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

     [X]  Annual report under section 13 or 15(d) of the Securities Exchange Act
          of 1934 for the fiscal year ended June 30, 2005
     [    ]  Transition  report  under  section  13 or 15(d)  of the  Securities
          Exchange Act of 1934 for the transition period from to

Commission file number: 0-22916
                                    PHC, INC.
             (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:

                                      NONE

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

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

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.                                                     No Disclosure X

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).                                  Yes No 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, 2004 the aggregate market value of the shares of common stock
of the registrant  held by  non-affiliates  of the registrant was  approximately
$23.1 million.

As of August 5, 2005, 17,332,330 shares of the registrant's Class A Common Stock
and 776,991 shares of the issuer's Class B Common Stock were outstanding.

                                    -- 1 --
<PAGE>
PART I All  references in this Annual  Report on Form 10-K to "Pioneer,"  "PHC,"
"the Company," "we," "us," or "our" mean, unless the context otherwise requires,
PHC, Inc. and its consolidated subsidiaries.


Item 1.           DESCRIPTION OF BUSINESS

INTRODUCTION

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

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

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

     The Company was  incorporated in 1976 and is a  Massachusetts  corporation.
Our corporate  offices are located at 200 Lake Street,  Suite 102,  Peabody,  MA
01960 and our telephone  number is (978) 536-2777.  As used herein,  our Company
refers to and includes the Company and each of its  subsidiaries  through  which
substantially all of our business and operations are conducted.

                                    -- 2 --
<PAGE>
PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

         Industry Background

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

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

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

         Company Operations

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

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

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

     The Company  believes that it has benefited from an increased  awareness of
the need to make substance abuse treatment  services  accessible to the nation's
workforce.  For  example,  Subchapter  D of the  Anti-Drug  Abuse  Act  of  1988
(commonly  known as The Drug Free  Workplace  Act),  requires  employers who are
Federal contractors or Federal grant recipients to establish drug free awareness


                                    -- 3 --
<PAGE>
programs to inform employees about available drug counseling, rehabilitation and
employee assistance  programs and the consequences of drug abuse violations.  In
response to the Drug Free  Workplace Act, many  companies,  including many major
national corporations and transportation  companies,  have adopted policies that
provide for treatment options as an alternative to termination of employment.

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

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

     Most patients are from Utah and surrounding states.  Individuals  typically
access Highland Ridge's services through professional referrals, family members,
employers,  employee  assistance  programs or contracts  between the Company and
health maintenance organizations located in Utah.

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

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

     Highland Ridge periodically  conducts or participates in research projects.
Highland Ridge was the site of a research project conducted by the University of
Utah Medical School.  The research explored the relationship  between individual
motivation  and treatment  outcomes.  The research was regulated and reviewed by
the Human  Subjects  Review Board of the  University  of Utah and was subject to
federal  standards that  delineated  the nature and scope of research  involving
human  subjects.  Highland  Ridge  benefited from this research by expanding its
professional  relationships  within the medical school community and by applying
the  findings of the  research  to improve  the quality of services  the Company
delivers.  In the past,  Highland Ridge  contracted with a major  pharmaceutical
manufacturer  to participate  in a research  study in  cooperation  with a local
nursing home. In the future all pharmaceutical research will be provided through
our research subsidiary, Pivotal Research Centers, Inc.

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

                                    -- 4 --
<PAGE>
     Mount  Regis  Center's  programs  are  sensitive  to the needs of women and
minorities.   The  majority  of  Mount  Regis  clients  are  from  Virginia  and
surrounding  states. In addition,  because of its relatively close proximity and
accessibility  to New York,  Mount Regis has been able to attract an  increasing
number of referrals from New York-based labor unions.  Mount Regis has also been
able to attract a growing  number of clients  through the Internet.  Mount Regis
has  established  programs that allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric  disorders),
cocaine  addiction  and  relapse-prone  patients.  The  multi-disciplinary  case
management, aftercare and family programs are key to the prevention of relapse.

General Psychiatric Facilities

Introduction

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

     The  Company  offers  inpatient  and  partial  hospitalization   psychiatry
services  through  Harbor Oaks Hospital.  The Company also provides  residential
treatment to adjudicated  juveniles through Detroit Behavioral  Institute,  Inc.
The Company also currently operates six outpatient psychiatric facilities.

     The  Company's  philosophy  at  these  facilities  is to  provide  the most
appropriate and efficacious care with the least restrictive modality of care. An
attending physician, a case manager and a clinical team, work together to manage
the care plan. The integrated delivery system allows for better patient tracking
and follow-up and fewer repeat procedures and therapeutic or diagnostic  errors.
Qualified,  dedicated staff members take a full history on each new patient, and
through  test and  evaluation  procedures,  they  provide a thorough  diagnostic
write-up of the  patient's  condition.  In addition a physician  does a complete
physical  examination  for  each  new  patient.   This  information  allows  the
caregivers  to  determine  which  treatment  alternative  is best suited for the
patient and to design an individualized recovery program for the patient.

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

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

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

     On February 10, 1997, Harbor Oaks Hospital opened an 8-bed residential unit
serving  adolescents  with  substance  abuse  problems  and  co-existing  mental
disorders who have been adjudicated to have committed criminal acts and who have
been referred or required to undergo psychiatric  treatment by a court or family
service  agency.  The patients in the program  range from 13 to 18 years of age.
The program provides  patients with educational and recreational  activities and
adult life  functioning  skills as well as  treatment.  Typically,  a patient is


                                    -- 5 --
<PAGE>
     admitted to the unit for an initial period of 30 days to six months. A case
review is done for any patient still in the program at six months, and regularly
thereafter,   to  determine   if   additional   treatment  is  required.   State
authorization  allowed  the  Company  to  increase  the  number  of  beds in the
adjudicated  residential  unit to twelve  on May 1, 1998 and  twenty on June 26,
1998.  In the fourth  quarter of fiscal  2005,  Harbor Oaks began  operating  an
outpatient  site  near New  Baltimore,  Michigan.  Its  close  proximity  to the
hospital allows for a continuum of care for patients after discharge.

DETROIT BEHAVIORAL  INSTITUTE - Detroit  Behavioral  Institute operates a thirty
bed residential unit,  located in downtown Detroit,  serving  delinquents with a
substance  abuse  problem  and a  co-existing  mental  disorder  who  have  been
adjudicated  to have  committed  criminal  acts and who have  been  referred  or
required to undergo  psychiatric  treatment by a court or family service agency.
The patients in the program are male, ranging from 12 to 18 years of age, with a
minimum IQ of 70. The  program  provides  individual,  group and family  therapy
sessions for medication  orientation,  anger management,  impulse control, grief
and loss,  family  interactions,  coping skills,  stress  management,  substance
abuse,   discharge   and   aftercare   planning   (home  visits  and   community
reintegration),   education,   recreation  therapy  and  sexual/physical   abuse
counseling  as  required.  Typically,  a patient is  admitted to the unit for an
initial  period of 30 days to six months.  A case review is done for any patient
still in the  program  at six  months,  and  each  subsequent  six-month  period
thereafter,  to determine if additional treatment is required. The Company is in
the process of acquiring the final permits to open an additional twenty-bed unit
for adjudicated  females in the same age range. This unit will be located in the
same building on the floor above the adjudicated male unit.

HARMONY  HEALTHCARE  - Harmony  Healthcare,  which  consists of two  psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for  railroads,  health  care  companies  and  several  large  gaming  companies
including Boyd Gaming  Corporation,  the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day and seven days a
week.   Harmony  also  provides   outpatient   psychiatric  care  and  inpatient
psychiatric case management through a capitated rate behavioral health carve-out
with PacifiCare Insurance.

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

Call Center Operations

WELLPLACE,  INC. - In the spring of 1994,  the Company began to operate a crisis
hotline service under contract with a major transportation  client. The hotline,
Wellplace,  formerly known as Pioneer  Development  Support  Services,  or PDS2,
shown as contract support services on the accompanying  statement of operations,
is a  national,  24-hour  telephone  service,  which  supplements  the  services
provided by the client's  Employee  Assistance  Programs.  The services provided
include  information,  crisis  intervention,  critical  incidents  coordination,
employee  counselor  support,  client  monitoring,  case  management  and health
promotion.  The  hotline  is  staffed  by  counselors  who refer  callers to the
appropriate  professional resources for assistance with personal problems. Three
major transportation companies subscribed to these services as of June 30, 2005.
Wellplace  operated the smoking  cessation  quitlines  for the State of Nebraska
until the  contract  expiration  in May 2004 and the  State of Kansas  until the
contract  expiration  in May 2005.  This  operation  is  physically  located  in
Highland  Ridge  Hospital,  but a staff  dedicated  to  Wellplace  provides  the
services  from a  separate  designated  area  of the  Hospital.  Wellplace  also
contracts  with Wayne  County  Michigan  to operate its call  center.  This call
center is located in downtown Detroit, Michigan. In the second fiscal quarter of
2005 this  contract  was expanded to provide  credentialing  services to Detroit
Wayne County  Community  Mental  Health  Carve-out  providers  and Agency staff.
Wellplace also signed a contract with Behavioral  Health Providers  Incorporated
to provide credentialing  services.  Wellplaces' primary focus is now on growing
its operations to take advantage of current  opportunities and capitalize on the
economies  of  scale in  providing  similar  services  to  other  companies  and
government units.

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<PAGE>
Research Operations

PIVOTAL RESEARCH CENTERS, INC. - (formerly PIONEER PHARMACEUTICAL RESEARCH, INC.
-  PPR)  -  Pivotal   Research   Centers  works  with  major   manufacturers  of
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the treatment of specific  illness.  In April 2004, the Company  expanded our
operations related to pharmaceutical  studies through the acquisition of 100% of
the membership  interest in Pivotal Research Centers,  LLC. Pivotal performs all
phases of clinical research for Phase I-IV drugs under development  through four
dedicated  research  sites,  including  one of the  largest  single  psychiatric
research sites in the country.  Pivotal currently has approximately 43 enrolling
studies and an additional 53 ongoing studies with approximately 75-80 percent of
Pivotal's  research  activity in central nervous system (CNS)  research.  With a
current  client  base  including  Alza,  AstraZeneca,   Bristol  Meyers  Squibb,
Cephalon,  Forest,  GlaxoSmithKline,  Hisamitsu,  Lilly, Merck, Mylan, Novartis,
Organon,  Sepracor and Wyeth, the Company currently has protocols in Alzheimer's
disease,  ADHD,  Diabetes Type II,  Fibromyalgia,  Generalized Anxiety Disorder,
Healthy  Volunteers,   Insomnia,  Major  Depressive  Disorder,   Obesity,  Pain,
Parkinson's  Disease,  Restless  leg  syndrome  and Shift Work  Sleep  Disorder.
Pivotal  currently  operates at four sites.  Two in Arizona and one each in Utah
and Michigan.  Although the Company's  other  facilities may still provide study
patients,  all future Studies will be supervised by the Company's  research arm,
Pivotal Research Centers, Inc.

Internet Operations

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

                                    -- 7 --
<PAGE>
Operating Statistics

     The following table reflects selected financial and statistical information
for all psychiatric services.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                  Year Ended June 30,
                                                                     (unaudited)
                                2005             2004         2003           2002          2001
                             ______________________________________________________________________
   Inpatient

   Net patient service      $18,469,578    $14,845,163    $14,430,069    $14,130,471   $13,507,124
   revenues

   Net revenues per         $       436    $       414    $       417    $       413   $       418
   patient day (1)

   Average occupancy rate         78.8%          76.7%          77.7%          76.9%         72.0%
   (2)

   Total number of
   licensed beds at end
   of period                        160            130            122            122           122

   Source of Revenues:
        Private (3)              61.79%         61.62%         62.20%         76.82%        82.00%
        Government (4)           38.21%         38.38%         37.80%         23.18%        18.00%

   Partial Hospitalization
   and Outpatient

   Net Revenues:
        Individual          $ 5,557,298    $ 5,647,752    $ 4,865,392    $ 4,678,493   $ 5,283,278
        Contract            $ 2,060,212    $ 1,925,440    $ 1,947,716    $ 2,300,140   $ 2,297,071

   Sources of revenues:

        Private                   97.2%          97.7%          98.0%          98.1%         97.9%

        Government                 2.8%           2.3%           2.0%           1.9%          2.1%

   Other Services:

   Wellplace(5)             $ 3,466,832    $ 2,984,477    $ 1,649,374    $   842,345   $   944,567

      Pharmaceutical
            Studies (6)     $ 4,509,338    $ 1,246,013    $   940,772    $         0   $         0
   Practice
         Management (7)     $         0    $         0    $         0    $         0   $   345,111


</TABLE>
(1)  Net revenues per patient day equals net patient service revenues divided by
     total patient days.
(2)  Average  occupancy  rates were  obtained  by dividing  the total  number of
     patient days in each period by the number of beds available in such period.
(3)  Private pay percentage is the percentage of total patient  revenue  derived
     from all payors other than Medicare and Medicaid.

                                    -- 8 --
<PAGE>
(4)  Government  pay  percentage  is the  percentage  of total  patient  revenue
     derived from the Medicare and Medicaid programs.
(5)  Wellplace,   formerly  PDS2,  Pioneer  Development  and  Support  Services,
     provides clinical support,  referrals management and professional  services
     for a number of the  Company's  national  contracts  and operates the Wayne
     County Michigan call center.
(6)  Pharmaceutical  Studies  includes  research studies of the Company prior to
     the  acquisition  of 100% of the  membership  interest in Pivotal  Research
     Centers,  LLC on April 30,  2004 and  ongoing  operations  of all  research
     sites.
(7)  Practice  Management  revenue was  produced  through  BSC-NY and PHC,  Inc.
     During the fiscal year ended June 30, 2001, the Company closed its practice
     management operations.

Business Strategy

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

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

 Marketing and Customers

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

     The Company employs nine  individuals  dedicated to marketing the Company's
facilities,  five of whom are in the research  division.  Each facility performs
marketing  activities  in its local  region.  The Senior Vice  President  of the
Company  coordinates  the Company's  national  marketing  efforts.  In addition,
employees at certain facilities perform local marketing  activities  independent
of the  Senior  Vice  President.  The  Company,  with the  support  of its owned
integrated outpatient systems and management services,  continues to pursue more
at-risk contracts and outpatient, managed health care fee-for-service contracts.
"At  risk"  contracts  require  that  the  Company  provide  all the  clinically
necessary  behavioral  health  services  for a group of people for a set fee per
person per month.  The Company  currently  has one at risk contract with a large
insurance  carrier,  which  requires  the Company to provide  behavioral  health
services to all of its  insured in the state of Nevada for a fixed fee.  This at
risk contract represents less than 5% of the Company's total gross revenues.  In
addition to providing  excellent  services and treatment  outcomes,  the Company
will continue to negotiate  pricing  policies to attract  patients for long-term
intensive  treatment  which  meet  length  of  stay  and  clinical  requirements
established  by insurers,  managed health care  organizations  and the Company's
internal professional standards.

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

     The Company  provides  services to employees  of a variety of  corporations
including: Boyd Gaming, Conrail, CSX, the IUE, MCC, MGM, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.

     In addition to its direct patient care services,  the Company maintains its
web site, Wellplace.com,  which provides articles and information of interest to
the general public as well as the behavioral health professional.  The Company's
internet  company  also  provides  the  added  benefit  of web  availability  of
information  for various EAP contracts  held and serviced by those  subsidiaries
providing direct treatment services.

                                    -- 9 --
<PAGE>
Competition

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

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

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

Revenue Sources and Contracts

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

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

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


                                    -- 10 --
<PAGE>
Quality Assurance and Utilization Review

     The Company has established comprehensive quality assurance programs at all
of its  facilities.  These  programs are  designed to ensure that each  facility
maintains  standards that meet or exceed  requirements  imposed upon the Company
with the objective of providing  high-quality  specialized treatment services to
its patients.  To this end, the Joint  Commission on Accreditation of Healthcare
Organizations   ("JCAHO")   surveys  and  accredits   the  Company's   inpatient
facilities,  except Detroit Behavioral  Institute,  and the Company's outpatient
facilities comply with the standards of National Commission on Quality Assurance
("NCQA")  although  the  facilities  are  not  NCQA  certified.   The  Company's
outpatient  facilities  in Michigan are  certified  by the American  Osteopathic
Association ("AOA"), which is nationally recognized by all payors as the measure
of quality in outpatient treatment.  The Company's professional staff, including
physicians, social workers,  psychologists,  nurses, dietitians,  therapists and
counselors,  must meet the minimum  requirements  of licensure  related to their
specific  discipline,  in  addition  to each  facility's  own  internal  quality
assurance  criteria.  The Company is currently in the process of providing  data
for accreditation  through the Council on Accreditation  ("COA") for the Detroit
Behavioral Institute residential facility.  This accreditation is expected to be
awarded in the next quarter.  The Company participates in the federally mandated
National  Practitioners  Data Bank,  which monitors  professional  accreditation
nationally.

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

Government Regulation

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

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

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

                                    -- 11 --
<PAGE>
Health Planning Requirements

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

Licensure and Certification

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

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

Medicare Reimbursement

     Currently,  the  only  facility  of  the  Company  that  receives  Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2005, 10.27% of
revenues  for Harbor  Oaks were  derived  from  Medicare  programs.  Harbor Oaks
revenue was 37.3% of total net patient care revenues.

     Effective for fiscal years beginning after January 1, 2005, the prospective
payment system ("PPS") was brought into effect for all Psychiatric services paid
through the Medicare program. The new system will change the present TEFRA-based
(Tax Equity and Fiscal  Responsibility Act of 1982) system to a 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 CMS's  administrative  data base (cost reports and claims data).
Patient-specific   characteristics   include   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 the next 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.  We expect this new system  will result in a higher  reimbursement
rate than the current rate at Harbor Oaks.

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

Medicaid Reimbursement

     Currently,  the only  facilities of the Company that receive  reimbursement
under  any  state  Medicaid  program  are  Harbor  Oaks and  Detroit  Behavioral
Institute.  A portion of  Medicaid  costs is paid by states  under the  Medicaid
program  and the  federal  matching  payments  are not made  unless the  state's
portion is made.  Accordingly,  the timely  receipt of  Medicaid  payments  by a
facility may be affected by the financial  condition of the relevant state.  For
the period  ended June 30,  2005,  24.03% of total net  patient  revenues of the
Company were derived from Medicaid programs.


                                    -- 12 --
<PAGE>
     Harbor Oaks and Detroit  Behavioral  Institute are both participants in the
Medicaid  programs administered by the State of Michigan.  The Company  receives
reimbursement  on a per diem basis,  inclusive  of  ancillary  costs.  The state
determines  the rate and adjusts it annually  based on cost reports filed by the
Company.

Fraud and Abuse Laws

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

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

Employees

     As of July 31,  2005,  the  Company  had 460  employees  of whom  nine were
dedicated to marketing, 139 (27 part time) to finance and administration and 312
(55 part time and 54 contingent) to patient care.  Until January of 2003, all of
the  Company's   employees  were  leased   through  Team  America,   a  national
employee-leasing firm. The Company elected to discontinue the use of the leasing
company  and  begin  processing  payroll  in-house  or using a more  traditional
payroll service while providing more employee services when the benefit of using
a leasing company began to diminish.

     The Company believes that it has been successful in attracting  skilled and
experienced personnel.  Competition for such employees is intense,  however, and
there can be no  assurance  that the Company  will be able to attract and retain
necessary  qualified  employees in the future.  On July 31, 2003,  the Company's
largest facility,  Harbor Oaks Hospital,  with  approximately 125 union eligible
nursing and administrative employees,  voted for union (UAW) representation.  In
December  2004,  the  Company  and the  Union  reached a  collective  bargaining
agreement, which was ratified by the employees on December 8, 2004 and signed by
the Union and the Company in January 2005.

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

                                    -- 13 --
<PAGE>
Insurance

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

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

Acquisition and Expansion

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

Item 2.           DESCRIPTION OF PROPERTY

Executive Offices

     The Company's executive offices are located in Peabody, Massachusetts.  The
Company's lease agreement in Peabody covers  approximately 4,800 square feet for
a 60-month  term,  which expires  September 16, 2009. The current annual payment
under the lease is $80,000.  The Company  believes  that this  facility  will be
adequate to satisfy its needs for the foreseeable future.

Highland Ridge Hospital

     The Highland Ridge premises consist of approximately  24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental  Health.  The lease is for a six-year  term expiring  December 31,
2009,  which  provides for monthly  rental  payments of  approximately  $20,000.
Changes in rental  payments each year are based on increases or decreases in the
CPI. The Company  believes that these  premises are adequate for its current and
anticipated needs and does not anticipate any difficulty in renewing or securing
alternate space on expiration of the lease.

Mount Regis Center

     The Company owns the Mount Regis facility,  which consists of a three-story
wooden  building  located on an  approximately  two-acre  site in a  residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage  in the  approximate  amount of  $331,800  as of June 30,  2005.  The
facility  is used  for both  inpatient  and  outpatient  services.  The  Company
believes that these premises are adequate for its current and anticipated needs.

Psychiatric Facilities

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

                                    -- 14 --
<PAGE>
Harbor Oaks Hospital

     The Company  owns the building in which  Harbor Oaks  operates,  which is a
single  story brick and wood frame  structure  comprising  approximately  32,000
square feet  situated  on an  approximately  three acre site.  The Company has a
$1,145,000  mortgage on this property as of June 30, 2005. The Company  believes
that these premises are adequate for its current and anticipated needs.

Item 3.  LEGAL PROCEEDINGS.

     In April 2004,  the  Company  successfully  resolved a medical  malpractice
lawsuit.  As a  result  of  the  settlement,  the  Company  made  a  payment  of
approximately $463,000, which compares to the previous judgment of approximately
$3 million.  The Company has not released other parties,  including an insurance
company.  Payments made by insurance and other  related  parties,  if collected,
could  significantly  reduce the Company's  financial  burden below the $463,000
payment.

     The  financial  impact  of  this  settlement  and  related  legal  fees  of
approximately  $1,030,000 is reflected in the operating  results during the year
ended June 30,  2004 as a  component  of  administrative  expenses.  The Company
continues to seek  reimbursement  from all sources for amounts  expended on this
case.

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


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

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended June 30, 2005.

                                    -- 15 --
<PAGE>
PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

                                                       HIGH             LOW
2004
        First Quarter                               $    .98         $    .72
        Second Quarter                              $   1.39         $    .83
        Third Quarter                               $   1.71         $   1.17
        Fourth Quarter                              $   1.37         $    .87
2005
        First Quarter                               $   1.21         $    .93
        Second Quarter                              $   1.73         $   1.11
        Third Quarter                               $   2.10         $   1.33
        Fourth Quarter                              $   2.62         $   1.75
2006
        First Quarter (through August 31, 2005)     $   2.95         $   2.26

     On August  31,  2005,  the last  reported  sale price of the Class A Common
Stock was  $2.42.  On August 5, 2005,  there  were 707  holders of record of the
Company's  Class A Common Stock and 312 holders of record of the Company's Class
B Common Stock.  Information required with respect to "Securities Authorized for
Issuance  Under Equity  Compensation  Plans" is included in Part III, Item 11 in
this  Annual  Report on Form 10-K.  The Company  did not  repurchase  any of its
equity  securities that were  registered  under Section 12 of the Securities Act
during the fourth quarter of fiscal 2005.

DIVIDEND POLICY

     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.

MARKET RISKS

     The  Company's  failure  to  meet  listing  requirements  resulted  in  the
delisting of the Company's  stock from the Nasdaq Stock Market in December 2000.
Since then, the Company's  stock has been a bulletin  board traded stock.  Since
there may be an absence of market makers on the bulletin board, the price may be
more volatile and it may be harder to sell the securities.  The shares have sold
at  prices  varying  between  a low of $.72 and a high of $2.95  from  July 2003
through  August  2005.  If our common stock is not  actively  traded,  the small
number of transactions can result in significant swings in the market price, and
it may be difficult  for  stockholders  to dispose of stock in a timely way at a
desirable market price or may result in purchasing of shares for a higher price.

     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


                                    -- 16 --
<PAGE>
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,  2005,  the Company did not
make any sales of unregistered securities.

Item 6.  SELECTED FINANCIAL DATA

     The following  selected  financial data should be read in conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  our  consolidated   financial  statements  and  related  notes
included elsewhere in this report.

     The selected  consolidated  financial data as of June 30, 2005 and 2004 and
for each of the three years in the period  ended June 30, 2005 have been derived
from our consolidated  financial statements which are included elsewhere in this
annual report on Form 10-K and were audited by BDO Seidman,  LLP, an independent
registered public accounting firm. The selected  consolidated  financial data as
of June 30,  2003,  2002 and 200l and for each of the two year period ended June
30,  2002 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
                                       2005          2004         2003          2002        2001
                                  ___________  ____________   __________    __________    _________
                                             (in thousands, except share and per share)
   Statements of Operations Data:

Revenues                          $    34,063  $    26,649   $    23,833   $    22,698   $   22,750
Cost and Expenses:
  Patient care expenses                14,582       12,422        11,676        10,692        9,663
  Contract expenses                     2,198        2,392         1,399           704          855
  Administrative expenses              12,424       10,333         8,204         8,821        8,804
  Practice management closing
   expenses *                              --           --            --            --        5,186
  Provision for doubtful accounts       1,272        1,356         1,108           717        2,490
  Interest Expense                        655          532           542           791        1,043
  Other (income) expenses,
   including interest income, net        (150)        (140)         (129)         (126)         (86)
                                  ___________  ____________   __________    __________    __________

Total expenses                         30,981       26,895        22,801        21,599       27,956
                                  ___________  ____________   __________    __________    __________

Income (loss) before income taxes       3,082         (246)        1,032         1,099       (5,206)

Provision for (benefit from)
  income taxes                            (74)          11            54            15           44
                                  ___________  ____________   __________    __________    __________

Net income (loss)                       3,156         (257)          978         1,084       (5,251)

Dividends                                  --           --            --           (99)        (383)
                                  ___________  ____________   __________    __________    __________
Net income (loss) applicable to
  common shareholders             $     3,156  $      (257)   $      978   $       985   $   (5,634)
                                  ===========  ============   ==========    ==========    ==========

Basic income (loss) per common
  share                           $      0.18  $     (0.02)  $      0.07   $      0.10   $    (0.66)
                                  ===========  ============   ==========    ==========    ==========

Basic weighted average number
  of shares outstanding            17,574,678   14,731,395    13,944,047    10,232,286    8,518,408
                                  ===========  ============   ==========    ==========    ==========

Diluted income (loss) per common
  share                           $      0.17  $     (0.02)   $     0.07   $      0.09     $  (0.66)
                                  ===========  ============   ============   ===========   =========

Diluted weighted average number
  of shares outstanding            18,364,076   14,731,395    14,564,078    11,012,861    8,518,408
                                  ===========  ============   ============   ===========   =========
</TABLE>
                                    -- 17 --
<PAGE>
                                      2005     2004      2003     2002    2001
                                    ___________________________________________
                                                   (in thousands)
Balance Sheet Data:
Cash and cash equivalents           $   918   $  595   $  495   $ 205   $   44
Working capital (deficit)             4,106      241      736    (154)  (2,908)

Long-term debt and obligations under
   capital leases                     2,712    2,285    3,002   3,427    3,897
Total stockholders' equity            9,102    5,367    1,935     616   (1,281)
Total assets                         17,896   13,312    9,412   9,474    9,723

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, 2005, 2004 and
2003. 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 six 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 illness 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


                                    -- 18 --
<PAGE>
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.  If
passed, this legislation may improve access to the Company's  programs.  Managed
care has had a  profound  impact  on the  Company's  operations,  in the form of
shorter lengths of stay, extensive  certification of benefits  requirements and,
in some cases, reduced payment for services.

Critical Accounting Policies

     The  preparation of our financial  statements in accordance with accounting
principles  generally  accepted  in  the  United  States  of  America,  requires
management to make estimates and judgments  that affect the reported  amounts of
assets, liabilities,  revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and  assumptions,  including but not limited to
those related to revenue recognition,  accounts receivable reserves,  income tax
valuation  allowances,  and the  impairment  of  goodwill  and other  intangible
assets.  We base our  estimates  on  historical  experience  and  various  other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

Revenue recognition and accounts receivable:

     Patient care revenues and accounts  receivable  are recorded at established
billing rates or at the amount  realizable  under  agreements  with  third-party
payors,  including  Medicaid and  Medicare.  Revenues  under  third-party  payor
agreements are subject to examination  and contractual  adjustment,  and amounts
realizable  may change due to periodic  changes in the  regulatory  environment.
Provisions  for  estimated  third party payor  settlements  are  provided in the
period the  related  services  are  rendered.  Differences  between  the amounts
provided and  subsequent  settlements  are recorded in operations in the year of
settlement.  Amounts due as a result of cost report  settlements is recorded and
listed  separately on the  consolidated  balance  sheets as "Other  receivables,
third party". 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 one "at-risk"  contract.  The contract calls for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada 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 this contract are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization  review,  monitors  closely,  and  pre-approves  all  inpatient  and
outpatient services not provided directly.  The contract is considered "at-risk"
because the payments to third-party  providers for services rendered could equal
or exceed the total amount of the revenue recorded.

     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.

     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 reported by the Company are shown net of estimated  allowances
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."

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


                                    -- 19 --
<PAGE>
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.

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  unless it is more likely than not that such assets
will be  realized in future  periods.  The Company  considers  estimated  future
taxable income or loss and other available  evidence when assessing the need for
its  deferred  tax  valuation  allowance.  During the fiscal year ended June 30,
2005, the Company recognized a tax benefit of approximately $209,000, related to
a decrease in its valuation allowance,  based on budgeted taxable income for the
next fiscal year. The Company's  policy is to recognize tax benefit for only the
next fiscal year based on the uncertainties surrounding the healthcare industry.

Valuation of Goodwill and Other Intangible Assets

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

Results of Operations

     The following table illustrates our consolidated  results of operations for
the years ended June 30, 2005, 2004 and 2003 (in thousands):
<TABLE>
<S>                           <C>        <C>      <C>       <C>     <C>      <C>
                                        2005             2004             2003
                                 ______________ ____________________________________
                                               (in thousands)
Statements of Operations Data:
                                   Amount     %       Amount    %      Amount     %
Revenue                           $34,063   100.0%   $26,649  100.0%  $23,833   100.0%
                                 ________   ______   _______   _____  _______   ______
Cost and Expenses:
   Patient care expenses           14,582    42.8%    12,422   46.6%   11,676    49.6%
   Contract expenses                2,198     6.5%     2,392    9.0%    1,399     5.9%
   Administrative expenses         12,424    36.5%    10,333   38.8%    8,204    33.8%
   Provision for bad debts          1,272     3.7%     1,356    5.1%    1,108     4.6%
   Interest Expense                   655     1.9%       532    2.0%      542     2.3%
   Other (income) expenses, net      (150)   -0.4%      (140)  -0.5%     (129)   -0.5%
                                 ________   ______   _______   _____  _______   ______

Total expenses                     30,981    91.0%    26,895  100.9%   22,801    95.7%
                                 ________   ______   _______   _____  _______   ______

                                    -- 20 --
<PAGE>
                                        2005             2004             2003
                                 ______________ ____________________________________
                                                  (in thousands)

Income (loss) before income taxes   3,082     9.0%      (246)  -0.9%    1,032     4.3%

Provision for (benefit from) income
     taxes                            (74)   -0.2%        11    0.0%       54     0.2%
                                 ________   ______   _______   _____  _______   ______

Net income (loss)                 $ 3,156     9.3%   $  (257)  -1.0%  $   978     4.1%
                                 ========   ======   ========   =====  =======   ======
</TABLE>
Years ended June 30, 2005 as compared to June 30, 2004

     The Company's profitability from its operations,  without the impact of the
litigation and settlement costs of approximately  $1,030,000  recorded in fiscal
2004, excluding research operations, increased 100.55% for the fiscal year ended
June 30, 2005 over the fiscal  year ended June 30,  2004.  Net income,  with the
same adjustments,  increased  253.39%.  This increase is primarily the result of
increased census in our treatment  facilities and the addition of 30 beds in the
second quarter of fiscal 2005. Total revenues increased 27.8% to $34,063,258 for
the year ended June 30, 2005 from  $26,648,845 for the year ended June 30, 2004.
Income from operations  increased to $3,587,412 for the year ended June 30, 2005
from $145,536 for the year ended June 30, 2004.

     Total net patient  care  revenue  from all  facilities  increased  16.4% to
$26,087,088  for the year ended June 30, 2005 as compared to $22,418,355 for the
year ended June 30, 2004.  Patient days increased over 6,500 days for the fiscal
year ending June 30, 2005 over the fiscal year ended June 30, 2004. In addition,
the Company experienced a better payor mix. In December 2004, the Company opened
30  residential  beds  increasing  our  available  beds  from  130 to  160.  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 24.4% to $18,469,578
for the year ended June 30, 2005 from $14,845,163 for the fiscal year ended June
30, 2004. Net partial hospitalization and outpatient care revenue increased 0.5%
to  $7,617,510  for the year ended June 30,  2005 from  $7,573,192  for the year
ended June 30,  2004.  This  minimal  increase is partially a result of the high
increase last year triggered by the utilization of these  step-down  programs by
managed care as a treatment alternative to inpatient care.  Pharmaceutical study
revenue  increased  261.9% to  $4,509,338  for the year ended June 30, 2005 from
$1,246,013  for the  year  ended  June 30,  2004.  This  increase  is due to the
acquisition  of Pivotal  Research  Centers,  LLC, in April 2004.  Revenues  also
increased in our contract support services division,  Wellplace,  formerly known
as  Pioneer  Development  and  Support  Services  ("PDS2").  Wellplace  revenues
increased  16.2% to $3,466,832 for the year ended June 30, 2005 from  $2,984,477
for the year ended June 30, 2004.  This  increase in revenue is primarily due to
the  increase  in the Wayne  County call center  contract in October  2004.  All
revenues reported in the accompanying  consolidated statements of operations are
shown net of estimated contractual  adjustments and charity care provided.  When
payment is made, if the contractual adjustment is found to have been understated
or  overstated,  appropriate  adjustments  are made in the period the payment is
received in accordance with the AICPA Audit and Accounting Guide for Health Care
Organizations.

     Patient care expenses,  excluding  research,  increased by  $1,327,950,  or
11.47%, to $12,905,286 for the year ended June 30, 2005 from $11,577,336 for the
year ended June 30, 2004 due to the  increase in  available  beds and  resulting
increase  in  patient  census  at our  inpatient  facilities.  Inpatient  census


                                    -- 21 --
<PAGE>
increased by 6,537 patient days,  18%, for the year ended June 30, 2005 compared
to the year ended June 30, 2004. Direct patient care payroll and payroll related
expenses  increased  8.5% to  $10,727,317  for the year ended June 30, 2005 from
$9,890,125 for the year ended June 30, 2004, food and dietary expense  increased
21.0% to $633,869  for the year ended June 30, 2005 from  $524,023  for the year
ended June 30, 2004, hospital supplies expense increased 6.6% to $51,863 for the
year  ended  June 30,  2005  from  $48,667  for the year  ended  June 30,  2004,
laboratory fees increased 5.9% to $160,603 for the year ended June 30, 2005 from
$151,697 for the year ended June 30, 2004,  laundry  expense  increased  7.5% to
$47,416  for the year ended June 30,  2005 from  $44,124 for the year ended June
30, 2004 and agency nursing  expense  increased  233.7% to $119,672 for the year
ended June 30, 2005 from $35,867 for the year ended June 30, 2004.  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  30 bed  residential  unit in December  2004.  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  98.4%  to
$1,676,749  for the year ended June 30,  2005 from  $845,291  for the year ended
June 30, 2004.  This increase is due to the  expansion of our research  division
through the acquisition of Pivotal Research Centers,  LLC in April 2004. Payroll
and related  direct care expenses  increased  113.4% to $1,287,038  for the year
ended June 30,  2005 from  $603,179  for the year ended June 30,  2004.  Patient
supplies expense increased 4.9% to $23,040 for the year ended June 30, 2005 from
$21,962 for the year ended June 30, 2004.  Patient  stipends  and other  patient
related  expenses  increased  66.7% to $366,671 for the year ended June 30, 2005
from $219,914 for the year ended June 30, 2004.  These  expenses are expected to
increase in a direct relationship with the increases in related revenue.

     Cost of contract support  services  related to Wellplace  decreased 8.1% to
$2,197,518  for the year ended June 30, 2005 from  $2,391,660 for the year ended
June 30, 2004.  This decrease is due to the expiration of the smoking  cessation
contracts  for Nebraska and Kansas over the last year.  Expenses are expected to
increase as new contracts are added.  With the exception of payroll and employee
related  expenses,  all expenses for  Wellplace  decreased.  Payroll and payroll
related  expenses  increased 6.5% to $1,003,988 for the year ended June 30, 2005
from $942,866 for the year ended June 30, 2004.

     Provision for doubtful accounts decreased 6.2% to $1,272,037 for the fiscal
year  ended June 30,  2005 from  $1,355,770  for the fiscal  year ended June 30,
2004.  This  decrease  is the  result of a  decrease  in the age of  outstanding
accounts receivable which affects the required balance in 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 resulted in an overall decrease in the age of its
accounts  receivable.  Although  through  increased  revenue the Company's gross
receivables  from direct patient care has increased  13.7% to $8,287,365 for the
year ended June 30, 2005 from  $7,287,090  for the year ended June 30, 2004, the
Company believes its reserve of approximately 24% 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,  decreased  .3%  to
$9,667,138  for the year ended June 30, 2005 from  $9,695,274 for the year ended
June 30, 2004. Legal expense decreased 78.7% to $255,794 for the year ended June
30, 2005 from $1,198,568 for the year ended June 30, 2004.  Unusually high legal
fees were experienced  last year due to the litigation and settlement  involving
one of the Company's  subsidiaries.  Administrative  salaries increased 16.9% to
$3,054,294  for the year ended June 30, 2005 from  $2,612,603 for the year ended
June 30, 2004. Greater  competition for experienced  health care  administrative
staff resulted in these increased salaries. Insurance expense increased 37.9% to
$587,751 for the year ended June 30, 2005 from  $426,148 for the year ended June
30,  2004  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  30.6% to $230,791 for the year
ended June 30, 2005 from  $176,746  for the year ended June 30,  2004.  Fees and
licenses  expense  increased 415.1% to $247,076 for the year ended June 30, 2005
from $47,967 for the year ended June 30, 2004. This increase is due to the newly
established  Michigan quality assurance  assessment fee, which accounted for the
majority of the increase.  Rent expense  increased 8.2% to $953,667 for the year
ended  June 30,  2005 from  $881,173  for the year  ended  June 30,  2004.  This
increase is due to the opening of the 30 residential beds at Detroit  Behavioral
Institute.

                                    -- 22 --
<PAGE>
     Total administrative expenses for the research division increased 332.2% to
$2,757,118  for the year ended June 30,  2005 from  $637,978  for the year ended
June 30, 2004.  This increase is due to the  expansion of our research  division
through  the  acquisition  of  Pivotal  Research  Centers,  LLC in  April  2004.
Administrative  payroll and taxes  increased  524.4% to $1,158,394  for the year
ended June 30, 2005 from  $185,520 for the year ended June 30, 2004.  Comparison
in the  operating  expenses  of the offices  are not  meaningful  because of the
addition of the operations of Pivotal.

     Interest  expense  increased  23.2% to $654,871 for the year ended June 30,
2005 from $531,564 for the year ended June 30, 2004. This increase is due to the
increase in the prime rate,  which dictates the interest rate on the majority of
the Company's  long-term debt. It also reflects the  amortization of capitalized
costs associated with the refinancing of the Company's debt, which was completed
in October  2004 and a penalty  associated  with the  extinguishment  of the old
debt.

     The Company's income taxes of $135,969 and $11,294 for the years ended June
30, 2005 and June 30, 2004,  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 2005 and 2004
represents  state income taxes for certain  subsidiaries  with no available  net
operating loss carry-forwards.  The Company has provided a significant valuation
allowance  against  its  deferred  tax asset and  recognized  a tax  benefit  of
$303,994  based on the estimated  taxable  income for the fiscal year ended June
30, 2006.

Years ended June 30, 2004 as compared to June 30, 2003

     The Company's profitability from its ongoing operations, without the impact
of the litigation and settlement  costs of approximately  $1,030,000,  decreased
for the fiscal year ended June 30,  2004.  Higher  expenses  and less  favorable
overall economic conditions  resulted in the decrease.  Total revenues increased
11.8% to $26,648,845  for the year ended June 30, 2004 from  $23,833,323 for the
year ended June 30, 2003. Higher  unemployment,  reduced insurance  coverage and
increases  in some  operating  expenses,  resulted  in a decrease in income from
operations,  before the  expenses of the  litigation  noted  above,  of 18.7% to
$1,175,536  for the year ended June 30, 2004 from  $1,445,689 for the year ended
June 30, 2003 and a decrease in income before taxes of 24.0% to $784,291 for the
fiscal year ended June 30, 2004 from  $1,031,976  for the fiscal year ended June
30, 2003.

     Total net patient  care  revenue  from all  facilities,  increased  5.5% to
$22,418,355  for the year ended June 30, 2004 as compared to $21,243,177 for the
year ended June 30,  2003.  Although  occupancy  and net revenue per patient day
shown in  "Operating  Statistics"  on page 8 of this  report  decreased,  actual
patient  days  increased  by over 1,250  days.  The  decrease in  percentage  of
occupancy is the result of the increase in available  beds  starting in November
2003 from 122 to 130. Net  inpatient  care revenue  from  inpatient  psychiatric
services  increased  2.9% to  $14,845,163  for the year ended June 30, 2004 from
$14,430,069 for the fiscal year ended June 30, 2003. Net partial hospitalization
and  outpatient  care revenue  increased  11.2% to $7,573,192 for the year ended
June 30, 2004 from $6,813,108 for the year ended June 30, 2003. This increase is
the result of  utilization  of these  step-down  programs  by managed  care as a
treatment alternative to inpatient care.  Pharmaceutical study revenue increased
32.4% to $1,246,013  for the year ended June 30, 2004 from $940,772 for the year
ended June 30, 2003.  This increase is due to the recent  acquisition of Pivotal
Research  Centers,  LLC, which  contributed  $699,341 of revenue in the last two
months of the  period.  The largest  increase in revenues  for the year was from
Wellplace,  formerly known as Pioneer Development and Support Services ("PDS2").
Wellplace  revenues  increased  80.9% to $2,984,477  for the year ended June 30,
2004 from  $1,649,374 for the year ended June 30, 2003. This increase in revenue
is due to the inclusion of the Wayne County call center contract, which began in
March 2003 and the Kansas smoking cessation  contract,  which began in May 2003.
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  Pivotal,  increased  by  $638,099  to
$11,577,336 for the year ended June 30, 2004 from $10,939,237 for the year ended
June 30, 2003 due to the increase in patient census at our inpatient facilities.


                                    -- 23 --
<PAGE>
Inpatient census increased by approximately 1,250 patient days, 4%, for the year
ended June 30, 2004  compared to the year ended June 30,  2003.  Direct  patient
care payroll and payroll related  expenses  increased 5.8% to $9,890,125 for the
year ended June 30, 2004 from  $9,343,880 for the year ended June 30, 2003; food
and dietary expense  increased 9.4% to $524,023 for the year ended June 30, 2004
from  $479,102  for the year  ended June 30,  2003,  hospital  supplies  expense
increased 27.5% to $48,595 for the year ended June 30, 2004 from $38,125 for the
year ended June 30, 2003,  laundry  expense  increased  11.0% to $44,124 for the
year  ended June 30,  2004 from  $39,761  for the year  ended June 30,  2003 and
Medical records  expense  increased 12.2% to $69,415 for the year ended June 30,
2004 from $61,865 for the year ended June 30, 2003. All of these  increases were
a result of increased  patient census and increased  needs of the patients based
on the severity of their illness. Other patient related expenses decreased 17.2%
to $46,472 for the year ended June 30, 2004 from $56,153 for the year ended June
30, 2003.  Laboratory  fees decreased  17.9% to $151,697 for the year ended June
30,  2004 from  $184,810  for the year  ended  June 30,  2003 due to a change in
service provider and closer monitoring of tests ordered.  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).

     Cost of contract support  services related to Wellplace  increased 79.2% to
$2,391,660  for the year ended June 30, 2004 from  $1,398,602 for the year ended
June 30, 2003.  This  increase is due to the  inclusion of the Wayne County call
center  contract,  which  began  March  2003 and the  Kansas  smoking  cessation
contract,  which  began in May 2003.  Expenses  are  expected to increase as new
contracts are added. Legal fees for Wellplace increased to $133,975 for the year
ended  June 30,  2004  from  $12,352  for the year  ended  June 30,  2003.  This
disproportionate increase is a result of an inquiry by the State of Nebraska.

     Provision  for doubtful  accounts  increased  22.3% to  $1,355,770  for the
fiscal year ended June 30, 2004 from  $1,108,498  for the fiscal year ended June
30, 2003.  This increase is the result of an increase in the age of  outstanding
accounts receivable with many insurance carriers delaying payment as much as 180
days as well as increased overall revenue.

     Total  administrative  expenses,  excluding  Pivotal,  increased  21.5%  to
$9,695,274  for the year ended June 30, 2004 from  $7,982,851 for the year ended
June 30, 2003. Legal expense increased approximately $1,068,000,  which accounts
for  more  than 62% of the  increase.  This is a result  of the  litigation  and
settlement  described  in  "Legal  Proceedings"  on  page  15  of  this  report.
Administrative salaries increased 7.2% to $2,612,603 for the year ended June 30,
2004 from $2,436,753 for the year ended June 30, 2003.  Greater  competition for
experienced  health  care  administrative  staff  resulted  in  these  increased
salaries.  Insurance expense increased 62.3% to $426,148 for the year ended June
30, 2004 from $262,563 for the year ended June 30, 2003 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 3.9% to $176,746 for the year ended June 30, 2004 from $170,135
for the year ended June 30, 2003.

     Patient  care  and  administrative   expenses  for  the  research  division
increased  for the year ended June 30,  2004 over the year ended June 30,  2003.
These increases are due to the acquisition of Pivotal  Research  Centers LLC. in
April  2004.  Comparisons  in the  expenses  of the  research  division  are not
meaningful because of the addition of the operations of Pivotal.

     Interest  expense  decreased  2.0% to $531,564  for the year ended June 30,
2004 from $542,269 for the year ended June 30, 2003. This decrease is due to the
decrease in the prime rate,  which dictates the interest rate on the majority of
the Company's  long-term debt and the decrease in outstanding  debt. The Company
also  expensed  $114,500 of costs related to the  Company's  initial  efforts to
finance the  Pivotal  acquisition  through  debt.  This  amount  would have been
amortized  over  the term of the loan  had the  loan  been  consummated.  It was
determined  that equity  financing  would be in the best interest of the Company
and its  shareholders  when more  favorable  loan  terms  could not be  secured.
Without  this  one time  expense,  interest  expense  for the  year  would  have
decreased 23.1% to $417,064.

     The Company's  income taxes of $11,294 and $54,234 for the years ended June
30, 2004 and June 30, 2003,  respectively,  are significantly  below the Federal
statutory  rate of 34% primarily due to the  availability  of net operating loss
carry-forwards.  Total  income tax expense  for fiscal 2004 and 2003  represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards.  The  Company has  provided a  significant  valuation  allowance
against its deferred tax asset due to the  uncertainty  of its  availability  in
future periods.

                                    -- 24 --
<PAGE>
     The  environment  the  Company   operates  in  today  makes  collection  of
receivables,  particularly  older  receivables,  more difficult than in previous
years.   Accordingly,   the  Company  has  increased  staff,  standardized  some
procedures  for  collecting   receivables   and  instituted  a  more  aggressive
collection  policy,  which has  resulted in an overall  decrease in its accounts
receivable.  Although the Company's gross  receivables  from direct patient care
have decreased,  the Company continues to reserve for bad debts based on managed
care denials and past difficulty in collections.  The growth of managed care has
negatively  impacted  reimbursement for behavioral health services with a higher
rate of denials requiring higher reserves.

Liquidity and Capital Resources

     As of June 30,  2005,  the  Company  had  working  capital  of  $4,106,316,
including cash and cash equivalents of $917,630,  compared to working capital of
$240,855,  including cash and cash  equivalents of $594,823 at June 30, 2004. At
June 30, 2004, the Company's current  liabilities  included  $1,500,000 in long-
term debt that was refinanced in October 2004.

     Cash provided by operating  activities was $983,466 for the year ended June
30, 2005 compared to cash used in operating  activities of $149,744 for the year
ended June 30, 2004.  Cash provided by operations in fiscal 2005 consists of the
net income of $3,155,900, offset by an increase in total net accounts receivable
of $2,251,931 due to increased revenue,  an increase in other assets of $92,044,
a decrease in accounts  payable of $754,011 and a non-cash  increase in deferred
tax  asset of  $303,994.  These  uses of cash  from  operations  were  offset by
depreciation and amortization of $511,211,  non-cash interest expense of $51,080
and non-cash equity  compensation of $105,681,  which are non-cash  expenditures
and a  decrease  in  prepaid  expenses  of $21,554  and an  increase  in accrued
expenses and other liabilities of $540,020.

     Cash used in investing  activities in fiscal 2005  consisted of $483,462 in
capital  expenditures  for the acquisition of property and equipment and $62,258
related to the acquisition of Pivotal Research Centers, LLC compared to $193,185
in capital  expenditures for the acquisition of property and equipment in fiscal
2004 and $2,191,697 related to the acquisition of Pivotal Research Centers, LLC.
(See Note L to the  consolidated  financial  statements  included  herewith  for
additional detail regarding the acquisition of Pivotal Research  Centers,  LLC).
The Company  expects  investment  amounts to increase with the build-out for the
additional  beds in Michigan and the upgrade of systems and  technology  Company
wide.

     Cash used in financing  activities in fiscal 2005  consisted of $206,306 in
net debt  repayments,  $208,445 in deferred  financing cost due to the Company's
new debt  arrangement,  $343,692  received  from the  issuance of common  stock,
$13,880  paid in the  purchase of treasury  stock and $30,000 in cost related to
the issuance of 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, 2005  accounts
receivable from patient care, net of allowance for doubtful accounts,  increased
approximately  20% to  $6,330,381  on June 30, 2005 from  $5,261,202 on June 30,
2004. This increase is a result of increased net revenue.  The Company's goal is
to maintain  receivables at their current levels 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
uncollectable.  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  acquisition  of the  membership  interest  in
Pivotal Research  Centers,  LLC, the Company  determined that it would be in the
best  interest of the  shareholders  to finance the cash portion of the purchase


                                    -- 25 --
<PAGE>
price through equity as well as raise  additional  working  capital,  since debt
with favorable terms was not available. Therefore, the Company offered 2,800,000
shares of Class A Common  Stock at $1.10 per share in a private  placement.  The
private  placement  also included 25% warrant  coverage at an exercise  price of
$1.10 per share with a three-year term and standard anti-dilution features. This
offering  was  completed  in two  stages.  As a result of the first stage of the
offering,  in March 2004,  the Company  issued  684,999 shares of Class A Common
Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A
Common Stock.  As a result of the second stage of this offering,  in April 2004,
the Company issued  1,918,196  shares of Class A Common Stock for $2,110,016 and
warrants to purchase  479,549  additional  shares of Class A Common  Stock.  The
private placement  facilitated the closing of the acquisition  without incurring
any additional  bank debt, and also provided the necessary  working  capital for
Pivotal to execute its business plan.

Contractual Obligations

     The Company's future minimum payments under contractual obligations related
to capital  leases,  operating  leases and term notes as of June 30, 2005 are as
follows:


     Year Ending                   Term      Capital   Operating
      June 30,                     Notes     Leases      Leases       Total
                                _________   _________   _________   __________

      2006                      $ 774,683    $29,777   $1,299,529   $2,103,989
      2007                        808,817     10,087    1,033,996    1,852,900
      2008                        517,797      2,123      919,895    1,439,815
      2009                        207,099         --      861,110    1,068,209
      2010                        212,609         --      388,467      601,076
      Thereafter                  153,699         --       94,730      248,429
                                _________   _________   _________   __________

      Total minimum payments   $2,674,704    $41,987   $4,597,727   $7,314,418
                               ==========    ========  ==========   ==========

     In addition to the above,  the Company is also subject to three  contingent
notes with a total face value of $2,500,000 as part of the Pivotal  acquisition.
Of  these  notes,  two  totaling  $1,500,000,  one  for  $1,000,000  and one for
$500,000,  bear interest at 6% per annum.  These notes are subject to additional
adjustment  based on the earnings of the acquired  operations.  Since adjustment
can be positive or negative  based on  earnings,  with no ceiling or floor,  the
liability  for only one of these notes was  recorded as of June 30,  2005.  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
$1,068,510  which  represents the earn out for the Pivotal  acquisition  through
December 31, 2004 net of payments  made through June 30, 2005. No payment is due
on the $500,000 note as earn-out requirements have not been attained.  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 $159,793 is included in the schedule above. (See Note
L  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.  The agreement  includes a term loan in the amount of $1,400,000
and an accounts  receivable  funding  revolving  credit agreement with a maximum
loan amount of  $3,500,000,  including  $900,000  available  as an overline  for
growth.

     The term loan note carries  interest at prime plus 3.5%,  but not less than
9%, with twelve  monthly  principal  payments of $25,000,  12 monthly  principal
payments of $37,500,  and eleven monthly principal payments of $50,000 beginning
November  1,  2004 with  balance  due at  maturity,  on  October  1, 2007 and is
included in the above table.

                                    -- 26 --
<PAGE>
     The  revolving  credit note carries  interest at prime plus 2.25%,  but not
less  than  6.75%  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,  2005  was  $2,385,629.  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, 2005 is included in the above table.

     The  Company  has  operated  ongoing  operations  profitably  for  eighteen
consecutive quarters with the exception of the litigation settlement and related
legal  costs  incurred  in the third  quarter of fiscal  year 2004.  While it is
difficult to project whether the current positive business  environment  towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.

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.

Operating Risks

     Negative cash flow could arise as a result of slow government payments. The
concentration of accounts  receivable due from government  payors could create a
severe cash flow problem should these agencies fail to make timely  payment.  We
had  substantial   receivables  from  Medicaid  and  Medicare  of  approximately
$1,256,511 at June 30, 2005 and $1,135,000 at June 30, 2004,  which would create
a cash flow problem should these  agencies  defer or fail to make  reimbursement
payments as due,  which would require us to borrow at  unfavorable  rates or pay
additional  interest as overline  fees on current debt  instruments.  This would
result in lower net income for the same services provided and lower earnings per
share.

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

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

     Aging of accounts  receivables  could  result in our  inability  to collect
receivables.  As our accounts  receivable age and become  uncollectible our cash
flow is negatively impacted.  Our accounts receivable from patient accounts (net
of  allowance  for bad debts) were  $6,330,381  at June 30, 2005  compared  with
$5,261,201 at June 30, 2004.  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, 2005 and 2004,  respectively,  and Bad Debt
Expense for the years ended June 30, 2005 and 2004:

                                    -- 27 --
<PAGE>

                                                Allowance for        Bad Debt
                        Accounts Receivable   Doubtful Accounts      Expense
                        ___________________   _________________    ___________

    June 30, 2005         $ 8,287,365           $ 1,956,984        $ 1,272,037
    June 30, 2004           7,287,090             2,025,888          1,355,770

     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 December 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004),  "Share-Based Payment", which is a revision of SFAS
No. 123, "Accounting for Stock-Based  Compensation". SFAS No. 123 (R) supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees",  and amends SFAS
No. 95, "Statement of Cash Flows".  Generally,  the approach in SFAS No. 123 (R)
is similar to the approach described in SFAS No. 123. However,  SFAS No. 123 (R)
requires all  share-based  payments to employees,  including  grants of employee
stock  options,  to be recognized in the statement of operations  based on their
fair values.  Pro-forma  disclosure is no longer an alternative.  The Company is
required to adopt SFAS No. 123 (R) on July 1, 2005. The effect of this change on
the  results of  operations  of the  Company is not  expected to have a material
affect on the Company's consolidated financial statements.

     In December 2004, the FASB issued FASB Staff  Position,  or FSP, No. 109-1,
"Application of FASB Statement No. 109, "Accounting  for Income Taxes",  to the
Tax Deduction on Qualified  Production  Activities Provided by the American Jobs
Creation Act of 2004". FSP No. 109-1 states that the impact of the tax deduction
on qualified production  activities provided by the AJCA should be accounted for
as a special deduction rather than a rate reduction.  FSP No. 1091 was effective
immediately and had no impact on our 2005 consolidated financial statements.

     In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign  Earnings  Repatriation  Provision  within the American
Jobs  Creation  Act of 2004".  FSP No. 109-2 grants a waiver to the SFAS No. 109
requirement  to  account  for the  impacts of new  legislation  in the period of
enactment. FSP No. 109-2 was effective immediately and had no impact on our 2005
consolidated financial statements.

     In December  2004,  the FASB issued SFAS No. 153,  "Exchange of Nonmonetary
Assets",  an  amendment  of APB  Opinion  No. 29,  "Accounting  for  Nonmonetary
Transactions".  SFAS  No.  153  is  based  on the  principle  that  exchange  of
nonmonetary  assets  should be measured  based on the fair  market  value of the
assets exchanged. SFAS No. 153 eliminates the exception of nonmonetary exchanges
of  similar  productive  assets and  replaces  it with a general  exception  for
exchanges of nonmonetary assets that do not have commercial substance.  SFAS 153
is effective for nonmonetary  asset exchanges in fiscal periods  beginning after
June 15, 2005. We are currently evaluating the provisions of SFAS No. 153 and do
not believe that the adoption of SFAS No. 153 will have a material impact on our
financial condition, results of operations and liquidity.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

          o Differences in actual and estimated earnings and cash flows;
          o Operating results differing from analysts' estimates;
          o Changes in analysts' earnings estimates;

                                    -- 28 --
<PAGE>
          o Quarter-to-quarter variations in operating results;
          o Changes in market conditions in the behavioral health care industry;
          o Changes in market conditions in the research industry;
          o Changes in general economic conditions; and
          o Fluctuations in securities markets in general.

     Our  interest  expense is  sensitive  to changes  in the  general  level of
interest rates.  With respect to our  interest-bearing  liabilities,  all of our
long-term  debt  outstanding  is  subject to rates at prime plus 2.25% and prime
plus 3.5%, which makes interest expense increase with changes in the prime rate.
Failure  to  meet  targeted  revenue  projections  could  cause  us to be out of
compliance with covenants in our debt  agreements.  (For additional  information
see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations").

                                    -- 29 --
<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
Report of Independent Registered Public Accounting Firm            F-2
Consolidated balance sheets                                        F-3
Consolidated statements of operations                              F-4
Consolidated statements of changes in stockholders' equity         F-5
Consolidated statements of cash flows                              F-6 - F-7
Notes to consolidated financial statements                         F-8 - F-29

                                                                            F-1



                                    -- 30 --
<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,  2005  and  2004,  and the  related  consolidated
statements of operations,  changes in stockholders'  equity,  and cash flows for
each of the three  years in the period  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 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  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
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,  2005 and 2004,  and the  results  of their
operations  and their cash flows for each of the three years in the period 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-2



                                    -- 31 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
                                                           June 30,
                                                       2005           2004
                                                  ___________      __________
ASSETS (Note C)
 Current assets: (Note A)
     Cash and cash equivalents (Note A)            $  917,630      $  594,823
    Accounts receivable, net of allowance for
      doubtful accounts of $1,956,984
      and $2,025,888 at June 30, 2005 and 2004,
      respectively  (Note A)                        6,265,381       5,165,150
    Pharmaceutical research receivables (Note A)    1,414,340         549,974
    Prepaid expenses                                  146,988         168,542
    Other receivables and advances (Note A)           638,654         310,221
    Deferred tax assets (Note F)                    1,375,800         842,806
                                                  ___________      __________

         Total current assets                      10,758,793       7,631,516
                                                  ___________      __________
Accounts receivable, non-current (Note A)              65,000          96,052
Other receivables (Note A)                             84,422          94,469
Property and equipment, net (Notes A, B, C,
  D and L)                                          1,516,114       1,353,975
Deferred financing costs, net of amortization
  of $62,507 at June 30, 2005                         145,938              --
Customer relationships, net of amortization of
  $140,000 and $20,000 at June 30, 2005 and
  2004, respectively (Notes A and L)                2,260,000       2,380,000
Goodwill (Notes A and L)                            2,648,209       1,416,119
Other assets (Note A)                                 417,172         339,438
                                                  ___________      __________
      Total assets                               $ 17,895,648     $13,311,569
                                                  ============    ===========

                                    -- 32 --
<PAGE>
LIABILITIES
Current liabilities:
    Accounts payable                             $    907,569     $ 1,668,509
    Current maturities of long-term
     debt (Notes C and L)                             769,599       1,713,395
    Revolving credit note (Note C)                  2,385,629       1,714,380
    Deferred revenue                                   85,061          38,151
    Current portion of obligations under capital
      leases (Note D)                                  29,777          18,169
    Accrued payroll, payroll taxes and benefits     1,411,653       1,305,490
    Accrued expenses and other liabilities
      (Note K)                                      1,063,189         682,567
       Convertible debentures (Note C)                     --         250,000
                                                  ___________      __________
         Total current liabilities                  6,652,477       7,390,661

Long-term debt, less current maturities
   (Notes C and L)                                  1,900,022         529,378
Obligations under capital leases (Note D)              12,210          24,493
Deferred tax liabilities (Note F)                     229,000              --
                                                  ___________      __________
         Total liabilities                          8,793,709       7,944,532
                                                  ___________      __________
Commitments and contingent liabilities
   (Notes D, G, H, I and L)

STOCKHOLDERS' EQUITY (Notes A, E, G, H, I and L)
 Preferred stock, 1,000,000 shares
   authorized, none issued or outstanding                  --              --
 Class A common stock, $.01 par value;
   30,000,000 shares authorized, 17,490,818
   and 16,744,848 shares issued at June 30,
   2005 and 2004, respectively                        174,908         167,448
Class B common stock, $.01 par value; 2,000,000
   shares authorized, 776,991 issued and
   outstanding at June 30, 2005 and 2004, each
   convertible into one share of class A
   common stock                                         7,770           7,770
Additional paid-in capital                         23,377,059      22,791,637
Treasury stock, 181,738 and 168,136 class A
  common shares at cost at June 30, 2005
  and 2004, respectively.                            (155,087)       (141,207)
Accumulated deficit                               (14,302,711)    (17,458,611)
                                                  ___________      __________
     Total stockholders' equity                     9,101,939       5,367,037
     Total liabilities and stockholders' equity   $17,895,648     $13,311,569
                                                  ===========     ===========

                                                                           F-3

See accompanying notes to consolidated financial statements.
                                    -- 33 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Operations

<TABLE>
<S>                                     <C>             <C>            <c>
                                                 For the Years Ended June 30,
                                               2005           2004          2003
                                          ____________    ___________   ____________
Revenues: (Note A)
     Patient care, net                     $26,087,088    $22,418,355    $21,243,177
     Pharmaceutical study                    4,509,338      1,246,013        940,772
     Contract support services               3,466,832      2,984,477      1,649,374
                                          ____________    ___________   ____________

         Total revenues                     34,063,258     26,648,845     23,833,323
                                          ____________    ___________   ____________
Operating expenses:
     Patient care expenses                  12,905,286     11,577,336     10,939,237
     Patient care expenses, pharmaceutical   1,676,749        845,291        736,962
     Cost of contract support services       2,197,518      2,391,660      1,398,602
     Provision for doubtful accounts         1,272,037      1,355,770      1,108,498
     Administrative expenses                 9,667,138      9,695,274      7,982,851
     Administrative expenses,
       pharmaceutical                        2,757,118        637,978        221,484
                                          ____________    ___________   ____________
         Total operating expenses           30,475,846     26,503,309     22,387,634
                                          ____________    ___________   ____________

Income from operations                       3,587,412        145,536      1,445,689
                                          ____________    ___________   ____________
Other income (expense):
     Interest income                            73,176         44,731         13,133
     Interest expense                         (654,871)      (531,564)      (542,269)
     Other income, net                          76,760         95,588        115,423
                                          ____________    ___________   ____________
              Total other expense, net        (504,935)      (391,245)      (413,713)
                                          ____________    ___________   ____________
Income (loss) before income taxes            3,082,477       (245,709)     1,031,976
Provision for (benefit from) income taxes
       (Notes A and F)                         (73,423)        11,294         54,234
                                          ____________    ___________   ____________
              Net income (loss)            $ 3,155,900    $  (257,003)   $   977,742
                                          ============    ===========   ============
Basic net income (loss) per common share
       (Note A)                            $      0.18    $     (0.02)   $      0.07
                                          ============    ===========   ============
Basic weighted average number of shares
       outstanding (Note A)                 17,574,678     14,731,395     13,944,047
                                          ============    ===========   ============
Fully diluted net income (loss) per
       common share (Note A)              $       0.17    $     (0.02)   $      0.07
                                          ============    ===========   ============
Fully diluted weighted average number of
      shares outstanding (Note A)           18,364,076     14,731,395     14,564,078
                                          ============    ===========   ============

See accompanying notes to consolidated financial statements.                 F-4

                                    -- 34 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Notes A, C, E, G, H,
I and L)
                                            Class A              Class B        Additional
                                         Common Stock         Common Stock       Paid-in
                                     Shares       Amount   Shares      Amount    Capital
                                 ___________    _________    _______    ______   ____________
Balance - June 30, 2002           12,919,042    $129,190    726,991    $7,270    $18,769,863

Costs related to private
   placements                                                                         (7,212)
Issuance of shares for options
   exercised                         408,025       4,081                             346,060
Issuance of warrants for services                                                      3,185
Shares issued for employee
   bonuses                            28,623         286                              18,726
Issuance of shares for warrants
   exercised                          62,363         624                               9,376
Issuance of employee stock
   purchase plan shares               19,014         190
Purchase of shares from former
   employee                                                                            7,606
Net income-year ended June 30,
   2003                          ___________    _________    _______    ______   ____________

Balance - June 30, 2003           13,437,067     134,371     726,991       7,270  19,147,604

Costs related to private
placements                                                                           (46,578)
Issuance of shares for options
   exercised                          46,165         461                              50,169
Issuance of warrants for services                                                     76,664
Shares issued for employee
  bonuses                             11,016         110                              10,279
Issuance of shares for warrants
   exercised                         155,000       1,550                              95,050
Issuance of employee stock
   purchase    plan shares             8,238          83                               6,383
Purchase of shares from former
   employee
Net value of repriced options                                                          5,425
Forgiveness of stock purchase
   debt
Private placement                  2,660,012      26,600                           2,899,414
Shares issued in acquisition         427,350       4,273                             495,727
Conversion of debt into Class B
   common stock                                               50,000         500      51,500
Net loss year ended June 30, 2004
                                 ___________    _________    _______    ______   ____________
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
                                 ===========    =========    =======    ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.


                                    -- 35 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity (Notes A, C, E, G, H,
I and L)
<TABLE>
<S>                                <C>         <C>       <C>        <C>             <C>
                                                             Notes
                                                         Receivable
                                       Treasury Stock    Common Stock    Accumulated
                                     Shares       Amount    Purchase       Deficit   Total
                                     ___________________  __________  ___________  ________
Balance - June 30, 2002               38,126    $(30,988) $(80,000)  $(18,179,350)  $615,985


Costs related to private
   placements                                                                         (7,212)
Issuance of shares for options
   exercised                                                                         350,141
Issuance of warrants for services                                                      3,185
Shares issued for employee
   bonuses                                                                            19,012
Issuance of shares for
   warrants exercised                                                                 10,000
Issuance of employee stock
   purchase plan shares                                                                7,796
Purchase of shares from former
   employee                           59,678     (41,392)                            (41,392)
Net income-year ended June 30,
   2003                                                                   977,742    977,742
                                    ________    _________  __________  ___________  ___________
Balance - June 30, 2003               97,804     (72,380)  (80,000)   (17,201,608) 1,935,257

Costs related to private
   placements                                                                        (46,578)
Issuance of shares for options
   exercised                                                                          50,630
Issuance of warrants for services                                                     76,664
Shares issued for employee
   bonuses                                                                            10,389
Issuance of shares for warrants
   exercised                                                                          96,600
Issuance of employee stock
   purchase plan shares                                                                6,466
Purchase of shares from former
   employee                           70,332     (68,827)                            (68,827)
Net value of repriced options                                                          5,425
Forgiveness of stock purchase debt                            80,000                  80,000
Private placement                                                                  2,926,014
Shares issued in acquisition                                                         500,000
Conversion of debt into class B
   common stock                                                                       52,000
Net loss-year ended June 30, 2004                                        (257,003)  (257,003)
                                     ________    _________  __________   ___________  ________
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 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
                                     ========   ==========  =========  ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.                F-5

                                    -- 36 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<S>                                                <C>          <c>           <c>
                                                    For the Years Ended June 30,
                                                    2005        2004      2003
                                                  __________  __________  __________
Cash flows from operating activities:
  Net income (loss)                               $3,155,900   $(257,003)   $ 977,742
  Adjustments to reconcile net income (loss)
        to net cash provided by (used in)
        operating activities:
      Depreciation and amortization                  511,211     321,835      198,695
      Non-cash interest expense                       51,080          --           --
      Deferred income taxes                         (303,994)    (34,199)     (41,814)
      Non-cash compensation                          105,681      74,142       22,686
      Fair value of warrants issued
        in exchange for services                          --      25,356        3,185
      Changes in operating assets and liabilities:
        Accounts and other receivables            (2,251,931)   (731,540)     513,193
        Prepaid expenses and other current
          assets                                      21,554     (99,001)      (2,889)
        Other assets                                 (92,044)   (135,904)     (96,766)
        Accounts payable                            (754,011)    813,077     (422,437)
        Accrued expenses and other liabilities       540,020     126,507      255,099
                                                   __________  __________   __________
         Net cash provided by (used in) operatin
           activities                                983,466    (149,744)   1,406,694
                                                   __________  __________   __________
  Cash flows from investing activities:
      Acquisition of property and equipment         (483,462)   (193,185)    (226,100)
      Costs related to business acquisition
        (Note L)                                     (62,258) (2,191,697)          --
                                                   __________  __________   __________
                Net cash used in investing
                  activities                        (545,720) (2,384,882)    (226,100)
                                                   __________  __________   __________
Cash flows from financing activities:
      Proceeds from repayment on revolving
        debt, net                                    671,249     610,819     (365,083)
      Proceeds from borrowings on long term debt   1,430,154      49,633      810,081
      Principal payments on long-term debt        (2,307,709)   (987,832)  (1,359,983)
      Deferred financing costs                      (208,445)      4,000        8,000
      Purchase of treasury stock                     (13,880)    (68,827)     (41,392)
      Proceeds from issuance of common stock, net    313,692   3,026,665       58,210
                                                   __________  __________   __________
         Net cash provided by (used in)financing
            activities                              (114,939)  2,634,458     (890,167)
                                                   __________  __________   __________
Net increase in cash and cash equivalents            322,807      99,832      290,427
Cash and cash equivalents, beginning of year         594,823     494,991      204,564
                                                   __________  __________   __________
Cash and cash equivalents, end of year            $  917,630   $ 594,823   $  494,991
                                                   ==========  ==========   =========
Supplemental cash flow information:
     Cash paid during the period for:
          Interest                                $  652,582   $ 452,454   $  506,909
                                                  ==========   ==========   ==========
          Income taxes                            $  123,150   $  35,986   $  121,323
                                                  ==========   ==========   =========
</TABLE>
See accompanying notes to consolidated financial statements.                F-6

                                    -- 37 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
<TABLE>
<S>                                                 <C>         <C>          <C>
                                                       For the Years Ended June 30,
                                                      2005       2004        2003
                                                   __________   _________  _________
  Supplemental disclosures of non-cash investing
      and financing activities:
      Conversion of debt into common stock          $  14,250  $  52,000   $       --
      Issuance of common stock in cashless
        exercise of options                                --     15,000      134,866
      Issuance of common stock in cashless exercise
         of warrants                                    3,229         --          424
      Pivotal Acquisition Note A earn out
         consideration recorded (Notes C and L)     1,169,832         --           --
      Value of warrants issued with debt recorded
         as debt discount                             167,185         --           --
</TABLE>

Acquisition disclosure

On April 30, 2004, the Company acquired Pivotal Research Centers, LLC (Note L):

                                             2005              2004
                                          __________       ____________

   Property and equipment                 $       --        $   85,000
   Intangible assets                       1,209,832         2,847,020
   Accrued                                        --           (40,000)
   expenses
   Accrued acquisition costs                      --          (149,016)
   Warrants issued in lieu of cash
      payment for acquisition costs               --           (51,307)
   Cash paid for purchase                                    2,191,697
   Note recorded for earn-out             (1,209,832)               --
                                          ___________       ___________
   Fair value of common stock issued      $       --        $   500,000
                                          ===========       ===========

See accompanying notes to consolidated financial statements.                F-7


                                    -- 38 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

     PHC, Inc. (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 eight psychiatric treatment locations which
     include Harbor Oaks Hospital,  a 64-bed psychiatric hospital located in New
     Baltimore,  Michigan,  Detroit Behavioral  Institute,  a 30-bed residential
     facility  and  six  outpatient  behavioral  health  locations  (one  in New
     Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, two
     in Las Vegas,  Nevada  operating as Harmony  Healthcare and three locations
     operating  as  Pioneer   Counseling   Center  in  the   Detroit,   Michigan
     metropolitan area);

(2)  Pharmaceutical  study services,  including four clinic study sites.  Two in
     Arizona,  in Peoria and Mesa, one Michigan  location in Royal Oak, Michigan
     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 Centers;

(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 as 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.

                                    -- 39 --
<PAGE>
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.

Revenues and accounts receivable:

Patient  care  revenues  and accounts  receivable  are  recorded at  established
billing rates or at the amount  realizable  under  agreements  with  third-party
payors,  including  Medicaid and  Medicare.  Revenues  under  third-party  payor
agreements are subject to examination  and contractual  adjustment,  and amounts
realizable  may change due to periodic  changes in the  regulatory  environment.
Provisions  for  estimated  third party payor  settlements  are  provided in the

                                                                             F-8

                                    -- 40 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

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

Revenues and accounts receivable (continued):

period the  related  services  are  rendered.  Differences  between  the amounts
provided and  subsequent  settlements  are recorded in operations in the year of
settlement.  The provision for contractual  allowances is deducted directly from
revenue and the net revenue  amount is  recorded  as  accounts  receivable.  The
allowance for doubtful accounts does not include the contractual allowances.

     Medicaid  reimbursements are currently based on established rates depending
on  the  level  of  care  provided  and  are  adjusted  prospectively.  Medicare
reimbursements  are  currently  based on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports filed by the Company with  Medicare.
The Company's cost reports to Medicare are routinely audited on an annual basis.
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 21%, 22% and 16% of the Company's total revenue is derived
from  Medicare and Medicaid  payors for the years ended June 30, 2005,  2004 and
2003,  respectively.  Differences  between the amounts  provided and  subsequent
settlements are recorded in operations in the year of the  settlement.  To date,
settlement adjustments have not been material.

     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 will change the present TEFRA-based
(Tax Equity and Fiscal  Responsibility Act of 1982) system to a 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 CMS's  administrative  data base (cost reports and claims data).
Patient-specific   characteristics   include   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 the next 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.  The  Company  expects  this new  system  will  result  in  higher
reimbursement than the current rate at Harbor Oaks.

     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.  As of June 30, 2005, the Company has no outstanding  balance in other
receivables, third party, 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.  Where
contracts  require  completion  of the  study  by the  patient,  no  revenue  is
recognized until the patient completes the study program.

     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

                                                                            F-9

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

Notes to Consolidated Financial Statements
June 30, 2005

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

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.  Accounts of former  patients  that do not comply with
these supplemental payment agreements 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  $242,385,  $147,096 and $54,263 for
the years ended June 30, 2005, 2004 and 2003, respectively. Patient care revenue
is stated net of charity care in the  accompanying  consolidated  statements  of
operations.

     The  Company  had  accounts   receivable  from  Medicaid  and  Medicare  of
approximately $1,257,000 at June 30, 2005 and $1,136,000 at June 30, 2004.

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
estimates.

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 losses and attendant loss in income.

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  accelerated  and  straight-line
methods. The estimated useful lives are as follows:
                                                                            F-10


                                    -- 42 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

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

Property and Equipment (Continued)

                                    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

Other assets:

     Other assets consists of deposits, deferred expenses and advances.

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, 2005.

Goodwill and other intangible assets:

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

     Customer  relationships,  acquired as a part of the assets  acquired in the
membership  interest  purchase of Pivotal  Research  Centers,  LLC, (Note L) are
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 for the fiscal year ended June 30, 2005, is included in  administrative
expenses in the accompanying consolidated statement of operations. The following
is a summary of  amortization  expense of intangible  assets for the  succeeding
fiscal years and thereafter as of June 30, 2005:
                                                                            F-11



                                    -- 43 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Goodwill and other intangible assets (continued)

                                   Year Ending
                                 June 30, Amount

                                       2006            $  120,000
                                       2007               120,000
                                       2008               120,000
                                       2009               120,000
                                       2010               120,000
                                       thereafter       1,660,000
                                                        __________
                                                       $2,260,000
Goodwill:

SFAS No. 142,  "Goodwill and Other  Intangible  Assets",  requires,  among other
things,  that companies no longer amortize  goodwill,  but instead test goodwill
for  impairment  at least  annually.  In addition,  SFAS 142  requires  that the
Company identify  reporting units for the purpose of assessing  potential future
impairments of goodwill,  reassess the useful lives of other existing recognized
intangible   assets,  and  cease  amortization  of  intangible  assets  with  an
indefinite useful life.

     The  Company's  goodwill of $969,099  relating  to the  treatment  services
reporting  unit of the  Company and  $1,679,110  related to the  research  study
services  reporting unit of the Company were evaluated  under SFAS No. 142 as of
June 30, 2005. 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.

Fair value of financial instruments:

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

Basic and diluted income (loss) per share:

     Income  (loss) per share is computed by dividing the income  applicable  to
common shareholders,  net of dividends charged directly to retained earnings, by
the  weighted  average  number of shares of common  stock  outstanding  for each
fiscal year.  All dilutive  common stock  equivalents  have been included in the
calculation  of diluted  earnings  per share for the fiscal years ended June 30,
2005 and 2003. Any increase in number of shares of common stock  equivalents for
the year ended June 30,  2004 would be  anti-dilutive  based on the year to date
loss and therefore not included.  The number of shares outstanding  increased by
789,398 and 620,031 dilutive common stock equivalents for the fiscal years ended
June 30, 2005 and 2003, respectively.

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

                                                                            F-12

                                    -- 44 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Basic and diluted income (loss) per share:  (continued)
                                                    Years Ended June 30,
                                              2005         2004         2003
                                           __________   __________  ___________

     Weighted average shares outstanding
        - basic                            17,574,678   14,731,395   13,944,047

     Employee stock options                   530,896           --      377,741

Warrants                                      258,502           --      242,290
                                          ___________   __________   ___________

     Weighted  average shares
       outstanding  - fully diluted        18,364,076   14,731,395   14,564,078
                                          ===========   ==========   ===========

     The following table summarizes securities  outstanding as of June 30, 2005,
2004 and 2003,  but not included in the  calculation of diluted net earnings per
share because such shares are antidilutive:

                                             Years Ended June 30,
                                          2005         2004           2003
                                       ________     _________       _________
          Employee stock options         32,500       945,000        29,500
          Warrants                      471,360     1,415,357       327,500
          Convertible debentures             --       125,000       125,000
                                       ________     _________       _________
                Total                   503,860     2,485,357       482,000
                                       ========     =========       =========
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  unless it is more likely than not that such assets
will be  realized in future  periods.  The Company  considers  estimated  future
taxable income or loss and other available  evidence when assessing the need for
its deferred tax valuation allowance.

Comprehensive income (loss):

     SFAS No. 130,  "Reporting  Comprehensive  Income",  requires  companies  to
classify items of other  comprehensive  income (loss) in a financial  statement.
Comprehensive  income  (loss) 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 (loss) is equal
to its net income (loss) for all periods presented.
                                                                            F-13

                                    -- 45 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

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

Stock-based compensation:

     Until January 1, 2003,  all of the Company's  employees were employed under
leasing arrangements. The Company believes that its employee leasing arrangement
met the employee definition requirements under FASB Interpretation ("FIN") No.44
"Accounting for Certain Transactions Involving Stock Compensation".  The Company
elected to  discontinue  the use of the  leasing  company  and begin  processing
payroll  in-house or using a more  traditional  payroll  service while providing
more  employee  services  internally  when it  believed  the  benefit of using a
leasing company began to diminish.

     For all periods  presented 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 has
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  (loss) and net income
(loss)  per share  would have  decreased  (increased)  to the pro forma  amounts
indicated as follows:
                                                    Year Ended June 30,
                                                2005        2004        2003
                                            __________   __________   _________

Net income (loss), as reported              $3,155,900   $(257,003)   $977,742

Add:  Stock-based employee compensation
   expense included in reported net income
   (loss), net of related tax effects          105,681      74,142      22,686
Deduct:  Total stock-based employee
   compensation expense determined under
   fair value based method for all awards,
   net of related taxes                       (298,084)   (134,630)    (78,575)
                                            __________   __________   _________
Pro forma net income (loss)                 $2,963,497   $(317,491)    921,853
                                            ==========   ==========   =========
Earnings (loss) per share:
   Basic - as reported                      $     0.18   $   (0.02)   $   0.07
                                            ==========   ==========   =========
   Basic - pro forma                        $     0.17   $   (0.02)   $   0.07
                                            ==========   ==========   ========
   Diluted - as reported                    $     0.17   $   (0.02)   $   0.07
                                            ==========   ==========   =========
   Diluted - pro forma                      $     0.16   $   (0.02)   $   0.06
                                            ==========   ==========   =========

     The  Company  has  computed  the pro forma  disclosures  for stock  options
granted to employees using the Black-Scholes  option pricing model prescribed by
SFAS No. 123. The assumptions  used and certain results during each of the three
years ended June 30, 2005 were as follows:

                                                       June  30,
                                             2005         2004        2003
                                           ___________  __________  __________

   Risk free interest rate                       4.00%       4.00%       6.00%
   Expected  dividend yield                        --          --          --
   Expected  lives                          5-10 years  5-10 years  5-10 years
   Expected  volatility                            45%         30%         30%

   Weighted average value of grants
     per share                              $      .63   $     .46    $    .29
   Weighted average remaining contractual
     life of options outstanding (years)          3.70        4.05        3.76

                                                                            F-14

                                    -- 46 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

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

Reclassifications:

     Certain  June 30,  2004 and  2003  amounts  have  been  reclassified  to be
consistent with the June 30, 2005 presentation.

Recent accounting pronouncements:

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004),  "Share-Based Payment", which is a revision of SFAS
No. 123, "Accounting for Stock-Based  Compensation." SFAS No. 123 (R) supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees",  and amends SFAS
No. 95, "Statement of Cash Flows".  Generally,  the approach in SFAS No. 123 (R)
is similar to the approach described in SFAS No. 123. However,  SFAS No. 123 (R)
requires all  share-based  payments to employees,  including  grants of employee
stock  options,  to be recognized in the statement of operations  based on their
fair values.  Pro-forma  disclosure is no longer an alternative.  The Company is
required to adopt SFAS No. 123 (R) on July 1, 2005. The effect of this change on
the  results of  operations  of the  Company is not  expected to have a material
affect on the Company's consolidated financial statements.

     In December 2004, the FASB issued FASB Staff  Position,  or FSP, No. 109-1,
"Application of FASB Statement No. 109,  "Accounting for Income Taxes",  to the
Tax Deduction on Qualified  Production  Activities Provided by the American Jobs
Creation Act of 2004". FSP No. 109-1 states that the impact of the tax deduction
on qualified production  activities provided by the AJCA should be accounted for
as a special deduction rather than a rate reduction. FSP No. 109-1 was effective
immediately and had no impact on our 2005 consolidated financial statements.

     In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign  Earnings  Repatriation  Provision  within the American
Jobs  Creation  Act of 2004".  FSP No. 109-2 grants a waiver to the SFAS No. 109
requirement  to  account  for the  impacts of new  legislation  in the period of
enactment. FSP No. 109-2 was effective immediately and had no impact on our 2005
consolidated financial statements.

     In December  2004,  the FASB issued SFAS No. 153,  "Exchange of Nonmonetary
Asset",  an  Amendment  of APB  Opinion  No.  29,"  Accounting  for  Nonmonetary
Transactions.  "SFAS  No.  153  is  based  on the  principle  that  exchange  of
nonmonetary  assets  should be measured  based on the fair  market  value of the
assets exchanged. SFAS No. 153 eliminates the exception of nonmonetary exchanges
of  similar  productive  assets and  replaces  it with a general  exception  for
exchanges of nonmonetary assets that do not have commercial substance.  SFAS 153
is effective for nonmonetary  asset exchanges in fiscal periods  beginning after
June 15, 2005. We are currently evaluating the provisions of SFAS No. 153 and do
not believe that the adoption of SFAS No. 153 will have a material impact on our
financial condition, results of operations and liquidity.




                                                                            F-15

                                    -- 47 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:

                                                           As of June 30,
                                                      2005              2004
                                                  __________        __________

Land                                              $   69,259        $   69,259
Buildings                                          1,136,963         1,136,963
Furniture and euipment                             1,610,327         1,446,005
Motor vehicles                                       174,302           134,995
Leasehold impovements                                816,197           570,291
                                                  __________        __________
                                                   3,807,048         3,357,513
Less accumulated depreciation and amortization     2,290,934         2,003,538
                                                  __________        __________
Property and equipment, net                       $1,516,114        $1,353,975
                                                  ==========        ===========

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                               As of June 30,
                                                            2005         2004
                                                         ___________  _________
9% mortgage note due in monthly installments of
   $4,850 including interest through July 1, 2012,
   when the remaining principal balance is payable,
   collateralized by a first mortgage on the PHC
   of Virginia, Inc, Mount Regis Center facility.          $ 331,808   $358,811
Note payable issued in conjunction with the final
   earn-out on the BSC-NY, Inc. acquisition.  All
   amounts were repaid at June 30, 2005.                          --    141,148
Note payable  issued in  conjunction  with the final
   earn-out on the BSC-NY, Inc. acquisition.  All
   amounts were repaid at June 30, 2005.                          --     44,573
Note payable due in monthly installments of $665
   including interest at 10.8 % through November 2005.         2,981     10,211
Term mortgage note payable with principal installments
   of $45,000 beginning December 2001 through November
   2002 and increasing annually by $5,000 through
   November 2004 at which time the remaining balance
   becomes due. The note bears interest at prime (4.0%
   at June 30, 2004) plus 3.5%. In October 2004, the
   entire amount was repaid with the proceeds received
   from a new term mortgage payable                               --  1,500,542
Note payable due in monthly  installments of $775
   including interest at 3.9% through October 2008.           28,998     36,978
Note payable in  conjunction with the earn out of the
   Pivotal Research Centers, LLC acquisition.  Minimum
   payment amount $200,000 in class A common stock due
   March 2009 interested imputed at 6%. (Note L)             159,793    150,510
Note payable due in monthly installments of $555
   including interest at 3.9% through March 2010.             28,811         --
Note payable due in monthly installments of $578
   including interest at 5.9% through May 2010.               29,108         --

                                                                            F-16

                                    -- 48 --
 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
                                                               As of June 30,
                                                           2005          2004
                                                        ___________  __________
Term mortgage note payable with principal installments
   of $25,000 beginning November 2004 through October
   2005 and increasing annually by $12,500 through
   October 1, 2007 at which time the remaining balance
   becomes  due. The note bears interest at prime
   (6.01% at June 30, 2005) plus 3.5% and is
   collateralized by all of the assets of the
   Company and its material subsidiaries except
   Pivotal Research Centers, Inc.                          1,019,612         --
Pivotal acquisition note (Note A) due in 16 quarterly
    principal installments, plus interest at 6% per
    annum, beginning January 2005. The principal on
    this $1,000,000 note was increased by $40,000 on
    January 1, 2005 for  accrued interest through
    December 31, 2004 and is subject to two annual
    adjustments based on earnings. The first earn
    out adjustment of $169,832 was added  to the
    note on February 1, 2005. Current quarterly
    payments are $76,322 plus accumulated interest
    at 6% per annum.                                       1,068,510         --
                                                        ____________   _________
                        Total                              2,669,621  2,242,773
Less current maturities                                      769,599  1,713,395
                                                        ____________   _________
Long-term portion                                        $ 1,900,022  $ 529,378
                                                        ============  =========

Maturities of long-term debt are as follows as of June 30, 2005:

                 Year Ending
                 June 30,                      Amount
                 ______________              _________
                 2006                        $ 769,599
                 2007                          808,817
                 2008                          517,797
                 2009                          207,099
                 2010                          212,609
                 Thereafter                    153,700
                                             __________
                                            $2,669,621

     In October 2004,  the Company  refinanced  its revolving  credit note under
which a maximum of $3,500,000  may be outstanding at any time. At June 30, 2005,
the  outstanding  balance was  $2,358,068.  At June 30,  2004,  the  outstanding
balance with the previous lender was $1,714,380. 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 (6.01% at June 30, 2005) plus 2.25%,  but not less than 6.75%. The initial
term of the agreement is for three 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.

     As of June 30, 2005,  the Company was not in compliance  with its financial
covenants under the revolving line of credit note.  Subsequent to year-end,  the
Company received a waiver of non-compliance.

                                                                            F-17

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

Notes to Consolidated Financial Statements
June 30, 2005

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

     On December 7, 1998,  the Company  issued the  principal sum of $500,000 of
convertible  debentures with interest at 12% per annum that were due on December
2,  2004.  At June 30,  2004,  the  outstanding  balance on the  debentures  was
$250,000. At June 30, 2005, the balance of these debentures is paid in full.

NOTE D - CAPITAL LEASE OBLIGATION

     At June 30, 2005,  the Company was obligated  under various  capital leases
for equipment  providing for monthly payments of approximately  $4,700 and terms
expiring from November 2005 through July 2007.

     The carrying value of assets under capital leases  included in property and
equipment is as follows:
                                                             June 30,
                                                     2005            2004
                                                  __________       _________

         Equipment and improvements                $ 131,989       $116,185
         Less accumulated amortization               (95,446)       (65,007)
                                                  __________       _________
                                                    $ 36,543       $ 51,178
                                                   =========       =========

     Future  minimum  lease  payments  under  the  terms  of the  capital  lease
agreements are as follows at June 30, 2005:

           Year Ending June 30,
           2006                                               $31,440
           2007                                                10,647
           2008                                                 2,168
                                                              _______
           Total future minimum lease payments                 44,255
           Less amount representing interest                    2,268
                                                              _______
           Present value of future minimum lease payments      41,987
           Less current portion                                29,777
                                                              _______
           Long-term obligations under capital leases         $12,210
                                                              =======

NOTE E - NOTES PAYABLE - RELATED PARTIES

     In prior  years,  Bruce A. Shear,  a director and the  President  and Chief
Executive Officer of the Company, and persons affiliated and associated with him
have made a series of  unsecured  loans to the Company and its  subsidiaries  to
enable them to meet ongoing financial commitments.  During the period ended June
30, 2004,  the Company paid Mr. Shear and  affiliates  approximately  $62,515 in
principal  and accrued  interest  under the related  party notes.  The remaining
balance of this debt,  $52,000,  was  converted  into  50,000  shares of class B
common stock at the then current  market price for class A common  stock.  As of
June 30, 2004 all outstanding related party debt has been eliminated. During the
fiscal year ended June 30, 2005 no amounts were  borrowed  from related  parties
and related party debt remains at zero.

NOTE F - INCOME TAXES

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

                                                                            F-18

                                    -- 50 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE F - INCOME TAXES (Continued)
                                                         Year Ended June 30,
                                                         2005        2004
                                                    ___________  __________
  Deferred tax asset:
    Allowance for doubtful accounts                 $  782,000   $ 811,000
    Depreciation                                        37,000     109,000
    Reserves not currently deductible and other             --     759,000
    Difference between book and tax bases
       of intangible assets                              9,000          --
    Operating loss carryforward                      3,107,000   3,800,000
                                                   ___________  __________
      Gross deferred tax asset                       3,935,000   5,479,000
                                                   ___________   _________
  Less:
    Valuation allowance                             (2,559,200) (4,636,194)
                                                   ___________   _________
  Deferred Tax Asset                                 1,375,800     842,806
                                                   ___________   _________
    Current portion                                 (1,375,800)   (842,806)
                                                   ___________   _________
     Long-term portion                             $        --   $      --
                                                   ===========   ==========
  Deferred tax liability:
     Difference between book and tax bases
       of intangible assets                        $  (229,000)  $      --
                                                   ___________   _________
     Net deferred tax liability                       (229,000)         --
                                                   ___________   _________

     The components of the income tax  provisions  (benefit) for the years ended
June 30, 2005, 2004 and 2003 are as follows:

                                            2005         2004         2003
                                         ___________   _________   __________
      Current
        Federal                            $     --    $     --     $      --
        State                               230,571      45,493        96,048
                                          ___________   _________  __________
                                            230,571      45,493        96,048
                                          ___________   _________  __________

      Deferred
        Federal                            (235,595)         --       (35,542)
        State                               (68,399)     (34,199)      (6,272)
                                          ___________   _________  __________
                                           (303,994)     (34,199)     (41,814)
                                          ___________   _________  __________

          Income tax provision (benefit)  $ (73,423)   $ 11,294     $  54,234
                                          ==========   =========   ==========

     A reconciliation of the federal  statutory rate to the Company's  effective
tax rate for the years ended June 30, 2005, 2004 and 2003 is as follows:

                                                      2005      2004      2003
                                                    ________   _______  _______

     Income tax provision at federal statutory rate   34.0%     34.0%    34.0%
     Increase (decrease) in tax resulting from:
       Utilization of net operating loss
         carryforwards                               (34.0%)       --       --
       State tax provision, net of federal benefit     4.5%      4.5%     4.5%
       Non-deductible expenses                         1.0%      1.0%     1.3%
       Other, net                                      1.5%     (5.0%)   (0.5%)
       Valuation allowance                            (9.0%)   (34.0%)  (34.0%)
                                                    ________   _______  _______
     Effective income tax rate                        (2.0%)     1.0%     5.3%
                                                    ========   =======  =======


                                                                            F-19



                                    -- 51 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE F - INCOME TAXES (CONTINUED)

     At June 30, 2005 the Company had a federal net operating loss  carryforward
amounting to approximately $8,500,000.  The Company's Federal net operating loss
carryforwards  are subject to review and  possible  adjustment  by the  Internal
Revenue  Service  and  are  subject  to  certain  limitations  in the  event  of
cumulative changes in the ownership interest of significant  stockholders over a
three-year period in excess of 50%. The Federal  carryforward  expires beginning
in 2011 through 2024.

     The Company has  provided a  significant  valuation  allowance  against its
deferred tax asset at June 30, 2005 and 2004.  The Company has  recognized  only
current expected tax benefit based on net income projections for the next fiscal
year. The Company's  policy is to recognize tax benefit for only the next fiscal
year based on the uncertainties surrounding the healthcare industry.

Operating leases:

     The Company leases office and treatment facilities, furniture and equipment
under operating  leases  expiring on various dates through  September 2011. Rent
expense  for the years  ended  June 30,  2005,  2004 and 2003 was  approximately
$1,484,000, $1,035,000 and $899,000, 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,
2005 are as follows:
                          Year Ending
                           June 30,          Amount
                          ___________      __________

                          2006             $ 1,299,529
                          2007               1,033,996
                          2008                 919,895
                          2009                 861,110
                          2010                 388,467
                          Thereafter            94,730
                                            ___________
                                           $ 4,597,727

Notes Receivable:

     In August 2000, the Company  entered into agreements with nine officers and
directors  to provide  each  officer and  director  with  $10,000  with which to
purchase  stock.  One  individual  left the  Company on  February  28,  2001 and
forfeited all rights.  The agreement called for the parties to sign notes, which
would provide the purchased shares as security,  with the Company  releasing the


                                    -- 52 --
<PAGE>
shares,  and canceling the officers' and directors'  obligations under the notes
based on  specific  PHC stock price  targets.  In the event that the stock price
targets  were  not  met,  the  agreement  called  for  the  cancellation  of the
obligation and release of the shares on the third  anniversary of the agreement.
The notes were  cancelled  pursuant to these  provisions  in August 2003,  which
resulted in a compensation  charge of $80,000 during the quarter ended September
30, 2003. Under FIN 44, the shares underlying the notes were subject to variable
accounting but did not result in any material  change in value during any period
presented.

Contingent Notes Payable:

     In conjunction with the acquisition of Pivotal Research Centers,  LLC (Note
L), the Company signed three notes,  with face amounts of  $1,000,000,  $500,000
and  $1,000,000.  The ultimate  amount payable under these notes is based on the
future earnings of the acquired entity.  Since all but $200,000 is 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. In December 2004 the first

                                                                            F-20

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

Notes to Consolidated Financial Statements
June 30, 2005

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

earn-out  period  ended  and  resulted  in  the  recording  of  $1,209,832  as a
liability.  This  note is  subject  to one  additional  earn-out  adjustment  in
December 2005.  The earn-outs are recorded as additional  purchase  price.  (See
Note L for discussion of the terms of these notes.)

Litigation:

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

     In April 2004,  the  Company  successfully  resolved a medical  malpractice
lawsuit.  As a  result  of  the  settlement,  the  Company  made  a  payment  of
approximately $463,000, which compares to the previous judgment of approximately
$3 million.  The Company has not released other parties,  including an insurance
company.  Payments made by insurance and other  related  parties,  if collected,
could  significantly  reduce the Company's  financial  burden below the $463,000
payment.

     The  financial  impact  of  this  settlement  and  related  legal  fees  of
approximately  $1,030,000 is reflected in the operating  results during the year
ended June 30,  2004 as a  component  of  administrative  expenses.  The Company
continues to seek  reimbursement  from all sources for amounts  expended on this
case.

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

NOTE H - STOCK AND STOCK PLANS

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.  The shares of Class A common stock offered  hereby and the
shares  issued  on  the  exercise  of  the  warrants  will  be  fully  paid  and
non-assessable.

Class B Common Stock

     The Class B common  stock is entitled to five votes per share with  respect

                                                                            F-21

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

Notes to Consolidated Financial Statements
June 30, 2005

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

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.

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.

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.

     The stock  option plan  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)


                                    -- 55 --
<PAGE>
option exercise  terms,  (iii) the exercise or purchase price (which in the case
of an incentive stock option will not be less than the market price of the Class
A common  stock as of the date of grant),  (iv) type and duration of transfer or
other  restrictions  and (v) the time and form of payment for  restricted  stock
upon exercise of options.

     The  employee  stock  purchase  plan  provides  for the purchase of Class A
common  stock at 85 percent  of the fair  market  value at  specific  dates,  to
encourage stock ownership by all eligible employees. A maximum of 500,000 shares
may be issued under this plan.

     The  non-employee  directors'  stock option plan  provides for the grant of
nonstatutory  stock options  automatically at the time of each annual meeting of
the Board.  Through June 30, 2005, options for 185,500 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

                                                                            F-22


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

Notes to Consolidated Financial Statements
June 30, 2005

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

350,000  shares may be issued.  Each  outside  director  is granted an option to
purchase  10,000 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, 2005,  1,650,583  shares were available
for future grant or purchase.

     The Company had the following activity in its stock option plans for fiscal
2005, 2004 and 2003:
                                               Number          Weighted-Average
                                                 of             Exercise Price
                                               Shares             Per Share
                                              _________        ________________

               Balance - June 30, 2002        1,275,000             $0.37
               Granted                          297,500             $0.73
               Exercised                       (555,000)            $0.25
               Expired                          (15,500)            $0.52
                                             ___________           ______
               Balance - June 30, 2003        1,002,000             $0.54
               Granted                          130,000             $1.17
               Exercised                        (68,500)            $0.41
               Expired                         (118,500)            $0.49
                                             __________           ______
               Balance - June 30, 2004          945,000             $0.64
                                             ==========            ======
               Granted                          320,000             $1.30
               Exercised                       (104,750)            $0.33
               Expired                          (22,000)            $0.76
                                             ___________           ______
               Balance - June 30, 2005        1,138,250             $0.85
                                             ==========            ======

     The following tables summarize  information about stock options outstanding
and exercisable at June 30, 2005:

                                 Weighted-Average
                  Number       Remaining Contractual
Exercise        Outstanding     Life of Options          Number Exercisable
 Price        At June 30,2005   Outstanding (years)       At June 30, 2005
_______       _______________  ____________________      __________________
$ .19              5,000               0.56                    5,000
  .22              8,000               4.29                    8,000
  .30            240,500               0.77                  240,500
  .35             40,000               5.22                   40,000
  .45             33,000               1.47                   33,000
  .55            138,000               1.80                  138,000
  .69             40,000               2.47                   40,000
  .74             50,000               6.53                   50,000
  .75            148,000               2.24                  148,000
  .81              6,000               4.48                    6,000
  .87             10,000               3.53                   10,000
  .97              7,500               3.94                    7,500

                                                                            F-23


                                    -- 57 --
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE H - STOCK AND STOCK PLANS (CONTINUED)


                                 Weighted-Average
                  Number       Remaining Contractual
Exercise        Outstanding     Life of Options          Number Exercisable
 Price        At June 30,2005   Outstanding (years)       At June 30, 2005
_______       _______________  ____________________      __________________
 1.03              6,000               3.48                    6,000
 1.07             10,000               3.94                   10,000
 1.11             50,000               3.94                   50,000
 1.17             20,000               3.64                   20,000
 1.20             45,000               4.26                   45,000
 1.21             53,750               4.28                   53,750
 1.33             50,000               7.53                   50,000
 1.37             15,000               4.35                   15,000
 1.38              5,000               4.56                    5,000
 1.41             50,000               4.48                   50,000
 1.45             25,000               3.64                   25,000
 1.48             50,000               8.53                   50,000
 2.06              6,000               2.49                    6,000
 2.38             15,000               4.96                   15,000
 3.50              6,000               1.64                    6,000
 6.63              5,500               0.57                    5,500
_____          _________               ____                _________
$ .85          1,138,250                3.2                 1,138,250
=====          =========               ====                =========

     The Company re-priced options to purchase 791,500 shares of class A common
stock in January 2001. During the fiscal year ended June 30, 2005, the remaining
50,000 repriced options were exercised. The compensation expense related to the
vested re-priced options was approximately $69,175, $16,435 and $2,505 for the
years ended June 30, 2005, 2004 and 2003, respectively.

     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.

     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
the 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.

     As of June 30, 2005, a total of 144,417 shares of class A common stock have
been issued  under the plan.  Ten  employees  are  participating  in the current
offerng  period under the plan,  which began on February 1, 2005 and will end on
January 31, 2006.


                                                                            F-24


                                    -- 58 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE I - CERTAIN CAPITAL TRANSACTIONS

     In addition to the  outstanding  options  under the  Company's  stock plans
(Note H), the Company has the following warrants outstanding at June 30, 2005:
<TABLE>
<S>       <C>                           <C>               <C>           <C>
   Date of                                      Number of    Exercise     Expiration
  Issuance          Description                   Shares      Price          Date
______________________________________________________________________________________

04/15/2001   Warrants issued for investor
              relations consulting services
              $1,136 value charged to
              professional fees               6,000 shares  $.25 per share  Apr 2006
07/20/2001   Warrants issued for investor
              relations consulting services
              $1,786 value charged to
              professional fees              12,000 shares  $.35 per share  Jul 2006
04/01/2003   Warrants issued for consulting
              services $3,185 charged
              to professional fees.          10,000 shares  $1.00 per share Apr 2008
07/03/2003   Warrants issued for consulting
              services $4,430 charged
              to professional fees           20,000 shares  $ .84 per share Jul 2008
09/22/2003   Warrants issued for consulting
              services $6,261 charged
              to professional fees           20,000 shares  $ .90 per share Sep 2008
10/20/2003   Warrants issued for investor
              relations consulting services
              $6,842 charged to professional
              fees                           30,000 shares  $ .86 per share Oct 2006
10/20/2003   Warrants issued for investor
              relations consulting services
              $6,578 charged to professional
              fees                           30,000 shares  $ .84 per share Oct 2006
03/02/2004   Warrants issued in a private
              placement of class  A
              common stock                   57,613 shares  $1.10 per share Mar 2007
04/29/2004   Warrants issued in a private
              placement of class A          287,499 shares  $1.10 per share Apr 2007
              common stock
04/30/2004   Warrants issued as a finder's
              fee in connection with
              the acquisition of Pivotal,
              $51,307 recorded as
              acquisition costs.              6,750 shares  $1.24 per share Apr 2007
10/19/2004   Warrants issued in conjunction
              with long-term debt transaction,
              $167,185 recorded as debt
              discount.                     250,000 shares  $1.15 per share Oct 2014
</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 $25,358 and $3,185 in fiscal 2004
and 2003, respectively. These warrants were all fully vested at grant date.

     In  addition,  in fiscal  2005,  the Company  issued  warrants to a finance
company in connection  with a long-term debt  transaction  (see the last item in
the above  table).  The value of the  warrant,  $167,185  was recorded as a debt
discount and is being recorded as additional  interest  expense over the life of
the debt.  During the fiscal year ended June 30, 2005,  $41,796 was amortized as
additional interest expense.

     Under existing dilution agreements with other stockholders, the issuance of
common stock under  agreements other than the employee stock purchase and option
plans will  increase  the number of shares  issuable  and  decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then  current  market  price and the price at which the new common  stock is
being issued.  The dilutive  effects of  transactions  through June 30, 2005 are
reflected in the table above.  The value of the additional  shares issuable as a
result of these dilution provisions was not material.

NOTE J - BUSINESS SEGMENT INFORMATION

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

                                                                            F-25


                                    -- 59 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE J - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<S>                     <C>         <C>         <C>         <C>         <C>        <C>
                         Behavioral
                          Health     Pharmaceutical
                         Treatment     Study      Contract   Administrative
                          Services   Services     Services     Services   Eliminations    Total
                        __________   ___________  ________   ____________  ___________  _________
   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
  (loss)                   4,543,372     180,820   1,243,514  (2,811,806)         --     3,155,900
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)

  For the Year ended
     June 30, 2004
Revenues-external
  customers              $22,418,355  $1,246,013  $2,984,477  $       --  $       --   $26,648,845
Revenues - intersegment      197,780          --       4,140   3,234,840  (3,436,760)           --
Segment net income
  (loss)                   1,822,642     (68,870)    706,817  (2,717,592)         --      (257,003)
Total assets               7,799,709   3,620,676     283,666   1,607,518          --    13,311,569
Capital expenditures         126,848       2,208       5,973      58,156          --       193,185
Depreciation &
  amortization               175,810      28,325       4,371     113,329          --       321,835
Goodwill                     969,099     447,020          --          --          --     1,416,119
Interest expense             378,163       2,307          --     151,094          --       531,564
Income tax expense            10,000       1,294          --          --          --        11,294


   For the Year ended
     June 30, 2003
Revenues-external
   customers             $21,243,177  $  940,772  $1,649,374  $       --  $       --   $23,833,323
Revenues - intersegment      286,200          --          --   2,962,224  (3,248,424)           --
Segment net income
(loss)                     2,962,177      90,153     334,772  (2,409,360)         --       977,742
Total assets               7,534,816     180,373          --   1,696,534          --     9,411,723
Capital expenditures         210,497       3,517          --      12,086          --       226,100
Depreciation &
   amortization              146,553       4,802       2,464      44,876          --       198,695
Goodwill                     969,099          --          --          --          --       969,099
Interest expense             402,260         818          --     139,191          --       542,269
Income tax expense            54,234          --          --          --          --        54,234
</TABLE>

NOTE K - ACCRUED EXPENSES AND OTHER LIABILITIES
         Accrued expenses and other liabilities consist of the following:

                                                           June 30
                                                    2005            2004
                                                 __________       ________

                Accrued professional fees         $ 767,592       $468,035
                Accrued operating expenses          284,181        203,068
                Income tax payable                   11,416         11,464
                                                 __________       ________
                               Total             $1,063,189       $682,567
                                                 ==========       =========

                                                                            F-26
                                    -- 60 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE L - ACQUISITIONS

     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  three-year  employment  and  non-compete
agreements.

     Pivotal performs 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.

     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 notes (Notes A, B and C) which are 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.

     Note A is a secured  promissory 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. The outstanding principal
will be  adjusted  in the first and second  years of the note based on  adjusted
EBITDA as defined in the agreement of $780,000. Where adjusted EBITDA of greater
then  $780,000 for each period  increases the note value by the  difference  and
adjusted  EBITDA of less  than  $780,000  will  decrease  the note  value by the
difference.  Quarterly payments are then made based on the adjusted value of the
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.  As of June 30, 2005, $1,068,510 is due under Note A.

     Note B is a secured promissory 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. The outstanding principal
will be adjusted on February 1, 2006 based on annual  adjusted EBITDA as defined
in the  agreement  of  $780,000  for the  adjustment  period of  January 1, 2005
through  December 31, 2006.  Where adjusted EBITDA greater then $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment  period will decrease the note value by
the difference.  Quarterly payments are then made based on the adjusted value of
the notes. As of June 30, 2005, no amounts have been recorded under Note B.

     Note C is a secured  promissory note with a face value of $1,000,000,  with
an annual  interest  rate of 6%, 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, of 2004 and each year thereafter multiplied
by .35. In addition  this 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 then 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.

     The purchase price was allocated as follows:

                                                                            F-27
                                    -- 61 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE L - ACQUISITIONS (CONTINUED)
                                            2005                2004
                                         ___________        ___________

   Property and equipment                $       --         $   85,000
   Intangible assets                      1,209,832          2,847,020
   Accrued expenses                              --            (40,000)
   Accrued acquisition costs                     --           (149,016)
   Warrants issued in lieu of cash
       payment for acquisition costs             --            (51,307)
   Cash paid for purchase                                    2,191,697
   Note recorded for earn-out            (1,209,832)                --
                                         ___________        ___________
   Fair value of stock issued            $       --         $  500,000
                                         ___________        ___________

     The fair  value  assigned  to  customer  relationships  was based  upon the
results of an independent appraisal.

     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.

     Since all but  $200,000 of these notes is  contingent  on future  earnings,
only $200,000,  less imputed interest,  has been recorded as of June 30, 2004 as
stipulated in SFAS No. 141. During fiscal 2005, $9,283 was recorded on the Note.

     Based on unaudited  data, the pro forma results of operations as though the
acquisition was completed at the beginning of the periods indicated below are as
follows.  Management does not believe such results are necessarily indicative of
future operations. The pro forma shares outstanding include the shares issued in
the acquisition and the private placement shares issued to fund the acquisition,
as though they were issued at the beginning of the periods shown.

                                                Year Ended June 30,
                                               (In thousands, except
                                                  per share data)
                                                   (unaudited)

                                                      2004
                                                    ________

     Revenues                                        $30,231
     Net income                                          191
     Basic income per common share                       .01
     Diluted income per common share                     .01

NOTE M - QUARTERLY INFORMATION (Unaudited)

     The following  presents selected  quarterly  financial data for each of the
quarters in the years ended June 30, 2005 and 2004.


                                                                            F-28

                                    -- 62 --
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2005

NOTE M - QUARTERLY INFORMATION (Unaudited) (Continued)

                              1st Quarter  2nd Quarter  3rd Quarter  4th Quarter
                              __________________________________________________
 2005

 Revenue                        $7,957,515  $8,069,201  $8,763,682  $9,272,860
 Income from operations            884,835     679,895     982,872   1,039,810
 Net income available to common
   shareholders                    775,628     408,804     880,456   1,091,012

 Earnings per share:
    Basic                       $     0.04  $     0.02  $     0.05  $     0.06
    Diluted                     $     0.04  $     0.02  $     0.05  $     0.06

 2004

 Revenue                        $6,103,167  $6,488,828  $6,472,188  $7,584,662
 Income (loss) from operations     179,546      77,821    (673,096)    561,264
 Net income (loss) available to
  common shareholders               53,149       2,659    (845,265)    532,454

 Earnings per share:
     Basic                      $     0.00  $     0.00  $    (0.06) $     0.03
     Diluted                    $     0.00  $     0.00  $    (0.06) $     0.03

o    During fiscal 2004 the Company incurred  approximately  $1,030,000 in legal
     expenses and settlement  costs. Of this amount,  the settlement of $463,000
     was recorded in the third quarter of fiscal 2004 (see Part I, Item 3, Legal
     Proceedings of this report for further information).
o    Also during fiscal 2004, on April 30, 2004,  the Company  acquired  Pivotal
     Research Centers, LLC (see Note L for details of the acquisition).

NOTE N -SUBSEQUENT EVENTS

     Subsequent  to year-end,  the Company  announced its plans to open a 60 bed
behavioral  health facility in Henderson,  Nevada for the treatment of children,
adolescence and adults. The Company anticipates the opening in the fall of 2006,
pending final approval of all regulatory licenses and permits.


                                                                            F-29

                                    -- 63 --
<PAGE>
Item  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

    Not Applicable.

Item 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

     As of the end of the period  covered  by this  report,  we  carried  out an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive  officer and chief  financial  officer,  of the  effectiveness  of the
design and  operation  of our  disclosure  controls and  procedures  to meet the
criteria referred to above. Based on the foregoing,  our chief executive officer
and  chief  financial  officer  concluded  that  our  disclosure   controls  and
procedures were effective.

Change in Internal Controls

     There were no  significant  changes in our  internal  controls  or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.


                                    -- 65 --
<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 June 30,  2005 are as
follows:

     Name                   Age           Position
________________________    ___  _____________________________________________

Bruce A. Shear              50   Director, President and Chief Executive Officer
Robert H. Boswell           57   Senior Vice President
Paula C. Wurts              56   Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D.      67   Director and Clerk
Donald E. Robar (1)(2)      68   Director
Howard W. Phillips          75   Director
William F. Grieco (1)(2)    51   Director
David E. Dangerfield (1)    64   Director

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

     The Company does not currently have a Nominating  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  Compensation  Committee and the Audit  Committee are shown below.
Officers  are  elected  annually  by the  Board of  Directors  and  serve at the
discretion  of the  Board.  There are no family  relationships  among any of the
directors or officers of the Company.

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

     BRUCE A. SHEAR has been President,  Chief Executive  Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February  1996.  From  1976 to 1980,  he  served  as Vice  President,  Financial
Affairs,  of the Company.  Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over 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  Controller  of the Company since 1989, as
Assistant Clerk since January 1996, as Assistant Treasurer from 1993 until April
2000 when she became  Treasurer.  Ms. Wurts served as the  Company's  Accounting
Manager  from 1985 until  1989.  Ms.  Wurts  received an  Associate's  degree in
Accounting  from the  University of South Carolina in 1980, a B.S. in Accounting
from  Northeastern  University in 1989 and passed the  examination for Certified
Public  Accountants.  She received a Master's  Degree in Accounting from Western
New England College in 1996.


                                    -- 64 --
<PAGE>
     GERALD M. PERLOW,  M.D.  has served as a Director of the Company  since May
1993 and as Clerk since February 1996. Dr. Perlow is a retired  cardiologist who
practiced  medicine  in Lynn,  Massachusetts,  and has been  Associate  Clinical
Professor  of  Cardiology  at the  Tufts  University  School  of  Medicine,  now
emeritus,  since 1972. Dr. Perlow is a Diplomat of the National Board of Medical
Examiners and a Fellow of the American Heart  Association,  the American College
of Cardiology  and the American  College of  Physicians.  From 1987 to 1990, Dr.
Perlow served as the Director,  Division of Cardiology,  at AtlantiCare  Medical
Center  in  Lynn,   Massachusetts.   Dr.   Perlow  served  as  a  consultant  to
Wellplace.com, formerly Behavioralhealthonline.com,  in fiscal year 2000 and has
been a contributing  journalist to Wellplace.com since 1999. Dr. Perlow received
a B.A. from Harvard College in 1959 and an M.D. from Tufts University  School of
Medicine in 1963.

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

     HOWARD W. PHILLIPS has served as a Director of the Company since August 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995.  From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate  Finance for D.H. Blair  Investment Corp. From 1969 until 1981, Mr.
Phillips  was  associated  with  Oppenheimer  & Co.  where he was a partner  and
Director of Corporate Finance.

     WILLIAM F. GRIECO has served as a Director of the  Company  since  February
18, 1997. Mr. Grieco has been a Managing Director of Arcadia Strategies,  LLC, a
legal and business  consulting  organization  servicing  science and  technology
companies,  since  1999.  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 BS from Boston  College in 1975,  an MS in Health  Policy and
Management  from  Harvard  University  in 1978 and a JD from Boston  College Law
School in 1981.

     DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has 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 state
organization. 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.

Item 11.    Executive Compensation

Employment agreements

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


Executive Compensation

     Three executive  officers of the Company received  compensation in the 2005
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 2005, 2004 and 2003:


                                    -- 65 --
<PAGE>
<TABLE>
<S>                <C>      <C>       <C>       <C>       <C>         <C>
                           Summary Compensation Table
                                                             Long Term
                                                             Compensation
                              Annual Compensation            Awards
                              ___________________            ____________
(a)                     (b)    (c)       (d)     (e)          (g)     (i)
                                                              Securities
Name and                                        Other        Underlying   All
Principal                                       Annual       Options     Other
Position                Year   Salary   Bonus   Compensation /SARs    Compensation
                                ($)       ($)     ($)         (#)        ($)
                        __________________________________________________________

Bruce A. Shear           2005  $383,965  $45,000  $62,498 (1)  60,000   $37,050
  President and Chief    2004  $345,416  $25,147  $15,395 (2)      --   $    --
  Executive Officer      2003  $306,771  $25,000  $15,730 (3)  40,000   $11,200

Robert H. Boswell        2005  $164,590  $10,000  $29,016 (4)  25,000   $15,750
  Senior Vice President  2004  $155,417  $32,794  $15,582 (5)      --   $    --
                         2003  $152,937  $40,147  $12,820 (6)  25,000   $ 7,000

Paula C. Wurts           2005  $140,586  $10,000  $35,009 (7)  25,000   $15,750
   Controller, Treasurer 2004  $129,125  $17,647  $13,901 (8)      --   $    --
   And Assistant Clerk   2003  $116,981  $22,000  $11,270 (9)  25,000   $ 7,000
</TABLE>

(1)  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.

(2)  This amount represents  $5,063  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $5,532 in premiums
     paid by the Company with respect to life and  disability  insurance for the
     benefit of Mr. Shear,  $912 in club membership dues paid by the Company for
     the benefit of Mr. Shear,  $3,888 personal use of a Company car held by Mr.
     Shear.

(3)  This amount represents  $4,057  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $4,768 in premiums
     paid by the Company with respect to life  insurance  for the benefit of Mr.
     Shear,  $1,387 in premiums  paid by the Company with respect to  disability
     insurance for the benefit of Mr. Shear, $2,009 in club membership dues paid
     by the Company for the benefit of Mr.  Shear and $3,509  personal  use of a
     Company car held by Mr. Shear.

(4)  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.

(5)  This amount represents a $6,000 automobile allowance, $4,650 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell, $428 in membership dues paid by the Company for the benefit of
     Mr.  Boswell,  $699 in benefit  derived from the purchase of shares through
     the employee stock  purchase plan, and $3,805 based on the intrinsic  value
     of the repricing of options held by Mr. Boswell.

(6)  This amount represents a $6,000 automobile allowance, $3,212 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
     Mr.  Boswell,  $617 in benefit  derived from the purchase of shares through
     the employee stock purchase plan,  $401 in club membership dues paid by the
     Company for the benefit of Mr.  Boswell and $1,950  based on the  intrinsic
     value of the repricing of options held by Mr. Boswell.


                                    -- 66 --
<PAGE>
(7)  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.

(8)  This amount represents a $4,800 automobile allowance, $5,063 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $233 in benefit derived from the purchase of shares through the
     employee stock purchase plan and $3,805 based on the intrinsic value of the
     repricing of options held by Ms. Wurts.

(9)  This amount represents a $4,800 automobile allowance, $4,211 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $309 in benefit derived from the purchase of shares through the
     employee stock purchase plan and $1,950 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  $5,000  stipend per year and $1,250 for each Board meeting they attend.
In  addition,  Directors of the Company are  entitled to receive  certain  stock
option grants under the Company's  Non-Employee  Director Stock Option Plan (the
"Director Plan").

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. During fiscal
2005 the  Compensation  Committee  consisted of Mr. Donald Robar and Mr. William
Grieco.  The Compensation  Committee met once during fiscal 2005. Mr. Shear does
not participate in discussions  concerning,  or vote to approve, his salary. All
members of the compensation committee are independent.

AUDIT COMMITTEE

     The Board of Directors has appointed an audit committee to assist the Board
in its  oversight  of  the  financial  reports,  internal  controls,  accounting
policies and procedures and practices. 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.
     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.

                                    -- 67 --
<PAGE>
     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 2005 the Audit Committee  consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco.  As required by the SEC, all members of
the committee are independent as such term is defined pursuant to applicable SEC
rules and  regulations  and Dr.  Dangerfield  serves as the  chairman and is the
financial  expert on the  committee.  The Audit  Committee met five times during
fiscal 2005. All of the committee members attended the meetings.

Meetings of the Board of Directors

     During  fiscal 2005,  the Board of Directors  held a total of four meetings
and took action by written consent five times. Each director attended all of the
meetings of the Board and committees of the Board on which such director served.

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
626,500  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 and
upon exercise of options. Generally, an option is not transferable by the option
holder  except  by  will or by the  laws  of  descent  and  distribution.  Also,
generally, no option may be exercised more than 60 days following termination of
employment.  However,  in  the  event  that  termination  is  due  to  death  or
disability,  the option is  exercisable  for a period of one year following such
termination.

     During the fiscal year ended June 30, 2005, the Company  issued  additional
options to purchase  320,000 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share  ranging  from $.69 to $2.38.  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.

     A total of 104,750 options were exercised during the fiscal year ended June
30, 2005, of which 95,000  options were  exercised at $.25,  46,000 options were
exercised  at  $.30,  15,000  options  were  exercised  at $.97 and  5,000  were
exercised at $1.21.

                                    -- 68 --
<PAGE>
Employee Stock Purchase Plan

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

     As of June 30, 2005, a total of 144,417 shares of class A common stock have
been issued  under the plan.  Ten  employees  are  participating  in the current
offering period under the plan,  which began on February 1, 2005 and will end on
January 31, 2006.

Non-Employee Director Stock Plan

     The Board of Directors  adopted the Company's first  Non-Employee  Director
Stock  Plan (the  "Director  Plan") on  October  18,  1995.  This stock plan has
expired however, options to purchase 185,500 shares remain outstanding under the
plan. On September 20, 2004 the Board of Directors adopted the Company's current
Non-Employee  Director Stock Plan and the  stockholders of the Company  approved
the plan on January  20,  2005.  The new plan  provides  for the  issuance  of a
maximum  of  350,000  shares  of the  Class A  Common  stock of the  Company  to
non-employee directors pursuant to the plan.

     The Board of Directors or a committee of the Board administers the Director
Plan. Under the Director Plan, each  non-employee  director is granted an option
to purchase 10,000 shares of the Class A Common Stock of the Company. The option
exercise  price is the fair market value of the shares of the Company's  Class A
Common Stock on the date of grant. The options are  non-transferable  and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third  anniversaries  of the grant date. If an optionee ceases to be a member of
the  Board of  Directors  other  than for  death or  permanent  disability,  the
unexercised  portion  of  the  options,  to  the  extent  unvested,  immediately
terminate,  and the  unexercised  portion of the options which have vested lapse
180 days after the date the optionee  ceases to serve on the Board. In the event
of death or permanent disability,  all unexercised options vest and the optionee
or his or her legal  representative  has the right to exercise  the option for a
period of 180 days or until the expiration of the option, if sooner.

     During the fiscal  year ended June 30,  2005,  40,000  options  were issued
under the  original  plan.  As of June 30, 2005 no options  have been  exercised
under the original plan and no options have been issued under the new plan.

     The following table provides information about options granted to the named
executive  officers during fiscal 2005 under the Company's Stock Plan,  Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

                  Individual Grants
(a)               (b)             (c)              (d)             (e)
                  Number of        % of Total
                  Securities       Options/SARs     Exercise
                  Underlying       Granted          or Base
Name              Options/SARs     to Employees     Price          Expiration
                  Granted (#)      in Fiscal Year   ($/Share)        Date
______________________________________________________________________________

Bruce A. Shear       60,000           18.75%        $.69-$2.38     01/07/2008-
                                                                   06/16/2010
Robert H. Boswell    25,000            7.81%             $1.41     12/21/2009
Paula C. Wurts       25,000            7.81%             $1.41     12/21/2009

All Directors and
  Officers as a                                                    01/07/2008-
  group (8 Persons) 160,000             50.0%            $1.43     01/06/2015

     The following  table provides  information  about options  exercised by the
named executive  officers during fiscal 2005 and the number and value of options
held at the end of fiscal 2005.


                                    -- 69 --
<PAGE>
(a)               (b)           (c)           (d)             (e)
                                              Number of
                                              Securities       Value of
                                              Underlying       Unexercised
                                              Unexercised      In-the-Money
                                              Options/SARs     Options/SARs at
                   Shares                     at FY-End (#)    FY-End ($)
                   Acquired on   Value        Exercisable/     Exercisable/
Name               Exercise (#)  Realized ($) Unexercisable    Unexercisable
_______________________________________________________________________________
Bruce A. Shear      25,000        $37,208       187,000/0       $327,260/$0
Robert H. Boswell    8,333         13,319       111,000/0        203,030/$0
Paula C. Wurts      11,667         18,648       111,000/0        203,030/$0

All Directors
 and Officers as
 a group (8
 persons)           45,000        $69,175       861,000/0       1,520,525/$0


     In  January  2001,  all  791,500  shares  underlying  the then  outstanding
employee  stock options were repriced to $0.25,  which was greater than the then
current market price, using the existing exercise durations. The computed effect
of the option  repricing of $69,175,  $16,435 and $2,505 was charged to salaries
in the fiscal years ended June 30, 2005, 2004 and 2003, respectively. As of June
30, 2005 all of the repriced options have been exercised.

     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.

                                    -- 69 --
<PAGE>
Item 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information  regarding the ownership
of shares of the  Company's  Class A Common  Stock and Class B Common Stock (the
only classes of common stock of the Company  currently  outstanding)  as of July
30, 2005 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named  executive  officers  as  defined in 17 CFR  228.402(a)(2)  and all
directors  and officers of the Company as a group.  Unless  otherwise  indicated
below,  to the  knowledge  of the  Company,  all persons  listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent  authority is shared by spouses under applicable law. In preparing
the following table, the Company has relied on the information  furnished by the
persons listed below:

                                                          Amount and
                                                          Nature of     Percent
                       Name and Address                   Beneficial      of
Title of Class         of Beneficial Owner                Owner (12)     Class
____________________  _____________________________   ______________  _________
Class A Common Stock  Bruce A. Shear                       626,995(1)      3.6%
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      Robert H. Boswell                     243,719(2)     1.4%
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      Paula C. Wurts                        192,349(3)     1.1%
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      Howard W. Phillips                    173,750(4)        *
                      P. O. Box 2047
                      East Hampton, NY   11937
                      Gerald M. Perlow                      143,125(5)        *
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      Donald E. Robar                       134,127(6)       *
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      William F. Grieco                     137,750(7)        *
                      115 Marlborough Street
                      Boston, MA   02116
                      David E. Dangerfield                   50,000(8)        *
                      5965 South 900 East
                      Salt Lake City, UT 84121
                      All  Directors and Officers as      1,701,815(9)     9.4%
                      a Group (8 persons)


                                    -- 70 --
<PAGE>

                                                          Amount and
                                                          Nature of     Percent
                       Name and Address                   Beneficial      of
Title of Class         of Beneficial Owner                Owner (12)     Class
____________________  _____________________________   ______________  _________
Class A Common Stock  Marathon Capital Mgmt, LLC          1,153,800        6.7%
(continued)           P. O. Box 771
                      Hunt Valley, MD  21030
Class B Common
Stock (10)            Bruce A. Shear                        721,259(11)   92.8%
                      c/o PHC, Inc.
                      200 Lake Street
                      Peabody, MA   01960
                      All Directors and Officers as
                      a Group (8 persons)                   721,259       92.8%

*    Less than 1%
1.   Includes  187,000  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.30
     to $2.38 per share.
2.   Includes  111,000  shares  of Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options at an exercise price range of $.30 to
     $1.41 per share.
3.   Includes  111,000  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.30
     to $1.41 per share.
4.   Includes 108,500 shares issuable  pursuant to currently  exercisable  stock
     options having an exercise price range of $.22 to $1.48 per share.
5.   Includes 97,000 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
6.   Includes 100,500 shares issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
7.   Includes  96,000  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.22
     to $3.50 per share.
8.   Includes  50,000  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options,  having an exercise price range of $
     .55 to $1.48 per share.
9.   Includes an  aggregate  of 861,000  shares  issuable  pursuant to currently
     exercisable stock options.  Of those options,  5,500 have an exercise price
     of $6.63 per share, 6,000 have an exercise price of $3.50 per share, 15,000
     have an exercise price of $2.38 per share,  6,000 have an exercise price of
     $2.06 per share,  50,000  have an exercise  price of $1.48,  50,000 have an
     exercise  price of $1.41,  15,000 have an exercise  price of $1.37,  50,000
     have an exercise price of $1.33 per share, 15,000 have an exercise price of
     $1.21,  6,000  have an  exercise  price of $1.03 per  share,  6,000 have an
     exercise  price of $.81 per share,  140,000 have an exercise  price of $.75
     per share,  50,000 have an exercise price of $.74 per share, 15,000 have an
     exercise  price of $.69 per share,  138,000 have an exercise  price of $.55
     per share,  15,000 have an exercise price of $.45 per share, 40,000 have an
     exercise  price of $.35 per share,  230,500 have an exercise  price of $.30
     per share and 8,000 have an exercise price of $.22 per share.
10.  Each share of class B common stock is convertible into one share of class A
     common stock  automatically upon any sale or transfer or at any time at the
     option of the holder.
11.  Includes  56,369  shares of class B common stock pledged to Steven J. Shear
     of 2 Addison Avenue,  Lynn,  Massachusetts 01902, Bruce A. Shear's brother,
     to secure the purchase  price  obligation  of Bruce A. Shear in  connection
     with his purchase of his brother's  stock in the Company in December  1988.
     In the absence of any default under this obligation, Bruce A. Shear retains
     full voting power with respect to these shares.

                                    -- 71 --
<PAGE>
12.  "Amount and Nature of Beneficial  Ownership".  Each share of Class A Common
     Stock is  entitled  to one vote per share and each  share of Class B Common
     Stock  is  entitled  to five  votes  per  share  on all  matters  on  which
     stockholders  may vote (except that the holders of the Class A Common Stock
     are entitled to elect two members of the  Company's  Board of Directors and
     holders of the Class B Common Stock are entitled to elect all the remaining
     members of the Company's Board of Directors).

     By virtue of the fact that Mr. Shear owns 92% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders,  Mr. Shear has the right to elect
the majority of the members of the Board of directors and may be deemed to be in
control of the Company.

     Based on the number of shares  listed under the column  headed  "Amount and
Nature of  Beneficial  Ownership,"  the  following  persons  or groups  held the
following  percentages  of voting rights for all shares of common stock combined
as of July 31, 2005:

                     Bruce A. Shear .............................19.78%
                     All Directors and Officers as a Group
                    (8 persons)..................................24.04%

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 a review of these  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 13.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Related Party Indebtedness

     For  approximately  the last fifteen years,  Bruce A. Shear, a director and
the President and Chief Executive Officer of the Company, and persons affiliated
and associated with him have made a series of unsecured loans to the Company and
its  subsidiaries  to enable them to meet  ongoing  financial  commitments.  The
borrowings  generally  were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company,  were entered
into at market rates given the financial  condition of the Company and the risks
of repayment at the time the loans were made.

     During the period  ended June 30,  2004,  the  Company  paid Mr.  Shear and
affiliates  approximately  $62,515 in principal and accrued  interest  under the
related party notes. The remaining balance of this debt, $52,000,  was converted
into 50,000 shares of class B common stock at the then current  market price for
class A common stock. As of June 30, 2004 all outstanding related party debt has
been  eliminated.  During the fiscal  year ended June 30,  2005 no amounts  were
borrowed from related parties and related party debt remains at zero.

Item 14.  Principal Accountant Fees and Services

     The following table presents fees for professional audit services rendered
by BDO Seidman, LLP for the Company's annual financial statements, quarterly
review services and other related services for the fiscal years ended June 2005
and 2004:
                                          2005          2004
                                        ________     ________

         Audit Fees                     125,500       117,500
         All other fees                      --        12,000
                                        ________     ________
              Total fees                125,500      $129,500
                                        =======      ========

                                    -- 72 --
<PAGE>
     In fiscal 2004,  BDO Seidman,  billed the Company an  additional  $4,000 in
connection  with the company's  current  report on form 8-k filed  regarding the
acquisition of Pivotal Research  Centers,  LLC and $8,000 in connection with the
Company's  registration  statement on form S-3. These amounts are listed as "All
other fees" in the above table and relate to services  traditionally provided by
auditors,  which  are  compatible  with BDO  Seidman,  LLP's  independence.  The
Company's  Audit  Committee  considered the non-audit  services  rendered by BDO
Seidman,  LLP  during  fiscal  2004  and  determined  that  such  services  were
compatible with BDO Seidman,  LLP's independence.  Firms other than BDO Seidman,
LLP, provide tax and other accounting services.

     BDO Seidman, LLP did not directly or indirectly,  operate, or supervise the
operation of, the Company's  information  systems or manage the Company's  local
area  network,  nor did BDO  Seidman,  LLP design or  implement  a  hardware  or
software system that aggregates source data underlying the financial  statements
of the Company or generates  information  that is  significant  to the Company's
financial statements taken as a whole.

     The charter of the Audit  Committee  provides that the Audit Committee must
pre-approve  all  auditing  and  non-auditing  services  to be  provided  by the
auditor.  In addition,  any  services  exceeding  pre-approved  cost levels will
require specific pre-approval by the Audit Committee.  All services shown in the
table above were pre-approved by the Audit Committee.


                                    -- 73 --
<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: The consolidated financial statements of
     PHC,  Inc. are included at Item 8, pages F-1 through  F-29,  in this Annual
     Report
2)   Financial   Statement   Schedules:   All  schedules  are  included  in  the
     Consolidated  financial  statements and footnotes thereto at Item 8 in this
     Annual Report
3)   The  exhibits  which are filed with this  report or which are  incorporated
     herein by reference are set forth in the Exhibit Index that follows.

Exhibit No.     Description

3.1  Restated Articles of Organization of the Registrant,  as amended. (Filed as
     exhibit 3.1 to the Company's Registration Statement on March 2, 1994).
3.1.1 Certification  of Chief Executive  Officer  Pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002. (Filed as exhibit 3.1.1 to the Company's report
     on Form 10-QSB dated November 12, 2004. Commission file number 0-22916).
3.1.2 Certification  of the Chief Financial  Officer  Pursuant to Section 302 of
     the  Sarbanes-Oxley  Act of 2002.  (Filed as exhibit 3.1.2 to the Company's
     report on Form 10-QSB  dated  November  12,  2004.  Commission  file number
     0-22916).
3.2  By-laws  of the  Registrant,  as  amended.  (Filed  as  exhibit  3.2 to the
     Company's  Post-Effective  Amendment  No.  2 on  Form  S-3 to  Registration
     Statement on Form SB-2 under the  Securities Act of 1933 dated November 13,
     1995. Commission file number 333-71418).
3.2.1 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 as exhibit 3.1.2 to the Company's report
     on Form 10-QSB dated November 12, 2004.  Commission  file number  0-22916).
4.1 Warrant Guaranty  Agreement for Common Stock Purchase Warrants issuable
     by PHC, Inc.  dated August 14, 1998 for Warrants No. 2 and No. 3. (Filed as
     exhibit  4.19 to the  Company's  report  on Form  10-KSB,  filed  with  the
     Securities  and Exchange  Commission on October 14, 1997.  Commission  file
     number  0-22916).
4.2  12%  Convertible  Debenture by and between PHC, Inc., and Dean & Co., dated
     December 3, 1998 in the amount of  $500,000.  (Filed as exhibit 4.20 to the
     Company's  report on Form 10-QSB dated February 12, 1999.  Commission  file
     number 0-22916).
4.3  Securities Purchase Agreement for 12% Convertible  Debenture by and between
     PHC, Inc. and Dean & Co., a Wisconsin nominee partnership for Common Stock.
     (Filed  as  exhibit  4.21 to the  Company's  report  on Form  10-QSB  dated
     February 12, 1999. Commission file number 0-22916).
4.4  Warrant  Agreement to purchase up to 25,000  shares of Class A Common Stock
     by and between PHC, Inc., and Dean & Co., dated December 3, 1998. (Filed as
     exhibit  4.22 to the  Company's  report on Form 10-QSB  dated  February 12,
     1999. Commission file number 0-22916).
4.5  Warrant  Agreement  by and  between  PHC,  Inc.,  and  National  Securities
     Corporation  dated  January 5, 1999 to  purchase  37,500  shares of Class A
     Common Stock. (Filed as exhibit 4.23 to the Company's report on Form 10-QSB
     dated February 12, 1999. Commission file number 0-22916).
4.6  Warrant  Agreements  by and  between  PHC,  Inc.,  and George H. Gordon for
     10,000 shares, 15,000 shares, 5,000 shares, 5,000 shares, 50,000 shares and
     10,000 shares of Class A Common Stock dated December 31, 1998; 5,000 shares
     of Class A Common Stock dated  December 1, 1998;  10,000  shares of Class A
     Common  Stock dated  January 1, 1999;  and 10,000  shares of Class A Common
     Stock  dated  February  1, 1999.  (Filed as exhibit  4.24 to the  Company's
     report on Form 10-QSB  dated  February  12,  1999.  Commission  file number
     0-22916).
4.7  Warrant  Agreement by and between PHC, Inc., and Barrow Street Research for
     3,000  shares of Class A Common Stock dated  February  23, 1999.  (Filed as
     exhibit  4.24 to the  Company's  Registration  Statement  on Form S-3 dated
     April 13, 1999. Commission file number 333-76137).
4.8  Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
     shares of Class A Common Stock dated March 1, 1999.  (Filed as exhibit 4.25
     to the Company's  Registration  Statement on Form S-3 dated April 13, 1999.
     Commission file number 333-76137).



                                    -- 74 --
<PAGE>
Exhibit No.     Description

4.9  Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
     shares of Class A Common Stock dated April 1, 1999.  (Filed as exhibit 4.26
     to the  Company's  Registration  Statement  on Form S-3 dated June 1, 1999.
     Commission file number 333-76137).
4.10 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
     shares of Class A Common Stock dated May 1, 1999. (Filed as exhibit 4.27 to
     the  Company's  Registration  Statement  on Form S-3  dated  May 14,  1999.
     Commission file number 333-76137).
4.11 Warrant  Agreements  by and  between  PHC,  Inc.,  and George H. Gordon for
     10,000  shares  of Class A Common  Stock  dated  April 1,  1999.  (Filed as
     exhibit 4.28 to the Company's report on Form 10-KSB dated October 13, 1999.
     Commission file number 0-22916).
4.12 Warrant  Agreements  by and  between  PHC,  Inc.,  and George H. Gordon for
     10,000 shares of Class A Common Stock dated July 1, 1999. (Filed as exhibit
     4.29 to the  Company's  report  on Form  10-KSB  dated  October  13,  1999.
     Commission file number 0-22916).
4.13 Warrant  Agreements  by and  between  PHC,  Inc.,  and George H. Gordon for
     10,000  shares of Class A Common  Stock  dated  August 1,  1999.  (Filed as
     exhibit 4.30 to the Company's report on Form 10-KSB dated October 13, 1999.
     Commission file number 0-22916).
4.14 Warrant Agreement issued to CapitalSource  Finance, LLC to purchase 250,000
     Class A Common shares dated October 19, 2004. (Filed as exhibit 4.14 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     Commission on October 22, 2004. Commission file number 0-22916).
4.15 Warrant  to  purchase  up to 37,500  shares of Class A Common  Stock by and
     between PHC, Inc., and National Securities  Corporation dated July 5, 1999.
     (Filed as exhibit 4.32 to the Company's report on Form 10-KSB dated October
     13, 1999. Commission file number 0-22916).
4.16 Common  Stock  Purchase  Warrant  by  and  between  PHC,  Inc.  and  Heller
     Healthcare Finance,  Inc. for 60,000 shares of Class A Common Stock. (Filed
     as exhibit  4.37 to the  Company's  report on Form  10-KSB,  filed with the
     Securities and Exchange  Commission on September 29, 2000.  Commission file
     number 0-22916).
4.17 Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC,  Inc.,  and Heller  Healthcare  Finance dated March 16,
     1998.  (Filed as exhibit  4.38 to the  Company's  quarterly  report on Form
     10-QSB,  filed with the Securities and Exchange  Commission on November 14,
     2000. Commission file number 0-22916).
4.18 Warrant  Agreement  issued to Marshall  Sternan to purchase  10,000 Class A
     Common shares dated April 15, 2001. (Filed as exhibit 4.41 to the Company's
     report on Form 10-QSB dated May 14, 2001. Commission file number 0-22916).
4.19 Equity Purchase  Warrant to purchase 1% equity in Behavioral  Health Online
     by and between PHC, Inc., and Heller Healthcare  Finance dated December 18,
     2000.  (Filed as exhibit 4.36 to the Company's  report on Form 10-KSB dated
     September 25, 2001. Commission file number 0-22916).
4.20 Form of Subscription  Agreement and Warrant.  (Filed as exhibit 4.22 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     commission on May 13, 2004. Commission file number 0-22916).
5.1  Opinion of Arent Fox Kintner  Plotkin & Kahn,  PPLC dated  January 8, 2003.
     (Filed as an exhibit to the  Company's  Registration  Statement on Form S-8
     dated January 8, 2003. Commission file number 333-102402).
5.2  Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC. (Filed as exhibit 5.2 to
     the  Company's  report on Form SB-2 dated June 19,  2002.  Commission  file
     number 333-76137).
10.1 Deed of Trust Note of Mount Regis Center  Limited  Partnership  in favor of
     Douglas  M.  Roberts,  dated  July 28,  1987,  in the  amount of  $560,000,
     guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis Center,
     Limited  Partnership  of even date.  (Filed as  exhibit  10.33 to Form SB-2
     dated March 2, 1994).  Assignment  and  Assumption  of Limited  Partnership
     Interest, by and between PHC of Virginia Inc. and each assignor dated as of
     June 30,  1994.  (Filed as exhibit  10.57 to Form 10-KSB on  September  28,
     1994).


                                    -- 75 --
<PAGE>

Exhibit No.     Description

10.2 Copy of Note of Bruce A. Shear in favor of Steven J. Shear,  dated December
     1988, in the amount of $195,695;  Pledge  Agreement by and between Bruce A.
     Shear and  Steven  J.  Shear,  dated  December  15,  1988;  Stock  Purchase
     Agreement by and between Steven J. Shear and Bruce A. Shear, dated December
     1, 1988. (Filed as exhibit 10.52 to the Company's Registration Statement on
     Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.3 Unconditional  Guaranty of Payment and performance by and between PHC, Inc.
     in favor of HCFP.  (Filed  as  exhibit  10.112 to the  Company's  quarterly
     report on Form 10-QSB, filed with the Securities and Exchange Commission on
     February 25, 1997. Commission file number 0-22916).
10.4 Agreement  between  Family  Independence  Agency and Harbor  Oaks  Hospital
     effective January 1, 1997. (Filed as exhibit 10.122 to the Company's report
     on Form 10-KSB,  with the Securities and Exchange Commission on October 14,
     1997. Commission file number 0-22916).
10.5 Master Contract by and between Family  Independence  Agency and Harbor Oaks
     Hospital  effective  January  1,  1997.  (Filed  as  exhibit  10.123 to the
     Company's  report on Form 10-KSB,  filed with the  Securities  and Exchange
     Commission on October 14, 1997. Commission file number 0-22916).
10.6 Financial Advisory Agreement,  Indemnification Agreement and Warrant by and
     between  Brean Murray & Company and PHC,  Inc.  dated  06/01/97.  (Filed as
     exhibit  10.125 to the  Company's  report on Form  10-KSB,  filed  with the
     Securities  and Exchange  Commission on October 14, 1997.  Commission  file
     number 0-22916).
10.7 Loan and Security  Agreement by and among HCFP  Funding,  Inc.,  and PHC of
     Michigan,  Inc.,  PHC of Utah,  Inc.,  PHC of Virginia,  Inc., PHC of Rhode
     Island, Inc., and Pioneer Counseling of Virginia, Inc. dated as of February
     18, 1998. (Filed as exhibit 10.139 to the Company's  Registration Statement
     on Form SB-2 dated July 24, 1998. Commission file number 333-59927).
10.8 Credit Line Deed of Trust by and between PHC of  Virginia,  Inc.,  and HCFP
     Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the Company's
     Registration  Statement on Form SB-2 dated July 24, 1998.  Commission  file
     number 333-59927).
10.9 Promissory Note for $50,000 dated May 18, 1998 by and between PHC, Inc. and
     Tot Care,  Inc.  (Filed as  exhibit  10.142 to the  Company's  Registration
     Statement  on Form  SB-2  dated  July  24,  1998.  Commission  file  number
     333-59927).
10.10 Promissory  Note for $50,000  dated June 9, 1998 by and between PHC,  Inc.
     and Tot Care, Inc.  (Filed as exhibit 10.143 to the Company's  Registration
     Statement  on Form  SB-2  dated  July  24,  1998.  Commission  file  number
     333-59927).
10.11 Amendment No. 1 to Loan and Security Agreement in the amount of $4,000,000
     by and among HCFP Funding,  Inc.,  and PHC of Michigan,  Inc., PHC of Utah,
     Inc.,  PHC of  Virginia,  Inc.,  PHC of Rhode  Island,  Inc.,  and  Pioneer
     Counseling  of Virginia,  Inc.  dated as of February  18,  1998.  (Filed as
     exhibit  10.57 to the  Company's  report on Form 10-KSB  dated  October 13,
     1998. Commission file number 0-22916).
10.12 Financial  Advisory  and  Consultant  Agreement  by and  between  National
     Securities Corporation and PHC, Inc. dated 01/05/99 (Filed as exhibit 10.61
     to the Company's report on Form 10-QSB dated February 12, 1999.  Commission
     file number 0-22916).
10.13 Amendment number 1 to Loan and Security  Agreement dated February 17, 2000
     by and between PHC of Michigan,  Inc., PHC, of Utah, Inc., PHC of Virginia,
     Inc., PHC of Rhode Island,  Inc. and Pioneer  Counseling of Virginia,  Inc.
     and Heller  Healthcare  Finance,  Inc., f/k/a HCFP Funding in the amount of
     $2,500,000.  (Filed as exhibit 10.70 to the Company's report on Form 10-QSB
     filed  with  the  Securities  and  Exchange  Commission  on May  11,  2000.
     Commission file 0-22916).


                                    -- 76 --
<PAGE>
Exhibit No.     Description

10.14 Promissory  Note for $532,000  dated May 30, 2000 by and between PHC, Inc.
     and Irwin J.  Mansdorf,  Ph.D.  (Filed as  exhibit  10.76 to the  Company's
     report on Form 10-KSB, filed with the Securities and Exchange Commission on
     September 29, 2000. Commission file number 0-22916).
10.15 Promissory  Note for $168,000  dated May 30, 2000 by and between PHC, Inc.
     and Yakov Burstein,  Ph.D.  (Filed as exhibit 10.77 to the Company's report
     on Form  10-KSB,  filed with the  Securities  and  Exchange  Commission  on
     September 29, 2000. Commission file number 0-22916).
10.16 Settlement  Agreement  and Mutual  Releases by and between  PHC,  Inc. and
     Yakov  Burstein,  Ph.D.  and Irwin J. Mansdorf,  Ph.D.  dated May 30, 2000.
     (Filed as exhibit 10.78 to the Company's report on Form 10-KSB,  filed with
     the  Securities and Exchange  Commission on September 29, 2000.  Commission
     file number 0-22916).
10.17 Amendment  number  2 to  Loan  and  Security  Agreement  originally  dated
     February 18, 1998 by and among PHC, of Utah,  Inc.,  PHC of Virginia,  Inc.
     and PHC of Michigan, Inc. and Heller Healthcare Finance, Inc. in the amount
     of  $3,000,000  amended as of May 24, 2001.  (Filed as exhibit 10.46 to the
     Company's  report on Form 10-KSB dated September 25, 2001.  Commission file
     number 0-22916).
10.18 Amendment  Number 3 dated December 6, 2001 to Loan and Security  Agreement
     dated February 18, 1998 by and between PHC of Michigan,  Inc., PHC of Utah,
     Inc.,  and PHC of  Virginia,  Inc.  and  Heller  Healthcare  Finance,  Inc.
     providing  collateral for the Loan and Security  Agreement in the amount of
     $3,000,000.  (Filed as exhibit 10.50 to the Company's  quarterly  report on
     Form 10-QSB,  filed with the Securities and Exchange Commission on February
     12, 2002. Commission file number 0-22916).
10.19 Consolidating  Amended  and  Restated  Secured  Term Note in the amount of
     $2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc. and.
     Heller  Healthcare  Finance,  Inc. (Filed as exhibit 10.51 to the Company's
     Quarterly  Report on Form 10-QSB,  filed with the  Securities  and Exchange
     Commission on February 12, 2002. Commission file number 0-22916).
10.20 Amended and  Restated  Revolving  Credit Note in the amount of  $3,000,000
     dated  December 6, 2001 by and between PHC of Michigan,  Inc., PHC of Utah,
     Inc. and PHC of Virginia,  Inc. and. Heller Healthcare Finance, Inc. (Filed
     as exhibit 10.52 to the Company's  Quarterly  Report on Form 10-QSB,  filed
     with  the  Securities  and  Exchange   Commission  on  February  12,  2002.
     Commission file number 0-22916).
10.21 Amended  and  Restated   Consolidated  Mortgage  Note  in  the  amount  of
     $5,688,598  dated December 6, 2001 by and between PHC of Michigan,  Inc and
     Heller  Healthcare  Finance,  Inc. (Filed as exhibit 10.53 to the Company's
     Quarterly  Report on Form 10-QSB,  filed with the  Securities  and Exchange
     Commission on February 12, 2002. Commission file number 0-22916).
10.22 Third  Amended  and  Restated  Cross-Collateralization  and  Cross-Default
     Agreement dated December 6, 2001 by and between PHC, Inc., PHC of Michigan,
     Inc., PHC of Utah, Inc. and PHC of Virginia,  Inc. and.  Heller  Healthcare
     Finance,  Inc. (Filed as exhibit 10.54 to the Company's quarterly report on
     Form 10-QSB,  filed with the Securities and Exchange Commission on February
     12, 2002. Commission file number 0-22916).
10.23 The Company's  1993 Stock  Purchase and Option Plan,  as amended  December
     2002.  (Filed as exhibit  10.34 to the  Company's  report on Form S-8 dated
     January 8, 2003. Commission file number 333-102402).
10.24 The Company's  1995  Non-Employee  Director  Stock Option Plan, as amended
     December 2002.  (Filed as exhibit 10.35 to the Company's report on Form S-8
     dated January 8, 2003. Commission file number 333-102402).



                                    -- 77 --
<PAGE>
Exhibit No.     Description

10.25 The Company's 1995 Employee Stock Purchase Plan, as amended December 2002.
     (Filed as exhibit 10.36 to the  Company's  report on Form S-8 dated January
     8, 2003. Commission file number 333-102402).
10.26 First Amended  Consolidating Amended and Restated Secured Term Note by and
     Between PHC Of Michigan,  Inc. and Heller  Healthcare  Finance,  Inc. (Form
     10-KSB,  filed with the Securities and Exchange Commission on September 19,
     2003. Commission file number 0-22916).
10.27 Membership  Purchase  Agreement  between PHC,  Inc.  and Pivotal  Research
     Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and Anthony A
     Bonacci  dated April 30,  2004.  (Filed as exhibit  10.27 to the  Company's
     report on Form 8-K filed with the Securities and Exchange commission on May
     13, 2004. Commission file number 0-22916).
10.28 Pledge Agreement  entered into April 30, 2004 by and between PHC, Inc. and
     Louis C. Kirby,  Carol A. Colombo and Anthony A Bonacci.  (Filed as exhibit
     10.28 to the  Company's  report on Form 8-K filed with the  Securities  and
     Exchange commission on May 13, 2004. Commission file number 0-22916).
10.29 Security  Agreement  entered into April 30, 2004 by and between PHC,  Inc.
     and Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A  Bonacci. (Filed as
     exhibit 10.29 to the Company's report on Form 8-K filed with the Securities
     and Exchange commission on May 13, 2004. Commission file number 0-22916).
10.30 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note A). (Filed as exhibit 10.30 to the  Company's  report on Form
     8-K filed with the  Securities  and  Exchange  commission  on May 13, 2004.
     Commission file number 0-22916).
10.31 Secured  Promissory Note dated April 30, 2004 in the amount of $500,000 by
     PHC,  Inc.  in favor of Louis C.  Kirby,  Carol A.  Colombo  and  Anthony A
     Bonacci (Note B).  (Filed as exhibit 10.31 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  commission  on May 13, 2004.
     Commission file number 0-22916).
10.32 Secured  Promissory  Note dated April 30, 2004 in the amount of $1,000,000
     by PHC,  Inc.  in favor of Louis C. Kirby,  Carol A.  Colombo and Anthony A
     Bonacci (Note C).  (Filed as exhibit 10.32 to the Company's  report on Form
     8-K filed with the  Securities  and  Exchange  commission  on May 13, 2004.
     Commission file number 0-22916).
10.33 Kirby Employment and Non-Compete Agreement. (Filed as exhibit 10.33 to the
     Company's  report  on Form 8-K  filed  with  the  Securities  and  Exchange
     commission on May 13, 2004. Commission file number 0-22916).
10.34 Colombo Employment and Non-Compete  Agreement.  (Filed as exhibit 10.34 to
     the  Company's  report on Form 8-K filed with the  Securities  and Exchange
     commission on May 13, 2004. Commission file number 0-22916).
10.35 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.35 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange commission on May 13, 2004.
     Commission file number 0-22916).
10.36 First Amendment to Membership  Purchase  Agreement and Colombo  Employment
     Agreement and Note C. (Filed as exhibit  10.36 to the  Company's  report on
     Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
     Commission file number 0-22916).
10.37 Subscription Agreement entered into September 20, 2004 by and between PHC,
     Inc. and Sandor  Capital Master Fund,  LP,  together with the  Registration
     rights  agreement and the form of  certificate  of  Designation.  (Filed as
     exhibit 10.37 to the Company's report on Form 8-K filed with the Securities
     and Exchange  Commission  on September  23,  2004.  Commission  file number
     0-22916).
10.38 Revolving  Credit,  Term Loan and Security  Agreement,  dated  October 19,
     2004, by and between PHC, Inc, PHC of Utah,  Inc.,  PHC of Virginia,  Inc.,
     PHC of Michigan,  Inc.,  PHC of Nevada,  Inc.,  North Point  Pioneer,  Inc,
     Wellplace,  Inc.,  Detroit  Behavioral  Institute,  Inc. and  CapitalSource
     Finance,  LLC. (Filed as exhibit 10.38 to the Company's  report on Form 8-K
     filed with the  Securities  and  Exchange  Commission  on October 22, 2004.
     Commission file number 0-22916).

                                    -- 78 --
<PAGE>
Exhibit No.     Description

10.39 Term Loan Note,  dated  October 19, 2004,  by and between PHC, Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $1,400,000.
     (Filed as exhibit 10.39 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.40 Revolving  Note dated  October 19, 2004,  by and between PHC,  Inc, PHC of
     Utah,  Inc., PHC of Virginia,  Inc., PHC of Michigan,  Inc., PHC of Nevada,
     Inc.,  North  Point  Pioneer,  Inc,  Wellplace,  Inc.,  Detroit  Behavioral
     Institute, Inc. and CapitalSource Finance, LLC in the amount of $3,500,000.
     (Filed as exhibit 10.40 to the Company's  report on Form 8-K filed with the
     Securities  and Exchange  Commission on October 22, 2004.  Commission  file
     number 0-22916).
10.41 One of two notes issued to replace the $3,500,000  note signed in favor of
     CapitalSource  on  October  19,  2004  by and  between  PHC,  Inc.,  PHC of
     Michigan,  Inc., PHC of Nevada,  Inc., PHC of Utah,  Inc., PHC of Virginia,
     Inc.,  Wellplace,  Inc. and Detroit  Behavioral  Institute,  Inc. (Filed as
     exhibit 10.47 to the Company's quarterly report on Form 10-QSB,  filed with
     the Securities  and Exchange  Commission on May 13, 2005.  Commission  file
     number 0-22916).
10.42 Second of two notes issued in the amount of  $1,500,000.00  to replace the
     $3,500,000 note signed in favor of CapitalSource on October 19, 2004 by and
     between PHC, Inc., PHC of Michigan, Inc., PHC of Nevada, Inc., PHC of Utah,
     Inc.,  PHC  of  Virginia,   Inc., Wellplace,  Inc. and  Detroit  Behavioral
     Institute,  Inc. (Filed as exhibit 10.48 to the Company's  quarterly report
     on Form 10-QSB,  filed with the Securities  and Exchange  Commission on May
     13, 2005. Commission file number 0-22916).
* 21.1 List of Subsidiaries.
* 23.1 Consent   of   BDO   Seidman,  LLP,  an   independent  registered  public
     accounting firm.
23.2 Consent  of Wood & Dwyer,  P.L.C.  accountants  for the  acquired  company.
     (Filed as exhibit 23.1 to the Company's report on Form 8-K/A filed with the
     Securities and Exchange commission on June 29, 2004. Commission file number
     0-22916).
* 31.1 Certification  of Chief  Executive Officer Pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.
* 31.2 Certification of the Chief Financial  Officer Pursuant to  Section 302 of
     the Sarbanes-Oxley Act of 2002.
* 32.1 Certification of the Chief Executive Officer and Chief  Financial Officer
     Pursuant to  18 U.S.C.  1350, as  adopted  Pursuant  to Section  906 of the
     Sarbanes-Oxley Act of 2002.
*        Filed herewith

(b) REPORTS ON FORM 8-K.

     The Company  filed one report on form 8-K during the quarter ended June 30,
2005. This report provided the same earnings  information to the public as shown
in  the  Company's  quarterly  press  release  as  required  by  Item  12 of the
instructions for form 8-K.

                                    -- 79 --
<PAGE>

                                                        SIGNATURES

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



                                                                       PHC, INC.


Date:    September 28, 2005               By:   /S/ BRUCE A. SHEAR
                                                _________________________
                                                    Bruce A. Shear, President
                                                    and Chief Executive Officer



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



          SIGNATURE                  TITLE(S)                       DATE


/s/ BRUCE A. SHEAR                President, Chief           September 28, 2005
_________________________         Executive Officer and
    Bruce A. Shear                Director  (principal
                                  executive officer)

/s/ PAULA C. WURTS                Controller and Treasurer   September 28, 2005
_________________________         (principal  financial
    Paula C. Wurts                and accounting officer)


/s/ GERALD M. PERLOW              Director                   September 28, 2005
_________________________
    Gerald M. Perlow


/s/ DONALD E. ROBAR               Director                   September 28, 2005
_________________________
    Donald E. Robar


/s/ HOWARD PHILLIPS               Director                   September 28, 2005
_________________________
    Howard Phillips


 /s/ WILLIAM F. GRIECO            Director                   September 28, 2005
_________________________
     William F. Grieco

/S/ DAVID E. DANGERFIELD          Director                   September 28, 2005
_________________________
    David E. Dangerfield




                                    -- 80 --