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

[X]      Annual report under section 13 or 15(d) of the Securities Exchange Act
         of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1999
[   ]    Transition report under section 13 or 15(d) of the Securities Exchange
         Act of 1934 [NO FEE REQUIRED] for the transition period from       to

Commission file number: 0-23524

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

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


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


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

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

                                      NONE.

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

                 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, 1999 were $ 19,139,496.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked prices of such stock,  as of  September  15, 1999,  was  $6,353,776.  (See
definition of affiliate in Rule 12b-2 of Exchange Act).

At September 15, 1999, 5,610,194 shares of the issuer's Class A Common Stock and
727,170 shares of the issuer's Class B Common Stock were outstanding.

                 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                    Yes No X



<PAGE>
     The Consolidated  Statement of Changes in Stockholders'  Equity at page F-5
of the  Company's  report on Form 10-KSB for the fiscal year ended June 30, 1999
is hereby replaced by the same report  attached and  incorporated by referenced.
The Company's  Form 10-KSB  reflected the Treasury  Shares Amount as of June 30,
1999 at ($2,122), the correct ending balance of this account as of June 30, 1999
is ($12,122).


<PAGE>
ITEM 7: FINANCIAL STATEMENTS

          Independent auditors' report                                    F-2

          Consolidated balance sheets                                     F-3

          Consolidated statements of operations                           F-4

          Consolidated statements of changes in stockholders' equity      F-5

          Consolidated statements of cash flows                        F-6, F-7

          Consolidated notes to financial statements                      F-8












                                                                         F-1


<PAGE>

INDEPENDENT AUDITORS' REPORT


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


We have audited the  accompanying Consolidated  balance  sheets of PHC, Inc. and
subsidiaries  as of  June  30,  1999  and  1998  and  the  related  consolidated
statements of operations,  changes in stockholders'  equity,  and cash flows for
the years then ended.  These financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of PHC,
Inc.  and  subsidiaries  at June 30,  1999 and  1998  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.

The consolidated  financial statements referred to above as of June 30, 1998 and
for the year then ended have been restated (See Note P).



                                                        BDO Seidman, LLP

Boston, Massachusetts
September 10, 1999
                                                                           F2



<PAGE>

PHC, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets
                                                            June 30,
                                                      1999               1998
                                                                   (as restated)
                                                      ____          ___________
ASSETS (Notes C and D)
 Current assets:
 Cash and cash equivalents (Note A)               $  381,170        $  227,077
    Accounts receivable, net of allowance for
     doubtful accounts of $3,647,848 at June 30,
     1999 and $3,488,029 at June 30, 1998
     (Notes A, L and M)                            6,343,227         7,441,972
Prepaid expenses                                     101,865           156,695
Other receivables and advances                       334,155           127,064
Deferred income tax asset (Note F)                   459,280           515,300
Other receivables, related party                      53,517            64,065
                                                  ___________       ___________
  Total current assets                             7,673,214         8,532,173

Accounts receivable, noncurrent                      595,000           685,000
Other receivables, noncurrent, related party,
  net of allowance for doubtful accounts of
  $782,000 in 1999 and $382,000 in 1998(Note K)    2,908,113         2,941,402
Other receivables                                    109,165           426,195
Property and equipment, net (Notes A, B and D)     1,483,319         2,128,273
Deferred income tax asset (Note F)                   154,700           154,700
Deferred financing costs, net of amortization
  of $64,041 and $18,065 at June 30, 1999 and
  1998, respectively                                  45,067            53,608
Goodwill, net of accumulated amortization of
  $116,900 and $307,707 at June 30, 1999 and 1998,
  respectively (Note A)                            1,761,075         2,011,613
Other assets (Note A)                                297,781            19,386
                                                 ___________       ___________
      Total assets                               $15,027,434       $16,952,350
                                                 ___________       ___________
LIABILITIES
Current liabilities:
Accounts payable                               $   1,832,750       $ 2,346,213
Notes payable - related parties (Note E)             200,000           159,496
Current maturities of long-term debt (Note C)      1,286,318         1,107,167
Revolving credit note (Note C)                     1,669,830         1,683,458
Current portion of obligations under capital
 leases (Note D)                                      60,815            67,492
Accrued payroll, payroll taxes and benefits          333,955           729,194
Accrued expenses and other liabilities             1,459,290         1,004,763
Deferred Gain (Note A and I)                       2,641,537         2,641,537
                                                 ___________       ___________
Total current liabilities                          9,484,495         9,739,320

Long-term debt, less current maturities (Note C)   1,730,230         2,850,089
Obligations under capital leases (Note D)             51,657            93,747
Convertible debentures (Note C)                      500,000                --
                                                 ___________       ___________
Total noncurrent liabilities                       2,281,887         2,943,836
                                                 ___________       ___________
Total liabilities                                 11,766,382        12,683,156
                                                 ___________       ___________
Commitments and contingent liabilities
  (Notes A, D, G, H, J, and K)

STOCKHOLDERS' EQUITY (Notes H, J and K)
Convertible Preferred stock, $.01 par value;
  1,000,000 shares authorized, 813 and 950
  shares issued and outstanding June 30, 1999
  and 1998 respectively                                    8                10
Class A common stock, $.01 par value; 20,000,000
  shares authorized, 5,612,930 and 4,935,267
  shares issued June 30,1999 and 1998, respectively   56,129            49,353
Class B common stock, $.01 par value; 2,000,000
  shares authorized, 727,210 and 727,328
  issued and outstanding  June 30, 1999 and 1998,
  respectively, convertible into one share of
  Class A common stock                                 7,272             7,273
Additional paid-in capital                        15,967,176        15,485,895
Treasury stock, 2,776 common shares at cost June
  30, 1999 and 1998                                  (12,122)          (12,122)
Accumulated deficit                              (12,757,411)      (11,261,215)
                                                  ___________       ____________
Total stockholders' equity                         3,261,052         4,269,194
                                                  ___________       ___________
     Total liabilities and stockholders' equity  $15,027,434       $16,952,350
                                                 ___________       ___________
See notes to financial statements


                                                                           F-3
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Operations
                                                  For the Year Ended June 30,
                                                  1999                 1998
                                                                 (as restated)
                                             ____________        _____________
Revenues:
     Patient care, net (Note A)             $ 17,529,978          $ 19,649,353
     Management fees (Note K)                    666,881               833,750
     Other                                       942,637               763,086

         Total revenues                       19,139,496            21,246,189

Operating expenses:
    Patient care expenses                      9,384,070            10,706,639
     Cost of management contracts                259,012               467,065
     Provision for doubtful accounts           2,183,139             3,684,452
     Administrative expenses                   7,865,013             9,488,631

         Total operating expenses             19,691,234            24,346,787
                                             ___________          _____________

Loss from operations                           (551,738)            (3,100,598)

Other income (expense):
     Interest income                            451,271                391,353
     Interest expense                        (1,258,314)            (1,289,642)
     Other income, net                           64,129                 58,583
                                            ___________           _____________

          Total other expense, net            (742,914)               (839,706)

Loss before income taxes                    (1,294,652)             (3,940,304)
Income taxes (Note F)                           59,434                 219,239

Loss from continuing operations             (1,354,086)             (4,159,543)

Loss from discontinued operations
 (Notes A and I)                                    --              (2,220,296)

             Net loss                       (1,354,086)             (6,379,839)

Dividends (Note J)                            (142,110)               (207,060)

Loss applicable to common shareholders   $  (1,496,196)           $ (6,586,899)

Basic and diluted loss per common share
 (Note A):
    Continuing operations                $        (.25)           $       (.84)
    Discontinued operations                         --                    (.42)
      Total                              $        (.25)           $      (1.26)
Basic and diluted weighted average
  number of shares outstanding                6,008,263              5,237,168

See notes to financial statements.
                                                                             F-4


<PAGE>

PHC, INC.  AND SUBSIDIARIES
<TABLE>

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

Consolidated Statements of Changes In Stockholders' Equity (See Notes A, C, H, J, K and N)

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

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

Balance -June 30, 1998
       (as restated)            4,935,267  $49,353   727,328   $7,273         0       $0     950        $10

Costs related to private placement
Conversion of preferred stock     248,129    2,481                                          (190)        (3)
Price guarantee shares            304,097    3,041
Issue warrants for services
Issuance of shares with consulting
     agreement                     56,470      564
Issuance of shares with earn out
     agreement                     53,374      534
Issuance of employee stock
     purchase plan shares          15,475      155
Issue warrants for financing
Conversion from class B to class A    118        1      (118)      (1)
Dividends on preferred stock                                                                  53          l
Net Loss - year ended June 30, 1999    --       --        --       --        --       --      --         --
                                   _______   _______   _______  _______  ______  ________   ______     ______

Balance - June 30, 1999         5,612,930  $56,129   727,210   $7,272         0      $ 0     813        $ 8


See notes to financial statements.
</TABLE>

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

Consolidated  Statements of Changes In Stockholders'  Equity (See Notes A, C, H,
J, K and N)

                      Additional
                      Paid-in
                      Capital,
                      Common      Treasury   Shares   Accumulated
                      Stock        Shares    Amount     Deficit         Total
                    _____________  ________  ______   ____________    _________

Balance - June 30,
   1997                $10,398,630  8,656  $(37,818)  $(4,674,316)   $5,724,581
Conversion of debt       2,696,789                                    2,710,106
Conversion of preferred
  stock series A           (2,458)                                            0
Issuance of shares with
  acquisition              79,605                                        80,015
Issuance private placement
  shares                  498,276                                       500,000
Conversion of shares                                                         -0-
Cancel class C common
  stock                     1,998                                            -0-
Issue warrants for
  services                184,523                                       184,523
Issuance of shares with
  consulting agreement     36,249                                        36,458
Issuance of shares with
  earn out agreement      531,991                                       534,265
Issuance of employee
  stock purchase plan
  shares                   35,750                                        35,897
Issuance of preferred
  stock series B          949,990                                       950,000
Adjustment related to
  beneficial conversion
  feature of convertible
  preferred stock         190,000                        (190,000)           -0-
Warrant issued with debt   48,809                                        48,809
Treasury stock issued to
  employees                        (5,880)   25,696                      25,696
Dividends on preferred stock                              (17,060)      (17,060)
Costs related to private
  placements             (164,257)                                     (164,257)
Net loss-year ended June
  30, 1998                     --      --        --    (6,379,839)   (6,379,839)
                      _____________  ________  ______   ____________  _________

Balance - June 30,
  1998 as restated)   $15,485,895   2,776  $(12,122) $(11,261,215)  $ 4,269,194

Costs related to private
  placement               (56,565)                                      (56,565)
Conversion of preferred
  stock                    91,959                         (92,569)        1,868
Price guarantee shares    117,076                                       120,117
Issue warrants for
  services                108,354                                       108,354
Issuance of shares with
  consulting agreement     38,436                                        39,000
Issuance of shares with
  earn out agreement       59,513                                        60,047
Issuance of employee
  stock purchase plan
  shares                   18,261                                        18,415
Issue warrants for
  financing                51,248                                        51,248
Conversion from class B
  to class A
Dividends on preferred
  stock                    52,999                         (49,541)        3,460
Net Loss-year ended June
  30, 1999                     --      --        --    (1,354,086)   (1,354,086)
                      _____________ ________  ________ ____________  __________
Balance-June 30, 1999  15,967,176   2,776  ($12,122) $(12,757,411)   $3,261,052


See notes to financial statements
                                                                            F-5


<PAGE>
PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Cash Flows
                                                 For the Year Ended June 30,
                                                    1999             1998
                                                                 (as restated)
                                               ______________     ___________
Cash flows from operating activities:
  Net loss                                      $(1,354,086)      $(6,379,839)
  Adjustments to reconcile net loss to
    net cash provided by (used in)
    operating activities:
  Depreciation and amortization                     325,764           674,162
  Compensatory stock options and
    stock and warrants issued
    for obligations                                 279,719           269,790
  Changes in:
     Accounts receivable                          1,188,745         1,544,791
     Prepaid expenses and other
       current assets                              (141,713)          257,173
     Other assets                                   693,275          (257,941)
     Accounts payable                              (513,463)         (182,913)
     Accrued expenses and other liabilities          59,288           758,072
     Net liabilities of discontinued operations          --         1,161,903
                                                ____________      _____________
       Net cash provided by (used in)
        operating activities                        537,529        (2,154,802)
                                               ____________      _____________
Cash flows from investing activities:
     Acquisition of property and equipment
       and intangibles                             (115,254)         (212,492)
     Loan receivable                                     --           152,749
                                               ____________      _____________
       Net cash (used in) investing
        activities                                 (115,254)          (59,743)
                                                ____________      _____________
Cash flows from financing activities:
     Revolving debt, net                             13,628           (106,513)
     Proceeds from borrowings                       485,829            950,000
     Payments on debt                            (1,274,969)          (557,883)
     Deferred financing costs                            --              6,967
     Preferred stock dividends                       (7,681)           (17,060)
     Issuance of capital stock                       15,011          1,321,640
     Convertible debt                               500,000                 --
                                                ____________      _____________
       Net cash provided by (used in)
         financing activities                      (268,182)         1,597,151
                                                ____________      _____________
Net increase (decrease) in cash and
   cash equivalents                                 154,093           (617,394)
Beginning balance of cash and cash equivalents      227,077            844,471
                                               ____________      _____________
Ending balance of cash and cash equivalents      $  381,170        $   227,077
                                               ____________       _____________
Supplemental cash flow information:
     Cash paid during the period for:
     Interest                                    $1,227,628         $1,567,763
     Income taxes                                $  189,027         $  130,290

See notes to financial statements
                                                                             F-6
<PAGE>


  Supplemental disclosures of noncash investing and financing
       activities:
Stock issued for acquisitions and earn-out agreement       $ 60,047    $614,280
Capital leases                                               25,010      83,082
Conversion of preferred stock                               190,000     500,000
Beneficial conversion feature of preferred stock                --      190,000
 Warrant Valuations                                         159,602     233,332
Conversion of Debt to Common Stock                              --    2,710,106
Issuance of Preferred Stock in lieu of cash for
   Dividends due                                             53,000          --
Issuance of Common Stock in lieu of Preferred Stock
  Dividends                                                  81,429          --

See notes to financial statements                                           F-7

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and consolidation:

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

Until January 1999, the Company  operated Pioneer  Counseling of Virginia,  Inc.
("PCV"),  an 80% owned subsidiary which provided  outpatient  services through a
physicians practice.  Until May 31, 1998, the Company operated Good Hope Center,
a substance  abuse  treatment  facility in West  Greenwich,  Rhode Island ("Good
Hope").  Until June 1, 1998 the Company also operated a subacute  long-term care
facility, Franvale Nursing and Rehabilitation Center ("Franvale"),  in Braintree
Massachusetts.  On June 1, 1998 Franvale was placed into state receivership.  On
October 5, 1998  Franvale  filed for  protection  under the Chapter 7 Bankruptcy
code.  All financial  information  for Franvale is reported in the  accompanying
financial statements as discontinued  operations.  The liquidation of the assets
and liabilities of Franvale may result in a non-cash financial statement gain of
approximately $2,000,000. 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.

During the year ended June 30,  1999,  the  Company  recorded an increase in its
accounts  receivable  reserve in line with its more  aggressive  reserve  policy
established last year and reserved for the remaining accounts receivable balance
for the closed  Rhode  Island  facility  and the closed  Pioneer  Counseling  of
Virginia facilities.

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







                                                                             F-8




<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

Revenues and accounts receivable (continued)

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.

The Company has $585,714 of  receivables  from Medicaid and Medicare at June 30,
1999,  which  constitute  a  concentration  of credit risk should  Medicaid  and
Medicare defer or be unable to make reimbursement payments as due.

Charity care amounted to approximately $242,000 and $504,000 for the years ended
June 30, 1999 and 1998, respectively,  and is classified as patient care revenue
and an  equal  amount  of  cost is  charged  to  patient  care  expenses  in the
statements of operations.

Property and equipment:

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


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

Other assets:

Other assets are primarily deposits and deferred expenses.

Goodwill, net of accumulated amortization:

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





                                                                            F-9


<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

In 1997, the Financial  Accounting  Standards Board (FASB) issued  Statement No.
128,  Earnings per share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  affects of options,  warrants  and  convertible  securities.  Dilutive
earnings per share is similar to the previously  reported fully diluted earnings
per share.

Estimates and assumptions:

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

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

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

Impairment of long-lived assets:

During the year ended June 30, 1999 the Company wrote off the carrying  value of
goodwill for Pioneer Counseling of Virginia,  Inc.,  approximately $305,000, and
wrote down the  remaining  balance of accounts  receivable  for the  facility of
approximately $43,000. During the year ended June 30, 1998 the Company wrote off
the carrying  value of goodwill  for PHC of Rhode  Island,  Inc.,  approximately
$23,000, and wrote off equipment and the land and building assets related to the
capital lease from that facility aggregating  approximately  $1,240,000 in total
assets and the related liability of approximately  $1,300,000.  Also in 1998 the
Company wrote down the remaining  balance of accounts  receivable  from a closed
California  facility,  approximately  $92,000,  and the equipment,  goodwill and
additional  closing costs  recorded for the Blacksburg  facility,  approximately
$136,000,  which was closed in fiscal year 1999 to consolidate operations in the
Salem, Virginia.

In accordance  with FASB statement no. 121,  long-lived  assets are reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be  recoverable.  For purposes of evaluating
the recoverability of long-lived  assets,  the recoverability  test is performed
using undiscounted net cash flows related to the long-lived assets.

                                                                            F-10
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

Stock-based compensation:

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

Recent Accounting Pronouncements:

In June 1998 and July 1999,  the  Financial  Accounting  Standards  Board issued
Statements of Financial  Accounting  Standards No. 133 and 137. ("SFAS No. 133),
"Accounting for Derivative  Instruments and Hedging  Activities," and ("SFAS No.
137"),  "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective  Date of FASB Statement No. 133." SFAS No. 133 and SFAS No. 137
require  companies to recognize all derivative  contracts at their fair value as
either assets or  liabilities on the balance  sheet.  If certain  conditions are
met, a derivative may be  specifically  designated as a hedge,  the objective of
which  is to  match  the  timing  of  gain or loss  recognition  on the  hedging
derivative  with the  recognition  of (1) the  changes  in the fair value of the
hedged asset or liability  that are  attributable  to the hedged risk or (2) the
earnings  effect of the hedged  forecasted  transaction.  For a  derivative  not
designated as a hedging instrument,  the gain or loss is recognized in income in
the period of change.  These statements are effective for all quarters beginning
after July 15, 1999.

Historically,  the Company has not entered into derivative  contracts  either to
hedge existing risks or for speculative purposes.  Accordingly, the Company does
not expect the adoption of the new standard to affect its financial statements.

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:


                                                             June 30,
                                                        1999           1998
                                                        ____           ____
         Land                                      $   69,259       $  119,859
         Buildings                                  1,136,963        1,676,963
         Furniture and equipment                      868,722          839,972
         Motor vehicles                                41,444           41,444
         Leasehold improvements                       358,207          354,687
                                                  ___________       ___________
                                                    2,474,595        3,032,925

        Less accumulated depreciation and
          amortization                                991,276          904,652
                                                  ___________       ___________
                                                   $1,483,319       $2,128,273
                                                  ___________       ___________




                                                                            F-11
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                                 June 30,
                                                             1999      1998
                                                             ____      ____
Note payable with interest at 9% requiring monthly
  payments of $1,150 through May 2001.                   $  23,509      $34,636
9% mortgage note due in monthly installments
  of $4,850, including interest through July 1,
  2012, when the remaining principal balance is
  payable.                                                 462,814      478,582
Note payable due in monthly installments of $21,506
    including interest at 10.5% through November 1,
    1999 when the remaining principal balance is
    payable, collateralized by all assets of PHN and
    certain receivables. Interest only payments were
    made from May 1998 through October 1998 per
    subsequent agreement.                                  261,802      374,190
Note payable due in monthly installments of $26,131
    including interest at 11.5% through June 2000 when
    the remaining principal balance is payable,
    collateralized by all assets of NPP.  Interest
    only payments were made from May 1998 through
    October 1998 per subsequent agreement.                  471,297     598,848
Note payable due in monthly installments of $5,558
    including interest at 9.25% through May 2012 when
    the remaining principal balance is payable,
    collateralized by real estate.                                0     521,000
Term mortgage note payable with interest only payments
    through March 1998 principal due in monthly
    installments of $9,167 beginning April 1998
    through February 2001.  A balloon payment of
    approximately $1,300,000 plus interest is due March
    2001, interest at prime plus 5% (12.75% at June 30,
    1999) collateralized by all assets of PHM.            1,433,333   1,600,000
Note payable bearing interest at prime plus 3 1/2%
    (11.25% at June 30, 1999) with the principal due
    on November 10, 1998 as extended and collateralized
    by MRC's real property and BSC's accounts receivable
    and cross-collateralized with the revolving credit
    note referred to below.                                 324,730     350,000
Note payable due in monthly installments of $2,378
    including interest at 12% through October 1999.           9,278           0
Note payable due in monthly installments of $7,633
    including interest at 12% through October 1999.          29,785           0
                                                          __________  _________
                                                          3,016,548   3,957,256

Less current maturities                                   1,286,318   1,107,167
                                                          __________  _________
Noncurrent maturities                                   $ 1,730,230 $ 2,850,089
                                                          __________  _________

                                                                            F-12

<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE C - LONG-TERM DEBT (CONTINUED)

Maturities of long-term debt are as follows as of June 30, 1999:

                         Year Ending
                         June 30,                Amount
                         ____________            ______________
                         2000                    $1,286,318
                         2001                     1,303,527
                         2002                        20,634
                         2003                        22,570
                         2004                        24,687
                         Thereafter              $  358,812
                                                 ______________
                                                 $3,016,548
                                                 ______________


The Company has a revolving  credit note under which a maximum of $4,000,000 may
be  outstanding  at any  time.  At June 30,  1999 the  outstanding  balance  was
$1,669,830.  Advances are made based on a percentage of accounts  receivable and
principal  is payable  upon  receipt of  proceeds  of the  accounts  receivable.
Interest  is payable  monthly at prime  plus 2.25% (10% at June 30,  1999).  The
agreement is automatically  renewable for one-year periods unless  terminated by
either party. Upon expiration,  all remaining principal and interest is due. The
notes are  collateralized  by  substantially  all of the assets of the Company's
subsidiaries excluding Franvale and guaranteed by PHC.

On December 7, 1998 the Company issued $500,000 in 12% convertible debentures to
private investors. These debentures are convertible in $1,000 increments for 500
shares of PHC, Inc. Class A Common Stock and expire December 2, 2004.

NOTE D - CAPITAL LEASE OBLIGATION

At June 30, 1999,  the Company was obligated  under various  capital  leases for
equipment providing for monthly payments of approximately $5,000 for fiscal 2000
and terms expiring from July 1999 through July 2003.

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

                                                     June 30,
                                                 1999          1998
                                                 ____          ____
Equipment and improvements                   $  528,820    $  511,517
Less accumulated amortization                  (259,564)     (225,703)
                                             $  269,256    $  285,814


                                                                           F-13


PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

Future minimum lease  payments  under the terms of the capital lease  agreements
are as follows at June 30, 1999:

         Year Ending
         June 30,
         ____________
         2000                                       $ 65,327
         2001                                         47,302
         2002                                         11,201
         2003                                          2,821
         Thereafter                                      235
                                                    _________
         Total future minimum lease payments         126,886
         Less amount representing interest            14,414
                                                    _________
         Present value of future minimum
              lease payments                         112,472

         Less current portion                         60,815

         Long-term obligations under capital lease   $51,657
                                                    _________
NOTE E - NOTES PAYABLE - RELATED PARTIES

Related party debt is summarized as follows:                  June 30,
                                                        1999            1998
                                                        ____            ____
Note payable, President and principal stockholder,
  interest at 8%, due in installments through
  December 1998                                      $    -0-         $ 39,496
Notes payable, Tot Care, Inc., Company owned by the
  President and principal stockholder, interest at
  12% payable on demand                              100,000           100,000
Note payable, President and principal stockholder,
  interest at 12% payable on demand                  100,000                -0-
Notes payable, other related parties, interest at
  12% and payable on demand                               -0-           20,000
                                                    _________         _________
 Total                                            $  200,000         $ 159,496
                                                    _________         _________

                                                                           F-14
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE F - INCOME TAXES

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

                                                            Year Ended
                                                              June 30,
                                                       1999           1998
                                                       ____           ____
   Temporary differences attributable to:
      Allowance for doubtful accounts               $1,546,000      $1,315,000
      Facility Closing Costs                           198,000          85,000
      Depreciation                                     237,000         225,000
      Other                                             86,000           2,000
   Operating loss carryforward                       1,542,000       1,650,000
                                                   ___________     ___________
         Total deferred tax asset                    3,609,000       3,277,000
   Less:
      Valuation allowance                           (2,995,000)     (2,607,000)
                                                    ___________     ___________
   Subtotal                                            614,000         670,000
      Current portion                                 (459,300)       (515,300)
                                                    ___________     ___________
         Long-term portion                          $  154,700      $  154,700
                                                    ___________     ___________

The Company had no deferred tax liabilities at June 30, 1999 and 1998.

Income tax expense is as follows:                            Year Ended
                                                              June 30,
                                                         1999           1998
                                                         ____           ____
         Current state income taxes                  $  59,434      $  219,239

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,
                                                         1999           1998
                                                         ____           ____

         Income tax benefit at statutory rate       $ (440,200)     $(2,044,400)
         State income taxes, net of federal
           benefit                                      39,000          144,700
         Increase in valuation allowance               388,000        1,780,000
         Increase due to nondeductible items,
           primarily penalties and travel and
           entertainment expenses                       37,000          161,231
         Other                                          35,634          177,708
                                                      __________       ________
                                                    $   59,434      $   219,239

At June 30,1999 the Company had a net operating loss  carryforward  amounting to
approximately $4,500,000 which expires at various dates through 2019.

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

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

Notes to Financial Statements
June 30, 1999 and 1998

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

The Company  leases office and treatment  facilities and furniture and equipment
under operating  leases expiring on various dates through January 31, 2004. Rent
expense for the years ended June 30,  1999 and 1998 was  approximately  $784,000
and $882,000,  respectively.  Rent expense  includes  certain short term rentals
and, in 1998,  additional rent expense  associated with the closing of Good Hope
Center.  Minimum future rental payments under  noncancelable  operating  leases,
having remaining terms in excess of one year as of June 30, 1999 are as follows:

                             Year Ending
                             June 30,               Amount
                             ____________           ____________
                             2000                   $ 606,854
                             2001                     562,243
                             2002                     552,339
                             2003                     504,989
                             2004                     562,320
                             Thereafter                14,584
                                                     ___________
                                                  $ 2,803,329
Litigation and contingency:

In connection with the  liquidation of Franvale,  some vendors allege that there
are amounts due for services  which are the  obligation of PHC, Inc. At June 30,
1999 total claims pending amounted to approximately $67,000.

In September  1998,  the Company and Franvale were each served with subpoenas in
connection  with an on-going  investigation  of Franvale being  conducted by the
Attorney General of the Commonwealth of Massachusetts.  The focus is the quality
of patient care  provided by Franvale  during the period of early 1997 until the
facility was placed into  receivership  in June 1998. The Company is cooperating
fully with the  investigation  and  currently is engaged in producing  documents
requested  in the  subpoenas.  The Company does not believe that it has violated
any laws and does not believe that any monetary  payments required in connection
with this  matter  will be  material  to the  financial  position  or results of
operations of the Company.

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

NOTE H - STOCK PLANS

[1]     Stock plans:

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

                                                                           F-16

<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS (CONTINUED)

    [1]   Stock plans: (continued)

          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, 1999, options for 23,500 shares
          were granted under this plan. A maximum of 50,000 shares may be issued
          under  this  plan.  Each  outside  director  is  granted  an option to
          purchase  2,000 shares of Class A common stock at fair market value on
          the date of  grant,  vesting  25%  immediately  and 25% on each of the
          first three anniversaries of the grant.

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

          Under the above plans, at June 30, 1999, 601,580 shares were available
          for future grant or purchase.

                                                                           F-17

<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS (CONTINUED)

     The Company had the following activity in its stock option plans for fiscal
     1999 and 1998:
                                                             Weighted-
                                                  Number     Average
                                                   of        Exercise Price
                                                  Shares     Per Share
                                                 _________   _____________
        Option plans:
            Balance - June 30, 1997               205,375        $4.27
            Granted                               210,000        $2.37
            Cancelled                             (40,000)       $3.21
                                                 _________
            Balance - June 30, 1998               375,375        $3.32
            Granted                               218,500        $1.21
            Cancelled                             (71,000)       $1.95
            Repriced Options
              Original                           (183,875)       $2.96
              Repriced                            183,875        $1.25
                                                 _________
            Balance - June 30 ,1999               522,875        $2.02
                                                 _________
[2]     Stock-based compensation:

          Options  for  252,000  shares are  exercisable  as of June 30, 1999 at
          exercise  prices  ranging  from $1.03 to $6.63 and a  weighted-average
          exercise   price   of   approximately   $3.08   per   share,   with  a
          weighted-average  remaining  contractual life of  approximately  three
          years.

          The exercise prices of options outstanding at June 30, 1999 range from
          $1.03 to $6.63 per share and have a weighted-average exercise price of
          approximately  $2.02  per  share,  with a  weighted-average  remaining
          contractual life of approximately four years.

          The Company has adopted  the  disclosure-only  provisions  of SFAS No.
          123,  but  applies  Accounting  Principles  Board  Opinion  No. 25 and
          related  interpretations  in  accounting  for its plans.  There was no
          compensation  expense  recognized  in 1999 or 1998. 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, loss per share would have been changed to
          the pro forma amounts indicated below:




                                                                            F-18

<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS (CONTINUED)
                                                         Year Ended
                                                          June 30,
                                                     1999               1998
                                                     ____               ____

    Loss applicable     As reported
      to common          Continuing Operations     $(1,496,196)     $(4,366,603)
      shareholders       Discontinued Operations            --       (2,220,296)

                        Pro forma
                         Continuing Operations      (1,595,475)      (4,494,930)
                         Discontinued Operations            --       (2,220,296)

    Loss per share      As reported
                         Continuing Operations            (.25)            (.84)
                         Discontinued Operations            --             (.42)

                        Pro forma
                         Continuing Operations            (.27)            (.86)
                         Discontinued Operations            --             (.42)

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 1999 and 1998: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of 6.5%; 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, 1999 and 1998 was $.48 and $.87, respectively.





                                                                           F-19
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS


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

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

Although  the full  extent  of the  financial  impact  on PHC,  Inc.  cannot  be
determined at this time,  the  management of PHC, Inc. does not believe that the
liquidation  of  the  assets  and  liabilities  of  Quality  Care  will  have  a
substantial  negative  impact on PHC's  financial  position  or the  results  of
operations.  The  Company is  subject to a  guarantee  signed by PHC,  Inc.  for
furniture and  equipment  purchased by Quality Care during the fiscal year ended
June  30,  1996.  The  amount  of this  debt  recorded  by  Quality  Care in the
accompanying financial statements is approximately  $150,000. The liquidation of
the assets  and  liabilities  of  Franvale  may  result in a non-cash  financial
statement gain of  approximately  $2,000,000.  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.


                                                                           F-20

<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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, 1999:

                                  Number of           Exercise      Expiration
Description                        Shares              Price          Date
______________
IPO warrants                   1,792,862 shares   $5.90 per share  March 2000
Private placement warrants       746,662 shares   $3.71 per share  January 2001
Bridge warrants                   37,002 shares   $6.94 per share  February 2001
Warrant for services              25,000 shares   $2.00 per share  October 2001
Warrant for services               3,559 shares   $2.95 per share  February 2002
Consultant warrant                80,000 shares   $2.62 per share  March 2002
Convertible debenture warrants   150,000 shares   $2.00 per share  March 2002
Preferred stock warrant           50,000 shares   $2.75 per share  June 2000
Warrant for services             150,000 shares   $2.50 per share  May 2002
Private Placement                 86,207 shares   $2.90 per share  Sept 2002
Private Placement                  3,000 shares   $2.90 per share  March 2003
Debt Service                      52,500 shares   $2.38 per share  March 2003
Private Placement                 49,990 shares   $2.31 per share  March 2001
Debt Service                      52,500 shares   $1.82 per share  July 2003
Debt Service                      20,000 shares   $1.50 per share  July 2003
Private Placement                 25,000 shares   $1.00 per share  Dec 2004
Private Placement                 60,000 shares   $1.00 per share  Dec 2003
Private Placement                 10,000 shares   $2.00 per share  Dec 2003
Private Placement                 15,000 shares   $1.50 per share  Dec 2003
Private Placement                 10,000 shares   $1.00 per share  Dec 2003
Private Placement                 10,000 shares   $1.00 per share  Jan 2004
Private Placement                 10,000 shares   $1.00 per share  Jan 2004
Private Placement                 10,000 shares   $1.00 per share  Feb 2004
Private Placement                 10,000 shares   $1.00 per share  March 2004
Private Placement                 10,000 shares   $1.00 per share  April 2004
Private Placement                 10,000 shares   $1.00 per share  May 2004
Private Placement                 10,000 shares   $1.00 per share  June 2004
Warrant for Services              37,500 shares   $1.45 per share  Jan 2004
Warrant for Services              37,500 shares   $1.45 per share  Apr 2004
Warrant for Services               3,000 shares   $1.20 per share  Feb 2004
Warrant for Services               5,000 shares   $1.00 per share  April 2004
Warrant for Services               5,000 shares   $1.00 per share  April 2004
Warrant for Services               5,000 shares   $1.00 per share  April 2004
Warrant for Services               1,000 shares   $1.00 per share  May 2004

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  $160,000
and $233,000 in fiscal 1999 and 1998 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.  The number of shares of Class A common stock into which the  preferred
stock may be  converted  is equal to 80% of the closing bid price of the Class A
common  stock as  reported  by  NASDAQ  for the five  trading  days  immediately
preceding  the  conversion  which  resulted in a deemed  dividend of $190,000 in
fiscal 1998. Cumulative preferred dividends are at the rate of $60 per share per
year, payable quarterly. Dividends are payable in cash or in shares of preferred
stock at $1,000 per share.  For the year ended June 30, 1999 and 1998  dividends
amounted  to $ 142,110 and  $17,060  respectively.  During the fiscal year ended
June 30,  1999 the  Company  issued 53 shares  of  series B  preferred  stock in
payment of dividends in lieu of cash.

                                                                           F-21
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

Under  existing  dilution  agreements  with other  stockholders  the issuance of
common stock under  agreements other than the employee stock purchase and option
plans will  increase  the number of shares  issuable  and  decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then  current  market  price and the price at which the new common  stock is
being  issued.  The dilutive  effect of  transactions  through June 30, 1999 are
reflected in the table above.

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

NOTE K - ACQUISITIONS

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

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

On  November 1, 1996,  BSC-NY,  Inc.  ("BSC"),  merged  with  Behavioral  Stress
Centers,  Inc.,  a  provider  of  management  and  administrative   services  to
psychotherapy  and  psychological   practices  in  the  greater  New  York  City
Metropolitan  Area. In connection  with the merger,  the Company  issued 150,000
shares of PHC,  Inc.  Class A common  stock to the former  owners of  Behavioral
Stress  Centers,  Inc. Also, in connection  with the merger,  another entity was
formed,  Shliselberg Physician Services,  P.C. formerly Perlow Physicians,  P.C.
("Shliselberg"),  to acquire  the assets of the  medical  practices  theretofore
serviced by BSC. The Company  advanced  Shliselberg  the funds to acquire  those
assets  and at June 30,  1999  Shliselberg  owed the  Company  $3,690,113  which
includes in addition to  acquisition  costs,  management  fees of  approximately
$1,657,500 and interest on the advances of approximately $576,300. During fiscal
1998 the Company  established a reserve against this receivable in the amount of
$382,000. The Company increased the reserve to $782,000 in the fiscal year ended
June 30, 1999.  It is expected that  collections  will be received over the next
several years and accordingly, these amounts have been classified as noncurrent.
The Company has no ownership interest in Shliselberg.

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

Notes to Financial Statements
June 30, 1999 and 1998

NOTE K - ACQUISITIONS (CONTINUED)

The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral  Stress Centers,  Inc. for the three years following
the merger date.  The  additional  purchase  price is based on the income of BSC
before taxes and is to be paid in PHC stock,  at market value up to $200,000 and
the  balance,  if any, in cash.  On March 26, 1998 the  Company  issued  227,347
shares of the Company's  Class A Common Stock to the former owners of Behavioral
Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be
paid to them for the  year  ended  October  31,  1997  resulting  in  additional
goodwill.  Of the 227,347  shares issued 127,924 were issued in lieu of cash and
were subject to a price guarantee of $2.35,  payable in shares.  Under the price
guarantee the Company issued an additional 304,097 shares of Common Stock in the
fiscal year ended June 30, 1999.

BSC also entered into a management agreement with Shliselberg whereby management
fees are required of Shliselberg on a monthly basis over a five-year period with
an automatic renewal for an additional  five-year period. The management fee was
calculated at 25% of the total  monthly  expenses of  Shliselberg  and effective
January 1, 1998 the management agreement was amended to provide for a management
fee of 20% of the total monthly  expenses of  Shliselberg.  In November 1998 the
management  fee was  further  reduced to 18% of the total  monthly  expenses  of
Shliselberg.

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

Summary,  unaudited financial information for Shliselberg as of and for the year
ended June 30, 1999 is as follows:

                          Total assets                       $  3,580,000
                          Stockholder's deficit              $   (782,000)
                          Net revenue                        $  2,930,000
         .                Net loss                           $   (400,349)

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

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

Notes to Financial Statements
June 30, 1999 and 1998

NOTE K - ACQUISITIONS (CONTINUED)

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

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

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

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

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

During fiscal 1999 the Company decided to close the remaining Pioneer Counseling
of Virginia clinic located in Salem, Virginia. Since the Company was required by
contract  to give  30-days  notice to  contract  therapists  before  closing the
clinic,  in January 1999 the Company closed its 80% owned outpatient  operations
in  Virginia,  Pioneer  Counseling  of  Virginia,  Inc.  The  Company  sold this
business,  excluding accounts  receivable and most fixed assets, to the minority
owners in exchange for their shares of stock in Pioneer  Counseling of Virginia,
Inc. approximately  $25,000,  release from the first mortgage on the property of
approximately  $506,000 and release from notes payable to the minority owners of
$20,000. The closure of this clinic resulted in a loss of approximately $300,000
which was charged to  administrative  expenses in the accompanying  statement of
operations.

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


                                                                           F-24
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE L - SALE OF RECEIVABLES

The Company had a sale and purchase  agreement whereby  third-party  receivables
were sold at a discount with recourse. In February 1998 the Company entered into
a finance  agreement with  Healthcare  Financial  Partners,  Inc. to provide for
receivables  funding and liquidate the debt due to the above referenced sale and
purchase agreement and provide  receivables  funding for PHC of Virginia,  Inc.,
PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc.

NOTE M - FOURTH QUARTER ADJUSTMENTS

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

In the  quarter  ended  December  31,  1998  the  Company  recognized  a gain of
approximately  $1,100,000 in its form 10-QSB  related to the  liquidation of the
assets  and  liabilities  of  Franvale  (See Note I). The  Company  subsequently
determined that it was more  appropriate to defer  recognition of any gain until
final  resolution of all potential  liabilities.  Accordingly,  the Company will
amend its  December  31,  1998 10-QSB to  reversed  recognition  of this gain in
fiscal 1999.

NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1999

On July 1, 1999 the Company  issued  warrants to purchase  10,000 shares of PHC,
Inc. Class A Common Stock,  exercisable at $1.00 per share,  to George H. Gordon
as part of the December 1998 private placement agreement.

On July 5, 1999 the Company  issued  warrants to purchase  37,500 shares of PHC,
Inc.  Class A  Common  Stock,  exercisable  at  $1.45  per  share,  to  National
Securities Corporation as part of a service agreement.

On August 1, 1999 the Company issued  warrants to purchase 10,000 shares of PHC,
Inc. Class A Common Stock,  exercisable at $1.00 per share,  to George H. Gordon
as part of the December 1998 private placement agreement.

On August 11,  1999 the  Company  borrowed  approximately  $310,000  from Heller
Healthcare  Finance,  Inc. f/k/a HCFP Funding,  Inc. through an extension of the
February 18, 1998 Loan and Security Agreement.

NOTE O - BUSINESS SEGMENT INFORMATION

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

                                                                            F-25

<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE P - RESTATEMENT OF FINANCIAL STATEMENTS

The Company has restated its  financial  statements  as of June 30, 1998 and for
the year then ended. The restatement  related to the Company's  accounting for a
beneficial conversion feature of a preferred stock issuance and the amortization
of the  value of  warrants  issued  to a  financial  advisor.  The  Company  has
determined that the beneficial conversion feature, amounting to $190,000, should
have been recorded in the 1998 financial  statements as a dividend.  The Company
also determined  that the value of the warrants issued to the financial  advisor
should have been fully amortized in 1998,  resulting in an additional expense in
1998 of $147,618. The table below reflects the impact of the restatement.

                                                AS REPORTED         AS RESTATED

         Loss from continuing operations        $(4,011,925)     $  (4,159,543)
         Loss from discontinued operations       (2,220,296)        (2,220,296)
                                                ____________     ______________
         Loss                                    (6,232,221)        (6,379,839)

         Dividends                                  (17,060)          (207,060)
                                                ____________     ______________
         Loss applicable to common
           shareholders                         $(6,249,281)     $  (6,586,899)
                                                ____________     ______________
         Basic and diluted loss per
           common share:

           Continuing operations                $     (0.77)     $       (0.84)
           Discontinued operations                    (0.42)             (0.42)
                                                ____________     ______________
                      Total                     $     (1.19)     $       (1.26)
                                                ____________     ______________



                                                                           F-26
<PAGE>
                                  SIGNATURES


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


                                    PHC, INC.


Date:    October 20, 1999           By: /s/   Bruce A. Shear, President and
                                              Chief Executive Officer