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

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 for the fiscal year ended June 30, 2001
[    ] Transition  report under section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the transition period from to

Commission file number: 0-22916

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

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

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

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

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

                                      NONE.

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

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

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

                                                             Yes  X   No

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

The issuer's revenues for the fiscal year ended June 30, 2001 were $22,749,836.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked  prices of such  stock,  as of  August  31,  2001,  was  $3,878,821.  (See
definition of affiliate in Rule 12b-2 of Exchange Act).

At August 31, 2001,  8,688,158  shares of the issuer's  Class A Common Stock and
726,991 shares of the issuer's Class B Common Stock were outstanding.

                 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                    Yes No X



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<PAGE>
PART I

ITEM 1.           DESCRIPTION OF BUSINESS

INTRODUCTION

     Our company is a national health care company,  which provides  psychiatric
services primarily to individuals who have alcohol and drug dependency,  related
disorders and to  individuals  in the gaming and trucking  industry.  We operate
substance  abuse  treatment  facilities  in Utah and Virginia,  four  outpatient
psychiatric  facilities in Michigan,  two outpatient  psychiatric  facilities in
Nevada,  one  outpatient   psychiatric  facility  in  Kansas  and  an  inpatient
psychiatric    facility   in    Michigan.    We   also    operate   a   website,
Behavioralhealthonline.com,  which provides education, training and materials to
behavioral health professionals in addition to providing internet support to all
of our other  subsidiaries.  Through  our newest  subsidiary  we work with major
manufacturers  of  psychiatric  pharmaceuticals  to  assist  in the study of the
effects of certain FDA approved  products in the  treatment  of specific  mental
illness. Until February we also provided management and administrative  services
to psychotherapy and psychological practices in New York.

     Our company  provides  behavioral  health  services  and  products  through
inpatient  and   outpatient   facilities   and  online  to   behavioral   health
professionals.  Our substance abuse  facilities  provide  specialized  treatment
services to patients who  typically  have poor  recovery  prognoses  and who are
prone to relapse. These services are offered in small specialty care 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  facility
provides inpatient psychiatric care and intensive outpatient treatment, referred
to  as  partial  hospitalization,  to  children,  adolescents  and  adults.  Our
outpatient  mental  health  clinics  provide  services  to  employees  of  major
employers,  as well as to managed  care,  Medicare  and  Medicaid  clients.  The
psychiatric  services  are offered in a larger,  more  traditional  setting than
PHC's substance abuse facilities, enabling PHC to take advantage of economies of
scale to provide cost-effective treatment alternatives.

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

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




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<PAGE>
PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

      Industry Background

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

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

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

      Company Operations

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

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



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

     The company  believes that it has benefited from an increased  awareness of
the need to make substance abuse treatment  services  accessible to the nation's
workforce.  For  example,  Subchapter  D of the  Anti-Drug  Abuse  Act  of  1988
(commonly  known as The Drug Free  Workplace  Act),  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 34-bed,  freestanding alcohol and drug
treatment  hospital,  which the company has been operating since 1984. It is the
oldest  facility  dedicated  to  substance  abuse  in  Utah.  Highland  Ridge is
accredited by the Joint Commission on Accreditation of Healthcare  Organizations
("JCAHO") and is licensed by the Utah  Department of Health.  Highland  Ridge is
recognized nationally for its excellence in treating substance abuse disorders.

     Most patients 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


                                     - 4 -
<PAGE>
also offers extensive aftercare assistance at programs  strategically located in
areas of client  concentration  throughout  the United  States.  Highland  Ridge
maintains a comprehensive  array of professional  affiliations to meet the needs
of discharged  patients and other  individuals  not admitted to the hospital for
treatment.

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

     In the  spring of 1994,  the  company  began to  operate  a crisis  hotline
service under contract with a major transportation client. The hotline,  Pioneer
Development  Support  Services,  or PDS2  ("PDS2"),  shown as  Contract  support
services on the accompanying income statement, 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.   Four  major   transportation   companies
subscribed to these  services as of June 30, 2001.  This operation is physically
located in Highland Ridge  Hospital,  but a staff dedicated to PDS2 provides the
services. PDS2 is currently operated by the parent entity, PHC, Inc.

     MOUNT  REGIS - Mount  Regis  is a  25-bed,  freestanding  alcohol  and drug
treatment center located in Salem, Virginia,  near Roanoke. The company acquired
the center in 1987.  It is the oldest of its kind in the Roanoke  Valley.  Mount
Regis is  accredited  by the JCAHO,  and  licensed by the  Department  of Mental
Health,  Mental  Retardation and Substance Abuse Services of the Commonwealth of
Virginia. In addition, Mount Regis operates Changes, an outpatient clinic at its
Salem, Virginia  Location.  The Changes  clinic  provides  structured  intensive
outpatient  treatment for patients who have been discharged from Mount Regis and
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.

     Mount  Regis  Center's  programs  are  sensitive  to  needs  of  women  and
minorities.   The  majority  of  Mount  Regis  clients  are  from  Virginia  and
surrounding  states. In addition,  because of its relatively close proximity and
accessibility  to New York,  Mount Regis has been able to attract an  increasing
number  of  referrals  from  New  York-based  labor  unions.   Mount  Regis  has
established  programs  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


                                     - 5 -
<PAGE>
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 through Harbor Oaks Hospital. The company also currently operates seven
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 and a case manager with continuing  oversight of the patient
as the patient  receives  care in different  locations  or programs  handle case
management.  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 5 years of age to senior citizens.
The psychiatric facilities treat a larger percentage of female patients than the
substance abuse facilities.

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

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

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

     HARMONY HEALTHCARE - Harmony Healthcare,  which consists of two psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for  railroads,  health  care  companies  and  several  large  casino  companies


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<PAGE>
including Boyd Gaming  Corporation,  the MGM Grand and the Venetian with a rapid
response  program to provide  immediate  assistance 24 hours a day. Harmony also
provides outpatient  psychiatric care and inpatient  psychiatric case management
through  a  capitated  rate  behavioral   health  carve-out  with  Pacific  Care
Insurance.

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

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

     PIONEER PHARMACEUTICAL  RESEARCH, INC. - PPR works with major manufacturers
of psychiatric  pharmaceuticals to assist in the study of the effects of certain
FDA approved products in the treatment of specific mental illness. These studies
are conducted primarily through our facilities in Michigan, Harbor Oaks Hospital
and North  Point-Pioneer  with the permission and assistance of patients who are
in treatment.

Internet Operations

     BEHAVIORAL HEALTH ONLINE, INC. - Behavioral Health Online designs, develops
and maintains the company's web site,  Behavioralhealthonline.com.  The web site
provides behavioral health  professionals with the educational tools required to
keep them  abreast  of  behavioral  health  breakthroughs  and keep  individuals
informed  of  current  issues in  behavioral  health of  interest  to them.  The
original site, Behavioralhealthonline.com, was launched in May 1999. The company
launched its new updated site  Wellplace.com  in September 2000.  Wellplace also
provides Internet support to the other operating Pioneer subsidiaries.

Operating Statistics

     The following table reflects selected financial and statistical information
for all psychiatric services.

                                                 Year Ended June 30,
                                              2001              2000
                                      ____________________________________

      Inpatient
      Net patient service revenues       $ 13,507,124       $ 11,768,434
      Net revenues per patient day (1)   $        418       $        403
      Average occupancy rate (2)                72.0%              65.1%
      Total number of licensed
        beds at end of period                     123                123
      Source of Revenues:
         Private (3)                            82.0%              81.9%
         Government (4)                         18.0%              18.1%
      Partial Hospitalization
        and Outpatient

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<PAGE>
                                         Year Ended June 30,
                                              2001              2000
                                      ____________________________________
      Net Revenues:*
         Individual                      $  5,283,278       $  5,027,238
         Contract                        $  2,297,071       $  1,880,168
      Sources of revenues:
         Private                                97.9%              97.6%
         Government                              2.1%               2.4%


      Other Psychiatric
      Services:
        PDS2 (5)                         $    944,567       $    653,930
        Practice Management (6)          $    345,111       $  1,048,990


(1)  Net revenues per patient day equals net patient service revenues divided by
     total patient days.

(2)  Average  occupancy  rates were  obtained  by dividing  the total  number of
     patient days in each period by the number of beds available in such period.

(3)  Private pay percentage is the percentage of total patient  revenue  derived
     from all payors other than Medicare and Medicaid.

(4)  Government  pay  percentage  is the  percentage  of total  patient  revenue
     derived from the Medicare and Medicaid programs.

(5)  PDS2, Pioneer Development and Support Services,  provides clinical support,
     referrals  management  and  professional  services  for  a  number  of  the
     company's national contracts.

(6)  Practice  Management  revenue was  produced  through  BSC-NY and PHC,  Inc.
     During the fiscal year ended June 30,  2001 the company  closed it practice
     management  services  as  outlined in this  report  under  "Description  of
     Business" and detailed in footnote A to the financial  statements  included
     in this report.

Business Strategy

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

     The company focuses its marketing efforts on "safety-sensitive" industries.
This focus  results in  customized  outcome  oriented  programs that the company
believes   produce   overall  cost  savings  to  the  patients   and/or   client
organizations.  The company intends to leverage experience gained from providing
services to customers in certain  industries  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,  oil and gas exploration, heavy
machinery and equipment,  manufacturing and healthcare  services.  Additionally,
the company  markets  its  services  in the gaming  industry  both in Nevada and
nationally.



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<PAGE>
     The company  employs five  individuals  dedicated  to  marketing  among the
company's  facilities.  Each facility performs marketing activities in its local
region. The Senior Vice President of the company coordinates the majority of the
company's  national  marketing  efforts.  In  addition,   employees  at  certain
facilities perform national marketing activities  independent of the 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.  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 system of comprehensive  outpatient mental health
clinics  complement  the  company's  inpatient  facilities.  These  clinics  are
strategically located in Nevada, Virginia, Kansas City, 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
Pioneer  Development  and Support  Services (PDS2) located in the Highland Ridge
facility in Salt Lake City,  Utah. PDS2 provides  clinical  support,  referrals,
management  and  professional  services for a number of the  company's  national
contracts.  It gives the  company the  capacity  to provide a complete  range of
fully integrated mental health services.

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

     In addition to its direct patient care services,  the company  launched its
web site,  Wellplace.com formerly  Behavioralhealthonline.com,  in May 1999. The
articles published on the web site are of interest to the general public as well
as the  behavioral  health  professional.  The company's  Internet  Company also
provides the added benefit of web  availability  of information  for various EAP
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,


                                     - 9 -
<PAGE>
employees and treatment facilities.  The company's Internet Company provides the
competitive  edge for service  information  and delivery for our direct  patient
care programs.


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. 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.


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 on Accreditation of Healthcare
Organizations  ("JCAHO") survey and accredit the company's inpatient  facilities
and the company's  outpatient  facilities  comply with the standards of National
Commission  Quality  Assurance  ("NCQA")  although the  facilities  are not NCQA
certified.  The  company's  professional  staff,  including  physicians,  social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific  discipline,  in
addition to each facility's own internal quality assurance criteria. The company
participates in the federally  mandated National  Practitioners Data Bank, which
monitors professional accreditation nationally.

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

Government Regulation

     The company's  business and the  development and operation of the company's
facilities  are  subject  to  extensive  federal,  state  and  local  government
regulation.  In recent years, an increasing number of legislative proposals have
been  introduced  at both the  national and state levels that would effect major


                                     - 10 -
<PAGE>
reforms  of the  health  care  system  if  adopted.  Among the  proposals  under
consideration   are  reforms  to  increase  the  availability  of  group  health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance  coverage to their employees.
The company  cannot  predict  whether  any such  legislative  proposals  will be
adopted and, if adopted,  what effect,  if any, such proposals would have on the
company's business.

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


Health Planning Requirements

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


Licensure and Certification

     State regulatory  authorities must license all of the company's facilities.
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.

                                     - 11 -
<PAGE>
Medicare Reimbursement

     Currently  the  only  facility  of  the  company  that  receives   Medicare
reimbursement  is Harbor Oaks. For the fiscal year ended June 30, 2001 12.68% of
revenues for Harbor Oaks were derived from Medicare programs.

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

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

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


Medicaid Reimbursement

     Currently  the only  facility of the company  that  receives  reimbursement
under any state Medicaid  program is Harbor Oaks. A portion of Medicaid costs 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.

     Harbor Oaks is a participant in the Medicaid  program  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


                                     - 12 -
<PAGE>
direct or indirect remuneration intended to induce the referral of patients, the
ordering,  arranging,  or providing  of covered  services,  items or  equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion   from   participation   in   the   Medicare,   Medicaid   and   other
government-sponsored  programs.  The federal  government has issued  regulations
that set forth certain "safe harbors,"  representing business  relationships and
payment  arrangements  that can safely be  undertaken  without  violation of the
federal  Fraud and Abuse  Laws.  Failure to fall  within a safe  harbor does not
constitute a per se violation of the federal  fraud and abuse laws.  The company
believes that its business  relationships and payment  arrangements  either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.

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


Employees

     As of July 31, 2001 the company had 378 employees of which 5 were dedicated
to marketing,  98 (19 part time) to finance and administration and 275 (127 part
time) to patient  care.  All of the  company's  378  employees  are leased  from
Inovis,  formerly  International  Personnel Resources,  LTD. ("IPR"), a national
employee-leasing firm. The company has elected to lease its employees to provide
more favorable employee health benefits at lower cost than would be available to
the company as a single employer and to eliminate certain  administrative  tasks
which otherwise would be imposed on the management of the company. The agreement
provides  that Inovis will  administer  payroll,  provide  for  compliance  with
workers'  compensation  laws,  including  procurement  of workers'  compensation
insurance and administering  claims, and procure and provide designated employee
benefits.  The company  retains  the right to reject the  services of any leased
employee  and Inovis has the right to increase  its fees at any time upon thirty
days' written notice or immediately upon any increase in payroll taxes, workers'
compensation insurance premiums or the cost of employee benefits provided to the
leased employees.

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

Insurance

     Each of the company's facilities maintains separate professional  liability
insurance policies. Harbor Oaks, Harmony Healthcare,  Total Concept and NPP have
coverage of $1,000,000 per claim and $3,000,000 in the aggregate. In addition to
this coverage  Harbor Oaks  maintains an umbrella  policy of  $1,000,000.  Mount
Regis has  limits of  $2,000,000  per claim  and  $4,000,000  in the  aggregate.
Highland  Ridge  has  limits of  $1,000,000  per  claim  and  $6,000,000  in the
aggregate.  In addition,  these entities  maintain general  liability  insurance
coverage in similar amounts.

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



                                     - 13 -
<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 17, 2004. The current annual payment
under the lease is $80,640 and increases to $88,896 in the final year.

     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 first floor of a two-story  hospital  owned by
Valley Mental Health. The lease is for a five-year agreement, which provides for
monthly rental payments of approximately  $16,360,  which included  housekeeping
and maintenance  provided by the landlord for the first six months, and includes
changes in rental payments each year based on increases or decreases in the CPI.
In July 1999 the  facility  began  paying  approximately  $6,500  each month for
housekeeping and maintenance.  The lease expires December 31, 2004, and includes
an option to renew for an additional five years. The company believes that these
premises are adequate for its current and anticipated needs.

Mount Regis Center

     The company owns the Mount Regis facility,  which consists of a three-story
wooden  building  located on an  approximately  two-acre  site in a  residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $425,000.  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.
Harmony,  Total  Concept,  NPP and BSC each lease  their  premises.  The company
believes that each of these premises is leased at fair market value and could be
replaced without significant time or expense if necessary.  The company believes
that all of these premises are adequate for its current and anticipated needs.

     The company  owns the building in which  Harbor Oaks  operates,  which is a
single  story brick and wood frame  structure  comprising  approximately  32,000
square feet  situated  on an  approximately  three acre site.  The company has a
$2,500,000  mortgage on this property.  The company believes that these premises
are adequate for its current and anticipated needs.


ITEM 3.     LEGAL PROCEEDINGS.

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

     On  or  about  September  14,  1998,  the  Company  and  its  wholly  owned
subsidiary,  Franvale,  were each served with  document  subpoenas in connection
with an on going  investigation  of Franvale being conducted by the Commonwealth
of Massachusetts.  In December 2000 the company finalized a settlement agreement
with the  Commonwealth in this case, which required payment of $660,000 in three
installments  between  December 31, 2000 and June 30, 2001.  This obligation has
been paid in full.

                                     - 14 -
<PAGE>
     On or about May 15,  2000,  the  company  was served with a subpoena by the
United  States  Attorney  for  the  District  of  Massachusetts.   The  subpoena
requested,  inter  alia,  patient  and  financial  records  relating to Franvale
Nursing  and  Rehabilitation  Center for the period of 1995  through  1998.  The
company is fully  cooperating with the investigation and currently is engaged in
resolution discussions.

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, 2001.


PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since the company's  public offering which was declared  effective on March
3, 1994, until December 2000 the company's Units, Class A Common Stock and Class
A Warrants were traded on the NASDAQ National Market under the symbols  "PIHCU,"
"PIHC" and  "PIHCW,"  respectively.  In December  2000 the  Company's  stock was
delisted due to failure to meet listing criteria.  Currently the company's Class
A  common  Stock is  traded  on the  NASDAQ  Bulletin  Board  under  the  symbol
"PIHC-BB."  There is no public trading  market for the company's  Class B Common
Stock.  In March 2001 the  company's  warrants  issued with its  initial  public
offering  expired:  therefore,  there is currently  no market for the  company's
warrants or units.  The following table sets forth,  for the periods  indicated,
the high and low sale price of the company's  Class A Common Stock,  as reported
by NASDAQ.

                                              HIGH              LOW
                                           ___________       ___________
2000
        First Quarter                      $   1.3125        $   .3125
        Second Quarter                     $   1.3125        $   .5625
        Third Quarter                      $   3.50          $   .688
        Fourth Quarter                     $   2.094         $  1.00

2001
        First Quarter                      $   1.50          $   .50
        Second Quarter                     $    .5625        $   .6250
        Third Quarter                      $    .6094        $   .1250
        Fourth Quarter                     $    .59          $   .19

2002
        First Quarter
         (through August 31, 2001)         $    .50          $   .30



     On August  31,  2001,  the last  reported  sale price of the Class A Common
Stock was $.50.  On August  31,  2001  there  were 683  holders of record of the
company's  Class A Common Stock and 312 holders of record of the company's Class
B Common Stock.

DIVIDEND POLICY

     The  company has never paid any cash  dividends  on its Common  Stock.  The
company is precluded under capital law from paying cash dividends,  however, the
company  does accrue  dividends on preferred  stock  according to the  preferred
stock agreement.  The company's ability to pay cash dividends in the future will
depend on the company's future earnings,  if any, the financial  position of the


                                     - 15 -
<PAGE>
company  and such other  factors as the  company's  Board of  Directors,  in its
discretion, deems relevant.

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

     The following is a discussion  and analysis of the financial  condition and
results of operations of the company for the years ended June 30, 2001 and 2000.
It should be read in conjunction with the consolidated  financial statements and
notes thereto appearing  elsewhere herein.  During fiscal year 2001 BSC-NY, Inc.
was closed as  outlined in this  report  under  "Description  of  Business"  and
detailed in footnote A to the financial statements included in this report.

Overview

     The company presently provides  behavioral health care services through two
substance abuse treatment centers,  a psychiatric  hospital and seven 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 payor 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 out patient 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.  Although  the company has changed the focus and
reduced expenses of its' internet operation,  Behavioral Health Online, Inc., to
provide  technology and internet support for the company's other operations,  it
also continues to provide  behavioral  health  information and education through
its web site at Wellplace.com.  As of the last month of the fiscal year, monthly
expenses of the internet  operation  have been  decreased by  approximately  70%
through the  consolidation of operations and elimination of excess leased space.
The company's most recent addition,  Pioneer  Pharmaceutical  Research contracts
with major  manufacturers of psychiatric  pharmaceuticals to assist in the study
of the effects of certain FDA  approved  products in the  treatment  of specific
mental illness.

     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.
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.

Results of Operations

Years Ended June 30, 2001 and 2000

     The company  experienced a significant  increase in profitability  from its
ongoing  operations.  Total revenues  increased by 11.6% to $22,749,836  for the
year  ended June 30,  2001 from  $20,378,760  for the year ended June 30,  2000.
Total revenues excluding BSC-NY,  Inc., the practice management operation closed
in the current fiscal year,  increased  15.9% to $22,404,725  for the year ended
June 30, 2001 from  $19,329,770  for the year ended June 30, 2000. This increase
in total revenues  resulted in an increase in income from operations of $671,176
for the year ended June 30,  2001 over the year ended June 30,  2000 to $937,486
from $266,310 before closing expenses of the practice management operation.  The


                                     - 16 -
<PAGE>
company  experienced  continued  progress on its return to profitability for its
operating  facilities.  Excluding the practice management closing expenses,  the
company  decreased its net loss to $64,399 for the year ended June 30, 2001 from
$612,671 for the year ended June 30, 2000.

     Total net patient  care  revenue from all  facilities,  increased  12.9% to
$21,087,473 for the year ended June 30, 2001 from $18,675,840 for the year ended
June 30,  2000.  This  increase in revenue is due  primarily  to the increase in
census at our inpatient facilities.  Net inpatient care revenue from psychiatric
services  increased 14.8% to $13,507,124 for the fiscal year ended June 30, 2001
from  $11,768,434  for the  fiscal  year  ended  June 30,  2000 and net  partial
hospitalization and outpatient care revenue increased 9.7% to $7,580,349 for the
year  ended June 30,  2001 from  $6,907,406  for the year  ended June 30,  2000.
Revenues from Pioneer  Development and Support Services ("PDS2") increased 44.4%
to $944,567  for the year ended June 30, 2001 from  $653,930  for the year ended
June  30,  2000.  All  revenues  reported  in  the  accompanying  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  increased  by  approximately  $369,500  due to the
increase in patient  census at our inpatient  facilities for the year ended June
30, 2001.  Inpatient census increased by approximately  3,000 patient days, 10%,
for the year  ended June 30,  2001  compared  to the year  ended June 30,  2000.
Pharmacy costs increased  approximately  32% to $322,520 for the year ended June
30,  2001 from  $245,338  for the year ended  June 30,  2000;  and food  expense
increased  approximately  14% to $445,651  for the year ended June 30, 2001 from
$389,697 for the year ended June 30,  2000.  We also  increased  our census from
outside  the  facilities  local  areas  resulting  in  an  increase  in  patient
transportation  expense of approximately 28% to $274,493 for the year ended June
30, 2001 from  $214,737 for the year ended June 30, 2000.  Close  monitoring  of
orders for laboratory tests and the fees associated with the tests resulted in a
decrease in laboratory fees of approximately  34% to $144,485 for the year ended
June 30, 2001 from  $218,810  for the year ended June 30,  2000.  We continue to
closely  monitor  the  ordering of 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).

     Website expenses  increased 72.6% to $1,351,150 for the year ended June 30,
2001 from $783,004 for the year ended June 30, 2000. This increase is due to the
build-up of the start-up operations in the first nine months of the year. During
the last three months of the year the company  changed the focus of the internet
Company to internal  support of the other  operating  locations and decreased on
going monthly expenses by approximately 70%.

     In December  2000 the  Company's  Board of Directors  decided to close its'
BSC-NY,  Inc.  practice  management  operations due to recent  deterioration  of
operating results. Revenues of BSC-NY, Inc. were dependent on the success of the
professional  corporation,  Rubenfaer  Physician  Services,  P.C.  for  which it
provided  management  services.   Although  the  New  York  practice  management
operations  reported  operating income of approximately  $131,000 for the fiscal
year ended June 30,  2000,  adverse  business  conditions  resulted in a loss of
approximately $399,000 for the six months ended December 31, 2000 before closing
expenses.  These  adverse  operating  conditions  were  caused by the decline in
revenues  produced by the  professional  corporation  which has closed down its'
business  operations.  Closing expenses for the practice management company were
$5,186,306  and  included  $1,545,609  in  goodwill  impairment,  $3,401,650  in
receivables  due  from  the  Professional  Corporation  and  $239,047  in  lease
termination and other expenses.

                                     - 17 -
<PAGE>
     Contract  expenses related to PDS2 increased 56.9% to $855,128 for the year
ended  June 30,  2001 from  $545,176  for the year  ended  June 30,  2000.  This
increase is due to an increased  number of  contracts  and  additional  services
provided to long term contracts.

     Total  administrative   expenses  for  all  facilities  increased  1.2%  to
$7,452,714  for the year ended June 30, 2001 from  $7,361,578 for the year ended
June 30, 2000.  This minimal  increase in  administrative  expense is due to the
increase  in  expenses  for  Pioneer   Pharmaceutical   Research  and  increased
administrative  costs  indirectly  related  to  increases  in census  which were
partially offset by decreases resulting from the close of BSC-NY, Inc. in fiscal
year 2001 and the close of Pioneer Counseling of Virginia in fiscal year 2000.

     Interest expense  increased 24.2% to $1,043,030 for the year ended June 30,
2001 from  $837,706  for the year ended June 30, 2000.  This  increase is due to
administrative  fees charged on the short term funds  required to pay the amount
due to the state of Massachusetts in legal settlement of the Franvale litigation
(see Part I, "Legal  Proceedings")  and  interest  expense  incurred on debt due
former owners of closed operations.

     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  resulted in an overall  decrease in its accounts
receivable.  In  response  to  today's  healthcare  environment,  the  company's
collection policy calls for earlier contact with insurance  carriers with regard
to payment,  use of fax and registered  mail to follow-up or resubmit claims and
earlier employment of collection  agencies to assist in the collection  process.
Our collectors  also seek  assistance  through every legal means,  including the
State insurance commissioner's office, when appropriate, to collect claims. This
early concentration on claim collection allows facility staff to become aware of
minor  billing  errors early and correct them before the claim can be denied for
timely and accurate submission. Any valid claims denied due to billing errors on
the part of the company which require  write-off are charged to bad debt expense
in the period the account is written off. Any invalid  claims result in a charge
against revenue not reserves. An amount is recorded as a contractual  adjustment
only if an agreement with the insurance carrier is on file before the patient is
admitted.  Although  the  company's  receivables  have  decreased,  the  company
continues  to reserve  for bad debts  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 reserves.  The collection  difficulties  experienced are due to
the denial of claims that had been previously  approved.  Managed care companies
frequently  deny claims  although  authorization  for treatment is on file.  The
company has limited  success in  challenging  these  denials.  Accordingly,  the
company has adopted a more  aggressive  reserve policy to reserve amounts sooner
to address these changing conditions in the healthcare environment.

Liquidity and Capital Resources

     The company used cash in operations of $461,277 for the year ended June 30,
2001.  The net loss of  $5,250,705,  included  non-cash  charges of $262,227 for
depreciation and  amortization and goodwill and accounts  receivable write downs
totaling $4,947,259 related to the practice  management  closing.  Additionally,
expenses related to a decrease in net liabilities of discontinued  operations of
$923,682, used for legal fees and the Franvale State settlement were offset by a
decrease in accounts receivable of $649,407.  During the fiscal year the company
also used cash in the  acquisition  of furniture  and  equipment of $186,842 and
website  development  of  $70,226.  The  company  was  required  to finance  its
shortfall  in cash from  operations  through  debt and  equity  transactions  as
follows:

                                     - 18 -
<PAGE>
                          NUMBER
           TRANSACTION    OF                    MATURITY
  DATE        TYPE        SHARES   PROCEEDS     DATE       TERMS     STATUS
______________________________________________________________________________

 08/99    Extension of             $310,000  12/31/99    $45,000 on  Paid
          existing over                                  signing     in full
          line Note                                      plus prime
          Payable                                        plus 2.25%
                                                         annual
                                                         interest
                                                         rate
 11/99    Revolving                $979,000  11/30/01    prime plus  Outstanding
          term Note                ($579,000             5% annual
          maximum                  paid                  interest
          advance                  off                   rate
          $1,000,000.              existing              plus 1%
          Secured by a             debt                  annual
          Restated                 and                   commitment
          Mortgage on              $400,000              fee
          the Michigan             advanced
          property and             for
          guarantee of             working
          the Parent               capital)
          Company.
 05/00    Term Note                $500,000  05/26/02    Prime       Outstanding
          $500,000                                       plus 3%
          Secured by a                                   annual
          restated                                       interest
          mortgage on                                    rate
          the Michigan                                   plus 1%
          property and                                   annual
          guarantee of                                   commitment
          the parent                                     fee
          company.
 06/00    Issue  series   136,000  $1,000,00006/28/03    8%          Outstanding
          C   preferred                                  dividend    19,300
          stock                                          paid        shares
                                                         upon        converted
                                                         conversion
 08/00    Issue  series   34,000   $250,000  08/01/03    8%          Outstanding
          C   preferred                                  dividend
          stock                                          paid
                                                         upon
                                                         conversion
 12/00    Overline                 $330,000  04/30/01    $30,000     Paid
          Agreement                                      on          in
          with Heller                                    signing     full
                                                         plus
                                                         Prime
                                                         plus
                                                         2.25%
 03/01    Extended the             $779,166  03/31/03    Prime       Outstanding
          March 1997                                     plus 5%
          Secured Term
          Note
          through
          March 2003


                                     - 19 -
<PAGE>
                         NUMBER
           TRANSACTION    OF                    MATURITY
  DATE        TYPE        SHARES   PROCEEDS     DATE       TERMS     STATUS
______________________________________________________________________________

 06/01    Overline                 $400,000  12/17/01    10% on      Outstanding
          Agreement                                      advance
          with Heller                                    of funds
          as amended                                     plus
          08/09/01                                       Prime
                                                         plus
                                                         2.25%

   The company also met certain obligations through the issuance of stock, stock
options and warrants totaling approximately $37,000 and $183,000 for the year
ended June 30, 2001 and 2000, respectively.

     A  significant  factor in the liquidity and cash flow of the company is the
timely collection of its accounts  receivable.  Current accounts receivable from
patient care, net of allowance for doubtful accounts decreased approximately 10%
to $6,220,715 on June 30, 2001 from  $6,928,490 at June 30, 2000.  This decrease
is a result of better  accounts  receivable  management due to increased  staff,
standardization  of  some  procedures  for  collecting  receivables  and a  more
aggressive  collection  policy.  The increased  staff has allowed the company to
concentrate on current accounts receivable and resolve any problem issues before
they become  uncollectable.  The company's  collection  policy calls for earlier
contact  with  insurance  carriers  with  regard  to  payment,  use of  fax  and
registered  mail to  follow-up  or  resubmit  claims and earlier  employment  of
collection  agencies to assist in the collection  process.  Our 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 May 2001, in
order to support the company's  continued revenue growth,  the company increased
its  accounts   receivable   funding  revolving  credit  agreement  with  Heller
Healthcare  Finance,  Inc. on behalf of three of its  subsidiaries.  The amended
agreement  provides  for  funding  of  up to  $3,000,000  based  on  outstanding
receivables.  The outstanding balance on this receivables  financing on June 30,
2001 was approximately $2,112,000. In March 2001 the company refinanced $779,166
ofthe  outstanding  mortgage  with Heller  Healthcare  Finance.  The company has
approximately $2,000,000 in long-term debt due in the fiscal year ended June 30,
2002.  This debt is primarily due to Heller  Healthcare  Financial,  its primary
lender.  The company has already  begun the process of renewing  this debt.  The
company also has $500,000 in outstanding convertible  debentures,  which include
the provision  that the holders of the  debentures may put all or any portion of
the  debentures  to the  company at the  original  purchase  price  plus  unpaid
interest upon 30 days written  notice  beginning  December 3, 2001.  The company
does not anticipate  that the put provision  will be exercised  since the coupon
rate is paid  quarterly  at 12% which is a higher  rate than would be  available
through other sources at this time.

     The company believes that, with the renewal of the debt mentioned above and
its  revolving  credit  facility  through  its  primary  lender,  it  will  have
sufficient   financing   available  to  fund  its  growing  operations  for  the
foreseeable  future.  The  company is  concentrating  on its core  business  and
expansion  of  its   pharmaceutical   research   operations  through  additional
contracts, which should increase revenues considerably and provide for immediate
cash from operations.

                                     - 20 -
<PAGE>
     The  liquidation of the assets and  liabilities of Franvale may result in a
non-cash  financial  statement  gain. In the quarter ended December 31, 1998 the
company  was  relieved  of the HUD  mortgage  of  approximately  $6,741,000  and
surrendered the underlying  assets  amounting to approximately  $4,329,000.  The
recognition  of the  gain  has  been  deferred  until  final  resolution  of all
contingent  liabilities (see Note A to the accompanying financial statements for
additional information regarding this gain.)

     The company has now operated  profitably  from ongoing  operations  for two
consecutive   quarters.   The  current  positive  business  environment  towards
behavioral  health  treatment  and  the  new  business   opportunities  give  us
confidence to foresee continued improved results.

New accounting standards

     In June 2001,  the Financial  Accounting  Standards  Board  finalized  FASB
Statements No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and
Other Intangible  Assets ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest  method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize  acquired  intangible assets apart from
goodwill if the  acquired  intangible  assets meet  certain  criteria.  SFAS 141
applies  to all  business  combinations  initiated  after  July 1,  2001 and for
purchase business  combinations  completed on or after July 1, 2001. It also may
require,  upon  adoption of SFAS 142 that the Company  reclassify  the  carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires 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. An intangible
asset  with an  indefinite  useful  life  should be  tested  for  impairment  in
accordance  with the  guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal  years  beginning  after  December  15, 2001 to all goodwill and other
intangible assets recognized at that date,  regardless of when those assets were
initially  recognized.  SFAS 142 requires the Company to complete a transitional
goodwill  impairment  test six months from the date of adoption.  The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

     The Company's  previous business  combinations were accounted for using the
purchase  method.  As of June 30, 2001,  the net carrying  amount of goodwill is
$969,099.  Amortization  expense  during  the  year  ended  June  30,  2001  was
approximately  $74,000.  Currently  the  Company  is  assessing  but has not yet
determined  how the adoption of SFAS 141 and SFAS 142 will impact its  financial
position and results of operation.




                                     - 21 -
<PAGE>
ITEM 7.           FINANCIAL STATEMENTS.
                                                                     AT PAGE

Index                                                                 F-1
Report of independent certified public accountants                    F-2
Consolidated balance sheets                                           F-3
Consolidated statements of operations                                 F-4
Consolidated statements of changes in stockholders' equity (deficit)  F-5
Consolidated statements of cash flows                                 F-6 - F-7
Notes to consolidated financial statements.                           F-8 - F-25



















                                                                            F-1




                                     - 22 -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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


We have audited the  accompanying  consolidated  balance sheets of PHC, Inc. and
subsidiaries  as of  June  30,  2001  and  2000  and  the  related  consolidated
statements of operations,  changes in stockholders'  equity (deficit),  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.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of PHC,
Inc.  and  subsidiaries  at June 30,  2001 and  2000  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.





                                                BDO Seidman, LLP

Boston, Massachusetts
August 31, 2001





                                                                             F2


                                     - 23 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
                                                               June 30,
                                                            2001       2000
                                                        ___________  ___________
ASSETS (Notes C and D)
Current assets:
   Cash and cash equivalents                            $   43,732    $ 551,713
   Accounts receivable, net of allowance for doubtful
     accounts of $2,632,525 and $2,850,470 at
     June 30, 2001 and 2000 respectively (Note A)        5,620,715    6,286,490
   Prepaid expenses                                         63,940      120,481
   Other receivables and advances                          112,579      148,554
   Deferred income tax asset (Note F)                      613,980      459,280
   Other receivables, related party                             --       77,500
                                                        __________  ____________
       Total current assets                              6,454,946    7,644,018

Accounts receivable, noncurrent                            600,000      642,000
Other receivables, noncurrent, related party, net of
  allowance for doubtful accounts of $1,125,054
  at June 30, 2000, (Notes A and  K)                            --    3,239,456
Other receivables (Note A)                                 104,863       95,214
Property and equipment, net (Notes A, B and D)           1,338,066    1,327,630
Deferred income tax asset (Note F)                              --      154,700
Deferred financing costs, net of amortization of
  $114,109 and $87,555 at June 30, 2001
  and 2000, respectively                                    20,000       46,554
Goodwill, net of accumulated amortization of
  $270,105 and $296,907 at June 30, 2001
  and 2000, respectively (Note A)                          969,099    2,588,834
Other assets (Note A)                                      236,478      149,403
                                                        __________  ____________
      Total assets                                      $9,723,452  $15,887,809
                                                        ==========   ==========
LIABILITIES
Current liabilities:
   Accounts payable                                     $1,866,631  $ 1,717,362
   Notes payable - related parties (Note E)                200,000      200,000
   Current maturities of long-term debt (Note C)         2,038,077    1,622,239
   Revolving credit note (Note C)                        2,111,586    1,555,149
   Current portion of obligations under capital
     leases (Note D)                                        16,725       45,482
   Accrued payroll, payroll taxes and benefits             460,723      416,111
   Accrued expenses and other liabilities                1,208,469    1,798,400
   Convertible debentures (Notes C and J)                  500,000           --
   Net liabilities of discontinued operations
    (Notes A and I)                                        960,552    1,884,234
                                                        __________  ____________
      Total current liabilities                          9,362,763    9,238,977

Long-term debt, less current maturities (Note C)         1,609,649    2,508,715
Obligations under capital leases (Note D)                   32,160       12,808
Convertible debentures (Notes C and J)                          --      500,000
                                                        __________  ____________
     Total liabilities                                  11,004,572   12,260,500
                                                        __________  ____________


                                    - 24 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
Commitments and contingent liabilities (Notes  D, G,
  H, I, J, and K)

STOCKHOLDERS' EQUITY (DEFICIT)(Notes C, H, J and K)
Convertible Preferred stock, $.01 par value;
   1,000,000 shares authorized:
   Series C 150,700 and 136,000 shares issued and
   outstanding June 30, 2001 and 2000, respectively,
   stated value $10 per share, liquidation preference,
   $1,507,000 and $1,360,000, respectively.                  1,507        1,360
Class A common stock, $.01 par value; 20,000,000
   shares authorized, 8,709,834 and 7,019,608
   shares issued June 30, 2001 and 2000, respectively.      87,098       70,196
Class B common stock, $.01 par value; 2,000,000
   shares authorized, 726,991 issued and outstanding
   June 30, 2001 and 2000 convertible into one share
   of Class A common stock.                                  7,270        7,270
Additional paid-in capital                              18,696,779   17,895,162
Treasury stock, 22,926 and 2,776 common shares at
  cost June 30, 2001 and 2000, respectively.               (24,894)     (12,122)
Notes receivable - common stock                            (80,000)          --
Accumulated deficit                                    (19,968,880) (14,334,557)
                                                      ____________  ____________
      Total stockholders' equity (deficit)              (1,281,120)   3,627,309
                                                      ____________  ____________
      Total liabilities and stockholders' equity
        (deficit)                                       $9,723,452  $15,887,809
                                                      ============  ============






See accompanying notes to consolidated financial statements                 F-3




                                     - 25 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Operations
                                                   For the Year Ended June 30,
                                                           2001        2000
                                                    ___________________________
Revenues:
   Patient care, net (Note A)                          $21,087,473  $18,675,840
   Management fees                                         345,111    1,048,990
   Pharmaceutical study                                    354,618           --
   Website services                                         18,067           --
   Contract support services                               944,567      653,930
                                                      ____________  ____________
      Total revenues                                    22,749,836   20,378,760
                                                      ____________  ____________

Operating expenses:
   Patient care expenses                                 9,663,051    9,293,499
   Cost of contract support services                       855,128      545,176
   Provision for doubtful accounts                       2,490,307    2,129,193
   Website expenses                                      1,351,150      783,004
   Practice management closing expenses (Note A)         5,186,306          --
   Administrative expenses                               7,452,714    7,361,578
                                                      ____________  ____________
      Total operating expenses                          26,998,656   20,112,450
                                                      ____________  ____________
Income (loss) from operations                           (4,248,820)     266,310

Other income (expense):
   Interest income                                          23,519       18,853
   Interest expense                                     (1,043,030)    (837,706)
   Other income, net                                        62,076       91,712
                                                      ____________  ____________
      Total other expense, net                            (957,435)    (727,141)

Loss before income taxes and change in
    accounting principle                                (5,206,255)    (460,831)
Income taxes (Note F)                                       44,450       79,390
                                                      ____________  ____________
Loss before change in accounting principle              (5,250,705)    (540,221)

Change in accounting principle (Note A)                         --      (72,450)
                                                      ____________  ____________
      Net loss                                          (5,250,705)    (612,671)

Dividends (Note J)                                        (383,618)    (964,474)
                                                      ____________  ____________

Loss applicable to common shareholders                 $(5,634,323) $(1,577,145)
                                                      ============= ============
Basic and diluted loss per common share (Note A):
   Loss before change in accounting principle          $      (.66) $      (.22)
   Change in accounting principle                               --         (.01)
                                                      ____________  ____________
      Net Loss                                        $       (.66) $      (.23)
                                                      ============= ============
Basic and diluted weighted average number of
    shares outstanding                                   8,518,408    6,916,598
                                                      ============= ============
See accompanying notes to consolidated financial statements                 F-4
                                     - 26 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
                        Class      A         Class     B
                        Common     Stock     Common    Stock    Preferred Stock
                        Shares     Amount    Shares    Amount   Shares    Amount
                        ________________________________________________________
Balance - June 30,
  1999                 5,612,930   $56,129  727,210   $ 7,272      813     $  8

Costs related to
  private placements
Issuance of preferred
  stock in lieu of
  cash dividends                                                    18        0
Conversion of preferred
  stock and related
  dividends            1,295,732    12,957                        (831)      (8)
Shares issued for
  employee bonuses        20,450       205
Issuance of warrants
  for services
Issuance of shares with
  consulting agreement    68,572       686
Issuance of employee
  stock purchase
  plan shares             12,330       123
Issuance of warrants
  for debt and equity
  financings
Conversion from class
  B to class A               219         2     (219)       (2)
Dividends on preferred
  stock
Issuance of shares on
  exercise of employee
  options                  9,375        94
Issuance of series C
  preferred stock at
  a discount                                                   136,000    1,360
Net loss - year ended
  June 30, 2000         ________________________________________________________
Balance - June 30,
  2000                 7,019,608    70,196  726,991     7,270  136,000    1,360

Costs related to
  private placements
Issuance of shares
  for earn-out
  obligation             414,815     4,148
Issuance of notes
  receivable for
  employee stock
  purchase
Conversion of
  preferred stock      1,160,160    11,603                     (19,300)    (193)
Issuance of preferred
  stock at a Discount                                           34,000      340


                                     - 27 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
                        Class      A         Class     B
                        Common     Stock     Common    Stock    Preferred Stock
                        Shares     Amount    Shares    Amount   Shares    Amount
                        ________________________________________________________
Beneficial conversion
  feature of preferred
  stock
Dividends on preferred
  stock
Shares issued for
  employee bonuses        92,663       925
Issuance of warrants
  for services
Issuance of employee
  stock purchase
  plan shares             22,588       226
Purchase of treasury
  stock in exchange
  for note
Repurchase of shares
  on open market
Net loss - year ended
  June 30, 2001         ________________________________________________________
Balance - June 30,
  2001                 8,709,834    87,098  726,991     7,270  150,700    1,507
                       =========    ======  =======     =====  =======   =======

See accompanying notes to consolidated financial statements.








                                     - 28 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
<TABLE>
<S>                <C>             <C>          <C>        <C>      <C>           <C>

                                     Notes
                       Additional    Receivable
                       Paid-in       Stock        Treasury   Stock    Accumulated
                       Capital       Purchase     Shares     Amount   Deficit         Total
                    _________________________________________________________________________

Balance - June 30,
  1999                $15,967,176                  2,776   $(12,122) $(12,757,411)  $3,261,052

Costs related to
  private placements     (210,689)                                                    (210,689)
Issuance of preferred
  stock in lieu of
  cash dividends           18,000                                         (18,000)           0

Conversion of preferred
  stock and related
  dividends               553,755                                        (566,703)           0
Shares issued for
  employee bonuses         25,491                                                       25,696
Issuance of warrants
  for services             69,775                                                       69,775
Issuance of shares
  with consulting
  agreement                38,314                                                       39,000
Issuance of employee
  stock purchase plan
  shares                   13,947                                                       14,071
Issuance of warrants
  for debt and equity
  financings               49,128                                         (14,963)      34,165

                                     - 29 -
<PAGE>
                                     Notes
                       Additional    Receivable
                       Paid-in       Stock        Treasury   Stock    Accumulated
                       Capital       Purchase     Shares     Amount   Deficit         Total
                    _________________________________________________________________________

Conversion from class
  B to class A                                                                               0
Dividends on
  preferred stock                                                          (4,809)      (4,809)
Issuance of shares on
  exercise of employee
  options                  11,625                                                       11,719
Issuance of series C
  preferred stock at a
  discount              1,358,640                                        (360,000)   1,000,000
Net loss - year ended
  June 30, 2000                                                          (612,671)    (612,671)
                        ________________________________________________________________________
Balance - June 30,
  2000                 17,895,162                  2,776    (12,122)  (14,334,557)   3,627,309

Costs related to
  private placements      (45,102)                                                     (45,102)
Issuance of shares
  for earn-out
  obligations             293,352                                                      297,500
Issuance of notes
  receivable for
  employee stock
  purchase                           (90,000)                                          (90,000)
Conversion of
  preferred stock          (7,904)                                                       3,506


                                     - 30 -
<PAGE>
                                     Notes
                       Additional    Receivable
                       Paid-in       Stock        Treasury   Stock    Accumulated
                       Capital       Purchase     Shares     Amount   Deficit         Total
                    _________________________________________________________________________

Issuance of preferred
  stock at a
  Discount                339,660                                         (90,000)     250,000
Beneficial conversion
  feature of
  preferred stock         166,500                                        (166,500)           0
Dividends on
  preferred stock                                                        (127,118)    (127,118)
Shares issued for
  employee bonuses         29,741                                                       30,666
Issuance of warrants
  for services             14,640                                                       14,640
Issuance of employee
  stock purchase plan
  shares                   10,730                                                       10,956
Purchase of treasury
  stock in exchange
  for note                            10,000      11,750    (10,000)                         0
Repurchase of shares
  on open market                                   8,400     (2,772)                    (2,772)
Net loss - year ended
  June 30, 2001                                                        (5,250,705)  (5,250,705)
                        ________________________________________________________________________
Balance - June 30,
  2001                $18,696,779   $(80,000)     22,926   $(24,894)  $(19,968,880) (1,281,120)
                        =========================================================================

</TABLE>
See accompanying notes to consolidated financial statements                 F-5

                                     - 31 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows
                                                   For the Year Ended June 30,
                                                       2001             2000
                                                  ______________________________
Cash flows from operating activities:
   Net loss                                       $(5,250,705)        $(612,671)
   Adjustments to reconcile net loss to net
       cash used in operating activities:
     Depreciation and amortization                    262,227           429,091
     Goodwill impairment                            1,545,609                --
     Write down of accounts receivable from
         professional corporation                   3,401,650                --
      Compensatory stock options and stock
         and warrants issued for obligations           45,306           182,707
      Changes in operating assets and liabilities:
         Accounts receivable                          649,407          (146,037)
         Prepaid expenses and other current
           assets                                      56,541           (18,616)
         Other assets                                 (22,873)          (25,369)
         Accounts payable                             152,775          (115,388)
         Accrued expenses and other
           liabilities                               (377,532)          123,766
         Net liabilities of discontinued
           operations                                (923,682)         (537,860)
                                                  _____________      ___________
             Net cash used in operating
               activities                            (461,277)         (720,377)
                                                   _____________      __________
 Cash flows from investing activities:
    Acquisition of property and equipment            (186,842)         (103,661)
    Website development costs                         (70,226)          (45,696)
    Disposition  of property,  equipment and
       intangibles                                      3,689                --
                                                   _____________      __________
             Net cash used in investing
               activities                            (253,379)         (149,357)
                                                   _____________      __________
Cash flows from financing activities:
    Borrowing (repayment) revolving debt, net         556,437          (114,681)
    Proceeds from borrowings                          146,526         1,870,050
    Principal payments on long-term debt             (639,157)       (1,509,826)
    Deferred financing costs                           26,554            (1,487)
    Preferred stock dividends                          (6,767)           (4,809)
    Issuance of preferred stock at a
      discount                                        250,000         1,000,000
    Cost related to preferred stock issuance          (45,102)         (210,689)
    Purchase of treasury stock                         (2,772)               --
    Issuance of common stock                           10,956            11,719
    Notes receivable for stock purchase               (90,000)               --
                                                   _____________      __________
             Net cash provided by financing
               activities                             206,675         1,040,277


                                     - 32 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
                                                   For the Year Ended June 30,
                                                       2001             2000
                                                  ______________________________
Supplemental cash flow information:
  Cash paid during the period for:
       Interest                                    $1,040,276          $852,421
       Income taxes                                $   94,780          $114,890


See accompanying notes to consolidated financial statements                 F-6



                                     - 33 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)

                                                   For the Year Ended June 30,
                                                       2001             2000
                                                  ______________________________
Supplemental disclosures of noncash investing and
  financing activities:
    Issuance of stock for the earn-out
      liability                                    $  297,500          $     --
    Beneficial conversion feature of preferred
      stock                                           166,500                --
    Purchase of treasury stock in exchange for note    10,000                --
    Accrued dividends on series C preferred stock     120,351                --
    Conversion of preferred stock at stated value     193,000           831,000
    Preferred stock discount                           90,000           360,000
    Issuance of stock in lieu of cash for
      dividends due                                     3,506            18,000
    Dividend on conversion of preferred stock to           --           566,703
      common stock
    Debt incurred in earn-out agreement                    --           997,500


















See accompanying notes to consolidated financial statements                 F-7

                                     - 34 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

PHC, Inc. and its wholly owned subsidiaries (the "company") is a national health
care company  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 provides
management,  administrative  and online behavioral health services.  The company
primarily operates under three business segments:

1.   Behavioral  health  treatment  services,   including  two  substance  abuse
     treatment facilities:  Highland Ridge Hospital,  located in Salt Lake City,
     Utah;  and  Mount  Regis  Center,  located  in Salem  Virginia,  and  eight
     psychiatric  treatment  locations  which include  Harbor Oaks  Hospital,  a
     64-bed  psychiatric  hospital located in New Baltimore,  Michigan and seven
     outpatient  behavioral health locations (two in Las Vegas, Nevada operating
     as Harmony  Healthcare,  one in Overland  Park,  Kansas  operating as Total
     Concept and four locations  operating as Pioneer  Counseling  Center in the
     Detroit, Michigan metropolitan area);

2.   Behavioral   health   administrative   services,   including   delivery  of
     management,  administrative  and help line  services.  PHC,  Inc.  provides
     management and administrative  services for its behavioral health treatment
     subsidiaries.  BSC-NY,  Inc., a subsidiary  of PHC,  Inc.,  which closed in
     fiscal 2001,  provided  management  services on behalf of  physician  owned
     behavioral  health practices in the greater New York City metropolitan area
     (see below).  Pioneer  Development and Support Services  ("PDS2")  provides
     help line  services  primarily  through  contracts  with  major  railroads.
     Pioneer  Pharmaceutical  Research,  Inc. conducts studies of the effects of
     FDA approved psychiatric pharmaceuticals on a controlled population through
     contracts with major manufacturers of these pharmaceuticals; and

3.   Behavioral  health  online  services,   which  includes  behavioral  health
     education,  training and products for the behavioral  health  professional,
     through     its     website     wellplace.com     formerly     known     as
     behavioralhealthonline.com.

In December 2000 the Company's Board of Directors  decided to close its' BSC-NY,
Inc.  practice  management  operations due to recent  deterioration of operating
results.  Revenues  of  BSC-NY,  Inc.  were  dependent  on  the  success  of the
professional  corporation,  Rubenfaer  Physician  Services,  P.C.  for  which it
provided  management  services.   Although  the  New  York  practice  management
operations  reported  operating income of approximately  $131,000 for the fiscal
year ended June 30,  2000,  adverse  business  conditions  resulted in a loss of
approximately $399,000 for the six months ended December 31, 2000 before closing
expenses.  These  adverse  operating  conditions  were  caused by the decline in
revenues  produced by the  professional  corporation  which has closed down its'
business operations.  The table below summarizes the practice management closing
expenses for the year ended June 30, 2001.



                                     - 34 -
<PAGE>


                        Goodwill impairment                        $1,545,609
                        Write down of the receivable
                          due from the professional corporation     3,401,650
                        Lease termination and other expenses          239,047
                                                                  ____________
                                                                   $5,186,306
                                                                   ==========



                                                                            F-8



                                     - 35 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):

On October 5, 1998 Quality Care Centers of  Massachusetts,  Inc., which operated
the company's  long-term  care  facility,  Franvale  Nursing and  Rehabilitation
Center,  filed for protection under the Chapter 7 Bankruptcy Code. All financial
information for Franvale is reported in the accompanying financial statements as
net  liabilities of discontinued  operations.  The liquidation of the assets and
liabilities of Franvale may result in a non-cash  financial  statement gain. Net
liabilities of discontinued  operations were $960,552 and $1,884,234 at June 30,
2001 and June 30,  2000,  respectively.  The  significant  decrease  in 2001 was
primarily due to payment of $660,000 for the Massachusetts  state settlement and
legal costs related to the closure.

Revenues and accounts receivable:

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

Medicaid  reimbursements  are currently based on established  rates depending on
the  level  of  care   provided   and  are  adjusted   prospectively.   Medicare
reimbursements  are  currently  based on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports filed by the company with  Medicare.
The company's cost reports to Medicare are routinely audited on an annual basis.
The company  periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The company believes that adequate provision has
been made in the financial statements for any adjustments that might result from
the outcome of Medicare audits. Approximately 11% of the company's total revenue
is derived from  Medicare and Medicaid  payors for the years ended June 30, 2001
and 2000.

Long-term assets include accounts receivable non current, other receivables, non
current, related party and other receivables.  Accounts receivable,  non current
consists of amounts due from former patients for service. This amount represents
amounts  collectable  under  supplemental  payment  agreements,  arranged by the
company's 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.  Accounts of former  patients that do not comply
with these  supplemental  payment  agreements are written off. Other receivables
non  current-related  party at June 30, 2000 is the amount that was due from the
related  professional  corporation  net of the related  allowance  for  doubtful
accounts. The balance due from the related professional  corporation was written
off in fiscal  year 2001 with the  closure of the  management  company,  BSC-NY,
Inc.,  as  outlined  above.  This amount  consisted  of the balance due of funds
advanced to the professional corporation for acquisition costs, management fees,
working  capital and interest on the advanced  funds (see  discussion  regarding
BSC-NY, Inc. in Note K).

                                     - 36 -
<PAGE>

Charity care amounted to approximately $491,000 and $149,000 for the years ended
June 30, 2001 and June 30,  2000,  respectively.  Patient care revenue is stated
net of charity care in the accompanying statements of operations.




                                                                            F-9


                                     - 37 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):

Estimates and assumptions:

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

Cash equivalents:

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

Property and equipment:

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

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

Other assets consists of deposits, deferred expenses and web development costs.

Organization Costs:

Organization   costs  are  expensed  as  incurred.   During  2000,   unamortized
organization costs of $72,450 related to the acquisition of businesses have been
written off as required by the American  Institute of Certified  Public Accounts
Statement of Position 98-2 "Reporting the Costs of Start-up Activities".

Goodwill:

The  excess of the  purchase  price  over the fair  market  value of net  assets
acquired is being amortized on a straight-line basis over twenty years.

In accordance  with Statement of Financial  Accounting  Standard (SFAS) No. 121,
long-lived  assets are reviewed  for  impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the  recoverability  test is performed using undiscounted net cash flows related
to the  long-lived  assets.  The amount of the impairment  losses  recognized is
measured  as the amount by which the  carrying  amount of the asset  exceeds the
fair value of the asset.  During fiscal year 2001 the company recorded  goodwill
impairment  of  $1,545,609  in  connection  with  the  closing  of its  practice
management operations.
                                                                           F-10


                                     - 38 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):

Basic and diluted loss per share:

The loss per  share is  computed  by  dividing  the loss  applicable  to  common
shareholders,  net of dividends  charged directly to retained  earnings,  by the
weighted  average number of shares of common stock  outstanding  for each fiscal
year.  No common stock  equivalents  have been  included in the  calculation  of
diluted loss per share because their effect would be anti-dilutive.

Net liabilities of discontinued operations:

Net liabilities of discontinued  operations  relates to the Franvale  closure in
1998 and consists of the following:
                                                             June 30,
                                                        2001         2000
                                                     __________________________
         Debt forgiveness and reserve for
           Contingencies                            $2,641,537      $2,641,537
         Less legal and  other expenses
           incurred to date                          1,680,986         757,303
                                                    ___________     ___________
         Net liabilities of discontinued
           Operations                               $  960,552      $1,884,234
                                                    ===========     ==========

Fair value of financial instruments:

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

Stock-based compensation:

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

All of the company's  employees are employed  under  leasing  arrangements.  The
company  believes that its leased  employees  meet the common law  definition of
employee  and  therefore  qualify as  employees  for  purposes of applying  SFAS
No.123. The company's employee leasing arrangement meets the employee definition
requirements   under  FASB   Interpretation   No.44   "Accounting   for  Certain
Transactions involving Stock Compensation".


                                                                           F-11


                                     - 39 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE A - OPERATIONS AND BUSINESS SEGMENTS (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 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.  The company  considers  estimated  future  taxable
income or loss and other  available  evidence  when  assessing  the need for its
deferred tax valuation allowance.

New accounting standard

In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141,  Business  Combinations  ("SFAS  141") and No. 142,  Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method
of  accounting  and  prohibits  the  use of the  pooling-of-interest  method  of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize  acquired  intangible assets apart from
goodwill if the  acquired  intangible  assets meet  certain  criteria.  SFAS 141
applies  to all  business  combinations  initiated  after  July 1,  2001 and for
purchase business  combinations  completed on or after July 1, 2001. It also may
require,  upon  adoption of SFAS 142, that the Company  reclassify  the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142  requires,  among  other  things,  that  companies  no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires 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. An intangible
asset  with an  indefinite  useful  life  should be  tested  for  impairment  in
accordance  with the  guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal  years  beginning  after  December  15, 2001 to all goodwill and other
intangible assets recognized at that date,  regardless of when those assets were
initially  recognized.  SFAS 142 requires the Company to complete a transitional
goodwill  impairment  test six months from the date of adoption.  The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after the adoption of SFAS 142.

The  Company's  previous  business  combinations  were  accounted  for using the
purchase  method.  As of June 30, 2001,  the net carrying  amount of goodwill is
$969,099.  Amortization  expense  during  the  year  ended  June  30,  2001  was
approximately  $74,000.  Currently  the  Company  is  assessing  but has not yet
determined  how the adoption of SFAS 141 and SFAS 142 will impact its  financial
position and results of operation.

                                                                           F-12
                                     - 40 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:
                                                             June 30,
                                                        2001       2000
                                                    __________    ___________
              Land                                 $   69,259    $   69,259
              Buildings                             1,136,963     1,136,963
              Furniture and equipment               1,023,636       929,762
              Motor vehicles                           92,871        62,292
              Leasehold improvements                  418,992       379,981
                                                    __________     ________
                                                    2,741,720     2,578,257

              Less accumulated depreciation and
                amortization                        1,403,654     1,250,627
                                                    __________   __________
                                                   $1,338,066    $1,327,630
                                                    ==========   ==========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                                 June 30,
                                                             2001        2000
                                                            __________________
9% mortgage  note due in  monthly  installments of $4,850,
   including interest through July 1, 2012, when the
   remaining principal balance is payable collaterlized
   by a first mortgage on the PHC of Virginia, Inc.
   Mount Regis Center facility.                          $  426,702  $  445,567
Term mortgage note payable with the monthly principal
   installments of $24,167 through October 2001,
   $20,000 November 2001 through February 2003,
   balloon payments of $354,167 due in December
   2001 and $349,167 due in March 2003 bearing
   interest at prime plus 5% (11.75% at June 30,
   2001) collateralized by all assets of PHC of
   Michigan, Inc. (PHM).  These funds were
   originally advanced in March and December 1997.
   Of the amount advanced in March 1997, $779,166
   was refinanced in March 2001 and the
   company intends to refinance the balloon payment
   of $354,167 on the second advance in December
   2001 when it comes due.                                1,090,000   1,273,333
Term mortgage note payable with interest only payments
   through October 2000 principal due in monthly
   installments of $10,000 beginning November 2000
   through October 2001. The note bears interest at
   prime plus 5% (11.75% at June 30, 2001) collateralized
   by all assets of PHM and may be renewed at the end of
   two years.                                               909,891     978,657
Term mortgage note payable with interest only payments
   through October 2001 principal due in monthly
   installments of $41,667 beginning November 2001
   through September 2002. The final payment of
   principal of approximately $42,000 is due October 2002.
   The note bears interest at prime plus 3% (9.75% at
   June 30, 2001) collateralized  by all assets
   of PHM and may be renewed at the end of two years.       500,000     500,000
Note Payable issued in conjunction with the final earn-out
   on the BSC-NY, Inc. acquisition due in monthly
   installments of $11,567 including interest at 11%
   through July 2005 (see Note K).                          454,939     532,000
Note Payable issued in conjunction with the final earn-out
   on the BSC-NY, Inc. acquisition due in monthly
   installments of $3,653 including interest at 11%
   through July 2005 (see Note K).                          143,665     168,000


                                                                           F-13

                                     - 41 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
                                                                    June 30,
                                                                 2001      2000
                                                               _________________

Note Payable due in monthly installments of $429 including
  interest at 8.69% through  May 2004.                        13,347     17,248
Note Payable due in monthly installments of $5,088 including
   interest at 9% through   October 2002.                     81,408    142,463
Note Payable due in monthly installments of $665 including
   interest at 10.8 % through November 2005.                  27,774         --
Note payable bearing interest at 9% paid in full May 2001.        --     11,323
Note Payable bearing interest at 9% paid in full March 2001.      --     62,363
                                                           __________ __________
                                                  Total    3,647,726  4,130,954
                                                           __________ __________
Less current maturities                                    2,038,077  1,622,239


Long-term portion                                         $1,609,649 $2,508,715
                                                          ==========  ==========

Maturities of long-term debt are as follows as of June 30, 2001:

                  Year Ending
                  June 30,                                   Amount
                  2002                                   $2,038,077
                  2003                                      866,245
                  2004                                      188,659
                  2005                                      204,874
                  2006                                       47,598
                  Thereafter                                302,273
                                                         __________
                                                         $3,647,726

The company has a revolving  credit note under which a maximum of $3,000,000 may
be  outstanding at any time. At June 30, 2001 and 2000 the  outstanding  balance
was  $2,111,586  and  $1,555,149,  respectively.  Advances  are made  based on a
percentage  of accounts  receivable  and  principal  is payable  upon receipt of
proceeds of the accounts  receivable.  Interest is payable monthly at prime plus
2.25% (9% at June 30,  2001).  The  agreement  is  automatically  renewable  for
one-year  periods  unless  terminated  by either  party.  Upon  expiration,  all
remaining  principal  and  interest  is due.  The  notes are  collateralized  by
substantially all of the assets of the company's  subsidiaries and guaranteed by
PHC.






                                                                           F-14



                                     - 42 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

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

On  December  7, 1998 the  company  issued  the  principal  sum of  $500,000  of
convertible  debentures  with interest at 12% per annum that are due on December
2, 2004.  Interest is payable quarterly.  The debentures and any unpaid interest
are convertible into shares of common stock at the rate of $1,000 for 500 shares
of common stock,  which  equates to $2.00 per share of common stock.  The traded
market  price of the  company's  common  stock at the  date of  issuance  of the
convertible  debentures  was  $1.188  per  share  and  accordingly  there was no
beneficial  conversion feature.  The holders of the debentures have the right to
put all or any portion of the debentures to the company at the original purchase
price plus unpaid  interest upon 30 days written  notice  beginning  December 3,
2001.  Accordingly  the  $500,000 is  classified  as a current  liability on the
accompanying  balance  sheet.  The company has the right to call the  debentures
upon the same terms as above. If called, the holders of the debentures then have
20 days from the date of written notice to exercise their  conversion  privilege
as to any debentures not then already converted.

NOTE D - CAPITAL LEASE OBLIGATION

At June 30, 2001,  the company was obligated  under various  capital  leases for
equipment providing for monthly payments of approximately  $1,400 and $4,000 for
fiscal 2001 and 2000 respectively and terms expiring from July 2001 through July
2006.

The  carrying  value of assets  under  capital  leases  included in property and
equipment is as follows:
                                                          June 30,
                                                       2001       2000
                                                    _________________________
             Equipment and improvements             $ 73,888    $167,857
             Less accumulated amortization           (39,940)   (100,714)
                                                   __________   __________
                                                    $ 33,948    $ 67,143
                                                    ========    =========

Future minimum lease  payments  under the terms of the capital lease  agreements
are as follows at June 30, 2001:

        Year Ending June 30,
        2002                              $  16,725
        2003                                 18,315
        2004                                 10,948
        2005                                  8,362
        2006                                  5,697
        2007                                  3,302

        Total future minimum lease payments  63,349
        Less amount representing interest    14,464

        Present value of future minimum
             lease payments                  48,885
        Less current portion                 16,725
        Long-term obligations under
        capital lease                     $  32,160
                                          ==========
                                                                           F-15

                                     - 43 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE E - NOTES PAYABLE - RELATED PARTIES

Related party debt is summarized as follows:
                                                               June 30,
                                                            2001         2000
                                                         ______________________
Notes payable, Tot Care, Inc., company owned by the
President and principal stockholder, interest at 12%
and payable on demand                                      $100,000    $100,000
Note payable, President and principal stockholder,
interest at 12% payable on demand                           100,000     100,000
                                                           _________   _________
Total                                                      $200,000    $200,000
                                                           ========== ==========
NOTE F - INCOME TAXES

The company has the following  deferred tax assets included in the  accompanying
balance sheets:
                                                              Year Ended
                                                                June 30,
                                                            2001        2000
                                                         ______________________
        Temporary differences attributable to:
           Allowance for doubtful accounts               $1,053,000  $1,350,000
           Depreciation                                      89,000     125,000
           Reserves not currently deductible and other      208,000      39,980
           Operating loss carryforward                    3,578,000   1,874,000
                                                        ___________   __________
                 Total deferred tax asset                 4,928,000   3,388,980
           Less:
               Valuation allowance                       (4,314,020) (2,775,000)
                                                       =============  ==========
           Subtotal                                         613,980     613,980
               Current portion                             (613,980)   (459,280)

                                                        ___________   __________
               Long-term portion                         $       --   $ 154,700
                                                       =============  ==========

The company  had no  deferred  tax  liabilities  at June 30, 2001 and 2000.  The
company anticipates that it will have sufficient taxable income in future fiscal
years to realize its net  deferred tax asset.  During the past three years,  the
company has closed three facilities that  contributed most  significantly to its
past  losses,  the Franvale  Nursing and  Rehabilitation  Center,  the Good Hope
Center and the  Pioneer  Counseling  of Virginia  clinics.  The company has also
closed its  practice  management  business  and has  implemented  procedures  to
improve the  operating  efficiency of its  remaining  centers.  The company also
anticipates that it will have a gain on the final  disposition of all contingent
liabilities of its closed Franvale facility (see Note I).

Income tax expense is as follows:
                                                              Year Ended
                                                                June 30,
                                                            2001         2000
                                                         ______________________
               Current state income taxes                  $ 44,450    $ 79,390
                                                       =============  ==========

                                                                          F-16

                                     - 44 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE F - INCOME TAXES (CONTINUED)

Reconciliations  of the statutory  U.S.  Federal income taxes based on a rate of
34% to actual income taxes is as follows:
                                                               Year Ended
                                                                 June 30,
                                                            2001         2000
                                                         ______________________
         Income tax benefit at statutory rate            $(1,770,000) $(235,300)
         State income taxes, net of federal benefit           29,000     52,400
         Change in valuation allowance                     1,539,020    220,000
         Effect of nondeductible items and other
           differences                                       246,430     42,290
                                                       _____________  __________
                                                          $   44,450  $  79,390

At June 30,  2001 the  company had a federal  net  operating  loss  carryforward
amounting to approximately $10,000,000. The Company's Federal net operating loss
carryforwards  are subject to review and  possible  adjustment  by the  Internal
Revenue  Service  and  are  subject  to  certain  limitations  in the  event  of
cumulative changes in the ownership interest of significant  stockholders over a
three-year period in excess of 50%. The Federal  carryforward  expires beginning
in 2011 through 2020.

The company has provided a significant  valuation allowance against its deferred
tax  asset  at June  30,  2001  and  2000  due to the  uncertainty  of its  full
recoverability  given the company's  history of operating  losses. No additional
valuation  allowance  was  provided on the  company's  net deferred tax asset of
$613,980 at June 30, 2001 and 2000 based on managements  estimated projection of
future taxable income.

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

The company  leases  office and  treatment  facilities,  furniture and equipment
under operating  leases expiring on various dates through May 2005. Rent expense
for the  years  ended  June 30,  2001 and 2000 was  approximately  $812,000  and
$714,000 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, 2001 are as follows:

                            Year Ending
                             June 30,       Amount
                            ____________   ________

                              2002        $ 651,182
                              2003          625,733
                              2004          545,618
                              2005          286,795
                                          __________
                                         $2,109,328
                                         ==========

                                                                           F-17

                                     - 45 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

Litigation:

Various legal  proceedings,  claims and  investigations  of a nature  considered
normal to its business  operations  are pending  against the  company.  The most
significant of these matters is described below.

On or about  September  14, 1998,  the Company and its wholly owned  subsidiary,
Franvale,  were each served with  document  subpoenas in  connection  with an on
going   investigation  of  Franvale  being  conducted  by  the  Commonwealth  of
Massachusetts.  In December  2000 the company  finalized a settlement  agreement
with the  Commonwealth in this case, which required payment of $660,000 in three
installments  between  December 31, 2000 and June 30, 2001.  This obligation has
been met.

On or about May 15,  2000,  the company was served with a subpoena by the United
States Attorney for the District of Massachusetts. The subpoena requested, inter
alia,   patient  and  financial   records   relating  to  Franvale  Nursing  and
Rehabilitation  Center for the period of 1995 through 1998. The Company is fully
cooperating  with the  investigation  and  currently  is engaged  in  resolution
discussions.

NOTE H - STOCK PLANS

[1]  Stock plans:
     The company has three stock plans:  a stock option plan, an employee  stock
     purchase plan and a nonemployee directors' stock option plan.

     The stock  option plan  provides for the issuance of a maximum of 1,000,000
     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.

     The  employee  stock  purchase  plan  provides  for the purchase of Class A
     common stock at 85 percent of the fair market value at specific  dates,  to
     encourage stock ownership by all eligible  employees.  A maximum of 150,000
     shares may be issued under this plan.

     The  non-employee  directors'  stock option plan  provides for the grant of
     nonstatutory stock options automatically at the time of each annual meeting
     of the Board. Through June 30, 2001, options for 35,500 shares were granted
     under this plan. A maximum of 50,000  shares may be issued under this plan.
     Each  outside  director  is granted an option to purchase  2,000  shares of
     Class A common stock at fair market value on the date of grant, vesting 25%
     immediately and 25% on each of the first three anniversaries of the grant.

     Under the above plans,  at June 30, 2001,  78,193 shares were available for
     future grant or purchase.

                                                                           F-18

                                     - 46 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE H - STOCK PLANS (CONTINUED)

The company had the following activity in its stock option plans for fiscal 2001
and 2000:
                                                               Weighted-Average
                                                     Number        Exercise
                                                       of           Price
                                                     Shares       Per Share
                                                  ____________  _______________
                Option plans:
                   Balance - June 30, 1999          522,875         $2.02
                   Granted                          271,000         $1.23
                   Cancelled                         (2,000)        $1.25
                   Exercised                         (9,375)        $1.25
                                                   _________
                   Balance - June 30, 2000          782,500         $1.46
                   Granted                          420,500         $0.28
                   Cancelled                        (62,000)        $0.25
                   Repriced Options
                        Original                   (791,500)        $1.38
                        Repriced                    791,500         $0.25
                                                   _________
                   Balance - June 30, 2001        1,141,000         $0.33
                                                  ==========
[2]  Stock-based compensation:

     Options for 582,706 were exercisable as of June 30, 2001 at exercise prices
     ranging  from  $0.19 to $6.63  and a  weighted  average  exercise  price of
     approximately $.41 per share with a weighted average remaining  contractual
     life  of  approximately  three  years.  Options  for  448,750  shares  were
     exercisable  as of June 30, 2000 at exercise  prices  ranging  from $.81 to
     $6.63 and a weighted  average  exercise  price of  approximately  $1.58 per
     share with a weighted average  remaining  contractual life of approximately
     three years.

     Options  to  purchase  1,141,000  shares  of  class  A  common  stock  were
     outstanding at June 30, 2001 at exercise  prices ranging from $.19 to $6.63
     per share with a weighted-average  exercise price of approximately $.33 and
     a weighted average remaining  contractual life of approximately four years.
     Options to purchase 782,500 shares of class A common stock were outstanding
     at June 30, 2000 at exercise  prices  ranging  from $.81 to $6.63 per share
     with weighted-average  exercise prices of approximately $1.46 per share and
     a weighted-average remaining contractual life of approximately four years.

     The Company  re-priced 791,500 options in January 2001. As a result of this
     modification,  791,500 options are subject to variable  accounting from the
     date of the  modification.  The compensation  expense related to 447,125 of
     the vested re-priced options amounted to approximately  $40,000,  which was
     recorded during the quarter ended June 30, 2001.

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

                                                                           F-19

                                     - 47 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE H - STOCK PLANS (CONTINUED)
                                                       Year Ended
                                                       June 30,
                                                 2001           2000
                                             ____________    _____________
        Net loss applicable
           to common
           Shareholders      As reported     $(5,634,323)    $(1,577,145)

                             Pro forma        (5,721,161)     (1,727,259)

        Net loss per share   As reported     $      (.66)    $      (.23)

                             Pro forma              (.67)           (.25)

The fair value of the company's stock options used to compute pro forma loss and
loss per share  disclosures  is the estimated  present value at grant date using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions for 2001 and 2000: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of 6.5% and 9.5% respectively; and an expected holding
period of five years.

The per share weighed  average grant date fair value of options  granted  during
the years ended June 30, 2001 and 2000 was $.10 and $.30, respectively.

NOTE I - DISCONTINUED OPERATIONS

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

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

                                                                           F-20

                                     - 48 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE I - DISCONTINUED OPERATIONS (CONTINUED)

Although  the full  extent  of the  financial  impact  on PHC,  Inc.  cannot  be
determined at this time,  the  management of PHC, Inc. does not believe that the
liquidation  of  the  assets  and  liabilities  of  Quality  Care  will  have  a
substantial  negative  impact on PHC's  financial  position  or the  results  of
operations.  The  company was subject to a  guarantee  signed by PHC,  Inc.  for
furniture and  equipment  purchased by Quality Care during the fiscal year ended
June 30, 1996. The company has come to an agreement with the leasing company and
is  currently  making  monthly  payments of $5,088,  for a total  obligation  of
$183,166,  which includes interest of 9%, in settlement of this obligation.  The
liquidation  of the assets and  liabilities of Franvale may result in a non-cash
financial  statement  gain. In the quarter ended  December 31, 1998, the company
was relieved of the HUD mortgage of approximately $6,741,000 and surrendered the
underlying assets amounting to approximately $4,329,000.  The net liabilities of
discontinued  operations  amounted to $960,552 at June 30, 2001.  As of June 30,
2001 the bankruptcy  remains open and management  cannot predict a final date of
closure  at this  time:  however,  the  company  did  receive a letter  from the
bankruptcy  trustee  stating that  discharge of the  bankruptcy  is awaiting the
final bankruptcy report and no further claims can be made at this time.

NOTE J - CERTAIN CAPITAL TRANSACTIONS

In addition to the outstanding options under the company's stock plans (Note H),
the company has the following options and warrants outstanding at June 30, 2001:

 Date of                                          Number of  Exercise Expiration
Issuance                   Description             Shares     Price     Date
________________________________________________________________________________

11/01/1996  Warrant for debt placement service      25,000   $2.00 per October
             $125,000 value charged to interest     shares    share    2001
             expense over term of debt
02/18/1997  Warrant for investor relation services   4,762  $2.20 per  February
             $1,210 value passed as an adjustment   shares   share     2002
03/03/1997  Consultant warrant for investor         40,000  $ .50 per  March
             relations                               shares  share     2002
             $16,306 value passed as an adjustment
09/17/1998  Consultant warrant for investor         40,000  $ .50 per  March
             relations                              shares   share     2002
             $12,776 value passed as an adjustmet
03/31/1997  Warrants issued as registration        150,000  $2.00 per  March
             penalty on Convertible debenture      shares    share     2002
             $46,375 value charged to interest
             expense over term of debentures
06/01/1997  Warrants issued for investment         206,031  $1.82 per  May
             banker services                       shares    share     2002
             $193,748 value charged to
             professional shares fees
09/19/1997  Private Placement warrants with         86,207  $2.90 per  September
             common stock issuance                 shares    share     2002
             Equity transaction
03/10/1998  Warrants issued as a penalty for         3,000  $2.90 per  March
             late registration of private          shares    share     2003
             placement shares
             Equity transaction
03/10/1998  Warrants issued as additional           71,186  $1.76 per  March
             interest on debt                      shares    share     2003
             $48,809 value charged to interest
             expense over term of loan
07/10/1998  Warrants issued with extension of       69,347  $1.37 per  July
             debt                                  shares    share     2003
             $28,740  value  charged to interest
             expense over term of loan
07/10/1998  Warrants  issued with  extension of     25,827  $1.16 per  July
             debt as price guarantee               shares    share     2003
             $14,779  value  charged to interest
             expense over term of loan
12/31/1998  Warrants issued with convertible        30,298  $ .83 per  December
             debenture                             shares    share     2004
             $9,240 value charged to professional
             fees over term of debentures
12/31/1998  Warrants issued for convertible         72,724  $1.51 per  December
             debentures finders fee                shares    share     2003
             $25,873 value charged to
             professional fees over term of
             debentures
12/31/1998  Warrants issued for convertible         13,288  $1.51 per  December
             debentures finders fee                shares    share     2003
             $3,696 value charged to
             professional fees over term of
             debentures
12/31/1998  Warrants issued for convertible         19,311  $1.17 per  December
             debentures finders fee                shares    share     2003
             $3,246 value charged to
             professional fees over term of
             debentures

                                                                           F-21

                                     - 49 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE J - CERTAIN CAPITAL TRANSACTIONS  (CONTINUED)

 Date of                                          Number of  Exercise Expiration
Issuance                   Description             Shares     Price     Date
________________________________________________________________________________

12/01/1998  Warrants issued for convertible         12,119  $ .83 per  December
             debentures finders fee                shares    share     2003
             $1,302 value charged to
             professional fees over term of
             debentures
01/01/1999  Warrants issued for  convertible        12,119  $ .83 per  January
             debentures finders fee                shares    share     2004
             $3,696 value charged to
             professional fees over term of
             debentures
02/01/1999  Warrants issued for convertible         12,119  $ .83 per  February
             debentures finders fee                shares    share     2004
             $3,696 value charged to
             professional fees over term of
             debentures
03/01/1999  Warrants issued for convertible         12,078  $ .83 per  March
             debentures finders fee                shares    share     2004
             $3,696 value charged to
             professional fees over term of
             debentures
04/01/1999  Warrants issued for convertible         12,078  $ .83 per  April
             debentures finders fee                shares    share      2004
             $3,696  value charged to
             professional fees over term of
             debentures
05/01/1999  Warrants issued for convertible         12,078  $ .83 per  May
             debentures finders fee                shares    share     2004
             $3,696 value charged to
             professional fees over term of
             debentures
06/01/1999  Warrants issued for convertible         12,037  $ .83 per  June
             debentures finders fee                shares    share     2004
             $3,696 value charged to
             professional fees over term of
             debentures
01/05/1999  Warrants issued for investment banker   48,071  $1.13 per  January
             services                              shares    share     2004
             $18,100 value charged to
             professional fees over service
             period
04/05/1999  Warrants issued for investment banker   47,680  $1.14 per  April
             services                              shares    share     2004
             $18,100 value charged to
             professional fees over service
             period
02/23/1999  Consultant warrant for investor          3,724  $ .97 per  February
             relations                             shares    share     2004
             $1,307 value charged to
             professional fees
04/21/1999  Consultant warrant for web site          6,039  $ .83 per  April
             development services                  shares    share     2004
             $1,547 value charged  to
             professional fees
05/18/1999  Consultant warrant for web site          6,020  $ .83 per  April
             advisory services                     shares    share     2004
             $1,848 value charged to
             professional fees
04/21/1999  Warrant issued for management            5,373  $ .93 per  April
             consultant services                   shares    share     2004
             $1,547 value charged to
             professional fees
05/18/1999  Warrant issued for management            1,204  $ .83 per  May
             consultant services                   shares    share     2004
             $370 value charged to
             professional fees
07/01/1999  Warrants issued for convertible         12,037  $ .83 per  July
             debentures finders fee                shares    share     2004
             $5,745 value charged to
             professional fees over term of
             debentures
08/01/1999  Warrants issued for convertible         12,037  $ .83 per  August
             debentures finders fee                shares    share     2004
             $4,187 value charged to
             professional fees over term  of
             debentures
07/05/1999  Warrants for investment banker          47,369  $1.15 per  July
             services                              shares    share     2004
             $12,944 value charged to
             professional fees over service
             period
10/05/1999  Warrants for investment banker          47,369  $1.15 per  October
             services                              shares    share     2004
             $6,042 value charged to
             professional fees over service
             period
03/31/2000  Warrants issued for services            11,334  $1.32 per  March
             $10,000 value charged to website      shares    share     2005
             development
05/26/2000  Warrants issued as additional           60,000  $1.50 per  May
             interest on debt                      shares    share     2005
             $33,264 value charged to interest
             expense
06/28/2000  Warrants issued with preferred stock   125,000  $3.00 per  June
             placement                             shares    share     2005
             Equity transaction
06/28/2000  Warrants issued with preferred stock   115,710  $1.41 per  June
             placement                             shares    share     2005
             Equity transaction
12/20/2000  Warrants issued for investment banker   52,530  $ .20 per  December
             services                              shares    share     2005
             $1,938 value charged to
             professional fees
03/20/2001  Warrants issued for investment banker   25,195   $ .21 per  March
             services                              shares    share     2006
             $969 value charged to professional
             fees
04/15/2001  Warrants issued for investor relations  10,061  $ .25 per  April
             consulting services                   shares    share     2006
             $1,136 value charged to professional
             fees
05/15/2001  Warrants issued for investor relations  10,000  $ .25 per  May
             consulting services                   shares    share     2006
             $2,577 value charged to
             professional fees

                                                                           F-22

                                     - 50 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

 Date of                                          Number of  Exercise Expiration
Issuance                   Description             Shares     Price     Date
________________________________________________________________________________

06/15/2001  Warrants issued for investor            10,000  $ .25 per  June
             relations consulting services         shares    share     2006
             $2,577 value charged to
             professional fees
06/20/2001  Warrants issued for investment          25,000  $ .21 per  June
             banker services                       shares    share     2006
             $5,383 value charged to
             professional fees

Warrants issued for services or in connection with debt are valued at fair value
at grant date using the Black-  Scholes  pricing model and charged to operations
consistent  with the  underlying  reason the warrants  were  issued.  Charges to
operations in connection with these warrants  amounted to approximately  $14,640
and $72,000 in fiscal 2001 and 2000, respectively.

In February 1998, the company received  $950,000 in exchange for the issuance of
Series B convertible  preferred  stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001.  For the year ended June 30, 2000  dividends  on the series B preferred
stock  amounted  to  $22,809.  During  the fiscal  year ended June 30,  2000 the
company issued 18 shares of series B preferred  stock in payment of dividends in
lieu of cash.  As of June 30, 2000 all series B  convertible  preferred has been
converted  into  shares of class A common  stock,  which  resulted in a dividend
charge of $566,703 for the year ended June 30,  2000,  which was paid in class A
common stock.

On June 28, 2000 the company  issued  136,000  shares of series C 8% convertible
preferred stock,  with a stated and liquidation  value of $10.00 per share, at a
discount  for  $1,000,000,  which  resulted  in a  dividend  charge to  retained
earnings of $360,000 for the year ended June 30, 2000. In conjunction  with this
transaction  the company  also issued a warrant to  purchase  125,000  shares of
class A common stock, which resulted in a charge to retained earnings of $14,963
in the year ended June 30,  2000.  The  investor  was  required  to  purchase an
additional  34,000  shares  of  series  C  preferred  stock as  provided  in the
agreement for $250,000.  This additional purchase of 34,000 shares was completed
in August 2000 resulting in an additional  dividend charge to retained  earnings
in fiscal year 2001 of $90,000.

The series C preferred stock is convertible unto shares of class A common stock.
In February 2001 the Series C preferred stock agreement was amended to allow for
conversion at 90% of the market value of class A common Stock.  This  beneficial
conversion  feature  resulted  in a  dividend  charge to  retained  earnings  of
$166,500 for the year ended June 30, 2000. As part of the amendment, the holders
of the  series C  preferred  stock  also  agreed  to limit  its  conversions  of
preferred stock so that such conversions will not in the aggregate  convert into
greater than 20% of the  outstanding  common stock of the  corporation,  821,705
additional  shares  of class A  common  stock,  from  the date of the  agreement
through July 31, 2001. Through June 30, 2001, 1,160,160 shares of class A common
stock have been issued upon  conversion of 19,300 shares of series C convertible
preferred  stock,  including  accrued  dividends  outstanding on those preferred
shares.  Of these shares of class A common stock,  350,250 were issued after the
February 2001 amendment.

Accrued  dividends  included in Accrued  expenses and other  liabilities  in the
accompanying  consolidated  balance  sheet were  $120,350 at June 30,  2001.  No
dividends were accrued and unpaid at June 30, 2000.

Under  existing  dilution  agreements  with other  stockholders  the issuance of
common stock under  agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the

                                                                           F-23

                                     - 51 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

exercise  price  of  certain  of  the  above  warrant  agreements  based  on the
difference  between the then current market price and the price at which the new
common stock is being issued.  The dilutive effect of transactions  through June
30, 2001 are reflected in the table above.  The value of the  additional  shares
issuable as a result of these dilution provisions was not material.

NOTE K - ACQUISITIONS

On  November 1, 1996,  BSC-NY,  Inc.  ("BSC"),  merged  with  Behavioral  Stress
Centers,  Inc.,  a  provider  of  management  and  administrative   services  to
psychotherapy  and  psychological   practices  in  the  greater  New  York  City
Metropolitan  Area. In connection with the merger,  the company advanced 150,000
shares  of PHC,  Inc.  Class A common  stock and  funds to  Rubenfaer  Physician
Services,  P.C.  formerly  Shliselberg  Physician  Services,  P.C., and formerly
Perlow Physicians, P.C., ("Rubenfaer"),  which were in turn issued to the former
owners of Behavioral  Stress Centers,  Inc. to acquire the assets of the medical
practices previously serviced by BSC.

In August 2000 the company  reached an agreement  with the former  owners on the
terms and amount of the final earn out  payment.  This  payment  was made in the
form of Notes  totaling  $700,000  and 414,815  shares of class A common  stock,
valued at $297,500.  This  agreement  was effective May 2000 and is reflected in
the accompanying  consolidated  financial statements.  Accrued expenses included
$297,500 at June 30, 2000,  which reflects the obligation for the 414,815 shares
issued in August 2000.

At  June  30,  2000,  Rubenfaer  owed  the  company  $4,364,510  which  included
acquisition  costs,  management  fees,  working capital advances and interest on
advances  through  June 30, 1999.  At June 30, 2000, a reserve of  approximately
$1,125,000 was established in  consideration  of the period of time expected for
repayment, the level of Rubenfaer's cash flow and other information available at
that time. In December 2000 the  company's  Board of Directors  decided to close
BSC due to the deterioration of its operating results.  Although the company had
no  ownership  interest  in  Rubenfaer,  BSC was  dependent  on the  success  of
Rubenfaer's operations through its management services agreement with Rubenfaer.
During fiscal 2001,  Rubenfaer closed its business operations and the net amount
due from  Rubenfaer of $3,401,650  was deemed  unrecoverable  and was charged to
practice management closing expenses during fiscal 2001 (see note A).

NOTE L - 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:


                                                                           F-24

                                     - 52 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000

NOTE L - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<S>                  <C>       <C>              <C>          <C>               <C>
                                BEHAVIORAL HEALTH

                       TREATMENT ADMINISTRATIVE   ONLINE
                       SERVICES    SERVICES       SERVICES    ELIMINATIONS     TOTAL
                     ___________________________________________________________________

  For the Year ended
    June 30, 2001
________________________________________________________________________________________
Revenues - external
   customers          $21,087,473   $ 1,644,296    $   18,067              0   $22,749,836
Revenues -
 intersegment                   0   $ 1,932,792    $   35,245   $ (1,968,037)            0
Segment profit
 (loss)               $ 2,936,935   $(7,384,801)   $ (802,839)             0   $(5,250,705)
Total assets          $ 8,503,698   $23,551,391    $  125,582   $(22,457,219)  $ 9,723,452

Capital expenditures  $   126,566   $    43,063    $   87,439              0   $   257,068
Depreciation  &
 amortization         $   187,876   $    53,179    $   21,172              0   $   262,227
_________________________________________________________________________________________
  For the Year ended
    June 30, 2000
_________________________________________________________________________________________
Revenues - external
   customers          $18,675,840   $ 1,702,920             0              0   $20,378,760
Revenues -
 intersegment                   0   $ 1,819,000    $    9,669   $ (1,828,669)            0
Segment profit
 (loss)               $ 1,690,314   $(1,818,723)   $ (484,262)             0   $  (612,671)
Total assets          $ 9,524,005   $27,608,700    $   63,200   $(21,308,096)  $15,887,809
Capital expenditures  $    41,593   $    38,785    $   68,979              0   $   149,357
Depreciation  &
   amortization       $   233,064   $   114,082    $    9,495              0   $   356,641
Change in
 accounting
 principle
 (amortization)       $    54,700   $    16,418    $    1,332              0   $    72,450

</TABLE>

                                                                           F-25

                                     - 53 -
<PAGE>
PART III

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  directors  and  officers  of the  company  as of June 30,  2001 are as
follows:

            Name                  Age                   Position
____________________________      ___  _________________________________________
Bruce A. Shear                     46  Director, President and Chief Executive
                                         Officer
Robert H. Boswell                  52  Senior Vice President
Michael R. Cornelison              51  Executive Vice President
Paula C. Wurts                     52  Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. (1)(2)      63  Director and Clerk
Donald E. Robar (1)(2)             64  Director
Howard W. Phillips                 71  Director
William F. Grieco (1)              47  Director

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

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

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

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

     ROBERT H.  BOSWELL has served as the 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.

     MICHAEL R.  CORNELISON  has served as Executive  Vice  President  and Chief
Operating  Officer of the company since June 1999. Mr. Cornelison also served as
the Director of Michigan Operations from December of 1997 through April 1998 and
Vice  President of  Operations  from April 1998  through June of 1999.  Prior to
joining the company Mr. Cornelison spent eleven years as a psychiatric  hospital
administrator  for both Universal  Health Services and Charter Medical  Systems.
Mr.  Cornelison  attended  Washington  State University and received a degree in
Business  Management from LaSalle  University in 1975. Mr. Cornelison has served
two terms as member of the Board of  Governors  of the  Federation  of  American
Health Systems.



                                     - 54 -
<PAGE>
     PAULA C. WURTS has served as the  Controller  of the company since 1989, as
Assistant Clerk since January 1996, as Assistant Treasurer from 1993 until April
2000 when she became  Treasurer.  Ms. Wurts served as the  company's  Accounting
Manager  from 1985 until  1989.  Ms.  Wurts  received an  Associate's  degree in
Accounting  from the  University of South Carolina in 1980, a B.S. in Accounting
from  Northeastern  University in 1989 and passed the  examination for Certified
Public  Accountants.  She received a Master's  Degree in Accounting from Western
New England College in 1996.

     GERALD M. PERLOW,  M.D.  has served as a Director of the company  since May
1993 and as Clerk since February 1996. Dr. Perlow is a retired  cardiologist who
practiced  medicine  in Lynn,  Massachusetts,  and has been  Associate  Clinical
Professor of Cardiology at the Tufts  University  School of Medicine since 1972.
Dr.  Perlow is a Diplomat of the  National  Board of Medical  Examiners  and the
American  Board of Internal  Medicine  (with a  subspecialty  in  cardiovascular
disease) and a Fellow of the American Heart Association, the American College of
Cardiology and the American College of Physicians. From 1987 to 1990, Dr. Perlow
served as the Director, Division of Cardiology, at AtlantiCare Medical Center in
Lynn,  Massachusetts.  Dr.  Perlow  served  as a  consultant  to  Wellplace.com,
formerly  Behavioralhealthonline.com,  in  fiscal  year  2000  and  has  been  a
contributing  journalist to Wellplace.com since 1999. Dr. Perlow received a B.A.
from  Harvard  College  in 1959 and an M.D.  from  Tufts  University  School  of
Medicine in 1963.

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

     HOWARD W. PHILLIPS has served as a Director of the company since August 27,
1996 and has been employed by the company as a public relations specialist since
August 1, 1995.  From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate  Finance for D.H. Blair  Investment Corp. From 1969 until 1981, Mr.
Phillips  was  associated  with  Oppenheimer  & Co.  where he was a partner  and
Director of Corporate  Finance.  From 1995 until 1999 Mr.  Phillips  served as a
member of the Board of Directors of Food Court Entertainment  Network,  Inc., an
operator  of  shopping  mall  television   networks,   and  Telechips  Corp.,  a
manufacturer of visual phones.

     WILLIAM F. GRIECO has served as a Director of the  company  since  February
18, 1997. Since August 1999 Mr. Grieco has been the Managing Director of Arcadia
Strategies,  LLC, a legal and business  consulting  organization.  From November
1995 to July 1999 he served as Senior Vice  President  and  General  Counsel for
Fresenius  Medical Care North  America.  From 1989 until  November of 1995,  Mr.
Grieco was a partner at Choate,  Hall & Stewart.  Mr. Grieco  received a BS from
Boston  College in 1975,  an MS in Health  Policy and  Management  from  Harvard
University in 1978 and a JD from Boston College Law School in 1981.

     Compliance With Section 16(A) Of The Exchange Act

     Based on a review of Forms 3 and 4 furnished to the company, all directors,
officers and  beneficial  owners of more than ten percent of any class of equity
securities of the company  registered  pursuant to Section 12 of the  Securities
Exchange Act filed on a timely basis  reports  required by Section  16(a) of the
Exchange Act during the most recent fiscal year.



                                     - 55 -
<PAGE>
ITEM 10.    Executive compensation.

Employment agreements

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

Executive Compensation

     Four executive  officers of the company  received  compensation in the 2001
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 2001, 2000, and 1999:

                           Summary Compensation Table
                                                                Long Term
                                                              Compensation
                              Annual Compensation                Awards
                          ________________________________  ___________________

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

 (a)                   (b)    (c)         (d)  (e)           (g)          (i)
Name and                                        Other        Securities
Principal                                       Annual       Underlying   All Other
Position               Year  Salary      Bonus  Compensation Options/SARs Compensation
                              ($)         ($)     ($)           (#)          ($)
_________________________________________________________________________________________
Bruce A. Shear         2001  $310,000(1)     --   $19,571(2)     67,000      $ 6,285
 President and         2000  $300,195(1)     --   $10,159(3)     50,000      $22,517
 Chief Executive       1999  $300,195(1)     --   $ 7,940(4)     50,000      $21,622
 Officer

Robert H. Boswell      2001  $126,000    $16,309  $15,521(5)     41,000      $ 3,864
 Senior Vice           2000  $116,000    $32,200  $12,846(6)     26,666      $14,261
 President             1999  $111,083    $   800  $ 7,955(7)     65,000      $29,753


Michael R. Cornelison  2001  $ 96,000    $15,910  $14,160(8)     41,000      $ 3,864
 Executive Vice        2000  $ 88,750    $13,000  $11,537(9)      5,000      $ 2,252
 President             1999  $ 81,265    $ 9,376  $ 3,400(10)    10,000      $ 4,435

Paula C. Wurts         2001  $100,800    $ 6,414  $13,867(11)    41,000      $ 3,864
 Controller, Treasurer 2000  $ 90,800    $13,500  $ 9,642(12)    33,334      $17,263
And Assistant Clerk    1999  $ 85,883        --   $ 8,950(13)    20,000      $ 9,055

</TABLE>

(1)  Although the Board of Director  authorized  base salary  effective  July 1,
     1995 is $310,000 base salary was drawn as listed above.

(2)  This amount represents  $3,799  contributed by the company to the company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $4,768 in premiums
     paid by the company with respect to life  insurance  for the benefit of Mr.
     Shear,  $208 in club membership dues paid by the company for the benefit of
     Mr.  Shear,  $2,921  personal  use of a company  car held by Mr.  Shear and
     $7,875 based on the intrinsic value of the repricing of options held by Mr.
     Shear.

(3)  This amount represents  $3,383  contributed by the company to the company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $4,837 in premiums
     paid by the company with respect to life  insurance  for the benefit of Mr.
     Shear and $1,938 personal use of a company car held by Mr. Shear.

                                     - 56 -
<PAGE>
(4)  This amount represents  $2,791  contributed by the company to the company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $2,792 in premiums
     paid by the company with respect to life  insurance  for the benefit of Mr.
     Shear and $2,357 personal use of a company car held by Mr. Shear.

(5)  This amount represents a $6,000 automobile allowance, $1,195 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell,  $22 in Class A Common  Stock  issued  to  employees,  $219 in
     benefit  derived  from the purchase of shares  through the  employee  stock
     purchase plan, and $8,085 based on the intrinsic  value of the repricing of
     options held by Mr. Boswell.

(6)  This amount represents a $6,000 automobile  allowance,  $952 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell,  $3,000 in relocation  expenses paid to Mr. Boswell and $2,894
     in benefit  derived from the purchase of shares  through the employee stock
     purchase plan.

(7)  This amount represents a $6,000 automobile  allowance,  $357 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Mr.  Boswell,  $704 in other  benefits paid by the company on behalf of Mr.
     Boswell and $894 in benefit derived from the purchase of shares through the
     employee stock purchase plan.

(8)  This amount represents a $7,050 automobile allowance, $22 in Class A Common
     Stock issued to employees  and $7,088 based on the  intrinsic  value of the
     repricing of options held by Mr. Cornelison.

(9)  This amount represents a $4,700 automobile allowance, $6,050 as a result of
     the  exercise of options and $787 in benefit  derived  from the purchase of
     shares through the employee stock purchase plan.

(10) This amount represents a $3,400 automobile allowance.

(11) This amount represents a $4,800 automobile allowance, $4,319 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts, $22 in Class A Common Stock issued to employees, $146 in benefit
     derived from the purchase of shares  through the  employee  stock  purchase
     plan and $4,580 based on the  intrinsic  value of the  repricing of options
     held by Ms. Wurts.

(12) This amount represents a $4,800 automobile allowance, $3,878 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts and $964 in benefit  derived from the purchase of shares  through
     the employee stock purchase plan.

(13) This amount represents a $4,800 automobile allowance, $3,940 contributed by
     the company to the company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts and $210 in benefit  derived from the purchase of shares  through
     the employee stock purchase plan.

COMPENSATION OF DIRECTORS

     Directors  who are  employees of the company  receive no  compensation  for
services as members of the Board. Directors who are not employees of the company
receive  $2,500  stipend per year and $1,000 for each Board meeting they attend.
In  addition,  directors of the company are  entitled to receive  certain  stock
option grants under the company's  Non-Employee  Director Stock Option Plan (the
"Director Plan").



                                     - 57 -
<PAGE>
COMPENSATION COMMITTEE

     The  Compensation  Committee  consists of Mr.  Donald Robar and Dr.  Gerald
Perlow.  The compensation  Committee met once during fiscal 2001. Mr. Shear does
not participate in discussions concerning, or vote to approve, his salary.

AUDIT COMMITTEE

     The Audit Committee consists of Mr. Donald Robar, Dr. Gerald Perlow and Mr.
William  Grieco.  The Audit  Committee  met two times during  fiscal  2001.  All
committee members attended both meetings.

OPTION PLANS

Stock Plan

     The Board of Directors  adopted the company's Stock Plan on August 26, 1993
and the  stockholders of the company  approved the plan on November 30, 1993 and
amended the plan on December  26, 1997 and  December  23,  1998.  The Stock Plan
provides for the issuance of a maximum of 1,000,000 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 and
upon exercise of options. Generally, an option is not transferable by the option
holder  except  by  will or by the  laws  of  descent  and  distribution.  Also,
generally, no option may be exercised more than 60 days following termination of
employment.  However,  in  the  event  that  termination  is  due  to  death  or
disability,  the option is  exercisable  for a period of one year following such
termination.

     During the fiscal year ended June 30, 2001, the company  issued  additional
options to purchase  414,500 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share  ranging  from $.19 to $.30.  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.  One hundred  thousand of the options issued during the fiscal year ended
June 30, 2000 were issued with  immediate  vesting of 50% and the balance vested
in year five of the ten-year life of the options.

     No options  were  exercised  during the fiscal year ended June 30,  2001. A
total of 9,375 options were exercised at $1.25 each during the fiscal year ended
June 30, 2000.




                                     - 58 -
<PAGE>
Employee Stock Purchase Plan

     On October 18, 1995, the Board of Directors voted to provide  employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to  participate  in an Employee  Stock  Purchase  Plan (the "Plan")  which
became  effective  February 1, 1996.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan  period.  The  plan  allows  for a total of  150,000
shares of class A common stock to be issued under the plan.

     As of June 30, 2001 a total of 86,307  shares of class A common  stock have
been issued under the plan since the first  offering  which began on February 1,
1997 through the latest completed  offering which ended in January 2001. Fifteen
employees are participating in the current offering period under the plan, which
began on February 1, 2001 and will end on January 31, 2002.

Non-Employee Director Stock Plan

     The Board of Directors  adopted the company's  Non-Employee  Director Stock
Plan (the "Director  Plan") on October 18, 1995. The Stockholders of the company
approved  the plan on December  15,  1995 and  amended the plan on December  26,
1997.  Non-qualified  options to  purchase  a total of 50,000  shares of Class A
Common Stock are available for issuance under the Director Plan.

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

     On February 18, 1997,  the company  issued options to purchase 6,000 shares
of Class A Common  Stock under the Director  Plan at an exercise  price of $3.50
per share.  On January 22, 1998,  the company  issued  options to purchase 6,000
shares of Class A Common Stock under the Director  Plan at an exercise  price of
$2.06. On February 23, 1999, the company issued options to purchase 6,000 shares
of Class A Common Stock under the Director  Plan at an exercise  price of $1.03.
On December 28, 1999,  the company  issued  options to purchase 6, 000 shares of
class A common stock under the Director  Plan at an exercise  price of $.81.  On
January 11, 2001 the company  issued options to purchase 6,000 shares of class A
common stock under the Director  Plan at an exercise  price of $.22.  As of June
30, 2000, none of the options issued had been exercised.





                                     - 59 -
<PAGE>
     The following table provides information about options granted to the named
executive  officers during fiscal 2001 under the company's Stock Plan,  Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

                    Individual Grants
                   ____________________

(a)                (b)             (c)          d)            (e)
                                   % of
                                   Total
                   Number of       Options/SARs
                   Securities      Granted to   Exercise
                   Underlying      Employees    or Base
                   Options/SARs    in Fiscal    Price           Expiration
                   Granted (#)     Year         ($/Share)       Date
                  _____________________________________________________________
Name
_________________
Bruce A. Shear        67,000       16.2%        $ .30                04/12/2006
Robert H. Boswell      5,000        1.2%        $ .25                10/12/2005
                      36,000        8.7%        $ .30                04/12/2006
Michael R. Cornelison  5,000        1.2%        $ .25                10/12/2005
                      36,000        8.7%        $ .30                04/12/2006
Paula C. Wurts         5,000        1.2%        $ .25                10/12/2005
                      36,000        8.7%        $ .30                04/12/2006

All Directors and
 Officers as a
 group (8 Persons)   196,000       46.6%        $.22-$.30  10/12/2005-4/12/2006







                                     - 60 -
<PAGE>
     The following  table provides  information  about options  exercised by the
named executive  officers during fiscal 2001 and the number and value of options
held at the end of fiscal 2001.

(a)                  (b)       (c)      (d)              (e)
                                          Number of
                                          Securities         Value of
                                          Underlying         Unexercised
                      Shares              Unexercised        In-the-Money
Name                  Acquired            Options/SARs at    Options/SARs at
                      on        Value     FY-End (#)         FY-End ($)
                      Exercise  Realized  Exercisable/       Exercisable/
                        (#)       ($)     Unexercisable      Unexercisable
_______________________________________________________________________________
Bruce A. Shear           --       --      129,250/ 87,750     $10,795/$ 5,385
Robert H. Boswell        --       --      121,333/ 60,333     $10,470/$ 4,080
Michael R. Cornelison    --       --      115,250/ 35,750     $ 9,923/$ 1,867
Paula C. Wurts           --       --       69,667/ 52,417     $ 5,820/$ 3,368
All Directors and
 Officers as a
 group (8 persons)       --       --      571,875/346,875     $45,948/$21,000

     In  February  1997,  all  95,375  shares  underlying  the then  outstanding
employee  stock  options were repriced to the current  market  price,  using the
existing  exercise  durations.  In  September  1998,  all 21,875  options due to
expire,  were extended for an additional five years. Also in September 1998, all
183,875  shares  underlying  the then  outstanding  employee  stock options were
repriced to the current market price, using the existing exercise durations.  In
January 2001, all 791,500 shares underlying the then outstanding  employee stock
options were repriced to $0.25 using the existing exercise durations,  which was
greater  than the  current  market  price.  The  computed  effect of the  option
repricing of $55,831 was charged to salaries in the quarter ended June 30, 2001.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding the ownership
of shares of the  company's  Class A Common  Stock and Class B Common Stock (the
only classes of common stock of the company currently  outstanding) as of August
31, 2001 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.  Unless  otherwise  indicated
below,  to the  knowledge  of the  company,  all persons  listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent  authority is shared by spouses under applicable law. In preparing
the following table, the company has relied on the information  furnished by the
persons listed below:

                        Name and Address           Amount and        Percent
Title of Class          of Beneficial Owner        Nature            of
                                                   of Beneficial     Class
                                                   Owner             (12)
_______________________________________________________________________________
Class A Common Stock    Gerald M. Perlow           59,375(1)           *
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA  01960
                        Donald E. Robar            66,375(2)           *
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA  01960
                        Bruce A. Shear            379,245(3)           4.3%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA  01960



                                     - 61 -
<PAGE>
                        Name and Address           Amount and        Percent
Title of Class          of Beneficial Owner        Nature            of
                                                   of Beneficial     Class
                                                   Owner             (12)
_______________________________________________________________________________
Class A Common Stock    Robert H. Boswell         159,128(4)           1.8%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA  01960
                        Howard W. Phillips         47,750(5)           *
                        P. O. Box 2047
                        East Hampton, NY 11937
                        William F. Grieco          53,375(6)           *
                        115 Marlborough Street
                        Boston, MA   02116
                        Paula C. Wurts             92,841(7)           1.1%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA  01960
                        Michael R. Cornelison     128,159(8)           1.4%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, Ma  01960
                        All Directors and
                        Officers as a Group     1,014,790(9)          10.8%
                        (8 persons)
Class B Common Stock    Bruce A. Shear            671,259(11)         92.3%
(10)                    c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        All Directors and         671,259             92.3%
                        Officers as a Group
                        (8 persons)

  *  Less than 1%

1.   Includes 37,625 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
2.   Includes 41,125 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
3.   Includes  129,250  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.25
     to $.30 per share.
4.   Includes an  aggregate of 133,833  shares of Class A Common Stock  issuable
     pursuant to currently  exercisable stock options at an exercise price range
     of $.25 to $.30 per share.
5.   Includes 36,000 shares  issuable  pursuant to currently  exercisable  stock
     options having an exercise price range of $.22 to $.30 per share.
6.   Includes  31,625  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.22
     to $3.50 per share.
7.   Includes  72,167  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.25
     to $.30 per share.
8.   Includes  115,250  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.25
     to $.30 per share.



                                     - 62 -
<PAGE>
9.   Includes an  aggregate  of 596,875  shares  issuable  pursuant to currently
     exercisable stock options.  Of those options,  5,500 have an exercise price
     of $6.63 per share,  6,000 have an exercise price of $3.50 per share, 6,000
     have an exercise price of $2.06 per share,  4,500 have an exercise price of
     $1.03 per share,  3,000 have an  exercise  price of $.81 per share,  66,625
     have an exercise price of $.30,  503,250 have an exercise price of $.25 and
     2,000 have an exercise price of $.22.
10.  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.
11.  Includes  56,369  shares of class B common stock pledged to Steven J. Shear
     of 2 Addison Avenue,  Lynn,  Massachusetts 01902, Bruce A. Shear's brother,
     to secure the purchase  price  obligation  of Bruce A. Shear in  connection
     with his purchase of his brother's  stock in the company in December  1988.
     In the absence of any default under this obligation, Bruce A. Shear retains
     full voting power with respect to these shares.
12.  Represents percentage of equity of class, based on numbers of shares listed
     under the column headed "Amount and Nature of Beneficial  Ownership".  Each
     share of Class A Common  Stock is  entitled  to one vote per share and each
     share of Class B Common  Stock is  entitled  to five votes per share on all
     matters on which  stockholders  may vote  (except  that the  holders of the
     Class A Common  Stock are  entitled to elect two  members of the  company's
     Board of Directors  and holders of the Class B Common Stock are entitled to
     elect all the remaining members of the company's Board of Directors).

     By  virtue of the fact that  class B  shareholders  have the right to elect
three of the five  members of the Board of  Directors  and Mr. Shear owns 92% of
the class B shares,  Mr. Shear has the right to elect the nominees and therefore
control the Board of Directors.

     Based on the number of shares  listed under the column  headed  "Amount and
Nature of  Beneficial  Ownership,"  the  following  persons  or groups  held the
following  percentages  of voting rights for all shares of common stock combined
as of August 31, 2001:

                  Bruce A. Shear ............................29.99%
                  All Directors and Officers as a Group
                     (8 persons).............................33.75%


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Related Party Indebtedness

     For approximately the last twelve years, Bruce A. Shear, a director and the
President and Chief Executive Officer of the company, and persons affiliated and
associated with him have made a series of unsecured loans to the company and its
subsidiaries  to  enable  them to  meet  on  going  financial  commitments.  The
borrowings  generally  were entered into when the company did not have financing
available from outside sources and, in the opinion of the company,  were entered
into at market rates given the financial  condition of the company and the risks
of repayment at the time the loans were made.  As of June 30, 2001,  the company
owed an aggregate of $200,000 to related parties.

     During the period  ended June 30,  2001,  the  company  paid Mr.  Shear and
affiliates approximately $22,300 in principal and accrued interest under various
notes.  As of June 30,  2001,  the  company  owed Bruce A. Shear  $100,000  on a
promissory  note,  which is dated August 13, 1998, bears interest at the rate of
12% per year and is payable on demand and Tot Care,  Inc., an affiliate of Bruce
A. Shear, $100,000 on promissory notes dated May 28, 1998 and June 9, 1998 which
bear interest at the rate of 12% per year and are payable on demand.







                                     - 63 -
<PAGE>
ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K.

Exhibit No.                              Description

    3.1   Restated  Articles  of  Organization  of the  Registrant,  as amended.
          (Filed as exhibit 3.1 to the company's Registration Statement on March
          2, 1994).
    3.1.1 Articles of Amendment filed with the  Commonwealth  of  Massachusetts.
          (Filed with the 10-QSB dated May 1997).
    3.1.2 Restated  Articles  of  Organization  of the  Registrant,  as amended.
          (Filed as exhibit 3.1.2 to the  company's  report on Form 10-QSB dated
          May 14, 2001. Commission file number 0-22916).
    3.2   By-laws of the  Registrant,  as amended.  (Filed as exhibit 3.2 to the
          company's  Post-Effective  Amendment No. 2 on Form S-3 to Registration
          Statement on Form SB-2 under the Securities Act of 1933 dated November
          13, 1995. Commission file number 333-71418).
    3.3   Certificate of Designation of Series C Convertible  Preferred Stock of
          PHC, Inc.  adopted by the Board of Directors on June 15, 2000 and June
          26,  2000.  (Filed  as  exhibit  4.35  to the  company's  Registration
          Statement  on Form S-3 dated July 14,  2000.  Commission  file  number
          333-41494).
    3.4   Certificate of Designation of Series C Convertible  Preferred Stock of
          PHC, Inc.  adopted by the Board of Directors on June 15, 2000 and June
          26,  2000.  (Filed as  exhibit  4.39 to the  company's  report on Form
          10-QSB dated May 14, 2001. Commission file number 0-22916).
    4.1   Form of  Warrant  Agreement.  (Filed as exhibit  4.1 to the  company's
          Registration Statement on March 2, 1994).
    4.2   Form of Unit Purchase  Option.  (Filed as exhibit 4.4 to the company's
          Registration Statement on March 2, 1994).
    4.3   Warrant Agreement issued to Alpine Capital Partners,  Inc. to purchase
          25,000 Class A Common shares dated October 7, 1996.  (Filed as exhibit
          4.15 to the  company's  Current  Report  on Form 8-K,  filed  with the
          Securities and Exchange Commission  November 5, 1996.  Commission file
          number 0-22916).
    4.4   Warrant  Agreement issued to Barrow Street Research,  Inc. to purchase
          3,000 Class A Common shares dated February 18, 1997. (Filed as exhibit
          4.17 to the company's  Registration Statement on Form SB-2 dated April
          15, 1997. Commission file number 333-25231).
    4.5   Consultant  Warrant  Agreement by and between PHC,  Inc., and C.C.R.I.
          Corporation  dated March 3, 1997 to purchase  160,000  shares  Class A
          Common  Stock.  (Filed as exhibit 4.18 to the  company's  Registration
          Statement  on Form SB-2 dated April 15, 1997.  Commission  file number
          333-25231).
    4.6   Warrant  Agreement by and between PHC,  Inc.  and  ProFutures  Special
          Equities  Fund,  L.P. for 50,000  shares of Class A Common Stock dated
          6/4/97. (Filed as exhibit 4.22 to the company's Registration Statement
          on Form SB-2 dated April 15, 1997. Commission file number 333-25231).
    4.7   Warrant  Agreement by and between PHC,  Inc.  and  ProFutures  Special
          Equities  Fund,  L.P. for up to 86,207  shares of Class A Common Stock
          dated 09/19/97. (Filed as exhibit 4.25 to the company's report on Form
          10-KSB,  filed with the Securities and Exchange  Commission on October
          14, 1997. Commission file number 0-22916).
    4.8   Transfer from Seacrest Capital  Securities of PHC, Inc. and securities
          to Summit Capital  Limited dated  12/19/97.  (Filed as exhibit 4.26 to
          the company's  report on Form 10-KSB,  filed with the  Securities  and
          Exchange  Commission  on October  14,  1997.  Commission  file  number
          0-22916).
    4.9   Warrant  Agreement by and between PHC,  Inc.  and  ProFutures  Special
          Equities Fund, LP for 3,000 shares of Class A Common Stock.  (Filed as
          exhibit 4.27 to the company's  Current  Report on Form 8-K, filed with
          the Securities and Exchange  Commission on April 29, 1998.  Commission
          file number 0-22916).




                                     - 64 -
<PAGE>
Exhibit No.                              Description

    4.10  Warrant to purchase up to 52,500 shares of Class A Common Stock by and
          between PHC, Inc., and HealthCare Financial Partners, Inc. dated March
          10,  1998.  (Filed  as  exhibit  4.30  to the  company's  Registration
          Statement  on Form SB-2 dated July 24,  1998.  Commission  file number
          333-59927).
    4.11  Warrant to purchase up to 52,500 shares of Class A Common Stock by and
          between PHC, Inc., and HealthCare Financial Partners,  Inc. dated July
          10,  1998.  (Filed  as  exhibit  4.31  to the  company's  Registration
          Statement  on Form SB-2 dated July 24,  1998.  Commission  file number
          333-59927).
    4.12  Warrant  Agreement by and between Joan  Finsilver and PHC, Inc.  dated
          07/31/98 for 60,000 shares common stock. (Filed as exhibit 4.15 to the
          company's  report on 10-KSB  filed with the  Securities  and  Exchange
          Commission  on October  13,  1998.  Commission  file  number  0-22916.
          Replaces  exhibit 4.15 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).
    4.13  Warrant  Agreement  by and between  Brean  Murray and Company and PHC,
          Inc. dated 07/31/98 for 90,000 shares common stock.  (Filed as exhibit
          4.17 to the company's  report on 10-KSB filed with the  Securities and
          Exchange  Commission on October 13, 1998. Replaces exhibit 4.23 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).
    4.14  Warrant Agreement by and between HealthCare  Financial Partners,  Inc.
          and its subsidiaries  (collectively  "HCFP")  and PHC, Inc. dated July
          10,  1998 - Warrant No. 3 for 20,000  shares of Class A Common  Stock.
          (Filed as exhibit 4.18 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).
    4.15  Warrant Guaranty Agreement for Common Stock Purchase Warrants issuable
          by PHC, Inc. dated August 14, 1998 for Warrants No 2 and No. 3. (Filed
          as exhibit 4.19 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).
    4.16  12%  Convertible  Debenture by and between PHC,  Inc., and Dean & Co.,
          dated  December 3, 1998 in the amount of  $500,000.  (Filed as exhibit
          4.20 to the company's  report on Form 10-QSB dated  February 12, 1999.
          Commission file number 0-22916).
    4.17  Securities  Purchase  Agreement for 12%  Convertible  Debenture by and
          between PHC, Inc. and Dean & Co., a Wisconsin nominee  partnership for
          Common Stock.  (Filed as exhibit 4.21 to the company's  report on Form
          10-QSB dated February 12, 1999. Commission file number 0-22916).
    4.18  Warrant  Agreement  to purchase up to 25,000  shares of Class A Common
          Stock by and between  PHC,  Inc.,  and Dean & Co.,  dated  December 3,
          1998.  (Filed as exhibit 4.22 to the  company's  report on Form 10-QSB
          dated February 12, 1999. Commission file number 0-22916).
    4.19  Warrant  Agreement by and between PHC, Inc.,  and National  Securities
          Corporation dated January 5, 1999 to purchase 37,500 shares of Class A
          Common Stock.  (Filed as exhibit 4.23 to the company's  report on Form
          10-QSB dated February 12, 1999. Commission file number 0-22916).
    4.20  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000  shares,  15,000  shares,  5,000 shares,  5,000 shares,  50,000
          shares and 10,000  shares of Class A Common  Stock dated  December 31,
          1998;  5,000  shares of Class A Common  Stock dated  December 1, 1998;
          10,000  shares of Class A Common  Stock  dated  January 1,  1999;  and
          10,000 shares of Class A Common Stock dated  February 1, 1999.  (Filed
          as exhibit 4.24 to the company's  report on Form 10-QSB dated February
          12, 1999. Commission file number 0-22916).




                                     - 65 -
<PAGE>
Exhibit No.                              Description

    4.21  Warrant Agreement by and between PHC, Inc., and Barrow Street Research
          for 3,000  shares of Class A Common  Stock dated  February  23,  1999.
          (Filed as exhibit 4.24 to the company's Registration Statement on Form
          S-3 dated April 13, 1999. Commission file number 333-76137).
    4.22  Warrant  Agreement by and between PHC,  Inc., and George H. Gordon for
          10,000  shares of Class A Common Stock dated March 1, 1999.  (Filed as
          exhibit 4.25 to the company's Registration Statement on Form S-3 dated
          April 13, 1999. Commission file number 333-76137).
    4.23  Warrant  Agreement by and between PHC,  Inc., and George H. Gordon for
          10,000  shares of Class A Common Stock dated April 1, 1999.  (Filed as
          exhibit 4.26 to the company's Registration Statement on Form S-3 dated
          June  1,  1999.   Commission  file  number  333-76137).
    4.24  Warrant  Agreement by and between PHC,  Inc., and George H. Gordon for
          10,000  shares of Class A Common  Stock  dated May 1, 1999.  (Filed as
          exhibit 4.27 to the company's Registration Statement on Form S-3 dated
          May 14, 1999. Commission file number 0-22916).
    4.25  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000  shares of Class A Common Stock dated April 1, 1999.  (Filed as
          exhibit 4.28 to the company's  report on Form 10-KSB dated October 13,
          1999. Commission file number 0-22916).
    4.26  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000  shares of Class A Common  Stock dated July 1, 1999.  (Filed as
          exhibit 4.29 to the company's  report on Form 10-KSB dated October 13,
          1999. Commission file number 0-22916).
    4.27  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000 shares of Class A Common Stock dated August 1, 1999.  (Filed as
          exhibit 4.30 to the company's  report on Form 10-KSB dated October 13,
          1999. Commission file number 0-22916).
    4.28  Warrant to purchase up to 37,500 shares of Class A Common Stock by and
          between PHC, Inc., and National Securities  Corporation dated April 5,
          1999.  (Filed as exhibit 4.31 to the  company's  report on Form 10-KSB
          dated October 13, 1999. Commission file number 0-22916).
    4.29  Warrant to purchase up to 37,500 shares of Class A Common Stock by and
          between PHC, Inc., and National  Securities  Corporation dated July 5,
          1999.  (Filed as exhibit 4.32 to the  company's  report on Form 10-KSB
          dated October 13, 1999. Commission file number 0-22916).
    4.30  Warrant  to  purchase  40,000  shares  of Class A Common  Stock by and
          between PHC, Inc. and CCRI, Inc. and Warrant to purchase 40,000 shares
          of Class A Common Stock by and between PHC, Inc. and M&K Partners both
          dated 3/3/97;  replaces warrant for 160,000 shares dated 3/3/97 by and
          between  PHC,  Inc.  and  CCRI,  Inc.  (Filed as  exhibit  4.34 to the
          company's report on Form 10-QSB filed with the Securities and Exchange
          Commission on May 11, 2000. Commission file 0-22916).
    4.31  Common Stock  Purchase  Warrant by and between PHC, Inc. and The Shaar
          Fund Ltd. dated June 28, 2000. (Filed as exhibit 4.36 to the company's
          Registration  Statement  on Form S-3 dated July 14,  2000.  Commission
          file number 333-41494).
    4.32  Common  Stock  Purchase  Warrant by and between  PHC,  Inc. and Heller
          Healthcare  Finance,  Inc. for 60,000  shares of Class A Common Stock.
          (Filed as  exhibit   4.37  to  the  company's  report on Form  10-KSB,
          filed with the  Securities  and Exchange  Commission  on September 29,
          2000. Commission file number 0-22916).
    4.33  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  4.38 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).
    4.34  Warrant  Agreement issued to Union Atlantic  Capital,  LC. to purchase
          25,000 Class A Common  shares dated March 20, 2001.  (Filed as exhibit
          4.40 to the  company's  report  on Form  10-QSB  dated  May 14,  2001.
          Commission file number 0-22916).




                                     - 66 -
<PAGE>
Exhibit No.                              Description

    4.35  Warrant  Agreement issued to Marshall Sternan to purchase 10,000 Class
          A Common  shares dated April 15,  2001.  (Filed as exhibit 4.41 to the
          company's  report on Form 10-QSB dated May 14, 2001.  Commission  file
          number 0-22916).
   *4.36  Equity  Purchase  Warrant to purchase 1% equity in  Behavioral  Health
          Online by and between PHC, Inc., and Heller  Healthcare  Finance dated
          December 18, 2000.
   10.1   1993 Stock Purchase and Option Plan of PHC, Inc., as amended  December
          26,  1997.  (Filed as  exhibit  10.1 to the  company's  Post-Effective
          Amendment  No. 2 on Form S-3 to  Registration  Statement  on Form SB-2
          under the Securities  Act of 1933 dated November 13, 1995.  Commission
          file number 333-71418).
   10.2   Deed of Trust Note of Mount Regis Center Limited  Partnership in favor
          of Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000,
          guaranteed by PHC,  Inc.,  with Deed of Trust  executed by Mount Regis
          Center,  Limited  Partnership of even date. (Filed as exhibit 10.33 to
          Form SB-2 dated March 2, 1994).  Assignment  and Assumption of Limited
          Partnership  Interest,  by and between PHC of Virginia  Inc.  and each
          assignor  dated as of June 30, 1994.  (Filed as exhibit  10.57 to Form
          10-KSB on September 28, 1994).
   10.3   Security  Agreement  Note of PHC of  Virginia,  Inc. in favor of Mount
          Regis  Center,  Inc.,  dated July 28, 1987,  in the amount of $90,000,
          guaranteed by PHC,  Inc.,  with Security  Agreement,  dated July 1987.
          (Filed as exhibit  10.34 to the  company's  Registration  Statement on
          Form SB-2 dated March 2, 1994. Commission file number 333-71418).
   10.4   Copy of Note of Bruce A.  Shear in favor of  Steven  J.  Shear,  dated
          December  1988,  in the amount of  $195,695;  Pledge  Agreement by and
          between Bruce A. Shear and Steven J. Shear,  dated  December 15, 1988;
          Stock  Purchase  Agreement by and between Steven J. Shear and Bruce A.
          Shear,  dated  December  1,  1988.  (Filed  as  exhibit  10.52  to the
          company's  Registration  Statement  on Form SB-2 dated  March 2, 1994.
          Commission file number 333-71418).
   10.5   1995  Employee  Stock  Purchase  Plan.  (Filed as exhibit 10.74 to the
          company's  Post-Effective  Amendment No. 2 on Form S-3 to Registration
          Statement on Form SB-2 under the Securities Act of 1933 dated November
          13, 1995.  Commission  file number  333-71418.  As amended on Form S-8
          dated March 12, 1999. Commission File number 333-74373).
   10.6   1995  Employee  Stock  Purchase  Plan.  (Filed as exhibit  10.7 to the
          company's  Post-Effective  Amendment No. 2 on Form S-3 to Registration
          Statement on Form SB-2 under the Securities Act of 1933 dated November
          13, 1995.  Commission  file number  333-71418.  As amended on Form S-8
          dated March 12, 1999. Commission File number 333-74373).
   10.7   1995 Non-Employee  Director Stock Option Plan. (Filed as exhibit 10.75
          to  the  company's  Post-Effective  Amendment  No.  2 on  Form  S-3 to
          Registration  Statement on Form SB-2 under the  Securities Act of 1933
          dated November 13, 1995. Commission file number 333-71418.  As amended
          on Form S-8 dated March 12, 1999. Commission File number 333-74373).
   10.8   Unconditional  Guaranty of Payment and performance by and between PHC,
          Inc.  in favor of HCFP.  (Filed as  exhibit  10.112  to the  company's
          quarterly  report  on Form  10-QSB,  filed  with  the  Securities  and
          Exchange  Commission  on February  25,  1997.  Commission  file number
          0-22916).
   10.9   Amendment  number 1 to Loan and Security  Agreement dated May 21, 1996
          by  and  between  PHC,  of  Utah,  Inc.  and  HCFP  Funding  providing
          collateral for the PHC of Michigan,  Inc. Loan and Security Agreement.
          (Filed as exhibit  10.113 to the  company's  quarterly  report on Form
          10-QSB,  filed with the Securities and Exchange Commission on February
          25, 1997 Commission file number 0-22916).




                                     - 67 -
<PAGE>
Exhibit No.                              Description

   10.10  Secured Term Note by and between PHC of Michigan,  Inc. and Healthcare
          Financial  Partners - Funding  II,  L.P.  in the amount of  $1,100,000
          dated  March  1997.   (Filed  as  exhibit   10.116  to  the  company's
          Registration  Statement on Form SB-2 dated April 15, 1997.  Commission
          file number 333-25231).
   10.11  Master  Equipment  Lease  Agreement by and between PHC,  Inc. and LINC
          Capital  Partners  dated  March 18,  1997 in the  amount of  $200,000.
          (Filed as exhibit  10.121 to the company's  Registration  Statement on
          Form SB-2 dated April 15, 1997. Commission file number 333-25231).
   10.12  Agreement between Family  Independence Agency and Harbor Oaks Hospital
          effective  January 1, 1997.  (Filed as exhibit 10.122 to the company's
          report on Form 10-KSB,  with the Securities and Exchange Commission on
          October 14, 1997. Commission file number 0-22916)
   10.13  Master Contract by and between Family  Independence  Agency and Harbor
          Oaks Hospital  effective  January 1, 1997. (Filed as exhibit 10.123 to
          the company's  report on Form 10-KSB,  filed with the  Securities  and
          Exchange  Commission  on October  14,  1997.  Commission  file  number
          0-22916).
   10.14  Financial Advisory  Agreement,  Indemnification  Agreement and Warrant
          by and between  Brean Murray & Company and PHC, Inc.  dated  06/01/97.
          (Filed as exhibit 10.125 to the company's report on Form 10-KSB, filed
          with the  Securities  and  Exchange  Commission  on October 14,  1997.
          Commission file number 0-22916).
   10.15  Secured  Term  Note;  Mortgage;   Environmental  Indemnity;  Agreement
          Guaranty by PHC, Inc.; and Amendment No. 2 Loan and Security Agreement
          by and between Healthcare  Financial;  and PHC, Inc. of Michigan dated
          December 1997. (Filed as exhibit 10.129 to the company's  Registration
          Statement on Form SB-2 dated January 8, 1997.  Commission  file number
          333-25231).
   10.16  Secured  Bridge Loan to be made to PHC,  Inc. by HCFP Funding II, Inc.
          in the amount of  $350,000  dated  March 10,  1998.  (Filed as exhibit
          10.136 to the  company's  Current  Report on Form 8-K,  filed with the
          Securities and Exchange Commission.  Commission file number 0-22916 on
          April 29, 1998).
   10.17  First  Amendment to Mortgage  between PHC of  Michigan,  Inc. and HCFP
          Funding,  Inc. (Filed as Exhibit 10.137 to the company's  10-QSB filed
          on May 15, 1998. Commission file number 0-22916).
   10.18  Secured  Unconditional  Guaranty  of Payment  and  performance  by and
          between  BSC-NY,  Inc.  and HCFP  Funding  II,  Inc.  in the amount of
          $350,000.  (Filed  as  exhibit  10.138 to the  company's  Registration
          Statement  on Form SB-2 dated July 24,  1998.  Commission  file number
          333-59927).
   10.19  Loan and Security  Agreement by and among HCFP Funding,  Inc., and PHC
          of Michigan,  Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc., PHC of
          Rhode Island, Inc., and Pioneer Counseling of Virginia,  Inc. dated as
          of  February  18,  1998.  (Filed as  exhibit  10.139 to the  company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).
   10.20  Credit Line Deed of Trust by and between PHC of  Virginia,  Inc.,  and
          HCFP Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the
          company's  Registration  Statement  on Form SB-2 dated July 24,  1998.
          Commission file number 333-59927).
   10.21  Amendment  No. 1 to Secured  Bridge  Note  dated July 10,  1998 by and
          between PHC, Inc. and HCFP Funding II, Inc.  (Filed as exhibit  10.141
          to the  company's  Registration  Statement on Form SB-2 dated July 24,
          1998. Commission file number 333-59927).
   10.22  Promissory  Note for $50,000  dated May 18,  1998 by and between  PHC,
          Inc.  and Tot Care,  Inc.  (Filed as exhibit  10.142 to the  company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).




                                     - 68 -
<PAGE>
Exhibit No.                              Description

   10.23  Promissory  Note for $50,000  dated June 9, 1998 by and  between  PHC,
          Inc.  and Tot Care,  Inc.  (Filed as exhibit  10.143 to the  company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).
   10.24  Amendment  No. 1 to Loan  and  Security  Agreement  in the  amount  of
          $4,000,000  by  and among HCFP Funding,  Inc.,  and PHC  of  Michigan,
          Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc., PHC of Rhode Island,
          Inc.,  and Pioneer  Counseling of Virginia,  Inc. dated as of February
          18,  1998.  (Filed as exhibit  10.57 to the  company's  report on Form
          10-KSB dated October 13, 1998. Commission file number 0-22916).
   10.25  Promissory  Note by and  between  PHC,  Inc.  and Bruce A. Shear dated
          August 13, 1998, in the amount of $100,000. (Filed as exhibit 10.58 to
          the company's report on Form 10-QSB dated November 3, 1998. Commission
          file number 0-23524).
   10.26  Financial  Advisory and Consultant  Agreement by and between  National
          Securities  Corporation and PHC, Inc. dated 01/05/99 (Filed as exhibit
          10.61 to the company's  report on Form 10-QSB dated February 12, 1999.
          Commission file number 0-22916).
   10.27  This  amendment  no. 2 to secured  bridge  note (the  "Amendment")  is
          hereby  entered  into as of the 10th day of May 1999 by and among PHC,
          INC., a Massachusetts corporation  ("Borrower"),  and HCFP FUNDING II,
          INC., a Delaware  corporation  ("Lender").  (Filed as exhibit 10.63 to
          the company's report on Form 10-KSB dated October 13, 1999. Commission
          file number 0-22916).
   10.28  Loan and Security Agreement by and between Heller Healthcare  Finance,
          Inc. f/k/a HCFP Funding, Inc.  and PHC of Michigan, Inc., PHC of Utah,
          Inc., PHC of  Virginia,  Inc., PHC of Rhode  Island, Inc. and Pioneer
          Counseling of Virginia,  Inc.  dated August 11, 1999.  (Filed as 10.64
          exhibit to the company's report on Form 10-KSB dated October 13, 1999.
          Commission file number 0-22916).
   10.29  Amendment  number 3 to Secured  Bridge  Note dated May 10, 1999 by and
          between PHC,  Inc. and HCFP (Filed as exhibit  10.65 to the  company's
          report  on  Form  10-KSB,  filed  with  the  Securities  and  Exchange
          Commission on October 13, 1999. Commission file number 0-22916).
   10.30  Promissory  Note by and  between  PHC,  Inc.  and  Mellon  US  Leasing
          Corporation dated November 1999, in the amount of $160,000.  (Filed as
          exhibit  10.68 to the company's  report on Form 10-QSB dated  November
          15, 1999.
   10.31  Secured Term Loan for  $1,000,000 by and between PHC of Michigan,  Inc
          and  Heller  Finance,  Inc.,  which  includes  Secured  Term Note from
          Borrower;  Restated  Mortgage  by and  between  Borrower  and  Lender;
          Guaranty of Term Loan by PHC, Inc.;  Secured  Guaranty of Term Loan by
          BSC-NY,  Inc.;  Guaranty  of Term Loan by Bruce A.  Shear  and  Letter
          Agreement.  (Filed as exhibit  10.69 to the  company's  report on Form
          10-QSB,  filed with the Securities and Exchange Commission on February
          14, 2000. Commission file 0-22916).
   10.32  Amendment  number 1 to Loan and Security  Agreement dated February 17,
          2000 by and between PHC of Michigan,  Inc., PHC, of Utah, Inc., PHC of
          Virginia,  Inc., PHC of Rhode Island,  Inc. and Pioneer  Counseling of
          Virginia, Inc. and Heller Healthcare Finance, Inc., f/k/a HCFP Funding
          in the amount of $2,500,000.  (Filed as exhibit 10.70 to the company's
          report  on  Form  10-QSB  filed  with  the   Securities  and  Exchange
          Commission on May 11, 2000. Commission file 0-22916).
   10.33  Secured  Term Note by and between  PHC of  Michigan,  Inc.  and Heller
          Healthcare Finance, Inc. in the amount of $500,000 dated May 26, 2000.
          (Filed as exhibit  10.71 to the  company's  Registration  Statement on
          Form S-3 dated July 14, 2000. Commission file number 333-41494).




                                     - 69 -
<PAGE>
Exhibit No.                              Description

   10.34  Registration  Rights  Agreement by and between PHC, Inc. and The Shaar
          Fund  Ltd.  dated  June  28,  2000.  (Filed  as  exhibit  10.72 to the
          company's  Registration  Statement  on Form S-3 dated  July 14,  2000.
          Commission file number 333-41494).
   10.35  Release  Notice by and between PHC, Inc. and The Shaar Fund Ltd. dated
          June 28, 2000.  (Filed as exhibit 10.73 to the company's  Registration
          Statement  on Form S-3 dated July 14,  2000.  Commission  file  number
          333-41494).
   10.36  Escrow  Instruction  by and between PHC, Inc.; The Shaar Fund Ltd. and
          Cadwalader,  Wickersham & Taft (an Escrow  Agent) dated June 28, 2000.
          (Filed as exhibit  10.74 to the  company's  Registration  Statement on
          Form S-3 dated July 14, 2000. Commission file number 333-41494).
   10.37  Securities  Purchase  Agreement by and between PHC, Inc. and The Shaar
          Fund Ltd.  dated June 28, 2000 to purchase  125,000  shares of Class A
          Common Stock.  (Filed as exhibit  10.75 to the company's  Registration
          Statement  on Form S-3 dated July 14,  2000.  Commission  file  number
          333-41494).
   10.38  Promissory  Note for  $532,000  dated May 30, 2000 by and between PHC,
          Inc. and Irwin J.  Mansdorf,  Ph.D.  (Filed as an exhibit 10.76 to the
          company's  report  on Form  10-KSB,  filed  with  the  Securities  and
          Exchange  Commission  on September  29, 2000.  Commission  file number
          0-22916).
   10.39  Promissory  Note for  $168,000  dated May 30, 2000 by and between PHC,
          Inc.  and  Yakov  Burstein,  Ph.D.  (Filed  as  exhibit 10.77   to the
          company's  report  on Form  10-KSB,  filed  with  the  Securities  and
          Exchange  Commission  on September  29, 2000.  Commission  file number
          0-22916).
   10.40  Settlement  Agreement and Mutual Releases by and between PHC, Inc. and
          Yakov Burstein, Ph.D. and Irwin J. Mansdorf, Ph.D. dated May 30, 2000.
          (Filed as exhibit 10.78 to the company's report on Form 10-KSB,  filed
          with the  Securities  and Exchange  Commission  on September 29, 2000.
          Commission file number 0-22916).
   10.41  Restated mortgage for $3,100,000 by and between PHC of Michigan,  Inc.
          and  Heller  Finance,   Inc.,  which  includes  Secured  Unconditional
          Guaranty   of  Payment  and   Performance   by  PHC,   Inc.;   Secured
          Unconditional  Guaranty of Payment and  Performance  by BSC-NY,  Inc.;
          Secured Unconditional  Guaranty of Payment and Performance by Bruce A.
          Shear   and   Amended   and   Restated   Cross-Collateralization   and
          Cross-Default  Agreement  By and Among PHC of Michigan,  Inc.,  PHC of
          Utah,  Inc.,  PHC of  Virginia,  Inc., PHC of Rhode  Island,  Inc. and
          Pioneer Counseling of Virginia,  Inc.  (Collectively,  "Borrower") And
          Heller Healthcare Finance, Inc. ("Lender"). (Filed as exhibit 10.79 to
          the company's  report on Form 10-KSB,  filed with the  Securities  and
          Exchange  Commission  on September  29, 2000.  Commission  file number
          0-22916).
   10.42  Loan and Security  Agreement by and among Heller  Healthcare  Finance,
          Inc., f/k/a HCFP Funding, Inc. and PHC Of Michigan,  Inc., Et Al dated
          December 18, 2000.  (Filed as exhibit 10.52 to the company's report on
          Form 10-QSB,  filed with the  Securities  and Exchange  Commission  on
          February 14, 2001. Commission file number 0-22916).
   10.43  Consolidated  Restated  Mortgage by and between PHC of Michigan,  Inc.
          and Heller  Healthcare  Finance,  Inc.,  Second  Amended and  Restated
          Cross-Collateralization  and  Cross-Default  Agreement dated March 9 ,
          2001.  (Filed as exhibit 10.53 to the company's  report on Form 10-QSB
          dated May 14, 2001. Commission file 0-22916).
   10.44  Amendment  number one,  dated March 2001,  to the Secured Term Note by
          and between PHC of  Michigan,  Inc. and Heller  Healthcare  Financial,
          Inc. in the amount of $1,100,000  dated March 1997.  (Filed as exhibit
          10.54 to the  company's  report on Form  10-QSB  dated  May 14,  2001.
          Commission file number 0-22916).




                                     - 70 -
<PAGE>
Exhibit No.                              Description

  *10.45  Loan and  Security Agreement originally dated as of  February 18, 1998
          by and among  Heller  Healthcare  Finance,  Inc.  and PHC of Michigan,
          Inc., PHC of Utah,  Inc. and Pioneer  Counseling  Centers of Virginia,
          Inc. dated as of June 27, 2001.
  *10.46  Amendment  number 2  to Loan and Security  Agreement  originally dated
          February  18, 1998 by and among PHC, of Utah,  Inc.,  PHC of Virginia,
          Inc. and PHC of Michigan,  Inc. and Heller Healthcare Finance, Inc. in
          the amount of $3,000,000 amended as of May 24, 2001.
   21.1   List  of   Subsidiaries.   (Filed  as  an  exhibit  to  the  company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).

* Filed herewith

(b) REPORTS ON FORM 8-K.

     The company  filed no reports on Form 8-K during the quarter ended June 30,
2001.





                                     - 71 -
<PAGE>
                                   SIGNATURES


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




                                          PHC, INC.


Date: September  25 , 2001                By: /S/   BRUCE A. SHEAR
                                                    Bruce A. Shear, President
                                                    and Chief Executive Officer


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

SIGNATURE                      TITLE(S)                         DATE
______________________________________________________________________________


/s/  BRUCE A. SHEAR            President, Chief             September 25, 2001
     Bruce A. Shear            Executive  Officer  and
                               Director  (principal
                               executive officer)

/s/  PAULA C. WURTS            Controller and Treasurer     September 25, 2001
     Paula C. Wurts            (principal financial and
                               accounting officer)

/s/  GERALD M. PERLOW          Director                     September 25, 2001
     Gerald M. Perlow

/s/  DONALD E. ROBAR           Director                     September 25, 2001
     Donald E. Robar

/s/  Howard Phillips           Director                     September 25, 2001
     Howard Phillips

 /s/ WILLIAM F. GRIECO         Director                     September 25, 2001
     William F. Grieco





                                     - 72 -
<PAGE>