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

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

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

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

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

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

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

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

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

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

                                      NONE
                                (Title of Class)

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

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

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

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

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

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

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

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

                                       1
<PAGE>
Table of Contents

                     Index                                              Page

Explanatory Note                                                          3
10-K Table of Contents                                                    4
PART II
Item 5.   Market for Registrant's Common Equity and
           Related Stockholder Matters                                    5
Item 6.   Selected Financial Data                                         7
Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                           9
Item 8.   Financial Statements and Supplementary Data                     22
            Index to financial statements                                 F-1
PART III
Item 10.  Directors, Executive Officers and Corporate Governance          54
Item 11.  Executive Compensation                                          57
PART IV
Item 15.  Exhibits and Financial Statement Schedules                      66
List of   Exhibits included in this report on form 10-K/A                 66
Signatures                                                                67

                                       2
<PAGE>
Explanatory Note

     This  amendment  to the  Company's  report  on Form  10-K,  filed  with the
Commission on September 28, 2007, is being filed to correct  information  in the
original filing as follows:

     Table of Contents

     The original table of contents is being  corrected to show the correct page
numbers for the report on Form 10-K as originally filed.

      PART II

     Item 5,  Market for  Registrant's  Common  Equity and  related  Stockholder
Matters,  is being amended to correct the date of the referenced 8-K filing from
December  20,  2007 to December  20, 2006 and to include the market  performance
graph as required in the annual report to shareholders.

     Item  6,   Selected   Financial   Data,  is  being  amended  to  correct  a
typographical error in the amount shown as Administrative Expenses for 2006 from
$13,727 to $13,728.

     Item 7,  Management's  Discussion  and analysis of Financial  Condition and
Results of Operations:

     Results of Operations,  Statements of Operations  Data table to correct the
2007  percentages of Income before income taxes,  Benefit from  (provision  for)
income  taxes,  and Net Income;  to correct the amount of total patient care and
administrative  expenses  and related  percentages;  and, to change the footnote
reference from Note I to Note K - Segment Information.

     Year ended June 30, 2007  compared to June 30, 2006 to correct  comparisons
of patient care expenses to more accurately  reflect the accounts  included;  to
correct the patient  care and  administive  expense  comparisons  to reflect the
reallocation  of these  expenses  in the Income  Statement;  and,  to change the
footnote reference from Note I to Note K - Segment Information.

     Liquidity  and  Capital  Resources  is being  amended to correct the amount
shown as capital  expenditures  and net debt  repayments  to reflect the correct
amounts as shown in the Statement of Cash flows;  to correct the name of the LLC
the Company invested in, to Seven Hills Psych Center, LLC; to correct the filing
date of the  referenced  8-K filing from December 20, 2007 to December 20, 2006;
to include the average interest rate paid on our revolving credit line of credit
and additional  information  regarding the  refinancing of our long term debt in
June 2007 and to correct the precentage of revenue  derived from a single client
from 15% to 10%.

     Item 8, Financial  Statements and  Supplementary  Data, is being amended to
correct the page numbers of the  financial  reports from F-27 through  F-31;  to
correct a  typographical  error on the balance  sheet  under the  heading  Other
receivables 2007 which was filed as $93,697 but should be $91,697; to reclassify
amounts on the income  statement under the heading Patient care expenses 2007 to
Administrative  Expenses  2007;  to  correct  the  name of the  LLC the  Company
invested  in,  to Seven  Hills  Psych  Center,  LLC:  to  eliminate  information
duplicated in NOTE E which includes the  information on the Pivotal  acquisition
note (Note B) at $729,801 and the information regarding the Company's compliance
with its financial  covenants  and to correct the segment net income  allocation
for the year  ended  June 30,  2007 and the total  assets  from  $21,984,987  to
$21,715,987 for the year ended June 30, 2006 in Note K.

     PART III

     Item 10, Directors,  Executive Officers,  Promoters and Control Persons, is
being  amended to correct the number of meetings of the  Compensation  Committee
held during 2007 to include telephonic meetings.

     Item  11,  Executive   Compensation,   is  being  amended  to  correct  the
compensation to directors previously reported incorrectly.

     PART IV

                                       3
<PAGE>
     Item 15, Exhibits and Financial  Statement  Schedules,  is being amended to
correct  the  final  page  number  of the  Notes to the  consolidated  financial
statements.

     This Form  10-K/A  does not amend,  update or change any other items or any
other  disclosure in the Original  Report or reflect  events that occurred after
the date of the Original  Report.  Therefore,  this Amendment  should be read in
conjunction  with our  Original  Report  and our  other  filings  made  with the
Securities  and  Exchange  Commission  subsequent  to the filing of the Original
Report.

Table of Contents

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

                                       4
<PAGE>
PART II

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

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

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

DIVIDEND POLICY

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

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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

MARKET RISKS

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

     Our right to issue  convertible  preferred  stock may adversely  affect the
rights of the common  stock.  Our Board of Directors  has the right to establish
the preferences for and issue up to 1,000,000  shares of preferred stock without
further  stockholder  action.  The terms of any series of preferred stock, which
may include  priority  claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.
During the twelve month  period  ended June 30, 2007,  the Company did not issue
any preferred stock;  however, it did issue 961,539 shares of unregistered Class
A common  stock in a private  placement  with the  requirement  to register  the
common stock which was done in February 2007. (See the Company's  report on form
8-K filed with the Securities  and Exchange  Commission on December 20, 2006 for
additional details regarding this transaction).

                                       5
<PAGE>
STOCK PERFORMANCE GRAPH

     The following  table depicts the  cumulative  total return on the Company's
common stock compared to the cumulative total return for the Nasdaq Composite-US
Index and the Nasdaq Health Services Index (which includes both U.S. and foreign
companies),  an index  published  by the  University  of  Chicago's  Center  for
Research in Security  Prices.  The table assumes the  investment of $100 on June
30, 2002.

          Comparison of Five-Year Cumulative Total Returns
                             Performance Report for
                                    PHC, Inc.

             Prepared by the Center for Research in Security Prices
               Produced on 09/27/2007 including data to 06/29/2007

Company Index:        CUSIP         Ticker      Class         Sic      Exchange

                     69331510        PHC          A           8082       AMEX

                          Fiscal Year-end is 06/30/2007

Market Index:  Nasdaq Stock Market (US Companies)

     Peer Index:            Nasdaq              Health Services Stocks
                             SIC                8000-8099 US & Foreign


         Date         Company Index        Market Index            Peer Index

      06/28/2002         100.000               100.000                 100.000
      07/31/2002          83.544                90.869                  90.624
      08/30/2002          96.203                89.904                  88.230
      09/30/2002          94.937                80.235                  87.980
      10/31/2002          94.937                91.195                  89.481
      11/29/2002          87.342               101.362                  89.865
      12/31/2002         103.797                91.534                  85.991
      01/31/2003         101.266                90.545                  88.801
      02/28/2003         100.000                91.817                  82.374
      03/31/2003         117.722                92.081                  85.353
      04/30/2003         106.329               100.450                  87.320
      05/30/2003          94.937               109.270                  98.341
      06/30/2003          97.468               111.023                 105.272
      07/31/2003         106.329               118.673                 112.688
      08/29/2003         102.532               123.849                 114.804
      09/30/2003         108.861               122.239                 118.153
      10/31/2003         111.392               132.080                 125.005
      11/28/2003         156.962               134.038                 131.553
      12/31/2003         175.949               136.863                 131.497
      01/30/2004         193.671               140.920                 141.880
      02/27/2004         158.228               138.268                 146.977
      03/31/2004         170.886               135.913                 146.220
      04/30/2004         145.570               131.409                 150.293
      05/28/2004         130.380               135.773                 150.496
      06/30/2004         140.506               139.945                 156.311
      07/30/2004         146.835               129.263                 142.018
      08/31/2004         132.911               126.099                 136.695
      09/30/2004         153.165               129.860                 138.118
      10/29/2004         172.152               135.125                 141.260
      11/30/2004         192.405               143.451                 156.938
      12/31/2004         182.278               148.944                 165.721
      01/31/2005         206.329               141.194                 162.956
      02/28/2005         232.911               140.391                 170.209
      03/31/2005         254.430               136.821                 180.643
      04/29/2005         253.165               131.844                 181.097
      05/31/2005         251.899               142.037                 186.528
      06/30/2005         320.253               141.461                 197.526
      07/29/2005         367.089               150.488                 202.057
      08/31/2005         306.329               148.101                 206.869
      09/30/2005         360.759               148.219                 209.084
      10/31/2005         322.785               146.315                 212.473
      11/30/2005         302.532               154.296                 230.843
      12/30/2005         263.291               152.110                 227.863
      01/31/2006         278.481               158.826                 242.328
      02/28/2006         272.152               157.247                 235.339
      03/31/2006         291.139               161.346                 238.946
      04/28/2006         275.949               160.077                 229.412
      05/31/2006         278.481               150.420                 227.725
      06/30/2006         278.481               150.417                 226.575
      07/31/2006         298.734               144.682                 227.431
      08/31/2006         265.823               151.106                 229.161
      09/29/2006         272.152               156.308                 219.257
      10/31/2006         259.494               163.962                 209.430
      11/30/2006         282.278               168.248                 216.406
      12/29/2006         402.532               167.115                 227.554
      01/31/2007         392.405               170.371                 230.059
      02/28/2007         474.684               166.886                 233.926
      03/30/2007         411.392               167.357                 239.310
      04/30/2007         398.734               174.615                 251.628
      05/31/2007         417.722               179.974                 267.219
      06/29/2007         386.076               179.305                 265.692

             The index level for all series was set to 100.0 on 06/28/2002

                                       6
<PAGE>
Item 6.  SELECTED FINANCIAL DATA

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

     The historical results are not necessarily  indicative of the results to be
expected for any future period.
<TABLE>
<S>                          <C>                 <C>            <C>             <C>        <C>
                                    PHC, Inc.
                             Selected Financial Data
                     As of and for the Years Ended June 30,

                                            2007          2006          2005         2004          2003
                                            ____          ____          ____         ____          ____
                                         (in thousands, except share and per share data)
    Statements of Operations Data:
Revenues                               $    45,127   $    38,013   $    34,063  $    26,649   $     23,833
Cost and Expenses:
   Patient care expenses                    21,965        16,512        14,582       12,422         11,676
   Contract expenses                         3,103         2,676         2,198        2,392          1,399
   Administrative expenses                  15,116        13,728        12,424       10,333          8,204
   Provision for doubtful accounts           1,934         1,913         1,272        1,356          1,108
   Interest expense                            649           607           655          532            542
   Other (income) expenses including
     interest income, net                     (469)         (158)         (150)        (140)          (129)
                                       ____________   ___________    __________ ____________  ____________
Total expenses                              42,298        35,278        30,981       26,895         22,801
                                       ____________   ___________    __________ ____________  ____________
Income (loss) before income taxes            2,829         2,735         3,082         (246)         1,032

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

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

Basic income (loss) per common share   $      0.09   $      0.22   $      0.18  $     (0.02)   $      0.07
                                       ===========   ===========   ===========  ============    ==========
Basic weighted average number of
   shares outstanding                   19,287,665    18,213,901    17,574,678   14,731,395     13,944,047
                                        ==========   ===========    ==========  ===========     ==========
Diluted income (loss) per common
  share                                $      0.09   $      0.21   $      0.17  $    (0.02)    $      0.07
                                       ===========   ===========    ==========  ===========    ===========
Diluted weighted average number of
   shares outstanding                   19,704,697    19,105,193    18,364,076   14,731,395     14,564,078
                                        ==========    ==========   ===========  ===========     ==========

                                       7
<PAGE>
                                            2007          2006          2005         2004          2003
                                            ____          ____          ____         ____          ____

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

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

</TABLE>

                                       8
<PAGE>
Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

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

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

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

Overview

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

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

Critical Accounting Policies

     The  preparation of our financial  statements in accordance with accounting
principles  generally  accepted  in  the  United  States  of  America,  requires
management to make estimates and judgments  that affect the reported  amounts of
assets, liabilities,  revenues, expenses and related disclosures. On an on-going



                                       9
<PAGE>
basis, we evaluate our estimates and  assumptions,  including but not limited to
those related to revenue recognition,  accounts receivable reserves,  income tax
valuation  allowances,  and the  impairment  of  goodwill  and other  intangible
assets.  We base our  estimates  on  historical  experience  and  various  other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

Revenue recognition and accounts receivable:

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

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

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

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

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

                Net Patient Care Revenue by Payor (in thousands)

                          For the Twelve Months Ended

                      June 30, 2007    June 30, 2006       June 30, 2005
                      _____________    _____________       _____________
                   Amount   Percent   Amount   Percent    Amount   Percent
                   ______   _______   ______   _______    ______   _______
Private Pay       $ 1,632     5%      $ 1,207     5%      $ 1,212     5%
Commercial         23,477    65%       17,572    63%       17,608    67%
Medicare*           1,379     4%          946     3%          999     4%
Medicaid            9,535    26%        8,137    29%        6,268    24%
                  _______             _______             _______
   Net Revenue    $36,023             $27,862             $26,087
                  ========            ========            ========

                                       10
<PAGE>
* includes Medicare cost report settlement revenue as noted above

    Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
<TABLE>
<S>       <C>    <C>   <C>    <C>    <C>    <C>     <C>    <C>     <C>     <C>
     Fiscal Year Ended June 30, 2007
                        Over    Over  Over    Over    Over   Over     Over
Payor         Current    30      60    90      120     150    270      360     Total
_____         ______   ______  ____   ____   ____   ______    ____    ____    _____

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

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

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

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

Private Pay   $  247   $   139  $ 98   $ 64   $ 75   $  154    $127    $ 32   $  936
Commercial     1,708       645   389    239    216      379     208      26    3,810
Medicare         121        16     7     --     --        1      --      --      145
Medicaid         556       277    94     74     96      342      --      --    1,439
              ______   ______   ____   ____   ____   ______    ____    ____   ______
   Total      $2,632    $1,077  $588   $377   $387   $  876    $335    $ 58   $6,330
              ======    ======  ====   ====   ====   ======    ====    ====   ======
</TABLE>

     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study  criteria and  billable  units of service are  provided.  Where a
contract  requires  completion  of the  study  by the  patient,  no  revenue  is
recognized  until the patient  completes  the study  program.  All  revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.

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

Allowance for doubtful accounts:

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

                                       11
<PAGE>
Income Taxes:

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

Valuation of Goodwill and Other Intangible Assets

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

Investment in Seven Hills

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

Results of Operations

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

     The following table illustrates our consolidated results of operations for
the years ended June 30, 2007, 2006 and 2005 (in thousands):
<TABLE>
<S>                           <C>      <C>      <C>        <C>     <C>       <C>
                                        2007                2006              2005
                                        ____                ____              ____
Statements of Operations Data:                   (in thousands)
                                   Amount     %       Amount      %     Amount     %
Revenue                           $45,127   100.0%   $38,013   100.0%   $34,063  100.0%
                                  _______   ______   _______   ______   _______  ______
Costs and expenses:
   Patient care expenses           21,921    48.6%    16,512    43.5%    14,582   42.8%
   Contract expenses                3,103     6.9%     2,676     7.0%     2,198    6.5%
   Administrative expenses         15,161    33.6%    13,727    36.1%    12,424   36.5%
   Provision for bad debts          1,933     4.3%     1,913     5.0%     1,272    3.7%
   Interest expense                   649     1.4%       607     1.6%       655    1.9%

                                       12
<PAGE>
   Other (income)expenses, net      (469)    -1.0%      (158)   -0.4%     (150)   -0.4%
                                  _______   ______   _______   ______   _______  ______
Total expenses                     42,298    93.7%    35,278    92.8%    30,981   91.0%
                                  _______   ______   _______   ______   _______  ______
Income before income taxes          2,829     6.3%     2,735     7.2%     3,082    9.0%
Benefit from (provision for)
  income taxes                     (1,147)   -2.5%     1,310     3.4%        74    0.2%
                                  _______   ______   _______   ______   _______  ______
Net income                        $ 1,682     3.8%   $ 4,045    10.6%    $3,156    9.3%
                                  =======     ====    =======   =====    =======  =====
</TABLE>

Year ended June 30, 2007 as compared to year ended June 30, 2006

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

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

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

     Patient care expenses,  excluding  research,  increased by  $5,468,817,  or
38.3%, to $19,738,357 for the year ended June 30, 2007 from  $14,269,540 for the
year ended June 30, 2006 due to the increase in available beds  contributing  to
the increase in patient  census at our  inpatient  facilities  and the increased
utilization  of our  out-patient  services as a result of the new capitated rate
contract.  Inpatient census increased by 5,291 patient days, 10.7%, for the year
ended June 30, 2007 compared to the year ended June 30, 2006.  Contract expense,
which includes the cost of outside service providers for our capitated contracts

                                       13
<PAGE>
increased  650.6% to  $1,785,697  for the year ended June 30, 2007 from $237,899
for the  year  ended  June  30,  2006  due to the new  capitated  rate  contract
effective January 1, 2007. This contract has an expected annual gross revenue of
approximately  $8,000,000 and calls for the Company to provide behavioral health
care for approximately  325,000 members.  Payroll and service related consultant
including agency nursing  increased 31.6% to $14,579,031 for the year ended June
30, 2007 from  $11,075,774  for the year ended June 30,  2006,  Food and dietary
expense  increased  1.0% to  $776,796  for the year  ended  June 30,  2007  from
$769,367 for the year ended June 30, 2006,  hospital  supplies expense increased
30.3% to  $93,204  for the year ended June 30,  2007 from  $71,539  for the year
ended June 30, 2006,  and other patient  related  expenses  increased to 7.5% to
$101,277  for the year ended June 30, 2007 from  $94,218 for the year ended June
30, 2006. All of these  increases were a result of increased  patient census and
increased  utilization  of our out  patient  services.  We  continue  to closely
monitor the ordering of all hospital supplies,  food and pharmaceutical supplies
but these  expenses  all  relate  directly  to the  number of days of  inpatient
services we provide and are expected to increase with higher  patient census and
out patient visits. (see "Operating Statistics" Part I, Item 1).

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

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

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

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

     Total  administrative  expenses,  excluding  research,  increased  13.5% to
$12,722,007 for the year ended June 30, 2007 from $11,210,296 for the year ended
June 30, 2006.  Administrative  salaries  increased  20.6% to $4,232,863 for the
year  ended June 30,  2007 from  $3,508,980  for the year  ended June 30,  2006.
Payroll tax expense increased 16.9% to $354,229 for the year ended June 30, 2007
from  $302,932 for the year ended June 30,  2006.  Employee  benefits  increased
16.1% to $676,464  for the year ended June 30, 2007 from  $582,785  for the year
ended June 30, 2006. Other employee benefits increased 93.1% to $239,555 for the
year ended June 30, 2007 from $124,035 for the year ended June 30, 2006.  All of
these  increases  in payroll and  employee  related  expenses are a result of an
increase  of  approximately  200% in the  staff  at our Las  Vegas  out  patient
location to service the new capitated rate contract and greater  competition for
experienced  health  care  administrative  staff  resulted  in  these  increased
salaries.  General  insurance  expense  increased 17.9% to $760,338 for the year
ended  June 30,  2007 from  $644,882  for the year  ended  June 30,  2006 due to
general increases in property and liability  insurance and the addition of three
additional out patient sites, two in Las Vegas and one in Arizona.  Rent expense

                                       14
<PAGE>
increased  28.9% to $1,440,342 for the year ended June 30, 2007 from  $1,117,098
for the year ended June 30, 2006.  This increase is due to the three  additional
clinics  opened  this year and normal CPI  increases  included  in our  property
leases. Transfer fee expense increased 255.6% to $91,932 for the year ended June
30,  2007  from  $25,856  for the year  ended  June 30,  2006 as a result of the
initial American Stock Exchange listing fee.

     Total  administrative  expenses for the research division decreased 3.1% to
$2,438,802  for the year ended June 30, 2007 from  $2,517,074 for the year ended
June 30, 2006.  Administrative payroll and taxes was the most significant of the
change as it  decreased  5.7% to $974,695  for the year ended June 30, 2007 from
$1,033,160  for the year ended June 30, 2006 due to the closing of the  Michigan
office and the decrease in study activity.  Advertising  expense decreased 25.4%
to $216,953  for the year ended June 30, 2007 from  $290,673  for the year ended
June  30,  2006.  This  decrease  was  also a result  of the  decrease  in study
activity.

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

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

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

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

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

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

                                       15
<PAGE>
contractual  adjustments and charity care provided. When payment is made, if the
contractual  adjustment  is  found  to  have  been  understated  or  overstated,
appropriate  adjustments  are made in the period  the  payment  is  received  in
accordance   with  the  AICPA  Audit  and  Accounting   Guide  for  Health  Care
Organizations.

     Patient care expenses,  excluding  research,  increased by  $1,364,254,  or
10.6%, to $14,269,540 for the year ended June 30, 2006 from  $12,905,286 for the
year ended June 30, 2005 due to the  increase in  available  beds and  resulting
increase  in  patient  census  at our  inpatient  facilities.  Inpatient  census
increased by 6,861 patient days,  16%, for the year ended June 30, 2006 compared
to the year ended June 30, 2005. Direct patient care payroll and payroll related
expenses  increased  9.7% to  $11,764,978  for the year ended June 30, 2006 from
$10,727,317 for the year ended June 30, 2005, food and dietary expense increased
21.4% to $769,367  for the year ended June 30, 2006 from  $633,869  for the year
ended June 30, 2005,  hospital  supplies expense  increased 37.9% to $71,539 for
the year  ended June 30,  2006 from  $51,863  for the year ended June 30,  2005,
laboratory  fees  increased  36.4% to $219,063  for the year ended June 30, 2006
from $160,603 for the year ended June 30, 2005, agency nursing expense increased
38.8% to $166,047  for the year ended June 30, 2006 from  $119,672  for the year
ended June 30, 2005 and other patient related expenses  increased to $94,218 for
the year ended June 30, 2006 from $45,481 for the year ended June 30, 2005.  All
of these increases were a result of increased patient census and increased needs
of the patients  based on the severity of their  illness and the start up of the
additional  20 bed  residential  unit in October  2005.  We  continue to closely
monitor the ordering of all hospital supplies,  food and pharmaceutical supplies
but these  expenses  all  relate  directly  to the  number of days of  inpatient
services we provide and are  expected to increase  with higher  patient  census.
(see "Operating Statistics" Part I, Item 1).

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

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

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

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

     Total  administrative  expenses,  excluding  research,  increased  16.0% to
$11,210,296  for the year ended June 30, 2006 from $9,667,138 for the year ended
June 30, 2005. Legal expense decreased 39.0% to $156,054 for the year ended June

                                       16
<PAGE>
30, 2006 from  $255,794 for the year ended June 30, 2005,  due to the booking of
some  residual  legal fees last year for the North Point  litigation  settled in
fiscal 2004 and legal fees associated with finalizing the collective  bargaining
agreement for Harbor Oaks Hospital.  Administrative  salaries increased 14.9% to
$3,508,980  for the year ended June 30, 2006 from  $3,054,294 for the year ended
June 30, 2005. Greater  competition for experienced  health care  administrative
staff resulted in these increased salaries.  Insurance expense increased 9.7% to
$644,882 for the year ended June 30, 2006 from  $587,751 for the year ended June
30,  2005  due  to  general  increases  in  property  and  liability  insurance.
Accounting fees, which includes non-audit accounting services, including but not
limited to taxes, cost reports and individual contract audits, provided by firms
other than our principal  audit firm,  increased  45.8% to $336,425 for the year
ended June 30, 2006 from  $230,791  for the year ended June 30,  2005.  Fees and
licenses  expense  increased  19.1% to $294,165 for the year ended June 30, 2006
from  $247,076  for the year ended June 30,  2005.  This  increase is due to the
Michigan quality  assurance  assessment fee, which accounted for the majority of
the increase. Rent expense increased 17.1% to $1,117,098 for the year ended June
30, 2006 from $953,667 for the year ended June 30, 2005. This increase is due to
the opening of the  additional  20  residential  bed unit at Detroit  Behavioral
Institute.

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

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

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

Liquidity and Capital Resources

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

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

     Cash used in investing  activities in fiscal 2007  consisted of $955,459 in
capital  expenditures  for the  acquisition of property and equipment,  $400,000
investment  in the Seven Hills Psych Center,  LLC and  $1,719,623 in advances on
the  construction in progress for the Seven Hills Hospital  compared to $710,638
in

                                       17
<PAGE>
capital  expenditures  for property and  equipment in the fiscal year ended June
30, 2006. Other than Seven Hills related investments, the increase was primarily
due the purchase and  implementation of the Meditech software and the upgrade of
hardware to accommodate the software Company wide.

     Cash  provided  by  financing   activities  in  fiscal  2007  consisted  of
$1,246,798 in net debt  repayments,  $83,664 in deferred  financing  costs,  and
$64,783  in private  placement  costs  offset by  $2,501,798  received  from the
issuance of common stock.

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

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

     Contractual Obligations

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

  YEAR                                                  OPERATING
 ENDING         TERM NOTES          CAPITAL LEASES        LEASES      TOTAL**
_______         __________          _____________       _________     _______
June 30
            Principal  Interest   Principal   Interest   Payments
  2008       $1,134     $ 25        $ 206      $ 41       $2,088      $3,494
  2009          625       20          170        25        2,072       2,912
  2010           53       16           45        14        1,764       1,892
  2011           46       12           11         6          721         796
  2012           51        8           --        --          304         363
  2013           57        3           --        --          261         321
             ______     ____        _____      ____       ______      ______
  Total      $1,966     $ 84        $ 432      $ 86       $7,210      $9,778
             ======     ====        =====      =====      =======     =======

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

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

                                       18
<PAGE>
     In addition to the above,  the Company is also subject to three  contingent
notes with a total face value of $2,500,000 as part of the Pivotal  acquisition.
Of these notes, one for $1,000,000 and one for $500,000, bear interest at 6% per
annum. These notes are subject to additional adjustment based on the earnings of
the acquired  operations.  Since adjustment can be positive or negative based on
earnings,  with no  ceiling or floor,  the  liability  for these  notes was only
recorded  after the  required  revenue  targets were met.  This  treatment is in
accordance  with  SFAS No.  141,  "Business  Combinations",  which  states  that
contingent  consideration  should be recognized only when determinable  beyond a
reasonable doubt.  Payments on the $1,000,000 note began on January 1, 2005. The
above table  includes  the  outstanding  balance on this note of $441,109  which
represents the earn out for the Pivotal  acquisition  through  December 31, 2005
net of payments made through June 30, 2007. Earn-out  requirements have been met
on the $500,000  note which  resulted in the  recording of this earn-out note in
the amount of $923,934 which  includes  $80,000 in accrued  interest.  The above
table includes the outstanding balance on this note of $729,801.  The final note
for $1,000,000  does not bear interest,  is also subject to adjustment  based on
earnings  but has a minimum  value of $200,000 to be paid in PHC,  Inc.  Class A
common stock on March 31, 2009.  This minimum  liability  has been recorded with
imputed interest of 6% and $180,112 is included in the schedule above. (See Note
C  to  the  consolidated  financial  statements  included  in  this  report  for
additional details on the Pivotal acquisition)

     In October 2004, the Company entered into a revolving credit, term loan and
security  agreement  with  CapitalSource  Finance,  LLC to replace the Company's
primary lender and provide additional liquidity.  Each of the Company's material
subsidiaries,  other than Pivotal Research Centers,  Inc, is a co-borrower under
the  agreement.  This  agreement  was amended on June 13,  2007 to increase  the
amount  available  under the term loan,  extend the term,  decrease the interest
rates  and  modify  the  covenants  based  on the  Company's  current  financial
position.  The agreement  now includes a term loan in the amount of  $3,000,000,
with a balance of $289,143 at June 30, 2007, and an accounts  receivable funding
revolving  credit  agreement  with a  maximum  loan  amount  of  $3,500,000.  In
conjunction  with this  refinancing  the Company paid $32,500 in commitment fees
and approximately $53,000 in legal fees and issued a warrant to purchase 250,000
shares  of class A common  stock at $3.09  per share  valued  at  $456,880.  The
relative fair value of the warrants was recorded as deferred financing costs and
is being amortized over the period of the loan as additional interest.

     The term loan note carries  interest at prime plus .75%,  but not less than
6.25%,  with twelve monthly  reductions in available credit of $50,000 beginning
July 1, 2007 and  increasing to $62,500 on July 1, 2009 until the  expiration of
the loan.  As of June 30, 2007 the Company had  $2,710,857  available  under the
term loan.

     The revolving credit note carries interest at prime plus .25%, but not less
than 4.75% paid through lock box  payments of third party  accounts  receivable.
The revolving credit term is three years,  renewable for two additional one-year
terms.  The balance on the  revolving  credit  agreement as of June 30, 2007 was
$1,518,742.  For  additional  information  regarding this  transaction,  see the
Company's  current  report on form 8-K filed with the  Securities  and  Exchange
Commission on October 22, 2004. The balance  outstanding as of June 30, 2007 for
the  revolving  credit  note is not  included  in the above  table.  The average
interest rate paid on the revolving credit loan, which includes the amortization
of deferred financing costs related to the financing of the debt, was 14.28%.

     This  agreement  was  amended  on June 13,  2007 to modify the terms of the
agreement.  Advances are available based on a percentage of accounts  receivable
and the payment of principal is payable upon receipt of proceeds of the accounts
receivable.  Interest is payable  monthly at prime (8.25% at June 30, 2007) plus
0.25%,  but not less than 4.75%.  The amended  term of the  agreement is for two
years,  renewable  for two  additional  one year  terms.  Upon  expiration,  all
remaining  principal  and  interest  are  due.  The  revolving  credit  note  is
collateralized by substantially all of the assets of the Company's  subsidiaries
except Pivotal Research Centers, Inc. and guaranteed by PHC.

     Off Balance Sheet Arrangements

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

     Aging of accounts  receivables  could  result in our  inability  to collect
receivables.  As our accounts  receivable age and become  uncollectible our cash
flow is negatively impacted.  Our accounts receivable from patient accounts (net

                                       19
<PAGE>
of  allowance  for bad debts) were  $6,559,387  at June 30, 2007  compared  with
$6,995,475 at June 30, 2006.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  We have  focused on better  accounts  receivable  management  through
increased staff,  standardization of some procedures for collecting  receivables
and a more  aggressive  collection  policy  in  order  to  keep  the  change  in
receivables  consistent with the change in revenue.  We have also  established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected.  The following chart represents our Accounts  Receivable and Allowance
for  Doubtful  Accounts  at June 30, 2007 and 2006,  respectively,  and Bad Debt
Expense for the years ended June 30, 2007 and 2006:

                                          Allowance for
                Accounts Receivable     doubtful accounts     Bad Debt Expense

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

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

Recent accounting pronouncements

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

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

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

     In February 2007, the Financial  Accounting Standards Board ("FASB") issued
SFAS No.  159,  The  Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities ("SFAS No. 159"),  including an amendment of FASB Statement No. 115.
SFAS No. 159 allows companies to choose to elect to measure  eligible  financial
instruments  and certain  other items at fair value that are not  required to be
measured at fair value.  SFAS No. 159 requires that unrealized  gains and losses

                                       20
<PAGE>
on items for  which the fair  value  option  has been  elected  be  reported  in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years  beginning  after  November  15, 2007 and is required to be adopted by the
Company  beginning in the first quarter of fiscal 2009. The Company is assessing
the impact the  adoption  of SFAS No. 159 will have on the  Company's  financial
position and results of operations.


                                       21
<PAGE>

Item 8.           Financial Statements and Supplementary Data.

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


                                                                     PAGE

Index                                                                F-1
Reports of Independent Registered Public Accounting Firms            F-2 - F-3
Consolidated balance sheets                                          F-4
Consolidated statements of income                                    F-5
Consolidated statements of changes in stockholders' equity           F-6
Consolidated statements of cash flows                                F-7 - F-8
Notes to consolidated financial statements                           F-9 - F-31

                                                                            F-1

                                       22
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
PHC, Inc.



We have audited the  accompanying  consolidated  balance sheets of PHC, Inc. and
subsidiaries  as of  June  30,  2007  and  2006,  and the  related  consolidated
statements of income,  changes in stockholders'  equity,  and cash flows for the
years  ended  June  30,  2007  and  2006.  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 of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial statements are free of material  misstatement.  An audit also includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

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





/s/ Eisner LLP


New York, New York
September 27, 2007
                                                                             F-2
                                       23
<PAGE>
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
PHC, Inc.:



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

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the consolidated  results of operations and
cash flows of PHC,  Inc.  and  subsidiaries  for the year ended June 30, 2005 in
conformity with accounting principles generally accepted in the United States of
America.





                                                  /s/ BDO Seidman, LLP


Boston, Massachusetts
August 23, 2005
                                                                             F-3

                                       24
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
                                                               June 30,
                                                           2007        2006
                                                           ____        ____
ASSETS (Note A)
 Current assets:
     Cash and cash equivalents
                                                         $3,395,173  $1,820,105
    Accounts receivable, net of allowance for doubtful
     accounts of $3,764,583 and $3,100,586  at June 30,
     2007 and 2006, respectively                          6,524,387   6,955,475
    Pharmaceutical research receivables                   1,942,268   1,470,019
    Prepaid expenses                                        688,600     490,655
    Other receivables and advances                          868,628     751,791
    Deferred tax assets                                   2,015,000   2,841,000
                                                          _________   _________

         Total current assets                            15,434,056  14,329,045
                                                          _________   _________
Accounts receivable, non-current                             35,000      40,000
Other receivables                                            91,697      53,457
Property and equipment, net                               2,121,191   1,799,888
Deferred financing costs, net of amortization of
   $150,124 and $106,422 at June 30, 2007 and 2006,
   respectively                                             613,865     117,023
Customer relationships, net of amortization of
   $380,000 and $260,000 at June 30, 2007 and 2006,
   respectively                                           2,020,000   2,140,000
Goodwill                                                  3,508,576   2,664,643
Other assets                                              3,465,356     571,931
                                                          _________   _________

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

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

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

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

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


See accompanying notes to consolidated financial statements.                F-4

                                       25
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<S>                                        <C>              <C>                <C>

                                                          For the Years Ended June 30,
                                                  2007              2006             2005
                                                  ____              ____             ____
Revenues:
     Patient care, net                         $36,022,529       $27,861,701      $26,087,088
     Pharmaceutical study                        4,564,314         5,799,815        4,509,338
     Contract support services                   4,540,634         4,351,576        3,466,832
                                               ___________       ___________      ___________
         Total revenues                         45,127,477        38,013,092       34,063,258
                                               ___________       ___________      ___________
Operating expenses:
     Patient care expenses                      19,738,357        14,269,540       12,905,286
     Patient care expenses, pharmaceutical       2,182,357         2,242,900        1,676,749
     Cost of contract support services           3,102,551         2,676,340        2,197,518
     Provision for doubtful accounts             1,933,499         1,912,516        1,272,037
     Administrative expenses                    12,722,007        11,210,296        9,667,138
     Administrative expenses, pharmaceutical     2,438,802         2,517,074        2,757,118
                                               ___________       ___________      ___________

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

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

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

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

Basic net income per common share              $      0.09       $      0.22           $ 0.18
                                               ===========       ===========      ===========
Basic weighted average number of shares
       outstanding                              19,287,665        18,213,901       17,574,678
                                               ===========        ==========      ===========
Fully diluted net income  per common
       share                                   $      0.09            $ 0.21           $ 0.17
                                               ===========        ==========      ===========
Fully diluted weighted average number of
      shares outstanding                        19,704,697        19,105,193       18,364,076
                                               ===========        ==========      ===========
</TABLE>
See accompanying notes to consolidated financial statements.                F-5


                                       26
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S>                             <C>             <C>        <C>               <C>
                                             Class A             Class B       Additional
                                          Common Stock        Common Stock      Paid-in
                                      Shares       Amount      Shares  Amount   Capital

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

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

Costs related to private
placements                                                                        (64,783)
Fair value of options                                                              214,606
Issuance of shares for warrants
    exercised                          543,089         5,431                       330,692
Issuance of shares for options
    exercised                          231,627         2,316                       143,060
Issuance of shares in a private
    placement                          961,539         9,616                     1,990,384
Non-cash value of warrant issued
   in connection with a
   refinancing                                                                     456,880
Issuance of employee stock
   purchase plan shares                 10,855           109                        23,772
Net income year ended June 30, 2007
                                    __________   _________    _______   _______   __________
Balance - June 30, 2007             19,622,076     $ 196,221  775,760   $ 7,758 $ 26,812,808
                                     __________    ________    _______   _______   __________

See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
PHC, INC.  AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity
                                             Class A
                                         Treasury Stock        Accumulated
                                      Shares       Amount        Deficit      Total
                                      ______       ______      ___________    _____

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

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

Stock options issued as
  compensation                                                                  116,425
Purchase of treasury shares from
   former employee                      17,360    (36,613)                      (36,613)
Issuance of shares for warrants
    exercised                                                                    52,450
Issuance of shares for options
    exercised                                                                    84,077
Common shares issued as
    compensation                                                                  5,660
Disgorgement                                                                        112
Value of acceleration of certain
   stock options                                                                  9,875
Non-cash value of warrant issued
   in connection with an
   acquisition                                                                   56,180
Conversion from Class B to Class A
Issuance of employee stock
   purchase plan shares                                                          20,188
Net income year ended June 30, 2006                            4,045,482      4,045,482
                                     ____________________________________________________
Balance - June 30, 2006                199,098  $(191,700)  $(10,257,229)   $13,455,775

Costs related to private
placements                                                                     (64,783)
Fair value of options                                                           214,606
Issuance of shares for warrants
    exercised                                                                   336,123
Issuance of shares for options
    exercised                                                                   145,376
Issuance of shares in a private
    placement                                                                 2,000,000
Non-cash value of warrant issued
   in connection with a
   refinancing                                                                  456,880
Issuance of employee stock
   purchase plan shares                                                          23,881
Net income year ended June 30, 2007                            1,682,283      1,682,283
                                    ____________________________________________________
Balance - June 30, 2007                199,098   (191,700)    (8,574,946)    18,250,141
                                       =======  ==========  =============   ===========
</TABLE>
See accompanying notes to consolidated financial statements.               F-6

                                       28
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<S>                                                 <C>           <C>          <C>
                                                           For the Years Ended June 30,
                                                          2007          2006        2005
                                                          ____          ____        ____
Cash flows from operating activities:
   Net income                                          $1,682,283   $4,045,482   $3,155,900
   Adjustments to reconcile net income to net cash
           provided by operating activities:
     Depreciation and amortization                        744,206      777,419      511,211
     Non-cash interest expense                            164,994       65,583       51,080
     Deferred income taxes                                863,000   (1,638,713)    (303,994)
     Stock based compensation                             220,067      134,988      105,681
     Change in allowance for doubtful accounts            663,999    1,143,602      (68,904)
   Changes in operating assets and liabilities:
           Accounts and other receivables                (855,237)  (1,946,547)  (2,183,027)
           Prepaid expenses and other current assets     (197,945)    (343,667)      21,554
           Other assets                                  (229,885)    (186,817)     (92,044)
           Accounts payable                              (247,818)     611,046     (754,011)
           Accrued expenses and other liabilities         735,933      471,930      540,020
                                                      ____________  __________   __________
             Net cash provided by operating
               activities                               3,543,,597   3,134,306      983,466
                                                      ____________  __________   __________
  Cash flows from investing activities:
      Acquisition of property and equipment              (955,459)    (710,638)    (483,462)
      Equity investment in unconsolidated subsidiary     (400,000)          --           --
      Construction in progress ($1,362,000 in escrow
         for improvements)                             (1,719,623)          --           --
 Costs related to business acquisition                          --          --      (62,258)
                                                      ____________  __________   ___________

             Net cash used in investing activities     (3,075,082)    (710,638)    (545,720)
                                                      ____________  __________   __________
Cash flows from financing activities:
      (Repayment) Proceeds on revolving debt, net         (84,626)   (782,261)      671,249
          Proceeds from borrowings on long term debt           --      17,551     1,430,154
          Principal payments on long-term debt         (1,162,172)   (858,669)   (2,307,709)
      Deferred financing costs                            (83,664)    (15,000)     (208,445)
      Purchase of treasury stock                               --     (36,613)      (13,880)
      Proceeds from issuance of common stock, net       2,437,015     153,799       313,692
                                                      ____________  __________   __________
             Net cash provided by (used in)
               financing activities                     1,106,553  (1,521,193)    (114,939)
                                                      ____________  __________   __________

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

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

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

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

                                       29
<PAGE>
 PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
<TABLE>
<S>                                               <C>          <C>           <C>
                                                          For the Years Ended June 30,
                                                          2007          2006        2005
                                                          ____          ____        ____

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

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


                                       30
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

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

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

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

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

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

 Principles of consolidation:

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

Revenues and accounts receivable:

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



                                                                             F-9

                                       31
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

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

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

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

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

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


                                                                            F-10

                                       32
<PAGE>


PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Revenues and accounts receivable (continued):

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

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

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

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

Allowance for doubtful accounts:

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

Estimates and assumptions:

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


                                                                            F-11

                                       33
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Estimates and assumptions: (continued)

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

Reliance on key clients:

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

Cash equivalents:

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

Property and equipment:

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

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

Other assets:

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




                                                                            F-12



                                       34
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Long-lived assets:

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

Fair value of financial instruments:

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

Basic and diluted income per share:

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

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

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

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

                                                   Years Ended June 30,
                                                   ____________________
                                         2007          2006          2005
                                         ____         _____          ____

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

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

                                                                            F-13

                                       35
<PAGE>
PHC,  INC. AND
SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Income taxes:

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

Comprehensive income:

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

Stock-based compensation:

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

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

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

                                 Year ended June 30,     Year ended June 30,
                                 ___________________      __________________
                                      2007                      2006
                                      ____                      ____

    Directors fees                   $ 47,088                $ 21,000
    Employee compensation             167,518                 105,300
                                     ________                ________
      Total                          $214,606                $126,300
                                     ========                ========
                                                                            F-14



                                       36
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Stock-based compensation: (continued)

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

                                                  Year ended June 30,
                                            2007        2006          2005
                                            ____        ____          ____

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

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

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

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

                                                                           F-15



                                       37
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Stock-based compensation: (continued)
                                                            Year Ended
                                                            __________
                                                             June 30,
                                                             ________
                                                               2005
                                                             _________

    Net income, as reported                                  $3,155,900
    Add:  Stock-based employee compensation
      expense included in reported net income, net of
      related tax effects                                       105,681
    Deduct:  Total stock-based employee compensation
      expense determined under fair value based
      method for all awards, net of related taxes              (298,084)
                                                            ____________
     Pro forma net income (loss)                             $2,963,497
     Earnings (loss) per share:
       Basic - as reported                                   $     0.18
                                                             ==========
       Basic - pro forma                                     $     0.17
                                                             ==========
       Diluted - as reported                                 $     0.17
                                                             ==========
       Diluted - pro forma                                   $     0.16
                                                             ==========

Advertising Expenses:

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

Reclassifications:

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

Recent accounting pronouncements:

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

     In September  2006,  the Securities  and Exchange  Commission  (SEC) issued
Staff  Accounting   Bulletin  108,   "Considering  the  Effects  on  Prior  Year
Misstatements   when   Quantifying   Misstatements  in  Current  Year  Financial
Statements," ("SAB 108"). SAB 108 requires  registrants to quantify errors using
both the income  statement  method (i.e.  iron curtain  method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction  in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction  to the prior year  results  that are not  material  to those  years,

                                                                           F-16

                                       38
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Recent accounting pronouncements: (continued)

would not  require a  "restatement  process"  where  prior  financials  would be
amended.  SAB 108 is effective for fiscal years ending after  November 15, 2006.
Adopting  SAB 108 did not have a  material  effect  on our  financial  position,
results of operations or cash flows.

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

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

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:

                                              As of June 30,
                                              ______________
                                         2007               2006
                                         ____               ____
Land                                   $   69,259         $   69,259
Buildings                               1,136,963          1,136,963
Furniture and equipment                 2,614,274          2,048,006
Motor vehicles                            178,478            174,302
Leasehold improvements                  1,462,260          1,224,624
                                       __________         __________
                                        5,461,234          4,653,154
Less accumulated depreciation and
   amortization                         3,340,043          2,853,266
                                       __________         __________
Property and equipment, net            $2,121,191        $ 1,799,888
                                      ===========        ===========

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

                                                                           F-17

                                       39
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS:

     Goodwill and other intangible  assets are initially  created as a result of
business  combinations or acquisitions.  Critical estimates and assumptions used
in the initial  valuation of goodwill and other intangible  assets include,  but
are not limited to: (i) future expected cash flows from services to be provided,
customer  contracts and  relationships,  and (ii) the acquired market  position.
These  estimates  and  assumptions  may  be  incomplete  or  inaccurate  because
unanticipated  events and  circumstances may occur. If estimates and assumptions
used to initially  value goodwill and intangible  assets prove to be inaccurate,
ongoing  reviews of the carrying  values of such goodwill and intangible  assets
may indicate  impairment  which will require the Company to record an impairment
charge in the period in which the Company identifies the impairment.

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

                          Year Ending
                            June 30,               Amount
                           _________            __________
                             2008                 $120,000
                             2009                  120,000
                             2010                  120,000
                             2011                  120,000
                             2012                  120,000
                             Thereafter          1,420,000
                                                ___________
                                                 $2,020,000
Goodwill:

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

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

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

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

                                                                            F-18



                                     40
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

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

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

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

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

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

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

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

                                                                           F-19
                                       41
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE D - OTHER ASSETS

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

         The following table lists amounts included in other assets:

           Description                                  As of June 30,
                                                        ______________
                                                      2007          2006
                                                      ____          ____
   Construction in progress ($1,362,000 in
     escrow for improvements)                     $1,719,623     $      --
   Licensure fees                                    701,220       158,271
   Investment in unconsolidated subsidiary           400,000            --
   Deferred Expense                                  319,842       153,507
   Deposits                                          314,671       250,153
   Excess of cost over book value                     10,000        10,000
                                                  __________     __________
             Total                                $3,465,356     $ 571,931
                                                  ==========     =========

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

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


                                                                           F-20



                                       42
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

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

                                                           As of June 30,
                                                           ______________
                                                          2007          2006
                                                          ____          ____

Note payable due in monthly  installments  of $578
  including  interest at 5.9% through May 2010.           18,058         23,746
Note payable due in monthly  installments  of $555
  including  interest at 3.9% through March 2010.         17,327         23,180
Note payable due in monthly  installments  of $775
  including  interest at 3.9% through October 2008.       12,061         20,698
Unamortized debt discount in connection with the
  Term loan                                                   --        (69,660)
Insurance installment notes renewed annually               8,090          8,956
                                                       _________    __________
                                    Total              1,965,687      1,939,559
Less current maturities                                1,134,300        918,013
                                                       _________    ___________
Long-term portion                                      $ 831,387    $ 1,021,546
                                                       =========    ===========

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

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

     In October 2004,  the Company  refinanced  its revolving  credit note under
which a maximum of $3,500,000 may be  outstanding  at any time. The  outstanding
balance on this note was  $1,518,742  and  $1,603,368 at June 30, 2007 and 2006,
respectively. This agreement was amended on June 13, 2007 to modify the terms of
the  agreement.  Advances  are  available  based  on a  percentage  of  accounts
receivable  and the payment of  principal is payable upon receipt of proceeds of
the accounts receivable. Interest is payable monthly at prime (8.25% at June 30,
2007) plus 0.25%, but not less than 4.75%. The average interest rate paid during
the fiscal year ended June 30, 2007 was 14.28%,  which includes the amortization
of deferred financing costs related to the initial  financing.  The amended term
of the agreement is for two years,  renewable for two additional one year terms.
Upon  expiration,  all  remaining  principal and interest are due. The revolving
credit  note  is  collateralized  by  substantially  all  of the  assets  of the
Company's  subsidiaries except Pivotal Research Centers,  Inc. and guaranteed by
PHC.  The  Company  paid  $32,500  in  commitment  fees and  issued a warrant to
purchase  250,000  shares of Class A common  stock at $3.09  expiring on June13,
2017.

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

                                                                            F-21

                                       43
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE F - CAPITAL LEASE OBLIGATION

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

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

                                                          June 30,
                                                          ________
                                                    2007           2006
                                                    ____           ____

         Equipment and software                  $ 784,114      $ 287,099
         Less accumulated amortization            (225,055)      (168,869)
                                                 __________      _________
                                                 $ 559,059      $ 118,230
                                                 ==========     =========

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

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

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

NOTE G - ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

                                                     June 30
                                                     _______
                                             2007             2006
                                             ____             ____

           Accrued professional fees       $  896,874      $  249,260
           Accrued operating expenses         630,898         522,063
           Income tax payable                 175,000         255,096
                                            _________      __________
                    Total                  $1,702,772      $1,026,419
                                           ===========     ==========


                                                                            F-22

                                       44
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE H - INCOME TAXES

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

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

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

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

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

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

                                                                           F-23

                                       45
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

     NOTE H - INCOME TAXES (CONTINUED)

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

                                                     2007     2006      2005
                                                     ____     ____      ____

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


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

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

NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

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

                          Year Ending
                            June 30,             Amount
                           ___________           _______

                          2008                 $ 2,087,819
                          2009                   2,071,512
                          2010                   1,763,949
                          2011                     721,268
                          2012                     304,084
                          Thereafter               260,510
                                               ___________
                                               $ 7,209,142
                                               ===========
                                                                           F-24

                                       46
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

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

Contingent Notes Payable:

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

Litigation:

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

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

Other:

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

                                                                           F-25

                                       47
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS

Preferred Stock

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

Common Stock

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

Class A Common Stock

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

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

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

Class B Common Stock

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

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

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

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

                                                                           F-26

                                       48
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

Private Placement

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

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

Stock Plans

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

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

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


                                                                           F-27

                                       49
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

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

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

     The Company had the following activity in its stock option plans for fiscal
2007, 2006 and 2005:

<TABLE>
<S>                                    <C>             <C>         <C>       <C>
                                                             Weighted-Average
                                               Number                 Remaining   Aggregate
                                                 of        Exercise  Contractual Intrinsic
                                               Shares      Price       Term       Value
                                             ________      ________  ___________  _________

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

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

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

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

                                                                            F-28

                                       50
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

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

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

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

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

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

04/01/2003     Warrants issued for consulting
                services $3,185 charged
                to professional fees.               10,000 shares  $1.00 per share   April 2008
09/22/2003     Warrants issued for consulting
                services $6,261 charged
               to professional fees                 20,000 shares  $ .90 per share   Sept 2008
06/13/2007     Warrants issued in conjunction with
                long-term debt transaction, $456,880
                recorded as deferred financing
                costs.                             250,000 shares  $3.09 per share   June 2017
</TABLE>
     Warrants  issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and accounted for in a
manner consistent with the underlying  reason the warrants were issued.  Charges
to operations in connection with warrants were $1,880 in fiscal 2007. There were
no charges to operations in connection with warrants in fiscal 2006 or 2005. All
of these warrants were fully vested at the grant date.

       The Company had the following warrant activity during fiscal 2007:


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

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

     During the fiscal year ended June 30,  2006,  the Company  acquired  17,360
shares of Class A common  stock for $36,613 from a former  employee.  During the
fiscal year ended June 30, 2007,  675,953  warrants were exercised  resulting in
$336,123 in proceeds. Included in the above total are 356,750 warrants exercised
using a cashless  exercise  feature  resulting in the issuance of 223,886 common
shares.



                                                                          F-29

                                       51
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE K - BUSINESS SEGMENT INFORMATION

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

                          Behavioral
                            Health
                           Treatment   Pharmaceutical  Contract  Administrative
                           Services    Study Services  Services    Services     Eliminations     Total
                          __________   ______________  ________  ______________  ____________   ________
   For the year ended
     June 30, 2007
Revenues-external
   customers              $36,022,529   $4,564,314   $4,540,634   $       --   $        --    $45,127,477
Revenues - intersegment       182,700           --       79,390    3,696,000    (3,958,090)            --
Segment net income          4,459,796     (228,104)    1,072,837   (3,622,246)           --      1,682,283
(loss)
Total assets               10,624,784    6,792,439      807,361    9,065,157            --     27,289,741
Capital expenditures          522,790       48,402       15,964      368,303            --        955,459
Depreciation &
   amortization               391,960      156,536      106,427       52,328            --        707,251
Goodwill                      969,099    2,539,477           --           --            --      3,508,576
Interest expense              395,445      172,804        4,236       76,681            --        649,166
Income tax expense
(benefit)                     845,156        3,100      368,441      (69,697)           --      1,147,000

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

Revenues - intersegment        38,750           --       88,875    3,264,000    (3,391,625)           --
Segment net income          3,172,699      972,973    1,636,408   (1,736,598)           --     4,045,482
(loss)
Total assets               10,399,918    5,584,753      844,784    4,886,532            --    21,715,987
Capital expenditures          603,152       51,628      144,636       65,291            --       864,707
Depreciation &
   amortization               436,488      170,167       62,220       61,139            --       730,014
Goodwill                      969,099    1,695,544           --           --            --     2,664,643
Interest expense              485,589       67,528        5,048       48,728            --       606,893
Income tax expense
(benefit)                     210,231        3,840       34,860   (1,559,034)           --    (1,310,103)

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

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

</TABLE>
                                                                           F-30


                                       52
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2007

NOTE K - BUSINESS SEGMENT INFORMATION (CONTINUED)

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

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

NOTE L - QUARTERLY INFORMATION (Unaudited)

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

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

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

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

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

</TABLE>
NOTE M - SUBSEQUENT EVENT

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

                                                                           F-31

                                       53
<PAGE>
PART III

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

  Name                          Age             Position
 _____                          ___             ________

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

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

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

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

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

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

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

                                       54
<PAGE>
     DONALD E. ROBAR has served as a Director of the  Company  since 1985 and as
the Treasurer from February 1996 until April 2000. He served as the Clerk of the
Company  from 1992 to 1996.  Dr.  Robar has been a professor  of  Psychology  at
Colby-Sawyer  College in New London,  New Hampshire from 1967 to 1997 and is now
Professor Emeritus. Dr. Robar received an Ed.D. (Counseling) from the University
of Massachusetts in 1978, an M.A. in Clinical  Psychology from Boston College in
1968 and a B.A. from the University of Massachusetts in 1960.

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

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

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

Meetings of the Board of Directors

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

Audit Committee

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

     o    Hire,   evaluate   and,  when   appropriate,   replace  the  Company's
          independent  registered  public  accounting  firm, whose duty it is to
          audit the books and accounts of the Company and its  subsidiaries  for
          the fiscal year in which it is appointed.
     o    Approve all audit fees in advance of work performed.
     o    Approve  any  accounting  firm and fees to be charged for taxes or any
          other  non-audit  accounting  fees.
     o    Review internal controls over financial reporting with the independent
          accountant and a designated accounting staff member.
     o    Review with management and the registered  public  accounting  firm:
          o    The independent accountant's audit of and report on the financial
               statements.
          o    The auditor's  qualitative  judgments about the  appropriateness,
               not  just  the  acceptability,   of  accounting   principles  and
               financial  disclosures and how aggressive (or  conservative)  the
               accounting principles and underlying estimates are.

                                       55
<PAGE>
          o    Any serious difficulties or disputes with management  encountered
               during the course of the audit.
          o    Anything  else about the audit  procedures  or findings that GAAS
               requires the auditors to discuss with the committee.
     o    Consider and review with management and a designated  accounting staff
          member:
          o    Any  significant   findings  during  the  year  and  management's
               responses to them.
          o    Any  difficulties an accounting  staff member  encountered  while
               conducting  audits,  including any  restrictions  on the scope of
               their work or access to required information.
          o    Any changes to the planned scope of  management's  internal audit
               plan that the  committee  thinks  advisable.
     o    Review the annual filings with the SEC and other  published  documents
          containing the company's financial statements and consider whether the
          information in the filings is consistent  with the  information in the
          financial statements.
     o    Review the interim financial reports with management,  the independent
          registered public accounting firm and an accounting staff member.
     o    Prepare a letter for inclusion in the annual report that describes the
          committee's    composition   and    responsibilities   and   how   the
          responsibilities were fulfilled.
     o    Review the audit  committee  charter at least  annually  and modify as
          needed.

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

Nominating and Corporate Governance Committee

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

Compensation Committee

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

Code of Ethics

     The Company maintains a Corporate  Compliance Plan, which  incorporates our
code of ethics that is applicable to all employees,  including all officers. The
Corporate   Compliance  Plan  incorporates  our  guidelines  designed  to  deter
wrongdoing  and to promote  honest  and  ethical  conduct  and  compliance  with
applicable laws and  regulations.  It also  incorporates our expectations of our
employees  that  enable us to  provide  accurate  and timely  disclosure  in our
filings  with  the   Securities   and  Exchange   Commission  and  other  public
communications. In addition, it incorporates our guidelines pertaining to topics
such as health and safety compliance, diversity and non-discrimination,  patient
care and privacy.

                                       56
<PAGE>
     The full text of our Corporate  Compliance Plan is published on our website
at  www.phc-inc.com.  We will post any  amendments to the  Corporate  Compliance
Plan,  as well as any waivers  that are required to be disclosed by the rules of
the SEC, on our website.

Compliance with Section 16(A) of the Exchange Act

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

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

Item 11.    Executive Compensation

Compensation Discussion and Analysis

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

Objectives of our Executive Compensation Program

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

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

Role of the Compensation Committee

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

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

     On an annual  basis,  or in the case of promotion or hiring of an executive
officer,  the Compensation  Committee reviews and makes  recommendations  to the
Board of  Directors  regarding  the  compensation  package to be provided to our
named  executive  officers.  On an  annual  basis,  the  Compensation  Committee
undertakes  a review of the base  salary and bonus  targets of each of our named

                                       57
<PAGE>
executive  officers and evaluates  their  respective  compensation  based on the
committee's  overall  evaluation of their performance  toward the achievement of
our  financial,  strategic  and other goals,  with  consideration  given to each
executive officer's length of service and to comparative executive  compensation
data.  Based on its review,  from time to time the  Compensation  Committee  has
increased the salary and/or potential bonus amounts for our executive officers.

                          COMPENSATION COMMITTEE REPORT

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

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

Compensation Committee
______________________
Donald E. Robar
William F. Grieco

Elements of Executive Compensation

     Compensation  for our named executive  officers  generally  consists of the
following  elements:  o base salary;  o cash bonuses;  o stock-based  awards;  o
health,  dental and life insurance and disability  and retirement  plans;  and o
severance and change-in-control arrangements.

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

Base Salary

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

Bonuses

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

                                       58
<PAGE>
Stock Based Awards

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

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

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

Insurance and Other Employee Benefits

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

Severance and Change-in-Control Arrangement

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

                  Name and position                             Multiplier
                  _________________                             __________

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


Changes in Executive Compensation for Fiscal 2007

     In  September  2006,  the   Compensation   Committee  met  to  discuss  the
compensation of the named executive officers. The meeting resulted in a proposal
to the Board of  Directors  to increase  the base salary of the named  executive
officers and change the net earnings targets for the named executive officers to
earn cash and stock based  compensation  for each  quarter of fiscal  2007.  The
Board of Directors  accepted the proposals of the Committee and salary  increase

                                       59
<PAGE>
were affected and bonus and stock-based compensation targets were set. The named
executive  officers met the bonus and  stock-based  compensation  targets in the
fourth fiscal quarter of 2007.

Accounting for Executive Compensation

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

Employment agreements

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

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

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

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

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

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

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

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

     (2)  This  amount  represents  $8,910  contributed  by the  Company  to the
          Company's  Executive  Employee  Benefit  Plan on behalf of Mr.  Shear,
          $13,648  in  premiums  paid by the  Company  with  respect to life and
          disability  insurance  for  the  benefit  of Mr.  Shear,  $864 in club
          membership dues paid by the Company for the benefit of Mr. Shear,  and
          $4,036 personal use of a Company car held by Mr. Shear.

                                       60
<PAGE>
     (3)  This  amount  represents  $7,789  contributed  by the  Company  to the
          Company's  Executive  Employee  Benefit  Plan on behalf of Mr.  Shear,
          $7,541  in  premiums  paid by the  Company  with  respect  to life and
          disability  insurance  for the  benefit of Mr.  Shear,  $2,805 in club
          membership  dues paid by the  Company  for the  benefit of Mr.  Shear,
          $4,027  personal  use of a Company  car held by Mr.  Shear and $40,336
          based on the  intrinsic  value of the repricing of options held by Mr.
          Shear.

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

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

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

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

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

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

COMPENSATION OF DIRECTORS

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


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

  Donald Robar          $27,000       $22,525        $    --       $49,525
  William Grieco        $27,000       $22,525        %    --       $49,525
  David Dangerfield     $27,000       $22,525        %    --       $49,525
  Howard W. Phillips*   $    --       $16,550        $42,470       $50,020

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

                                       61
<PAGE>
     As of June 30, 2007 each member of the Board of Directors had the following
options  outstanding:  Donald Robar,  117,500 (87,500  vested);  William Grieco,
117,500 (87,500 vested); David Dangerfield,  50,000 (20,000 vested); and, Howard
Phillips, 117,500 (87,500 vested).

Compensation Committee Interlocks and Insider Participation

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

OPTION PLANS

Stock Plan

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

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

     During the fiscal year ended June 30, 2007, the Company  issued  additional
options to purchase  177,500 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share  ranging from $2.06 to $3.35.  Generally,  options are
exercisable  upon grant for 25% of the shares  covered  with an  additional  25%
becoming  exercisable  on each of the first three  anniversaries  of the date of
grant.

Employee Stock Purchase Plan

     On October 18, 1995, the Board of Directors voted to provide  employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to  participate  in an Employee  Stock  Purchase Plan (the "Plan"),  which
became  effective  February 1, 1996. The price per share was to be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan  period.  The plan was amended on December  19, 2001
and December  19, 2002 to allow for a total of 500,000  shares of Class A Common
Stock to be issued under the plan. On January 31, 2006 the stockholders approved
a  replacement  Employee  Stock  Purchase  Plan to replace the 1995 plan,  which
expired on  October  18,  2005.  The new plan is  identical  to the old plan and
expires on January 31, 2016.

     A total of 157,034  shares of Class A Common  Stock were  issued  under the
1995 plan before it's  expiration  and 10,855  shares have been issued under the
2005 plan.  Thirteen  employees are participating in the current offering period
under the new plan,  which began on February 1, 2007 and will end on January 31,
2008.


                                       62
<PAGE>
Non-Employee Director Stock Plan

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

     If an optionee  ceases to be a member of the Board of Directors  other than
for death or permanent  disability,  the unexercised  portion of the options, to
the extent unvested,  immediately terminate,  and the unexercised portion of the
options  which have vested lapse 180 days after the date the optionee  ceases to
serve  on the  Board.  In the  event  of  death  or  permanent  disability,  all
unexercised options vest and the optionee or his or her legal representative has
the  right  to  exercise  the  option  for a period  of 180  days or  until  the
expiration of the option, if sooner.

Options Exercised

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

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

                                        GRANTS OF PLAN-BASED AWARDS
                                        ____________________________

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

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

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

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


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

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


                                       63
<PAGE>
     The following table provides information about options outstanding, held by
the named executive officers at the end of fiscal 2007.
                    OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

                  Number of       Number of
                  Securities      Securities
                  Underlying      Underlying       Option
                  Unexercised     Unexercised     Exercise        Option
                   Options         Options          Price     Expiration Date
  Name            Exerciseable    Unexerciseable
                       #               #             $
  ____            ____________    ______________   _______    ________________


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

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

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


                                       64
<PAGE>
                       OPTIONS EXERCISED AND STOCK VESTED

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

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


       Bruce A. Shear                20,000          $51,000

       Robert H. Boswell             25,000           59,625

       Paula C. Wurts                25,000           69,250


                                       65
<PAGE>
PART IV

   Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

     1)  Consolidated Financial Statements:                         Page Number
          o    Reports of Independent Registered Public
                Accounting Firms                                     F-2 - F-3
          o    Consolidated balance sheets                           F-4
          o    Consolidated statements of income                     F-5
          o    Consolidated statements of changes in stockholders'
                equity                                               F-6
          o    Consolidated statements of cash flows                 F-7 - F-8
          o    Notes to consolidated financial statements            F-9 - F-31

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

(b)  The  following  exhibits are filed as part of or  furnished  with this Form
     10-K/A as applicable: Exhibits

Exhibit No.              Description

*23.1 Consent of Eisner, LLP, an independent registered public accounting firm.

*23.2 Consent of BDO Seidman,  LLP, an independent  registered public accounting
      firm. * 31.1 Certification of Chief Executive  Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.

*31.2 Certification  of the Chief Financial  Officer  pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.

*32.1 Certification of the Chief Executive  Officer and Chief Financial  Officer
      pursuant  to 18 U.S.C.  1350, as adopted  Pursuant  to Section  906 of the
      Sarbanes-Oxley Act of 2002.

*Filed herewith


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<PAGE>

                                   SIGNATURES

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

                                         PHC, INC.

Date:  October 4, 2007                   By:   /S/ BRUCE A. SHEAR
                                         __________________________
                                                   Bruce A. Shear, President
                                                   and Chief Executive Officer


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


     SIGNATURE                       TITLE(S)                         DATE


/s/ BRUCE A. SHEAR             President, Chief                October 4, 2007
_________________________      Executive Officer and
    Bruce A. Shear             Director  (principal
                               executive officer)


/s/ PAULA C. WURTS            Chief Financial Officer,         October 4, 2007
_________________________     Treasurer and Clerk
    Paula C. Wurts            (principal  financial
                              and accounting officer)

/s/ DONALD E. ROBAR           Director                         October 4, 2007
_________________________
    Donald E. Robar


/s/ HOWARD PHILLIPS           irector                          October 4, 2007
_________________________
    Howard Phillips


 /s/WILLIAM F. GRIECO         Director                         October 4, 2007
_________________________
    William F. Grieco


/S/ DAVID E. DANGERFIELD     Director                          October 4, 2007
_________________________
    David E. Dangerfield


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