U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 FORM 10-KSB/A2

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 [FEE REQUIRED] for the fiscal year ended June 30, 1999

[  ] Transition report under section 13 or 15(d) of the Securities Exchange Act
     of 1934 [NO FEE REQUIRED] for the transition period from to

Commission file number: 0-22916

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

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

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

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

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

                                      NONE.

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

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





                                      (1)
<PAGE>

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

                                                           Yes X   No

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

The issuer's revenues for the fiscal year ended June 30, 1999 were $ 19,139,496.

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

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

                 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                    Yes No X




                                      (2)
<PAGE>


Changes in this amendment include:

1.   Item 6. Management's  discussion and analysis or plan of operation is being
     amended  to more  clearly  define  refinement  of  collection  and  reserve
     policies, collection difficulties and increases in other assets.

2.   Item 7. The footnotes to the  financial  statements  are being  expanded to
     include further explanation of accounting policies,  additional information
     with regard to certain capital transactions,  notes, taxes and acquisitions
     and detailed financial information by operating segment.


                                      (2)
<PAGE>
ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The following is a discussion  and analysis of the financial  condition and
results of operations of the Company for the years ended June 30, 1999 and 1998.
It should be read in conjunction with the consolidated  financial statements and
notes  thereto  appearing  elsewhere  herein.  During the fiscal  years  several
businesses were acquired or closed which makes  comparability  of period results
difficult.  See Psychiatric  Service  Industry - Operating  Statistics" in Part
One, Item One of this report for further detail.

Overview

The Company presently  provides health care services through two substance abuse
treatment  centers,  a  psychiatric  hospital and seven  outpatient  psychiatric
centers (collectively called "treatment facilities").  The Company's revenue for
providing  behavioral  health services  through these facilities is derived from
Medicare and Medicaid and contracts with managed care companies, state agencies,
railroads,   gaming   industry   corporations   and  individual   clients.   The
profitability of the Company is largely dependent on the level of patient census
and the payor mix at these treatment  facilities.  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 because of the fixed components
of these expenses. The Company's most recent addition, Behavioral Health Online,
Inc., is a provider of behavioral  health  information and education through its
web site.  Revenues from the web site are expected to be derived from behavioral
health  professionals for educational units required by professional  standards,
sponserships  and  advertising for behavioral  health  suppliers and the sale of
books,  tapes and other  behavioral  health  related items to behavioral  health
professionals and other consumers.

     The healthcare  industry is subject to extensive  federal,  state and local
regulation governing,  among other things, licensure and certification,  conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement.  In addition, there are ongoing debates and initiatives regarding
the  restructuring of the health care system in its entirety.  The extent of any
regulatory  changes  and their  impact on the  Company's  business  is  unknown.
Managed care has had a profound impact on the Company's operations,  in the form
of shorter lengths of stay, extensive certification of benefits requirements and
reduced payment for services.





                                      (3)
<PAGE>
Results of Operations

Years Ended June 30, 1999 and 1998

     The Company  experienced an increase in  profitability  from its continuing
operations.  Earnings before taxes, interest,  depreciation and amortization for
currently operating  facilities  increased by $1,351,169 for the year ended June
30, 1999 to $845,747  from a loss for the year ended June 30, 1998 of  $505,422.
These amounts exclude income and loss for both years for the  California,  Rhode
Island,  and  Virginia  operations.  Although  net  revenue  for  the  operating
facilities decreased by 2%, approximately  $337,000, for the year ended June 30,
1999, many changes toward more efficient operations resulted in non-proportional
decreases in many operating  expenses.  Total consultant fees related to patient
care  decreased  16% to  $2,273,601  for the  year  ended  June  30,  1999  from
$2,721,960 for the year ended June 30, 1998.  While patient care related payroll
expense  increased  only 2% to $5,507,138  for the year ended June 30, 1999 from
$5,417,628 for the year ended June 30, 1998.  This is a combined 4% reduction in
the cost of salaries  related to patient care as a result of the more  efficient
use of salaried  employees  time and the  reduction  in the use of  non-employee
therapists for patient care. More efficient  ordering has resulted in a decrease
of 62% in the cost of hospital  supplies  excluding  food,  laboratory  fees and
pharmacy, which also decreased. A change in laboratory service provider and more
efficient management of requests for lab tests resulted in a 37%,  approximately
$76,000,  decrease in laboratory fees expense for the fiscal year ended June 30,
1999.  A change  in  pharmacy  and a shift  in some  pharmacy  billing  from our
facilities to the vendor resulted in a 7%,  approximately  $14,000,  decrease in
pharmacy  costs for the  operating  facilities.  Savings  were also  evident  in
administrative  expenses for the operating  facilities.  More efficient ordering
also  resulted in a decrease  of 10.8%,  approximately  $25,000,  in the cost of
general office supplies and expense. Consolidating marketing efforts contributed
toward a 24%,  approximately  $74,000,  decrease in  marketing,  promotion,  and
travel expenses. More efficient staffing in administrative positions resulted in
a decrease of 17%, approximately  $458,000, in administrative payroll, while the
cost of administrative  consultants also decreased 26% or approximately $63,000.
Bad  debt  expenses  also  decreased  27%,  approximately  $775,000,  due to the
considerable  charge to bad debt  expense in the  previous  year and the current
decline in accounts receivable.  Because most of the changes outlined above were
in place for all of the year ended June 30, 1999, the Company does not expect to
experience the same decreases in expenses in future years but intends to work at
maintaining the current level of expenses.  The Company will, however,  continue
to evaluate  operations  looking for less expensive  alternatives to provide the
same quality service.

     The Company  reduced its total loss by $5,090,703 for the fiscal year ended
June 30, 1999  compared to June 30, 1998.  The Company also  continued to divest
itself of facilities  operating at a loss. The remaining  Pioneer  Counseling of
Virginia clinic was closed in January 1999 resulting in  approximately  $300,000
in expenses to write-down intangible assets. The total loss recorded for Pioneer
Counseling of Virginia,  including this expense was approximately  $810,000. The
final cost of the release from two of the Michigan  outpatient  clinic leases is
also reflected in the current  fiscal year. The Company also  experienced a loss
of    approximately    $160,000    through   its   start   up   operations   for
Behavioralhealthonline.com. None of the start-up costs of the web site have been
capitalized.  Except for the purchase of equipment, all costs have been expensed

                                      (4)
<PAGE>
as incurred.  The web site  produces  minimal  revenues  during the  development
stages when  operating  costs are high.  To date, no revenues have been recorded
for the web site. The web site is expected to be fully  operational in the third
quarter of the fiscal year 2000.

     In the fiscal year ended June 30, 1998 the Company  experienced a loss from
the  discontinued  operations of Franvale Nursing and  Rehabilitation  Center of
approximately $2,200,000.

     The  environment  the  Company   operates  in  today  makes  collection  of
receivables,  particularly  older  receivables,  more difficult than in previous
years.   Accordingly,   the  Company  has  increased  staff,  standardized  some
procedures  for  collecting   receivables   and  instituted  a  more  aggressive
collection  policy,  which has  resulted in an overall  decrease in its accounts
receivable.  In  response  to  today's  healthcare  environment,  the  Company's
collection policy calls for earlier contact with insurance  carriers with regard
to payment,  use of fax and registered  mail to follow-up or resubmit claims and
earlier employment of collection  agencies to assist in the collection  process.
Our collectors  also seek  assistance  through every legal means,  including the
State insurance commissioner's office, when appropriate, to collect claims. This
early concentration on claim collection allows facility staff to become aware of
minor  billing  errors early and correct them before the claim can be denied for
timely and accurate submission. Any valid claims denied due to billing errors on
the part of the Company which require  write-off are charged to bad debt expense
in the period the account is written off. Any invalid  claims result in a charge
against revenue not reserves. An amount is recorded as a contractual  adjustment
only if an agreement with the insurance carrier is on file before the patient is
admitted.  Although  the  Company's  receivables  have  decreased,  the  Company
continues  to reserve  for bad debts  based on  managed  care  denials  and past
difficulty  in  collections.  Changing  conditions  in  healthcare  required the
Company to reevaluate its methods for determining collectability.  The growth of
managed  care  has  negatively  impacted  reimbursement  for  behavioral  health
services with a higher rate of denials requiring higher reserves. The collection
difficulties  experienced  are  due  to the  denial  of  claim,  that  had  been
previously  approved.  Managed care companies  frequently  deny claims  although
authorization  for  treatment  is on file.  The Company  has limited  success in
challenging  these  denials.   Accordingly,  the  Company  has  adopted  a  more
aggressive  reserve  policy to reserve  amounts sooner to address these changing
conditions in the  healthcare  environment.  During the year ended June 30, 1998
the Company  increased its bad debt reserve by  approximately  $300,000 to write
down the receivables of the closed Rhode Island facility,  Good Hope Center, and
during the year ended June 30, 1999 the Company  increased  its bad debt reserve
by  approximately  $33,000 to write down the  receivables of the closed Virginia
facility, Pioneer Counseling of Virginia, Inc.

     Total  patient  care  revenue  from  all   facilities,   decreased  10%  to
$19,139,496 for the year ended June 30, 1999 from $21,246,189 for the year ended
June 30, 1998. This decline in revenue is due primarily to the decline in census
and closure of Good Hope Center in Rhode Island. Net inpatient care revenue from
psychiatric services decreased 12% to $11,955,143 for the fiscal year ended June
30,  1999  compared  to  $13,640,801  for the year ended  June 30,  1998 and net
outpatient  care revenue  decreased 7% to $5,574,835 for the year ended June 30,
1999 from  $6,008,552  for the year ended June 30, 1998.  Revenues from Practice
Management and Pioneer Development and Support Services ("PDSS") increased 3% to
$1,519,518  for the year ended June 30, 1999 from  $1,476,836 for the year ended
June 30, 1998. All revenues reported above and in the accompanying  statement 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.

     Total patient care expenses for all facilities  decreased 12% to $9,384,070
for the year ended June 30,  1999 from  $10,706,639  for the year ended June 30,
1998.  This decrease in patient care expenses is largely a result of the closure




                                      (5)
<PAGE>
of Good Hope Center and the Virginia clinics. The Company expects these expenses
to decline in fiscal  2000 as  compared  to fiscal  1999.  Total  administrative
expenses for all facilities  decreased 17% to $7,865,013 for the year ended June
30, 1999 from  $9,488,631  for the year ended June 30,  1998.  This  decrease in
administrative  expense is due largely to the one-time  charges  recorded in the
fiscal year ended June 30,  1998.  Expenses  for the closure of Good Hope Center
and the Blacksburg Clinic were among these one-time charges.

     There was  significant  increase in other assets in the year ended June 30,
1999.  Other  assets  consist of  deposits  and other  deferred  expenses.  This
increase is  primarily  due to the  deferred  expenses of Quality  Care  Centers
recorded during the year.  These deferred  expenses are legal expenses and other
closure  expenses  relating  to the  move  of  records  from  the  facility  and
production of facility  records for various  litigations  as listed under ITEM 3
LEGAL  PROCEEDINGS in this report.  The deferred expenses will be offset against
an expected  gain to be  realized  upon the final  resolution  of the closing of
Quality Care Centers.

Year 2000 Compliance

     The Company was unable to reach an agreement with its  Information  Systems
Vendor to upgrade its current  accounts  receivable  software to  accommodate  a
four-digit  year. The Company has  identified  alternative  software  solutions,
which are year 2000  compliant.  The software  installation is anticipated to be
operational by the deadline; however, as a precaution, the Company has contacted
each of its facilities' fiscal  intermediaries and has been granted an extension
of time beyond the HCFA  deadline  for year 2000  compliance.  In the event that
installation  of the  software is  delayed,  each  facility  is making  plans to
complete the billing  process by adding the  four-digit  year manually for those
bills that are not currently  processed through a third party electronic biller.
Although  this is a time  consuming  and costly  alternative,  it will allow the
Company to continue  processing  bills.  The Company  has already  upgraded  the
network  software at the  corporate  offices and most of its  facilities  and is
currently upgrading hardware to accommodate all required software upgrades.

     The  Company is  currently  in the process of  contacting  each third party
payor of accounts receivable, financial institution, major supplier of essential
products  and utility to request the status of their year 2000  compliance.  The
company has received  responses from approximately 60% of all vendors contacted.
All operation critical equipment,  telephones,  elevators, etc., has been tested
and found to be  compliant.  There  are a few  suppliers  of goods and  services
critical  to  operations  that have not yet  responded.  The  Company  is in the
process of identifying alternate sources for these goods and services.

     To date the Company has expended approximately $60,000 on items relating to
the year 2000  issues  and  anticipates  approximately  $165,000  in  additional
expenses relating to the upgrade of Company's computer systems.

Liquidity and Capital Resources

     For the two fiscal years ended June 30, 1999, the Company met its cash flow
needs  through  accounts  receivable  financing  and by issuing  debt and equity
securities as follows:

                                      (6)
<PAGE>

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

DATE   TRANSACTION TYPE       NUMBER OF    PROCEEDS        MATURITY     TERMS           STATUS
                               SHARES                        DATE

9/97   Common Stock            172,414      $500,000            N/A      Issued with     Common Stock
                                                                         warrants at a    Sold
                                                                         3.3% discount
9/97   Warrant issued as        86,207            --      09/30/2002     exercise price  outstanding
       part of the units                                                 $2.90
       in the Private
       Placement of Common
       Stock
9/97   Warrant issued in       150,000            --      05/31/2002     exercise price  outstanding
       exchange for cash and                                             $2.50
       financial advisory
       services
12/97  Mortgage advance             --      $500,000      10/31/2001     Prime Plus 5%   outstanding
3/98   Warrant issued as         3,000            --      03/10/2003     exercise price  outstanding
       a penalty for late                                                $2.90
       registration of Private
       Placement Common Stock
3/98   Note Payable                 --      $350,000      05/10/99       Prime Plus      outstanding
                                                          as extended    3.5%
3/98   Warrants issued as       52,500            --      03/10/2003     exercise price  outstanding
       additional interest on                                            $2.38
       3/98 debt
                                       (7)
<PAGE>
3/98   Common Stock issued     227,347      $534,265      N/A            N/A             N/A
       to the former owners
       of BSC-NY, Inc. for
       the earn out agreement
       in lieu of cash
3/98   Convertible Preferred       950      $950,000     03/18/2000      6% Interest     outstanding
       Stock                                                             per Yr.
                                                                         convertible at
                                                                         80% of 5 day
                                                                         average bid
                                                                         price
3/98   Warrants issued in        49,990           --     03/18/2001      exercise price outstanding
       connection with the                                               $2.31
       Private Placement of
       Convertible Preferred
       Stock on 3/98
5/98   Note Payable -                --      $50,000     on demand       12% annual     outstanding
       Related Party                                                     interest rate
6/98   Note Payable -                --      $50,000     on demand       12% annual     outstanding
       Related Party                                                     interest rate






                                      (8)
<PAGE>
7/98   Warrants issued as        52,500           --     07/10/2003      exercise price outstanding
       additional interest on                                              $1.81
       extension of 3/98 debt
7/98   Warrants issued as        20,000           --     07/10/2003      exercise price outstanding
       additional interest on                                               $1.81
       extension of 3/98 debt
8/98   Warrants issued for       50,000           --     08/15/2001      exercise price outstanding
       services                                                          $1.75
8/98   Note Payable -                --     $100,000     on demand       12% annual     outstanding
       Related Party                                                     interest rate
12/98  Shares issued for        304,097           --            --       --             outstanding
       price guaratee
12/98  Convertible Debentures        --     $500,000     12/02/2004      12% annual     outstanding
                                                                         interest
                                                                         convertible
                                                                         at $2.00 in
                                                                         $1,000 increments
12/98  Warrants issued in       165,000           --     06/2004         issued from    outstanding
       Private Placement                                                 Dec thru June;
                                                                         exercisable at
                                                                         $1.00 to $2.00
01/99  Warrants for services     94,000           --     05/2004         issued from    outstanding
                                                                         Jan thru June;
                                                                         exercisable at
                                                                         $1.00 to $1.45
</TABLE>
     A  significant  factor in the liquidity and cash flow of the Company is the
timely collection of its accounts  receivable.  Accounts receivable from patient
care,  net of allowance  for doubtful  accounts,  decreased  14.6% to $6,938,227
during the year ended  June 30,  1999 from  $8,126,972  at June 30,  1998.  This
decrease in accounts  receivable is largely the result of the  write-down of the
accounts receivable for closed facilities,  increased staff,  standardization of
some  procedures for collecting  receivables  and a more  aggressive  collection
policy.  The increased  staff has allowed the company to  concentrate on current
accounts   receivable   and  resolve  any  problem  issues  before  they  become
uncollectable.  The Company's  collection  policy calls for earlier contact with
insurance  carriers with regard to payment,  use of fax and  registered  mail to
follow-up or resubmit  claims and earlier  employment of collection  agencies to
assist in the  collection  process.  Our  collectors  will also seek  assistance
through every legal means, including the State insurance  commissioner's office,
when appropriate,  to collect claims. At the same time, the Company continues to
increase  reserves  for bad debt based on potential  insurance  denials and past
difficulty in collections. In February 1998 the Company entered into an accounts
receivable   funding  revolving  credit  agreement  with  Healthcare   Financial
Partners-Funding II, L.P. ("HCFP"), on behalf of five of its subsidiaries, which
provides for funding of up to $4,000,000 based on outstanding  receivables.  The
outstanding  balance  on  this  receivables  financing  on  June  30,  1999  was
approximately $1,669,830.

     The Company believes that it has sufficient  financing available to sustain
existing  operations  for the  foreseeable  future.  The Company also intends to
renew the  expansion of its existing  operations  through new product  lines and
expansion  of  contracts.  The  Company  will also  expand  through its web site
operations offering the behavioral health professional goods and services unique




                                      (9)
<PAGE>
and specific to their needs for a fee.

     The  liquidation of the assets and  liabilities of Franvale may result in a
non-cash financial  statement gain of approximately  $2,000,000.  In the quarter
ended  December  31,  1998 the  company  was  relieved  of the HUD  mortgage  of
approximately  $6,741,000 and  surrendered  the underlying  assets  amounting to
approximately  $4,329,000.  The  recognition of the gain has been deferred until
final resolution of all contingent liabilities.



                                      (10)
<PAGE>
ITEM 7.           FINANCIAL STATEMENTS.
                                                                 AT PAGE
Index..............................................................F-1
Independent auditor'report.........................................F-2
Consolidated balance sheets........................................F-3
Consolidated statements of operation...............................F-4
Consolidated statements of changes in stockholders'equity..........F-5
Consolidated statements of cash flows..............................F-6, F-7
Consolidated notes to financial statements.........................F-8


                                                                           F-1




                                      (11)
<PAGE>
INDEPENDENT AUDITORS' REPORT


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


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

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

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

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




                                                                BDO Seidman, LLP
Boston, Massachusetts
September 10, 1999
                                                                              F2


                                      (12)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

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

Accounts receivable, noncurrent                      595,000           685,000
Other receivables, noncurrent, related party,
  net of allowance for doubtful accounts of
  $782,000 in 1999 and $382,000 in 1998(Note K)    2,908,113         2,941,402
Other receivables                                    109,165           426,195
Property and equipment, net (Notes A, B and D)     1,483,319         2,128,273
Deferred income tax asset (Note F)                   154,700           154,700
Deferred financing costs, net of amortization
  of $64,041 and $18,065 at June 30, 1999 and
  1998, respectively                                  45,067            53,608
Goodwill, net of accumulated amortization of
  $116,900 and $307,707 at June 30, 1999 and 1998,
  respectively (Note A)                            1,761,075         2,011,613
Other assets (Note A)                                297,781            19,386
                                                 ___________       ___________
      Total assets                               $15,027,434       $16,952,350
                                                 ___________       ___________

LIABILITIES
Current liabilities:
Accounts payable                               $   1,832,750       $ 2,346,213
Notes payable - related parties (Note E)             200,000           159,496
Current maturities of long-term debt (Note C)      1,286,318         1,107,167
Revolving credit note (Note C)                     1,669,830         1,683,458
Current portion of obligations under capital
 leases (Note D)                                      60,815            67,492
Accrued payroll, payroll taxes and benefits          333,955           729,194
Accrued expenses and other liabilities             1,459,290         1,004,763
Net Current Liabilities
  of Discontiuned Operations (Note A and I)        2,641,537         2,641,537
                                                 ___________       ___________
Total current liabilities                          9,484,495         9,739,320

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

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


                                                                           F-3


                                      (13)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

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

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

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

         Total operating expenses             19,691,234            24,346,787
                                             ___________          _____________
 Loss from operations                           (551,738)            (3,100,598)

Other income (expense):
     Interest income                            451,271                391,353
     Interest expense                        (1,258,314)            (1,289,642)
     Other income, net                           64,129                 58,583
                                            ___________           _____________
          Total other expense, net            (742,914)               (839,706)

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

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

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

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

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

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

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

See notes to financial statements.
                                                                             F-4


                                      (14)
<PAGE>
PHC, INC.  AND SUBSIDIARIES
<TABLE>

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

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

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

Balance - June 30, 1997         2,877,836  $28,778   730,360  $ 7,304   199,816  $ 1,998     500       $  5
Conversion of debt              1,331,696   13,317
Conversion of preferred stock
  series A                        246,305    2,463                                          (500)        (5)
Issuance of shares with
  acquisition                      41,024      410
Issuance private placement
   shares                         172,414    1,724
Conversion of shares                3,032       31    (3,032)     (31)
Cancel class C common stock                                            (199,816)  (1,998)
Issue warrants for services
Issuance of shares with
   consulting agreement            20,870      209
Issuance of shares with
   earn out agreement             227,347    2,274
Issuance of employee stock purchase
   plan shares                     14,743      147
Issuance of preferred stock Series B                                                         950         10
Adjustment related to beneficial
   conversion feature of convertible
   preferred stock
Warrant issued with debt
Treasury stock issued to employees
Dividends on preferred stock
Costs related to private placements
Net Loss - year ended June 30, 1998    --       --        --       --        --       --      --         --
                                   _______   _______   _______  _______  ______  ________   ______     ______
Balance -June 30, 1998
       (as restated)             4,935,267  $49,353   727,328   $7,273         0       $0     950        $10

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

Net Loss - year ended June 30, 1999    --       --        --       --        --       --      --         --
                                   _______   _______   _______  _______  ______  ________   ______     ______

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

See notes to financial statements.
</TABLE>

                                      (15)
<PAGE>
PHC, INC.  AND SUBSIDIARIES (con't)

Consolidated  Statements of Changes In Stockholders'  Equity (See Notes A, C, H,
J, K and N)
                      Additional
                      Paid-in
                      Capital,
                      Common      Treasury   Shares   Accumulated
                      Stock        Shares    Amount     Deficit       Total
                    _____________  ________  ______   ____________    _____

Balance - June 30,
   1997                $10,398,630  8,656  $(37,818)  $(4,674,316)   $5,724,581
Conversion of debt       2,696,789                                    2,710,106
Conversion of preferred
  stock series A           (2,458)                                            0
Issuance of shares with
  acquisition              79,605                                        80,015
Issuance private placement
  shares                  498,276                                       500,000
Conversion of shares                                                         -0-
Cancel class C common
  stock                     1,998                                            -0-
Issue warrants for
  services                184,523                                       184,523
Issuance of shares with
  consulting agreement     36,249                                        36,458
Issuance of shares with
  earn out agreement      531,991                                       534,265
Issuance of employee
  stock purchase plan
  shares                   35,750                                        35,897
Issuance of preferred
  stock series B          949,990                                       950,000
Adjustment related to
  beneficial conversion
  feature of convertible
  preferred stock         190,000                        (190,000)           -0-
Warrant issued with debt   48,809                                        48,809
Treasury stock issued to
  employees                        (5,880)   25,696                      25,696
Dividends on preferred stock                              (17,060)      (17,060)
Costs related to private
  placements             (164,257)                                     (164,257)
Net loss-year ended June
  30, 1998                     --      --        --    (6,379,839)   (6,379,839)
                      _____________  ________  ______   ____________  _________
Balance - June 30,
  1998 (as restated)  $15,485,895   2,776  $(12,122) $(11,261,215)  $ 4,269,194

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


See notes to financial statements
                                                                             F-5

                                      (16)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Consolidated Statements of Cash Flows

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


See notes to financial statements
                                                                             F-6

                                      (17)
<PAGE>

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


See notes to financial statements                                           F-7


                                      (17)
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and consolidation:

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

Until January 1999, the Company  operated Pioneer  Counseling of Virginia,  Inc.
("PCV"),  an 80% owned subsidiary which provided  outpatient  services through a
physicians practice.  Until May 31, 1998, the Company operated Good Hope Center,
a substance  abuse  treatment  facility in West  Greenwich,  Rhode Island ("Good
Hope").  Until June 1, 1998 the Company also operated a subacute  long-term care
facility, Franvale Nursing and Rehabilitation Center ("Franvale"),  in Braintree
Massachusetts.  On June 1, 1998 Franvale was placed into state receivership.  On
October 5, 1998  Franvale  filed for  protection  under the Chapter 7 Bankruptcy
code.  All financial  information  for Franvale is reported in the  accompanying
financial statements as discontinued  operations.  The liquidation of the assets
and liabilities of Franvale may result in a non-cash financial statement gain of
approximately $2,000,000. In the quarter ended December 31, 1998 the company was
relieved of the HUD mortgage of  approximately  $6,741,000 and  surrendered  the
underlying assets amounting to approximately $4,329,000.  The recognition of the
gain has been deferred until final resolution of all contingent liabilities.

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

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


                                      (18)
               <PAGE>                                                        F-8
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

Revenues and accounts receivable (continued)

Medicaid  reimbursements  are currently based on established  rates depending on
the  level  of  care   provided   and  are  adjusted   prospectively.   Medicare
reimbursements  are  currently  based on  provisional  rates  that are  adjusted
retroactively  based on annual cost reports filed by the Company with  Medicare.
The Company's cost reports to Medicare are routinely audited on an annual basis.
The Company  periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision has
been made in the financial statements for any adjustments that might result from
the outcome of Medicare audits.

The Company has $585,714 of  receivables  from Medicaid and Medicare at June 30,
1999,  which  constitute  a  concentration  of credit risk should  Medicaid  and
Medicare  defer or be unable to make  reimbursement  payments as due.  Long-term
assets       include        accounts        receivable-non-current,        other
receivables-non-current-related    party   and   other   receivables.   Accounts
receivable-non-current consists of amounts due from former patients for service.
This  amount  represents   amounts   collectable  under   supplemental   payment
agreements,  arranged by the Company's collection agencies, entered into because
of the  patients' inability  to pay under  normal  payment  terms.  All of these
receivables  have been  extended  beyond their  original  due date.  Accounts of
former patients that do not comply with these  supplemental  payment  agreements
are written off. Other  receivables-non-current-related  party is the amount due
from  a  related  professional  corporation  net of the  related  allowance  for
doubtful accounts.  This amount consists of the balance due of funds advanced to
the professional  corporation for acquisition  costs,  management fees,  working
capital and interest on the advanced  funds (see  discussion  regarding  BSC-NY,
Inc. in Note K). Other receivables consists of amounts due to the Company from a
third  party  in a  licensure  agreement  and  amounts  due from  employees  for
advances.  Charity care amounted to approximately  $242,000 and $504,000 for the
years ended June 30, 1999 and 1998, respectively. Patient care revenue is stated
net of charity care in the accompanying statements of operations.

Property and equipment:

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

                                                          Estimated
                          Assets                         Useful Life
                        ________                       _________________

                        Buildings                         39 years
                        Furniture and equipment            3 through 10 years
                        Motor vehicles                    5 years
                        Leasehold improvements            Term of lease

Other assets:

Other assets are primarily deposits and deferred expenses.

Goodwill, net of accumulated amortization:

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

                                                                             F-9


                                      (19)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

Basic and diluted loss per share:

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

In 1997, the Financial  Accounting  Standards Board (FASB) issued  Statement No.
128,  Earnings per share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  affects of options,  warrants  and  convertible  securities.  Dilutive
earnings per share is similar to the previously  reported fully diluted earnings
per  share.  Diluted  loss  per  share  does  not  include  warrants,   options,
convertible  securities  or  contingently  issuable  shares  that  would have an
anti-dilutive effect.

Estimates and assumptions:

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

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

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

Impairment of long-lived assets:

During the year ended June 30, 1999 the Company wrote off the carrying  value of
goodwill for Pioneer Counseling of Virginia,  Inc.,  approximately $305,000, and
wrote down the  remaining  balance of accounts  receivable  for the  facility of
approximately $43,000. During the year ended June 30, 1998 the Company wrote off
the carrying value of goodwill for PHC of Rhode Island,  Inc.,  approximately  $
23,000,  and wrote off equipment and the land and building assets related to the
capital lease from that facility aggregating  approximately  $1,240,000 in total
assets and the related liability of approximately  $1,300,000.  Also in 1998 the
Company wrote down the remaining  balance of accounts  receivable  from a closed
California  facility,  approximately  $92,000,  and the equipment,  goodwill and
additional  closing costs  recorded for the Blacksburg  facility,  approximately
$136,000,  which was closed in fiscal  year 1999 to  consolidate  operations  in
Salem,  Virginia.  All of the above write-downs were considered necessary due to
the closing of facilities.  The assets had no ongoing value or were written-down
to their net realizable value. Write-downs in the carrying value of goodwill and
property and equipment are charged to  depreciation  and  amortization  expense,
which is included in  administrative  expenses in the  Company's  statements  of
operations. Write-downs in accounts receivable were charged to the provision for
doubtful accounts in the accompanying statements of operations.
                                                                            F-10


                                      (20)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

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

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

Stock-based compensation:

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

All of the Company's  employees are employed  under  leasing  arrangements.  The
Company  believes that its leased  employees  meet the common law  definition of
employee and therefore qualify as employees for purposes of applying SFAS 123.

Recent Accounting Pronouncements:

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

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

In April 1998  Statement  of Position  98-5,  Reporting on the Costs of Start-up
Activities was issued which required such costs,  including  organization costs,
to be expensed as incurred and is effective  for fiscal  years  beginning  after
December 15, 1998.  The Company does not expect that this  Statement of Position
will  have a  material  impact  on the  Company's  statement  of  operations  or
financial position.

                                                                           F-11

                                      (21)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

 NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:


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

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

NOTE C  NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                          June 30,
                                                     1999            1998
                                                    ______        __________
Note payable with interest at 9% requiring
  monthly payments of $1,150 through May 2001       $23,509         $34,636
9% mortgage note due in monthly installments
  of $4,850, including  interest through July
  1, 2012 when the remaining principal balance
  is payable                                        462,814         478,582
Note payable due in monthly installments of
  $21,506  including  interest at 10.5% through
  November 1, 1999 when the remaining principal
  balance is payable, collateralized by all
  assets of PHN and certain receivables.
  Interest only payments were made from May 1998
  through October 1998 per subsequent agreement.    261,802         374,190
Note payable due in monthly installments of
  $26,131 including interest at 11.5% through
  June 2000 when the remaining principal balance
  is payable, collateralized by all assets of NPP.
  Interest only payments were made from May 1998
 through October 1998 per subsequent agreement.     471,297         598,848
Note payable due in monthly installments of
  $5,558 including interest at 9.25% through
  May 2012 when the remaining principal balance
  is payable, collateralized by real estate.              0         521,000
Term mortgage note payable with interst only
  payments through March 1998 principal due in
  monthly installments of $9,167 beginning
  April 1998 through February 2001.  A balloon
  payment of approximately $1,300,000 plus
  interst is due March 2001, interest at prime
  plus 5% (12.75% at June 30, 1999) collateralized
  by all assets of PHM.                           1,433,333       1,600,000


                                      (22)
<PAGE>
NOTE C  NOTES PAYABLE AND LONG-TERM DEBT (CON'T)

Long-term debt is summarized as follows:
                                                          June 30,
                                                     1999            1998
                                                    ______        __________
Note payable bearing interest at prime plus
  3-1/2% (11.25% at June 30, 1999) with
  the principal due on November 10, 1998 as
  extended and collateralized by MRC's real
  property and BSC's accounts receivable and
  cross-collateralized with the revolving
  credit note referred to below.                    324,730         350,000
Note payable due in monthly installments of
  $2,378 including interest at 12% through
  October 1999.                                       9,278               0
 Note payable due in monthly installments of
  $7,633 including interest at 12% through
  October 1999.                                      29,785               0
                                                  __________      __________
                                                  3,016,548        3,957,256
Less current maturities                           1,286,318        1,107,167
                                                  __________      __________
Noncurrent maturities                           $ 1,730,230      $ 2,850,089
                                                  __________      __________

                                                                            F-12


                                      (23)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE C - LONG-TERM DEBT (CONTINUED)

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

                  Year Ending
                   June 30,                         Amount
                  ___________                       _______

                     2000                          $1,286,318
                     2001                           1,303,527
                     2002                              20,634
                     2003                              22,570
                     2004                              24,687
                     Thereafter                      $358,812
                                                     ________
                                                   $3,016,548

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

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

NOTE D - CAPITAL LEASE OBLIGATION

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

The  carrying  value of assets  under  capital  leases  included in property and
equipment is as follows:
                                                            June 30,
                                                     1999               1998
                                                     _______________________

        Equipment and improvements                  $528,820         $511,517
        Less accumulated amortization               (259,564)        (225,703)
                                                    __________       __________
                                                    $269,256         $285,814
                                                                            F-13

                                      (24)
<PAGE>

PHC, INC. AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)

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

           Year Ending
             June 30,
          _____________

           2000                                       $  65,327
           2001                                          47,302
           2002                                          11,201
           2003                                           2,821
           Thereafter                                       235
                                                      __________

           Total future minimum lease payments          126,886
           Less amount representing interest             14,414
                                                      __________

           Present value of future minimum
                lease payments                          112,472

           Less current portion                          60,815
                                                     __________

           Long-term obligations under capital lease  $  51,657
                                                     __________

NOTE E - NOTES PAYABLE - RELATED PARTIES

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


                                                                           F-14

                                      (25)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE F - INCOME TAXES

The Company has the following  deferred tax assets included in the  accompanying
balance sheets:
                                                           Year Ended
                                                            June 30,
                                                      1999          l998
                                                  ________________________
        Temporary differences attributable to:
          Allowance for doubtful accounts          $1,546,000    $1,315,000
          Facility Closing Costs                      198,000        85,000
          Depreciation                                237,000       225,000
          Other                                        86,000         2,000
        Operating loss carryforward                 1,542,000     1,650,000
                                                    _________     __________
                Total deferred tax asset            3,609,000     3,277,000

        Less:
           Valuation allowance                     (2,995,000)   (2,607,000)
                                                    _________     __________
        Subtotal                                      614,000       670,000
           Current portion                           (459,300)     (515,300)
                                                    _________     __________
              Long-term portion                     $ 154,700     $ 154,700
                                                    _________     __________

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

Income tax expense is as follows:
                                                         Year Ended
                                                            June 30,
                                                      1999          l998
                                                  ________________________

           Current state income taxes                $ 59,434      $219,239
                                                    _________     __________

Reconciliations  of the statutory  U.S.  Federal income taxes based on a rate of
34% to actual income taxes is as follows:
                                                          Year Ended
                                                            June 30,
                                                      1999          l998
                                                  ________________________
           Income tax benefit at statutory
             rate                                  $ (440,200)  $(2,044,400)
           State income taxes, net of federal
             benefit                                   39,000       144,700
           Increase in valuation allowance            388,000     1,780,000
           Increase due to nondeductible items,
             primarily penalties and travel
             and entertainment expenses                37,000       161,231
           Other                                       35,634       177,708
                                                    _________     __________
                                                    $  59,434    $  219,239
                                                    _________     __________

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

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

                                                                            F-15

                                      (26)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE F - INCOME TAXES (CONTINUED)

The Company  anticipates  that it will have sufficient  taxable income in future
fiscal  years to realize  its net  deferred  tax assets  existing as of June 30,
1999.  The  Company  has  closed  two  facilities  that   contributed  the  most
significantly to its past losses, the Franvale Nursing and Rehabilitation Center
and the Good Hope Center. The Company has also implemented procedures to improve
the operating  efficiency of its remaining centers. The Company also anticipates
that it will have a substantial gain on the closing of its Franvale  facility of
over $2,000,000 (see Note I).

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

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


        Year Ending
          June 30,                 Amount
        ___________                ______

          2000                    $ 606,854
          2001                      562,243
          2002                      552,339
          2003                      504,989
          2004                      562,320
          Thereafter                 14,584
                                  _________
                                $ 2,803,329

 Litigation and contingency:

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

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

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

                                                                            F-16

                                      (27)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS

[1]     Stock plans:

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

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

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

     The  non-employee  directors'  stock option plan  provides for the grant of
     nonstatutory stock options automatically at the time of each annual meeting
     of the Board. Through June 30, 1999, options for 23,500 shares were granted
     under this plan. A maximum of 50,000  shares may be issued under this plan.
     Each  outside  director  is granted an option to purchase  2,000  shares of
     Class A common stock at fair market value on the date of grant, vesting 25%
     immediately and 25% on each of the first three anniversaries of the grant.

     In  February  1997,  all  95,375  shares  underlying  the then  outstanding
     employee stock options were repriced to the current market price, using the
     existing exercise  durations.  In September 1998, all 21,875 options due to
     expire, were extended for an additional five years. Also in September 1998,
     all 183,875 shares  underlying the then outstanding  employee stock options
     were  repriced to the current  market  price,  using the existing  exercise
     durations.

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

                                                                            F-17

                                      (28)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS (CONTINUED)

     The Company had the following activity in its stock option plans for fiscal
     1999 and 1998:

                                                 Number        Weighted-Average
                                                   of           Exercise Price
                                                 Shares           Per Share
                                                 ______        ________________

       Option plans:
         Balance - June 30, 1997                205,375            $4.27
         Granted                                210,000            $2.37
         Cancelled                              (40,000)           $3.21
         Balance - June 30, 1998                375,375            $3.32
         Granted                                218,500            $1.21
         Cancelled                              (71,000)           $1.95
         Repriced Options
           Original                            (183,875)           $2.96
           Repriced                             183,875            $1.25
         Balance - June 30, 1999                522,875            $2.02

[2]  Stock-based compensation:

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

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

     The Company has adopted the disclosure-only provisions of SFAS No. 123, but
     applies   Accounting   Principles   Board   Opinion   No.  25  and  related
     interpretations  in  accounting  for its plans.  There was no  compensation
     expense recognized in 1999 or 1998. If the Company had elected to recognize
     compensation  cost for the plans  based on the fair value at the grant date
     for awards granted,  consistent with the method prescribed by SFAS No. 123,
     loss per share would have been changed to the pro forma  amounts  indicated
     below:


                                                                            F-18


                                      (29)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE H - STOCK PLANS (CONTINUED)
                                                              Year Ended
                                                               June 30,
                                                         1999          1998
                                                         __________________
     Loss applicable    As reported
      to common          Continuing Operations       $(1,496,196)   $(4,366,603)
      shareholders       Discontinued Operations              --     (2,220,296)

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

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

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

The fair value of the Company's stock options used to compute pro forma loss and
loss per share  disclosures  is the estimated  present value at grant date using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions for 1999 and 1998: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of 6.5%; and an expected holding period of five years.

The per share  weighed-average  grant-date  fair value of options granted during
the years ended June 30, 1999 and 1998 was $.48 and $.87, respectively.

NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS

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

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

                                                                           F-19


                                      (30)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS (CONTINUED)

Although  the full  extent  of the  financial  impact  on PHC,  Inc.  cannot  be
determined at this time,  the  management of PHC, Inc. does not believe that the
liquidation  of  the  assets  and  liabilities  of  Quality  Care  will  have  a
substantial  negative  impact on PHC's  financial  position  or the  results  of
operations.  The  Company is  subject to a  guarantee  signed by PHC,  Inc.  for
furniture and  equipment  purchased by Quality Care during the fiscal year ended
June  30,  1996.  The  amount  of this  debt  recorded  by  Quality  Care in the
accompanying financial statements is approximately  $150,000. The liquidation of
the assets  and  liabilities  of  Franvale  may  result in a non-cash  financial
statement gain of  approximately  $2,000,000.  In the quarter ended December 31,
1998 the company was  relieved of the HUD mortgage of  approximately  $6,741,000
and surrendered the underlying assets amounting to approximately $4,329,000. The
recognition  of the  gain  has  been  deferred  until  final  resolution  of all
contingent  liabilities.  As of June 30,  1999 the  Company  paid  approximately
$220,000 in costs  related to record  transfer and  litigation  surrounding  the
close of Franvale.  This total deferred amount and any litigation settlements or
other  related  costs  will be  offset  against  the  Quality  Care  Centers  of
Massachusetts, Inc. gain when recognized.

NOTE J - CERTAIN CAPITAL TRANSACTIONS

In addition to the outstanding options under the Company's stock plans (Note H),
the Company has the following options and warrants outstanding at June 30, 1999:
<TABLE>
<S>            <C>                                <C>              <C>              <C>
   DATE OF                                             NUMBER OF       EXERCISE    EXPIRATION
  ISSUANCE     DESCRIPTION                              SHARES           PRICE         DATE

03/10/1994     IPO Warrants
               Equity transaction                  1,792,862 shares $5.90 per share  March 2000
02/08/1996     Private Placement warrants with
               common stock issuance
               Equity transaction                    746,662 shares $3.71 per share  January 2001
02/27/1996     Warrants issued with the exercise of
               Bridge warrants
               Equity transaction                     37,002 shares $6.94 per share  February 2001
11/01/1996     Warrant for debt placement service
               $125,000 value charged to interest
               expense over term of debt              25,000 shares $2.00 per share  October 2001
02/18/1997     Warrant for investor relation services
               $1,210 value passed as an adjustment    3,559 shares $2.95 per share  February 2002
03/03/1997     Consultant warrant for investor relations
               $16,306 value passed as an adjustment  40,000 shares $2.62 per share  March 2002
09/17/1998     Consultant warrant for investor
               $12,776 value passed as an adjustment  40,000 shares  $2.00 per share  March 2002
03/31/1997     Warrants issued as registration penalty
               on Convertible Denbeture $46,375
               value charged to interest expense
               over term of debentures               150,000 shares $2.00 per share  March 2002
06/04/1997     Warrants issued with preferred stock
               placement Equity transaction           50,000 shares $2.75 per share  June 2000
06/01/1997     Warrants issued for investment banker
               services $193,748 value charged to
               professional fees                     150,000 shares $2.50 per share  May 2002
09/19/1997     Private Placement warrants with common
               stock issuance
               Equity transaction                     86,207 shares $2.90 per share  Sept 2002
03/10/1998     Warrants issued as a penalty for late
               registration of private placement shares
               Equity transaction                      3,000 shares $2.90 per share  March 2003
03/10/1998     Warrants issued as additional interest
               on debt $48,809 value charged
               to interest expense
               over term of loan                      52,500 shares $2.38 per share  March 2003
03/19/1998     Warrants issued with preferred stock
               private placement
               Equity transaction                     49,990 shares $2.31 per share  March 2001

                                                                            F-20

                                      (31)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

   DATE OF                                             NUMBER OF       EXERCISE    EXPIRATION
  ISSUANCE     DESCRIPTION                              SHARES           PRICE         DATE

07/10/1998     Warrants issued with extension of debt
               $28,740 value charged to interest
               expense over term of loan              52,500 shares $1.81 per share  July 2003
07/10/1998     Warrants   issued  with   extension
               of debt as price guarantee
               $14,779 value charged to interest
               expense over term of loan              20,000 shares $1.50 per share  July 2003
12/31/1998     Warrants issued with convertible
               debenture
               $9,240 value charged to professional
               fees over term of debenture            25,000 shares $1.00 per share  Dec 2004
12/31/1998     Warrants issued for convertible
               debentures finders fee
               $25,873 value charged to professional
               fees over term of debenture            60,000 shares $1.00 per share  Dec 2003
12/31/1998     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $2.00 per share  Dec 2003
12/31/1998     Warrants issued for convertible
               debentures finders fee
               $3,246 value charged to professional
               fees over term of debenture            15,000 shares $1.50 per share  Dec 2003
12/01/1998     Warrants issued for convertible
               debentures finders fee
               $1,302 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  Dec 2003
01/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  Jan 2004
02/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  Feb 2004
03/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  March 2004
04/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  Apr 2004
05/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  May 2004
06/01/1999     Warrants issued for convertible
               debentures finders fee
               $3,696 value charged to professional
               fees over term of debenture            10,000 shares $1.00 per share  Jun 2004
01/05/1999     Warrants for investment banker services
               $18,100 value charged to professional
               fees over service period               37,500 shares $1.45 per share  Jan 2004
04/05/1999     Warrants for investment banker services
               $18,100 value charged to professional
               fees over service period               37,500 shares $1.45 per share  Apr 2004
02/23/1999     Consultant warrant for investor relations
               $1,307 value charged to professional
               fees                                    3,000 shares $1.20 per share  Feb 2004
04/21/1999     Consultant warrant for web site
               development services
               $1,547 value charged to professional
               fees                                    5,000 shares $1.00 per share  Apr 2004
05/18/1999     Consultant warrant for web site
               advisory services
               $1,848 value charged to professional
               fees                                    5,000 shares $1.00 per share  Apr 2004
04/21/1999     Warrant issued for management
               consultant services
               $1,547 value charged to professional
               fees                                    5,000 shares $1.00 per share  Apr 2004
05/18/1999     Warrant issued for management consultant
               services
               $370 value charged to professional
               fees                                    1,000 shares $1.00 per share  May 2004

</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 charged to
     operations  consistent with the underlying reason the warrants were issued.
     Charges to  operations  in  connection  with  these  warrants  amounted  to
     approximately $160,000 and $233,000 in fiscal 1999 and 1998 respectively.

     In September  1997, the Company  received  $500,000 in exchange for 172,414
     unregistered  shares of PHC,  Inc.  class A common  stock and  warrants  to
     purchase  86,207  additional  shares of PHC, Inc.  class A common stock for
     $2.90 per share in a private  placement.  The  agreement  required that the
     shares  be  registered  within  90 days  of  closing  date  of the  private
     placement.  The registration was not complete by the deadline therefore the
     Company was required to issue warrants to purchase 3,000 additional  shares
     at $2.90 per share.

                                                                            F-21


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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

In February 1998, the Company received  $950,000 in exchange for the issuance of
Series B convertible  preferred  stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001.  The number of shares of Class A common stock into which the  preferred
stock may be  converted  is equal to 80% of the closing bid price of the Class A
common  stock as  reported  by  NASDAQ  for the five  trading  days  immediately
preceding  the  conversion  which  resulted in a deemed  dividend of $190,000 in
fiscal 1998. Cumulative preferred dividends are at the rate of $60 per share per
year, payable quarterly. Dividends are payable in cash or in shares of preferred
stock at $1,000 per share.  For the year ended June 30, 1999 and 1998  dividends
amounted  to $ 142,110 and  $17,060  respectively.  During the fiscal year ended
June 30,  1999 the  Company  issued 53 shares  of  series B  preferred  stock in
payment of dividends in lieu of cash. The series B convertible  preferred  stock
agreement  carries with it a $2.00 minimum  conversion price  guarantee.  If the
actual computed conversion price is lower than the minimum conversion price, the
Company was  originally  required to issue a promissory  note for the difference
between the market value of the shares to be issued at the conversion  price and
at the minimum  conversion  price.  Subsequent  to the issuance of the preferred
stock,  the Company obtained the right to issue either shares of common stock or
promissory notes for the "price guarantee" differential.

In December 1998, the Company issued $500,000 in 12%  convertible  debentures to
private investors.  These debentures require quarterly interest payments and are
convertible  in $1,000  increments  for 500 shares of PHC,  Inc.  class A common
stock. In conjunction  with this debt placement the Company has issued or agreed
to issue warrants to purchase 10,000 shares of PHC, Inc. class A common stock at
$2.00 per share,  15,000 shares of PHC,  Inc.  class A common stock at $1.50 per
share and 175,000 shares of PHC, Inc. class A common stock at $1.00 per share.

On March 26, 1998 the Company  issued  227,347  shares of the Company's  Class A
Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY,
Inc. in full  payment for the earn-out due to be paid to them for the year ended
October 31, 1997 resulting in additional goodwill.  Of the 227,347 shares issued
127,924  were issued in lieu of cash and were  subject to a price  guarantee  of
$2.35,  payable in  shares.  Under the price  guarantee  the  Company  issued an
additional  304,097  shares of Common  Stock in the quarter  ended  December 31,
1998. The value of the guarantee shares issued was recorded as 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  effect of  transactions  through June 30, 1999 are
reflected in the table above.

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

                                                                           F-22

                                      (33)
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE K - ACQUISITIONS

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

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

On  November 1, 1996,  BSC-NY,  Inc.  ("BSC"),  merged  with  Behavioral  Stress
Centers,  Inc.,  a  provider  of  management  and  administrative   services  to
psychotherapy  and  psychological   practices  in  the  greater  New  York  City
Metropolitan  Area. In connection with the merger,  the Company advanced 150,000
shares of PHC,  Inc.  Class A common  stock and funds to  Shliselberg  Physician
Services, P.C., formerly Perlow Physicians, P.C., ("Shliselberg"), which were in
turn issued to the former owners of Behavioral  Stress Centers,  Inc. to acquire
the assets of the medical practices previously serviced by BSC. At June 30, 1999
Shliselberg owed the Company  $3,690,113 which includes some acquisition  costs,
management  fees,  working capital  advances and interest on the advances net of
repayments.   Total interest  charged to Shliselberg by the Company was $305,121
and  $378,768  for the years  ended  June 30,  1998 and 1999  respectively.  The
Company expects these amounts to be paid in full;  however,  in consideration of
the  period  of time  expected  for  repayment,  the  lack of  profitability  at
Shliselberg in prior years and the changing healthcare environment,  the Company
established judgmental reserves related to these receivables. During fiscal 1998
the Company  established  a reserve  against  this  receivable  in the amount of
$382,000. The Company increased the reserve to $782,000 in the fiscal year ended
June 30, 1999.  It is expected that  collections  will be received over the next
several years and accordingly,  these amounts have been classified as noncurrent
related party  receivables on the Company's  balance  sheet.  The Company has no
ownership interest in Shliselberg.

The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral  Stress Centers,  Inc. for the three years following
the merger date.  The  additional  purchase  price is based on the income of BSC
before taxes and is to be paid in PHC stock,  at market value up to $200,000 and
the  balance,  if any, in cash.  On March 26, 1998 the  Company  issued  227,347
shares of the Company's  Class A Common Stock to the former owners of Behavioral
Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be
paid to them for the  year  ended  October  31,  1997  resulting  in  additional
goodwill.  Of the 227,347  shares issued 127,924 were issued in lieu of cash and
were subject to a price guarantee of $2.35,  payable in shares.  Under the price
guarantee the Company issued an additional 304,097 shares of Common Stock in the
fiscal year ended June 30, 1999.  The value of the  guarantee  shares issued was
recorded as interest expense.
                                                                            F-23


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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE K - ACQUISITIONS (CONTINUED)

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

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

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

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

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

                                                                           F-24

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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998



NOTE K - ACQUISITIONS (CONTINUED)

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

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

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

In  accordance  with the above  agreements  the purchase  price was allocated as
follows:

          Fixed Assets                                                   10,000
          Covenant not to compete                                        50,000
          Goodwill                                                       38,632
                                                                      _________
                                                                       $ 98,632
                                                                      _________

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

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

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

                                                                            F-25

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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE L - SALE OF RECEIVABLES

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

NOTE M - FOURTH QUARTER ADJUSTMENTS

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

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

The Company  wrote-down  the amount due BSC from  Shliselberg  by  approximately
$368,000  in the  fourth  quarter  of  fiscal  1999 due to slow  collections  at
Shliselberg.

NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1999

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

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

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

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



                                                                            F-26


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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE O - BUSINESS SEGMENT INFORMATION

The Company's nine operating  business units have separate  management teams and
infrastructures   that  offer  behavioral  health  treatment  through  different
delivery  systems.  PHC  of  Michigan,   Inc.  ("PHM")  provides  inpatient  and
outpatient  psychiatric  care. PHC of Utah, Inc. ("PHU") provides  inpatient and
outpatient  treatment of addictive  disorders  and chemical  dependency.  PHC of
Nevada,  Inc.  ("PHN")  provides  psychiatric  treatment on an outpatient  basis
through  fee for  service  and  capitated  rate  contracts  with  employers  and
insurance carriers.  North Point Pioneer,  Inc. ("NPP") operates four outpatient
behavioral health centers under the name of Pioneer Counseling  Centers.  PHC of
Virginia,  Inc. ("PHV") provides inpatient and outpatient treatment of addictive
disorders and chemical  dependency.  Behavioral  Stress  Centers,  Inc.  ("BSC")
provides   management  and   administrative   services  to   psychotherapy   and
psychological  practices.  PHC of  Kansas,  Inc.  ("PHK")  provides  psychiatric
treatment  on an  outpatient  basis.  Behavioral  Health  Online,  Inc.  ("BHO")
provides  behavioral health information and education through its web site. PHC,
Inc. ("PHC"), the parent Company, operates primarily as a management and holding
company for its  subsidiaries  and,  through PDSS,  provides  clinical  support,
referrals  management  and  professional  services for a number of the Company's
national contracts.  As allowed by Statement of Financial  Accounting  Standards
131, PHM, PHU,  PHN,  NPP,  PHV, BSC and PHK have been  aggregated.  None of the
other operating units of the Company exceed the  quantitative  thresholds of the
Standard for separately reporting segment information. Accordingly the following
information is presented as required by SFAS 131:

                        Aggregated Segmemts    All Others           Total
                   __________________________________________________________

1999
Revenues                 $17,569,171         $1,570,325          $19,139,496
Segment profit
 (loss)                   (1,541,087)           187,001           (1,354,086)
Total assets              13,575,413          1,452,021           15,027,434
Capital expenditures         101,384             13,870              115,254
Depreciation &
  Amortization               257,143             68,621              325,764

1998

Revenues                 $18,056,015         $3,190,174          $21,246,189
Segment profit
 (loss)                   (2,054,601)        (2,104,942)          (4,159,543)
Total assets              13,966,730          2,985,620           16,952,350
Capital expenditures         198,930             13,562              212,492
Depreciation &
  Amortization               294,305            379,857              674,162

                                                                           F-27


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<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Financial Statements
June 30, 1999 and 1998

NOTE P - RESTATEMENT OF FINANCIAL STATEMENTS

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

                                        AS REPORTED              AS RESTATED
         Loss from continuing
           operations                   $(4,011,925)             $(4,159,543)
         Loss from discontinued
           operations                    (2,220,296)              (2.220.296)
                                        _____________            ____________
         Loss                            (6,232,221)              (6,379,839)

         Dividends                       (  17,060)                ( 207,060)
                                        _____________            ____________

         Loss applicable to
           common shareholders          $(6,249,281)             $(6,586,899)
                                        _____________            ____________

         Basic and diluted loss
           per common share:

           Continuing operations        $     (0.77)             $     (0.84)
           Discontinued operations            (0.42)                   (0.42)

               Total                    $     (1.19)             $     (1.26)

                                                                           F-28


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<PAGE>

                                  SIGNATURES


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


                                         PHC, INC.

Date:  November 29, 1999            /s/  Bruce A. Shear
       as amended                        President, Chief Executive Officer and
                                         Director, (principal executive officer)