
                     25,000                --      $1.41         12/21/2009
                     10,000            10,000      $2.73         09/22/2010
                      5,625             1,875      $2.20         05/22/2011
                      1,875             5,625      $2.06         10/31/2011

     On June 30,  2005,  the Company  accelerated  the vesting on the 326,250 of
outstanding  unvested  options held by  employees.  This  resulted in a non-cash
charge to  compensation of $9,875 and $27,025 in the fiscal years ended June 30,
2006 and 2005,  respectively.  No charge was made for these repriced  options in
the fiscal year ended June 30, 2007.

                                       81
<PAGE>
                       OPTIONS EXERCISED AND STOCK VESTED

     The following table provides  information about options exercised,  held by
the named executive officers during the fiscal year ended June 30, 2007.

                                             Option Awards
            Name                      Number of        Value
                                        Shares         Realized
                                      Acquired           On
                                      on Exercise     Exercise
                                         (#)             ($)

           (a)                          (b)             (c)

       Bruce A. Shear                  20,000        $ 51,000

       Robert H. Boswell               25,000          59,625

       Paula C. Wurts                  25,000          69,250

                                       82
<PAGE>
Item 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
     RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information  regarding the ownership
of shares of the  Company's  Class A Common  Stock and Class B Common Stock (the
only classes of common stock of the Company currently  outstanding) as of August
15, 2007 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named  executive  officers  as  defined in 17 CFR  228.402(a)(2)  and all
directors and officers of the Company as a group. Shares of common stock subject
to stock options vesting on or before October 14, 2007 (within 60 days of August
15, 2007) are deemed to be outstanding  and  beneficially  owned for purposes of
computing  the  percentage  ownership  of such  person  but are not  treated  as
outstanding for purposes of computing the percentage ownership of others. Unless
otherwise  indicated below, to the knowledge of the Company,  all persons listed
below have sole  voting and  investment  power with  respect to their  shares of
common  stock,  except  to the  extent  authority  is shared  by  spouses  under
applicable law. In preparing the following  table, the Company has relied on the
information furnished by the persons listed below:

Beneficial Owners 5% (Non affiliate)
                                                       Amount and
                                                       Nature of
                      Name and Address                Beneficial     Percent of
Title of Class        of Beneficial Owner              Owner (11)       Class
______________        ___________________             ___________    __________

Class A Common Stock   Marathon Capital Mgmt, LLC        1,498,865        7.7%
                       P. O. Box 771
                       Hunt Valley, MD  21030

                       Camden Partners Capital           1,657,177        8.5%
                       Management LLC
                       500 East Pratt Street,
                       Suite 1200
                       Baltimore, MD 21202

                       Boston Partners Asset             1,508,370        7.8%
                       Management, LLC
                       28 State Street, 20th Floor
                       Boston, MA 02109

Beneficial Ownership of Named Executives and Directors
                                                       Amount and
                                                       Nature of
                      Name and Address                Beneficial     Percent of
Title of Class        of Beneficial Owner              Owner (11)       Class
______________        ___________________             ___________    __________

Class A Common Stock   Bruce A. Shear                    687,495(1)       3.5%
                       Robert H. Boswell                 243,186(2)       1.2%
                       Paula C. Wurts                    189,622(3)       1.0%
                       Howard W. Phillips                188,750(4)       1.0%
                       Donald E. Robar                   135,232(5)         *
                       William F. Grieco                 150,750(6)         *
                       David E. Dangerfield               25,000(7)         *
                       All  Directors and
                         Officers as                   1,649,975(8)        8.3%
                       a Group (7 persons)
Class B Common
  Stock (9)            Bruce A. Shear                    721,259(10)      93.0%

                                       83
<PAGE>
                       All Directors and
                         Officers as                     721,259          93.0%
                         a Group (7 persons)
  *    Less than 1%

1.   Includes  152,500  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.69
     to $2.68 per share.
2.   Includes  64,375  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options at an exercise price range of $.75 to
     $2.73 per share.
3.   Includes  63,750  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.75
     to $2.73 per share.
4.   Includes  55,000  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable stock options having an exercise price range of $.74
     to $3.18 per share.
5.   Includes  90,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable stock options having an exercise price range of $.22
     to $3.18 per share.
6.   Includes  90,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.22
     to $3.18 per share.
7.   Includes  25,000  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options,  having an exercise price range of $
     1.48 to $3.18 per share.
8.   Includes an  aggregate of 541,625  shares of Class A Common Stock  issuable
     pursuant to currently  exercisable stock options. Of those options,  20,000
     have an exercise price of $3.18, 20,000 have an exercise price of $2.73 per
     share,  45,000  have an exercise  price of $2.68 per share,  15,000 have an
     exercise  price of $2.38 per share,  7,500 have an exercise price of $2.20,
     40,000 have an exercise  price of $2.11 per share,  11,500 have an exercise
     price of $2.06 per share,  625 have an  exercise  price of $1.95 per share,
     40,000 have an exercise  price of $1.48 per share,  50,000 have an exercise
     price of $1.41 per share, 15,000 have an exercise price of $1.37 per share,
     30,000 have an exercise  price of $1.33 per share,  15,000 have an exercise
     price of $1.21, 4,000 have an exercise price of $1.03 per share, 4,000 have
     an exercise price of $.81 per share, 120,000 have an exercise price of $.75
     per share,  30,000 have an exercise price of $.74 per share, 15,000 have an
     exercise price of $.69 per share, 35,000 have an exercise price of $.55 per
     share,  20,000 have an  exercise  price of $.35 per share and 4,000 have an
     exercise price of $.22 per share.
9.   Each share of Class B Common Stock is convertible into one share of Class A
     Common Stock  automatically upon any sale or transfer or at any time at the
     option of the holder.
10.  Includes  56,369  shares of Class B Common Stock pledged to Steven J. Shear
     of 2 Addison Avenue,  Lynn,  Massachusetts 01902, Bruce A. Shear's brother,
     to secure the purchase  price  obligation  of Bruce A. Shear in  connection
     with his purchase of his brother's  stock in the Company in December  1988.
     In the absence of any default under this obligation, Bruce A. Shear retains
     full voting power with respect to these shares.
11.  "Amount and Nature of Beneficial  Ownership".  Each share of Class A Common
     Stock is  entitled  to one vote per share and each  share of Class B Common
     Stock  is  entitled  to five  votes  per  share  on all  matters  on  which
     stockholders  may vote (except that the holders of the Class A Common Stock
     are entitled to elect two members of the  Company's  Board of Directors and
     holders of the Class B Common Stock are entitled to elect all the remaining
     members of the Company's Board of Directors).

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

     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, 2007:

             Bruce A. Shear ........................................18.31%
             All Directors and Officers as a Group
             (7 persons)............................................22.04%

                                       84
<PAGE>
SECURITIES  AUTHORIZED FOR ISSUANCE UNDER EQUITY  COMPENSATION  PLANS as of JUNE
30, 2007
                              (a)              (b)                 c)

                                                              Number of
                                                              securities
                             Number of                        remaining
                             securities      Weighted-        availabl for
                             to be           average          future issuance
                             issued upon     exercise         under equity
                             exercise of     price of         compensation
                             outstanding     outstanding      plans excluding
                             options,        options,         securities
                             warrants and    warrants         reflected in
  PLAN                       rights          and rights       column (a))
                             ____________    ___________      _______________

   1993 Option plan            195,000         $0.70                   --
   2003 Option plan            675,000         $2.03              555,313
   2006 Employee stock
     Purchase plan                  --         $0.00              489,145
   1995 Director plan           76,000         $0.85                   --
   2005 Director plan          150,000         $2.41              190,000
                               _______         _____              _______
   Total Shares and
     Options authorized      1,096,000         $1.76            1,234,458
                             =========         =====            =========

All equity compensation plans were approved by the security holders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     For the periods  presented in this Annual Report on Form 10-K to date,  the
Company has had no related party transactions. Before entering into any contract
or  agreement  involving  a related  party the Board of  Directors  reviews  and
approves the transaction. In the event one of the related parties is a member of
the  Board  of  Directors,  that  member  of  the  Board  recuses  himself  from
participation in the discussion or approval of the transaction.

Item 14. Principal Accountant Fees and Services

     The information  required by this item is incorporated by reference to PHC,
Inc.'s Proxy  Statement for its 2007 Annual Meeting of  Stockholders to be filed
with the SEC within  120 days  after the end of the  fiscal  year ended June 30,
2007.



                                       85
<PAGE>
PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

     1)   Consolidated Financial Statements:                        Page Number

     o    Reports of Independent Registered Public Accounting Firms   F-2 - F-3

     o    Consolidated balance sheets                                 F-4

     o    Consolidated statements of income                           F-5

     o    Consolidated statements of changes in stockholders' equity  F-6

     o    Consolidated statements of cash flows                       F-7 - F-8

     o    Notes to consolidated financial statements                  F-9 - F-32

2)   Financial   Statement   Schedules:   All  schedules  are  included  in  the
     Consolidated financial statements and footnotes thereto.

3)   The  following  exhibits are filed as part of or  furnished  with this Form
     10-K as applicable:

(b) Exhibits

Exhibit No.        Description

3.1  Restated Articles of Organization of the Registrant,  as amended. (Filed as
     exhibit 3.1 to the Company's Registration Statement on March 2, 1994).
3.2  By-laws  of the  Registrant,  as  amended.  (Filed  as  exhibit  3.2 to the
     Company's  Post-Effective  Amendment  No.  2 on  Form  S-3 to  Registration
     Statement on Form SB-2 under the  Securities Act of 1933 dated November 13,
     1995.)
4.1  Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC,  Inc.,  and Heller  Healthcare  Finance dated March 16,
     1998.  (Filed as exhibit  4.17 to the  Company's  quarterly  report on Form
     10-QSB,  filed with the Securities and Exchange  Commission on November 14,
     2000. Commission file number 0-22916).
4.2  Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC, Inc., and Heller Healthcare  Finance dated December 18,
     2000.  (Filed as exhibit 4.19 to the Company's  report on Form 10-KSB dated
     September 25, 2001. Commission file number 0-22916).
4.3  Form of Subscription  Agreement and Warrant.  (Filed as exhibit 4.20 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Commission on May 13, 2004. Commission file number 0-22916).
*4.4 Warrant  Agreement  issued to  CapitalSource  Finance,  LLC to purchase
     250,000 Class A Common shares dated June 13, 2007.
10.1 Deed of Trust Note of Mount Regis Center  Limited  Partnership  in favor of
     Douglas  M.  Roberts,  dated  July 28,  1987,  in the  amount of  $560,000,
     guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis Center,
     Limited Partnership of even date. (Filed as exhibit 10.1 to Form SB-2 dated
     March 2, 1994).
10.2 Assignment and Assumption of Limited Partnership  Interest,  by and between
     PHC of Virginia Inc. and each assignor dated as of June 30, 1994. (Filed as
     exhibit 10.57 to Form 10-KSB on September 28, 1994).
10.3 Copy of Note of Bruce A. Shear in favor of Steven J. Shear,  dated December
     1988, in the amount of $195,695;  Pledge  Agreement by and between Bruce A.
     Shear and  Steven  J.  Shear,  dated  December  15,  1988;  Stock  Purchase
     Agreement by and between Steven J. Shear and Bruce A. Shear, dated December
     1, 1988. (Filed as exhibit 10.2 to the Company's  Registration Statement on
     Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.4 Agreement  between  Family  Independence  Agency and Harbor  Oaks  Hospital
     effective  January 1, 1997.  (Filed as exhibit 10.4 to the Company's report
     on Form 10-KSB,  with the Securities and Exchange Commission on October 14,
     1997. Commission file number 0-22916)
10.5 Master Contract by and between Family  Independence  Agency and Harbor Oaks
     Hospital effective January 1, 1997. (Filed as exhibit 10.5 to the Company's
     report on Form 10-KSB, filed with the Securities and Exchange Commission on
     October 14, 1997. Commission file number 0-22916). Exhibit No. Description

                                       86
<PAGE>
Exhibit No.        Description

10.6 The  Company's  1993 Stock  Purchase and Option Plan,  as amended  December
     2002.  (Filed as exhibit  10.23 to the  Company's  report on Form S-8 dated
     January 8, 2003.  Commission  file number  333-102402).
10.7 The  Company's  1995  Non-Employee  Director  Stock Option Plan, as amended
     December 2002.  (Filed as exhibit 10.24 to the Company's report on Form S-8
     dated January 8, 2003. Commission file number 333-102402).
10.8 The Company's 1995 Employee Stock Purchase Plan, as amended  December 2002.
     (Filed as exhibit 10.25 to the  Company's  report on Form S-8 dated January
     8, 2003. Commission file number 333-102402).
10.9 Membership  Purchase  Agreement  between  PHC,  Inc.  and Pivotal  Research
     Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and Anthony A
     Bonacci  dated April 30,  2004.  (Filed as exhibit  10.27 to the  Company's
     report on Form 8-K filed with the Securities and Exchange Commission on May
     13, 2004. Commission file number 0-22916).
10.10 Pledge  Agreement entered into April 30, 2004 by and between PHC, Inc. and
     Louis C. Kirby,  Carol A. Colombo and Anthony A Bonacci.  (Filed as exhibit
     10.28 to the  Company's  report on Form 8-K filed with the  Securities  and
     Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.11 Security  Agreement  entered into April 30, 2004 by and between PHC,  Inc.
     and Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A Bonacci.  (Filed as
     exhibit 10.29 to the Company's report on Form 8-K filed with the Securities
     and Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.12 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note A).  (Filed as exhibit 10.30 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.13 Secured  Promissory Note dated April 30, 2004 in the amount of $500,000 by
     PHC,  Inc.  in favor of Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A
     Bonacci (Note B).  (Filed as exhibit 10.31 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.14 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note C).  (Filed as exhibit 10.32 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  Commission  on May 13, 2004.
     Commission file number 0-22916).
10.15 Kirby Employment and Non-Compete Agreement. (Filed as exhibit 10.33 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Commission on May 13, 2004. Commission file number 0-22916).
10.16 Colombo Employment and Non-Compete  Agreement.  (Filed as exhibit 10.34 to
     the  Company's  report on Form 8-K filed with the  Securities  and Exchange
     Commission on May 13, 2004. Commission file number 0-22916).
10.17 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.35 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
     Commission file number 0-22916).
10.18 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.36 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
     Commission file number 0-22916).
10.19 Revolving  Credit,  Term Loan and Security  Agreement,  dated  October 19,
     2004, by and between PHC, Inc, PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,
     PHC of Michigan,  Inc.,  PHC of Nevada,  Inc.,  North Point  Pioneer,  Inc,
     Wellplace,  Inc.,  Detroit  Behavioral  Institute,  Inc. and  CapitalSource
     Finance,  LLC. (Filed as exhibit 10.38 to the Company's  report on Form 8-K
     filed with the  Securities  and  Exchange  Commission  on October 22, 2004.
     Commission file number 0-22916).

                                       87
<PAGE>
Exhibit No.          Description

10.20 Term Loan Note,  dated  October 19, 2004,  by and between PHC, Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $1,400,000.
     (Filed as exhibit 10.39 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.21 Revolving  Note dated  October 19, 2004,  by and between PHC,  Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $3,500,000.
     (Filed as exhibit 10.40 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.22 One of two (2) Revolving  Credit Notes in the amount of $1,500,000  issued
     to replace the $3,500,000  note signed in favor of  CapitalSource  Finance,
     LLC dated  October 19, 2004 by and between PHC of  Michigan,  Inc.,  PHC of
     Nevada,  Inc.,  PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,  North Point -
     Pioneer,  Inc.,  Wellplace,  Inc., Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance LLC. (Filed as exhibit 10.47 to the Company's report
     on Form 10-QSB dated May 13, 2005. Commission file number 0-22916).
10.23 One of two (2) Revolving  Credit Notes in the amount of $2,000,000  issued
     to replace the $3,500,000  note signed in favor of  CapitalSource  Finance,
     LLC dated  October 19, 2004 by and between PHC of  Michigan,  Inc.,  PHC of
     Nevada,  Inc.,  PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,  North Point -
     Pioneer,  Inc.,  Wellplace,  Inc., Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance LLC. (Filed as exhibit 10.48 to the Company's report
     on Form 10-QSB dated May 13, 2005.  Commission file number 0-22916).
10.24 Agreement  to purchase  licensed  software by and between PHC,  Inc.,  and
     Medical  Information  Technology,  Inc.,  dated March 31,  2006.  (Filed as
     exhibit  10.49 to the  Company's  report on Form 10-QSB dated May 22, 2006.
     Commission file number 0-22916).
10.25 Master  lease  agreement  by and between  PHC,  Inc.,  and Banc of America
     Leasing & Capital,  LLC, dated April 20, 2006,  effective April 1, 2006, in
     the amount of $662,431.  (Filed as exhibit 10.50 to the Company's report on
     Form 10-QSB dated May 22, 2006. Commission file number 0-22916).
10.26 First  Amendment to Revolving  Credit,  Term Loan and Security  Agreement,
     dated October 19, 2004, by and between PHC, Inc, PHC of Utah,  Inc., PHC of
     Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,  Inc.,  North Point
     Pioneer,  Inc,  Wellplace,  Inc.,  Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance,  LLC.,  adjusting  the  covenants  for census and
     EBITDAM.
10.27 Second Amendment to Revolving  Credit,  Term Loan and Security  Agreement,
     dated October 19, 2004, by and between PHC, Inc, PHC of Utah,  Inc., PHC of
     Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,  Inc.,  North Point
     Pioneer,  Inc,  Wellplace,  Inc.,  Detroit Behavioral  Institute,  Inc. and
     CapitalSource  Finance,  LLC. , extending the term of the agreement through
     October 19, 2008.
*10.28 Amendment to Revolving Credit,  Term Loan and Security  Agreement,  dated
     October 19,  2004,  by and between  PHC,  Inc,  PHC of Utah,  Inc.,  PHC of
     Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,  Inc.,  North Point
     Pioneer, Inc, Wellplace,  Inc., Detroit Behavioral Institute,  Inc., Severn
     Hills  Hospital,   Inc.  and  CapitalSource  Finance,  LLC.  modifying  the
     agreement to increase the amount available under the term loan,  extend the
     agreement through June 13, 2010, reduce the interest rates on the notes and
     adjusting the covenants under the agreement.
14.1 Code of Ethics
*21.1 List of  Subsidiaries.
*23.1 Consent of Eisner, LLP, an independent registered public accounting firm.
*23.2 Consent of BDO Seidman,  LLP, an independent  registered public accounting
     firm.

                                       88
<PAGE>
Exhibit No.        Description

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

*Filed herewith

                                       89
<PAGE>
                                                        SIGNATURES

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


                                              PHC, INC.

Date:    September 28, 2007                   By:   /S/ BRUCE A. SHEAR
                                                        __________________
                                                    Bruce A. Shear, President
                                                    and Chief Executive Officer


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


          SIGNATURE               TITLE(S)                         DATE


/s/ BRUCE A. SHEAR              President, Chief            September 28, 2007
___________________             Executive Officer and
    Bruce A. Shear              Director  (principal
                                executive officer)


/s/ PAULA C. WURTS             Chief Financial Officer,     September 28, 2007
___________________            Treasurer and Clerk
    Paula C. Wurts             (principal  financial
                               and accounting officer)


/s/ DONALD E. ROBAR             Director                    September 28, 2007
___________________
    Donald E. Robar



/s/ HOWARD PHILLIPS            Director                     September 28, 2007
___________________
    Howard Phillips



 /s/ WILLIAM F. GRIECO         Director                     September 28, 2007
___________________
     William F. Grieco


/S/ DAVID E. DANGERFIELD       Director                     September 28, 2007
___________________
    David E. Dangerfield


                                       90