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

[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended June 30, 2004 [ ] Transition report under section
13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from to

Commission file number: 0-22916

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


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

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

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

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

                                      NONE

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

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

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

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

The issuer's revenues for the fiscal year ended June 30, 2004 were $26,648,845.

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 July 28,  2004,  was  $18,337,590.88.  (See
definition of affiliate in Rule 12b-2 of Exchange Act).

At July 28, 2004,  16,576,712  shares of the  issuer's  Class A Common Stock and
776,991 shares of the issuer's Class B Common Stock were outstanding.

                 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
                                    Yes No X


                                     - 1 -
<PAGE>
PART I

ITEM 1.           DESCRIPTION OF BUSINESS

INTRODUCTION

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

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

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

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




                                     - 2 -
<PAGE>
PSYCHIATRIC SERVICES INDUSTRY

Substance Abuse Facilities

     Industry Background

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

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

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

     Company Operations

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

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

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

                                     - 3 -
<PAGE>
     The Company  believes that it has benefited from an increased  awareness of
the need to make substance abuse treatment  services  accessible to the nation's
workforce.  For  example,  Subchapter  D of the  Anti-Drug  Abuse  Act  of  1988
(commonly  known as The Drug Free  Workplace  Act),  requires  employers who are
Federal contractors or Federal grant recipients to establish drug free awareness
programs to inform employees about available drug counseling, rehabilitation and
employee assistance  programs and the consequences of drug abuse violations.  In
response to the Drug Free  Workplace Act, many  companies,  including many major
national corporations and transportation  companies,  have adopted policies that
provide for treatment options as an alternative to termination of employment.

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

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

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

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

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

     Highland Ridge periodically  conducts or participates in research projects.
Highland Ridge was the site of a research project conducted by the University of
Utah Medical School.  The research explored the relationship  between individual
motivation  and treatment  outcomes.  The research was regulated and reviewed by
the Human  Subjects  Review Board of the  University  of Utah and was subject to
federal standards that delineated the nature and scope of research involving


                                     - 4 -
<PAGE>
human  subjects.  Highland  Ridge  benefited from this research by expanding its
professional  relationships  within the medical school community and by applying
the  findings of the  research  to improve  the quality of services  the Company
delivers.  In the  past,  Highland  Ridge  has  also  contracted  with  a  major
pharmaceutical  manufacturer  to  participate in a research study in cooperation
with a local  nursing home.  In the future all  pharmaceutical  research will be
provided through our newest subsidiary, Pivotal Research Centers, Inc.

     MOUNT  REGIS - Mount  Regis  is a  26-bed,  freestanding  alcohol  and drug
treatment center located in Salem, Virginia,  near Roanoke. The Company acquired
the center in 1987.  It is the oldest of its kind in the Roanoke  Valley.  Mount
Regis is  accredited  by the  JCAHO and  licensed  by the  Department  of Mental
Health,  Mental  Retardation and Substance Abuse Services of the Commonwealth of
Virginia.  In addition,  Mount Regis operates Changes,  an outpatient clinic, at
its Salem,  Virginia location.  The Changes clinic provides structured intensive
outpatient  treatment for patients who have been discharged from Mount Regis and
for patients who do not need the formal  structure  of a  residential  treatment
program.  The program is licensed by the  Commonwealth  of Virginia and approved
for reimbursement by major insurance carriers.

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

General Psychiatric Facilities

Introduction

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

     The  Company  offers  inpatient  and  partial  hospitalization   psychiatry
services through Harbor Oaks Hospital.  The Company also currently operates five
outpatient psychiatric facilities.

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

                                     - 5 -
<PAGE>
     Managed health care organizations,  state agencies, physicians and patients
themselves  refer patients to our  facilities.  These  facilities have a patient
population  ranging from children as young as 5 years of age to senior citizens.
Compared to the substance abuse facilities,  the psychiatric  facilities treat a
larger percentage of female patients.

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

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

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

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

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

Call Center Operations

WELLPLACE,  INC. - In the spring of 1994,  the Company began to operate a crisis
hotline service under contract with a major transportation  client. The hotline,
Wellplace,  formerly known as Pioneer  Development  Support  Services,  or PDS2,
shown as contract support services on the accompanying statement of operations,


                                     - 6 -
<PAGE>
is a  national,  24-hour  telephone  service,  which  supplements  the  services
provided by the client's  Employee  Assistance  Programs.  The services provided
include  information,  crisis  intervention,  critical  incidents  coordination,
employee  counselor  support,  client  monitoring,  case  management  and health
promotion.  The  hotline  is  staffed  by  counselors  who refer  callers to the
appropriate  professional resources for assistance with personal problems.  Four
major transportation companies subscribed to these services as of June 30, 2004.
Wellplace also contracts with Wayne County  Michigan to operate its call center.
This call center is located in downtown Detroit,  Michigan.  Wellplaces' primary
focus is now placed on  growing  its  operations  to take  advantage  of current
opportunities  and  capitalize  on the  economies of scale in providing  similar
services to other companies and government units. Wellplace operated the smoking
cessation  quitline for the State of Nebraska  until the contract  expiration in
May 2004.  Wellplace  currently  operates the smoking cessation quitline for the
State of Kansas under a similar contract.  This operation is physically  located
in Highland  Ridge  Hospital,  but a staff  dedicated to Wellplace  provides the
services from a separate designated area of the Hospital.

Research Operations

PIVOTAL RESEARCH CENTERS, INC. - (formerly PIONEER PHARMACEUTICAL RESEARCH, INC.
- PPR) works with major  manufacturers of psychiatric  pharmaceuticals to assist
in the study of the  effects  of certain  pharmaceuticals  in the  treatment  of
specific  mental  illness.  We  recently  expanded  our  operations  related  to
pharmaceutical  studies  through  the  acquisition  of  100%  of the  membership
interest  in Pivotal  Research  Centers,  LLC.  Pivotal  performs  all phases of
clinical research for Phase I-IV drugs under  development  through two dedicated
research  sites,  including one of the largest single  psychiatric  sites in the
country.  Pivotal  currently  has  approximately  22  enrolling  studies  and an
additional  31 ongoing  studies with  approximately  75-80  percent of Pivotal's
research  activity in central  nervous  system  (CNS)  research.  With a current
client base including  AstraZeneca,  Bristol Meyers  Squibb,  Cephalon,  Forest,
GlaxoSmithKline, Lilly, Merck, Mylan, Novartis, Organon, Sepracor and Wyeth, the
Company currently has protocols in Alzheimer's disease,  ADHD, Diabetes Type II,
Generalized  Anxiety Disorder,  Insomnia,  Major Depressive  Disorder,  Obesity,
Pain,  Parkinson's  Disease,  and Shift Work Sleep Disorder.  Although our other
facilities  may  still  provide  study  patients,  all  future  studies  will be
supervised by our research arm, Pivotal Research Centers, Inc.

Internet Operations

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



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<PAGE>
Operating Statistics

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

                                                   Year Ended June 30,

                                                  2004               2003
                                          _____________________________________
     Inpatient

     Net patient service revenues           $ 14,845,163        $ 14,430,069

     Net revenues per patient day (1)           $    414            $    417

     Average occupancy rate (2)                    76.7%               77.7%

     Total number of licensed beds
       at end of period                              130                 122

     Source of Revenues:
         Private (3)                              61.62%              62.20%
         Government (4)                           38.38%              37.80%

     Partial Hospitalization
       and Outpatient

     Net Revenues:
         Individual                          $ 5,647,752         $ 4,865,392
         Contract                            $ 1,925,440         $ 1,947,716

     Sources of revenues:
         Private                                   97.7%               98.0%
         Government                                 2.3%                2.0%

     Other Services:
         Wellplace (5)                       $ 2,984,477          $1,649,374
         Pharmaceutical Studies (6)          $ 1,246,013           $ 940,772

(1)  Net revenues per patient day equals net patient service revenues divided by
     total patient days.
(2)  Average  occupancy  rates were  obtained  by dividing  the total  number of
     patient days in each period by the number of beds available in such period.
(3)  Private pay percentage is the percentage of total patient  revenue  derived
     from all payors other than Medicare and Medicaid.
(4)  Government  pay  percentage  is the  percentage  of total  patient  revenue
     derived from the Medicare and Medicaid programs.
(5)  Wellplace,   formerly  PDS2,  Pioneer  Development  and  Support  Services,
     provides clinical support,  referrals management and professional  services
     for a number of the Company's  national  contracts and a smoking  cessation
     help line for  the state of Kansas  and operates the Wayne County  Michigan
     call center.
(6)  Pharmaceutical  Studies  includes  research studies of the Company prior to
     the  acquisition  of 100% of the  membership  interest in Pivotal  Research
     Centers,  LLC on April  30,  2004 and two  months  operations  of the newly
     acquired Pivotal Research Centers, LLC for the current year.

                                     - 8 -
<PAGE>
Business Strategy

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

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

Marketing and Customers

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

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

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

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

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



                                     - 9 -
<PAGE>
Competition

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

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

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


Revenue Sources and Contracts

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

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

     Insurance  companies and managed care  organizations are entering into sole
source  contracts with  healthcare  providers,  which could limit our ability to
obtain patients.  Private insurers,  managed care organizations and, to a lesser
extent,  Medicaid and Medicare,  are beginning to carve-out  specific  services,
including  mental  health and substance  abuse  services,  and establish  small,
specialized  networks of  providers  for such  services  at fixed  reimbursement
rates.  We are not  aware  of any  lost  business  as a  result  of sole  source


                                     - 10 -
<PAGE>
contracts  to date,  as we have not been  advised by any payor that we have been
eliminated as a provider from their system based on an exclusivity contract with
another  provider.  Continued  growth  in the  use of  carve-out  systems  could
materially  adversely  affect our  business to the extent we are not selected to
participate in such smaller specialized networks or if the reimbursement rate is
not adequate to cover the cost of providing the service.

Quality Assurance and Utilization Review

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

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

Government Regulation

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

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

                                     - 11 -
<PAGE>
     Control of the healthcare  industry  exercised by federal,  state and local
regulatory agencies can increase costs,  establish maximum  reimbursement levels
and limit  expansion.  Our Company and the health care  industry  are subject to
rapid  regulatory  change with respect to licensure and conduct of operations at
existing  facilities,  construction of new  facilities,  acquisition of existing
facilities, the addition of new services,  compliance with physical plant safety
and land use  requirements,  implementation  of  certain  capital  expenditures,
reimbursement  for  services  rendered  and  periodic  government   inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in  the  healthcare  industry  including  our  Company.  As a  result  of  these
restrictions we cannot be certain that payments under  government  programs will
remain at a level  comparable to the present level or be sufficient to cover the
costs allocable to such patients. In addition, many states,  including the State
of  Michigan  where the  majority  of our  Medicaid  Revenue is  generated,  are
considering reductions in state Medicaid budgets


Health Planning Requirements

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


Licensure and Certification

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

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

Medicare Reimbursement

     Currently,  the  only  facility  of  the  Company  that  receives  Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2004, 14.70% of
revenues for Harbor Oaks were derived from Medicare programs.

                                     - 12 -
<PAGE>
     The Medicare program generally reimburses  psychiatric  facilities pursuant
to its prospective  payment system ("PPS"),  in which each facility  receives an
interim  payment of its allowable  costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year.  However,  current Medicare
payment policies allow certain  psychiatric  service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must  comply  with  numerous   organizational   and  operational   requirements.
PPS-exempt  providers  are cost  reimbursed,  receiving  the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively  adjusted upon
the submission of annual cost reports.

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

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

Medicaid Reimbursement

     Currently,  the only  facility of the Company that  receives  reimbursement
under any state Medicaid  program is Harbor Oaks. A portion of Medicaid costs is
paid by states under the Medicaid program and the federal matching  payments are
not made unless the state's portion is made. Accordingly,  the timely receipt of
Medicaid  payments by a facility may be affected by the  financial  condition of
the relevant state.

     Harbor Oaks is a participant in the Medicaid  program  administered  by the
State of  Michigan.  The  Company  receives  reimbursement  on a per diem basis,
inclusive  of  ancillary  costs.  The state  determines  the rate and adjusts it
annually based on cost reports filed by the Company.

Fraud and Abuse Laws

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


                                     - 13 -
<PAGE>
believes that its business  relationships and payment  arrangements  either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.

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

Employees

     As of July  30,  2004,  the  Company  had 404  employees  of whom  six were
dedicated  to  marketing,  131 (19 part time and 1  contingent)  to finance  and
administration  and 267 (31 part time and 40 contingent) to patient care.  Until
January  of 2003,  all of the  Company's  employees  were  leased  through  Team
America,  a national  employee-leasing  firm. The Company elected to discontinue
the use of the leasing Company and begin processing  payroll in-house or using a
more traditional payroll service while providing more employee services when the
benefit of using a leasing company began to diminish.

     The Company believes that it has been successful in attracting  skilled and
experienced personnel.  Competition for such employees is intense,  however, and
there can be no  assurance  that the Company  will be able to attract and retain
necessary  qualified  employees in the future.  On July 31, 2003,  the Company's
largest facility,  Harbor Oaks Hospital,  with  approximately 125 Union eligible
nursing and  administrative  employees,  voted for union  (UAW)  representation.
Contract negotiations are in progress at this time.

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

Insurance

     Each of the Company's facilities maintains separate professional  liability
insurance policies.  Harbor Oaks,  Highland Ridge Hospital,  Mount Regis Center,
Harmony  Healthcare,  Total  Concept and  Pivotal,  Inc.  each have  coverage of
$1,000,000 per claim and $3,000,000 in the aggregate.  In addition,  the Company
has maintained the insurance coverage in place for Pivotal Research Centers, LLC
of $3,000,000  per claim and  $3,000,000 in the  aggregate.  In addition to this
coverage, Harbor Oaks and Mount Regis Center each maintain an umbrella policy of
$1,000,000.  In addition,  these entities maintain general  liability  insurance
coverage in similar amounts.

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

                                     - 14 -
<PAGE>
Acquisition and Expansion

     If we acquire new businesses or expand our businesses,  the operating costs
may be far greater than revenues for a significant period of time. The operating
losses  and  negative  cash  flow   associated   with  start-up   operations  or
acquisitions  could  have a material  adverse  effect on our  profitability  and
liquidity  unless and until such facilities are fully  integrated with our other
operations  and become  self  sufficient.  Until such time we may be required to
borrow at  higher  rates  and less  favorable  terms to  supplement  short  term
operating cash flow shortages.  The acquisition of Pivotal Research Centers, LLC
in April 2004 has impacted our net operating results positively by approximately
$131,000  for the  months  of May and  June  2004.  Since  no  receivables  were
purchased in the  acquisition,  the operations of May and June have impacted the
Company's cash flow negatively by approximately $290,000, which will be reversed
as we collect the receivables.



ITEM 2.           DESCRIPTION OF PROPERTY

Executive Offices

     The Company's executive offices are located in Peabody, Massachusetts.  The
Company's lease agreement in Peabody covers  approximately 4,800 square feet for
a 60-month  term,  which expires  September 16, 2009. The current annual payment
under the lease is $76,800.  The Company  believes  that this  facility  will be
adequate to satisfy its needs for the foreseeable future.

Highland Ridge Hospital

     The Highland Ridge premises consist of approximately  24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental  Health.  The lease is for a six-year  term expiring  December 31,
2009,  which  provides for monthly  rental  payments of  approximately  $21,500.
Changes in rental  payments each year are based on increases or decreases in the
CPI. The Company  believes that these  premises are adequate for its current and
anticipated needs and does not anticipate any difficulty in renewing or securing
alternate space on expiration of the lease.

Mount Regis Center

     The Company owns the Mount Regis facility,  which consists of a three-story
wooden  building  located on an  approximately  two-acre  site in a  residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $358,800.  The facility is used for both
inpatient and outpatient services.  The Company believes that these premises are
adequate for its current and anticipated needs.

Psychiatric Facilities

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

      The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$1,500,000 mortgage on this property. The Company believes that these premises
are adequate for its current and anticipated needs.

                                     - 15 -
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS.

     A  medical  malpractice  claim was filed by a former  patient  against  the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former  clinician  that first  manifested  itself prior to the
Company's  acquisition  of the  subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's  fee for conduct.  The
clinician  declared  bankruptcy  and was not a party  to the  proceeding.  After
numerous  successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.

     The  Company's  subsidiary,  North  Point-Pioneer,   Inc.,  is  covered  by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company,  which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver  acknowledged to the Company,  Frontier's
obligations  under the policy and the Company has  recovered a small  portion of
the legal fees expended to date on this matter.

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

     The financial impact of this settlement and related legal fees is reflected
in the operating  results  during the year ended June 30, 2004. The Company will
continue to seek  reimbursement  from all  sources for amounts  expended on this
case.

     In fiscal  2004,  the State of  Nebraska  asked the  Company to provide the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract.  In the
fourth  quarter of fiscal 2004,  the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the  investigating  agencies on this matter and to date has  expended
approximately $120,000 in legal fees.


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

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended June 30, 2004.




                                     - 16 -
<PAGE>
PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

                                                      HIGH             LOW
                                                     ________         ________

2003
        First Quarter                                $    .89         $    .56
        Second Quarter                               $    .85         $    .65
        Third Quarter                                $    .95         $    .69
        Fourth Quarter                               $    .94         $    .72

2004
        First Quarter                                $    .98         $    .72
        Second Quarter                               $   1.39         $    .83
        Third Quarter                                $   1.71         $   1.17
        Fourth Quarter                               $   1.37         $    .87

2005
        First Quarter (through August 31, 2004)      $    1.19        $    .93


     On August  31,  2004,  the last  reported  sale price of the Class A Common
Stock was  $1.05.  On July 30,  2004,  there  were 715  holders of record of the
Company's  Class A Common Stock and 312 holders of record of the Company's Class
B Common Stock.

DIVIDEND POLICY

     The  Company has never paid any cash  dividends  on its Common  Stock.  The
Company  anticipates  that, in the future,  earnings will be retained for use in
the business or for other corporate  purposes,  and it is not  anticipated  that
cash  dividends  in  respect  to Common  Stock  will be paid in the  foreseeable
future.  Any decision as to the future  payment of dividends  will depend on the
results of  operations,  the  financial  position  of the Company and such other
factors, as the Company's Board of directors, in its discretion, deems relevant.

MARKET RISKS

     The  Company's  failure  to  meet  listing  requirements  resulted  in  the
delisting of the Company's  stock from the Nasdaq Stock Market in December 2000.
Since then, the Company's stock has been a bulletin board traded stock. The cost
of  trading  on the  bulletin  board can be more than the cost of trading on the
SmallCap  market  and since  there  may be an  absence  of market  makers on the
bulletin  board the price may be more  volatile and it may be harder to sell the
securities.  The shares have sold at prices varying  between a low of $.56 and a
high of $1.71  from July 2002  through  July 2004.  If our  common  stock is not
actively  traded,  the small number of  transactions  can result in  significant
swings in the market price,  and it may be difficult for stockholders to dispose
of stock in a timely way at a desirable market price or may result in purchasing
of shares for a higher price.

     Our right to issue  convertible  preferred  stock may adversely  affect the
rights of the common  stock.  Our Board of Directors  has the right to establish
the preferences for and issue up to 1,000,000  shares of preferred stock without
further  stockholder  action.  The terms of any series of preferred stock, which
may include  priority  claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.

                                     - 17 -
<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 quarters and years ended June 30,
2004 and 2003 . It should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.

Overview

     The Company presently provides  behavioral health care services through two
substance abuse treatment  centers,  a psychiatric  hospital and five outpatient
psychiatric centers (collectively called "treatment facilities").  The Company's
revenue for providing  behavioral  health services  through these  facilities is
derived from contracts with managed care companies,  Medicare,  Medicaid,  state
agencies,  railroads,  gaming industry  corporations and individual clients. The
profitability of the Company is largely dependent on the level of patient census
and the payor mix at these treatment  facilities.  Patient census is measured by
the number of days a client  remains  overnight at an inpatient  facility or the
number of visits or encounters with clients at outpatient clinics.  Payor mix is
determined  by the  source of  payment  to be  received  for each  client  being
provided billable services.  The Company's  administrative  expenses do not vary
greatly as a percentage  of total revenue but the  percentage  tends to decrease
slightly as revenue  increases.  Although  the Company has changed the focus and
reduced  expenses of its internet  operation,  Behavioral  Health  Online,  Inc.
continues to provide  technology  and internet  support for the Company's  other
operations.  It also  continues to provide  behavioral  health  information  and
education  through its web site at  Wellplace.com.  The expenses of the internet
operation  decreased  approximately 25% for the fiscal year ended June 30, 2004,
as the total effect of cost cuts were realized. The Company's research division,
Pivotal  Research  Centers,   Inc.,   contracts  with  major   manufacturers  of
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the  treatment  of specific  illness  through  its  clinics in  Michigan  and
Arizona.

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

Critical Accounting Policies

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

                                     - 18 -
<PAGE>
Revenue recognition and accounts receivable:

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

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

     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study  criteria and  billable  units of service are  provided.  Where a
contract  requires  completion  of the  study  by the  patient,  no  revenue  is
recognized until the patient completes the study program.

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

     All revenues reported by the Company are shown net of estimated  allowances
and charity care provided.  When payment is made, if the contractual  adjustment
is found to have been  understated or overstated,  appropriate  adjustments  are
made in the period the payment is received in  accordance  with the AICPA "Audit
and Accounting Guide for Health Care Organizations."

Allowance for doubtful accounts:

     The provision for bad debt is calculated based on a percentage of each aged
accounts   receivable  category  beginning  at  0-5%  on  current  accounts  and
increasing  incrementally  for  each  additional  30 days  the  account  remains
outstanding  until the account is over 360 days  outstanding,  at which time the
provision  is 70-100% of the  outstanding  balance.  These  percentages  vary by
facility based on each facility's  experience in and expectations for collecting
older  receivables.  The Company  compares this required  reserve  amount to the
current  "Allowance  for doubtful  accounts" to determine  the required bad debt
expense for the period.  This method of determining the required  "Allowance for
doubtful  accounts"  has  historically  resulted in an  allowance  for  doubtful
accounts of 30% or greater of the total outstanding receivables balance.

Income Taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of


                                     - 19 -
<PAGE>
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax basis of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against  deferred tax assets  unless it is more likely than not that such assets
will be  realized in future  periods.  The Company  considers  estimated  future
taxable income or loss and other available  evidence when assessing the need for
its deferred tax valuation allowance.


Valuation of Goodwill and Other Intangible Assets

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


Results of Operations

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

     Total net revenue from all facilities,  excluding the recent acquisition of
Pivotal  Research  Centers,  LLC,  increased  9.1% to $6,885,321 for the quarter
ended June 30, 2004 from $6,313,032 for the quarter ended June 30, 2003. This is
due to increased census in our inpatient  facilities and an increase in contract
revenue provided by Wellplace.  Total operating  expenses related to this period
increased 6.8% to $6,443,509 for the quarter ended June 30, 2004 from $6,035,579
for the  quarter  ended  June  30,  2003.  This is  primarily  due to the  costs
associated with the Wellplace contracts and additional  Administrative  expenses
for  salaries,  benefits and general  insurance  costs.  Net income for the same
period  increased  129.72% to $412,999 for the quarter  ended June 30, 2004 from
$179,786 for the same period last year.

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

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

                                     - 20 -
<PAGE>
     Total net patient  care  revenue  from all  facilities,  increased  5.5% to
$22,418,355  for the year ended June 30, 2004 as compared to $21,243,177 for the
year ended June 30,  2003.  Although  occupancy  and net revenue per patient day
shown in  "Operating  Statistics"  on page 7 of this  report  decreased,  actual
patient  days  increased  by over 1,250  days.  The  decrease in  percentage  of
occupancy is the result of the increase in available  beds  starting in November
2003 from 122 to 130. Net  inpatient  care revenue  from  inpatient  psychiatric
services  increased  2.9% to  $14,845,163  for the year ended June 30, 2004 from
$14,430,069 for the fiscal year ended June 30, 2003. Net partial hospitalization
and  outpatient  care revenue  increased  11.2% to $7,573,192 for the year ended
June 30, 2004 from $6,813,108 for the year ended June 30, 2003. This increase is
the result of  utilization  of these  step-down  programs  by managed  care as a
treatment alternative to inpatient care.  Pharmaceutical study revenue increased
32.4% to $1,246,013  for the year ended June 30, 2004 from $940,772 for the year
ended June 30, 2003.  This increase is due to the recent  acquisition of Pivotal
Research  Centers,  LLC, which  contributed  $699,341 of revenue in the last two
months of the  period.  The largest  increase in revenues  for the year was from
Wellplace,  formerly known as Pioneer Development and Support Services ("PDS2").
Wellplace  revenues  increased  80.9% to $2,984,477  for the year ended June 30,
2004 from  $1,649,374 for the year ended June 30, 2003. This increase in revenue
is due to the inclusion of the Wayne County call center contract, which began in
March 2003 and the Kansas smoking cessation  contract,  which began in May 2003.
All revenues reported in the accompanying  consolidated statements of operations
are shown net of estimated  contractual  adjustments  and charity care provided.
When  payment  is made,  if the  contractual  adjustment  is found to have  been
understated or overstated,  appropriate  adjustments  are made in the period the
payment is received in accordance with the AICPA Audit and Accounting  Guide for
Health Care Organizations.

     Patient  care  expenses,   excluding  Pivotal,  increased  by  $510,187  to
$12,186,386 for the year ended June 30, 2004 from $11,676,199 for the year ended
June 30, 2003 due to the increase in patient census at our inpatient facilities.
Inpatient census increased by approximately 1,250 patient days, 4%, for the year
ended June 30, 2004  compared to the year ended June 30,  2003.  Direct  patient
care payroll and payroll related expenses  increased 6.3% to $10,553,817 for the
year ended June 30, 2004 from  $9,927,554 for the year ended June 30, 2003; food
and dietary expense  increased 9.4% to $524,023 for the year ended June 30, 2004
from  $479,102  for the year  ended June 30,  2003,  hospital  supplies  expense
increased 24.4% to $48,667 for the year ended June 30, 2004 from $39,116 for the
year ended June 30, 2003,  laundry  expense  increased  11.0% to $44,124 for the
year  ended June 30,  2004 from  $39,761  for the year  ended June 30,  2003 and
Medical records  expense  increased 12.2% to $69,415 for the year ended June 30,
2004 from $61,865 for the year ended June 30, 2003. All of these  increases were
a result of increased  patient census and increased  needs of the patients based
on the severity of their illness. Other patient related expenses decreased 31.3%
to $237,806  for the year ended June 30, 2004 from  $345,907  for the year ended
June 30,  2003.  This  decrease  is  primarily  due to the  decrease in patients
participating  in  pharmaceutical  research studies through Pivotal in Michigan.
Laboratory  fees  decreased  17.8% to $151,933  for the year ended June 30, 2004
from  $184,810  for the year  ended  June 30,  2003 due to a change  in  service
provider and closer monitoring of tests ordered.  We continue to closely monitor
the  ordering of all hospital  supplies,  food and  pharmaceutical  supplies but
these expenses all relate  directly to the number of days of inpatient  services
we provide and are  expected  to  increase  with  higher  patient  census.  (see
"Operating Statistics" Part I, Item 1).

     Website  expenses  increased  35.2% to $293,200 for the year ended June 30,
2004  from  $216,827  for the year  ended  June 30,  2003.  This is a result  of
increased  depreciation  expense based on a revision of the estimated  remaining
useful life of the assets.  Without this  change,  website  expenses  would have
remained relatively stable. We expect Website expenses will remain at this level
while the internet Company's focus remains internal.

                                     - 21 -
<PAGE>
     Cost of contract support  services related to Wellplace  increased 79.2% to
$2,391,660  for the year ended June 30, 2004 from  $1,398,602 for the year ended
June 30, 2003.  This  increase is due to the  inclusion of the Wayne County call
center  contract,  which  began  March  2003 and the  Kansas  smoking  cessation
contract,  which  began in May 2003.  Expenses  are  expected to increase as new
contracts are added. Legal fees for Wellplace increased to $133,975 for the year
ended  June 30,  2004  from  $12,352  for the year  ended  June 30,  2003.  This
disproportionate  increase  is a result of an inquiry by the State of  Nebraska.
(see "Legal Proceedings" Part 1, Item 3)

     Total  administrative  expenses,  excluding  Pivotal,  increased  21.5%  to
$9,708,423  for the year ended June 30, 2004 from  $7,987,508 for the year ended
June 30, 2003. Legal expense increased approximately $1,068,000,  which accounts
for  more  than 62% of the  increase.  This is a result  of the  litigation  and
settlement  described  in  "Legal  Proceedings"  on  page  13  of  this  report.
Administrative salaries increased 6.8% to $2,455,232 for the year ended June 30,
2004 from $2,297,918 for the year ended June 30, 2003.  Greater  competition for
experienced  health  care  administrative  staff  resulted  in  these  increased
salaries.  Insurance expense increased 59.0% to $452,147 for the year ended June
30, 2004 from $284,306 for the year ended June 30, 2003 due to general increases
in property and liability  insurance.  Accounting fees, which includes non-audit
accounting  services,  including but not limited to cost reports and  individual
contract  audits,  provided  by firms  other  than  our  principal  audit  firm,
increased  3.0% to $185,626  for the year ended June 30, 2004 from  $180,815 for
the year ended June 30, 2003.

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

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

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

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

                                     - 22 -
<PAGE>
Liquidity and Capital Resources

     The  Company`s net cash used in operating  activities  was $149,744 for the
year ended June 30, 2004  compared to cash  provided by operating  activities of
$1,406,694  for the year ended June 30, 2003.  Cash used in operations in fiscal
2004  consists  primarily  of the net loss of  $257,003,  increase  in total net
accounts receivable of $731,540 due to increased revenue, an increase in prepaid
expenses of $99,001,  an increase  in other  assets of  $135,904,  a decrease in
accrued  expenses and other  liabilities of $126,507 and an increase in deferred
tax  asset of  $34,199.  These  uses of cash  from  operations  were  offset  by
depreciation  and  amortization of $321,835 and non-cash equity based charges of
$99,498, which are non cash expenditures  contributing to the net loss above and
an increase  in  accounts  payable of  $813,077.  The use of cash in  operations
results  primarily from the loss from  operations  resulting from the litigation
settlement and related legal fees as described in Legal Proceedings.

     Cash used in investing  activities in fiscal 2004  consisted of $193,185 in
capital   expenditures  for  the  acquisition  of  property  and  equipment  and
$2,191,697  related to the  acquisition  of the  membership  interest in Pivotal
Research  Centers,  LLC  compared to $226,100  in capital  expenditures  for the
acquisition  of  property  and  equipment  in  fiscal  2003.  (See Note L to the
consolidated  financial  statements  included  herewith  for  additional  detail
regarding the acquisition of Pivotal Research Centers, LLC)

     Cash used in financing  activities in fiscal 2004  consisted of $627,380 in
net debt repayments, $4,000 in deferred financing cost, $3,026,665 received from
the issuance of common stock and $68,827 paid in the purchase of treasury stock.
In addition to these  transactions,  the Company  also issued  50,000  shares of
class B common stock at market value in the retirement of related party debt.

     A  significant  factor in the liquidity and cash flow of the Company is the
timely collection of its accounts  receivable.  Current accounts receivable from
patient care, net of allowance for doubtful accounts increased  approximately 6%
to $5,261,202 on June 30, 2004 from  $4,945,301 on June 30, 2003.  This increase
is a  result  of  increased  net  revenue.  The  Company's  goal is to  maintain
receivables at their current levels or to have any increases  result from higher
revenues and timing of receivables  collection.  Only better accounts receivable
management  due to  increased  staff,  standardization  of some  procedures  for
collecting  receivables  and a more aggressive  collection  policy has made this
possible  in  behavioral  health,  which is  typically  a  difficult  collection
environment.  Increased  staff has allowed the Company to concentrate on current
accounts   receivable   and  resolve  any  problem  issues  before  they  become
uncollectable.  The Company's  collection  policy calls for earlier contact with
insurance  carriers with regard to payment,  use of fax and  registered  mail to
follow-up or resubmit  claims and earlier  employment of collection  agencies to
assist in the  collection  process.  Our  collectors  will also seek  assistance
through every legal means, including the State Insurance  Commissioner's office,
when appropriate,  to collect claims. At the same time, the Company continues to
closely monitor reserves for bad debt based on potential  insurance  denials and
past difficulty in collections.

     In order to  facilitate  the  acquisition  of the  membership  interest  in
Pivotal Research  Centers,  LLC, the Company  determined that it would be in the
best  interest of the  shareholders  to finance the cash portion of the purchase
price through equity as well as raise  additional  working  capital,  since debt
with favorable terms was not available. Therefore, the Company offered 2,800,000
shares of Class A Common  Stock at $1.10 per share in a private  placement.  The
private  placement  also included 25% warrant  coverage at an exercise  price of
$1.10 per share with a three-year term and standard anti-dilution features. This
offering  was  completed  in two  stages.  As a result of the first stage of the
offering,  in March 2004,  the Company  issued  684,999 shares of Class A Common
Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A

                                     - 23 -
<PAGE>
Common Stock.  As a result of the second stage of this offering,  in April 2004,
the Company issued  1,918,196  shares of Class A Common Stock for $2,110,016 and
warrants to purchase  479,549  additional  shares of Class A Common  Stock.  The
private placement  facilitated the closing of the acquisition  without incurring
any additional  bank debt, and also provides the necessary  working  capital for
Pivotal to execute its business plan. . The Company's  future  minimum  payments
under contractual  obligations  related to capital leases,  operating leases and
term notes as of June 30, 2004 are as follows:


      Year Ending                Term       Capital     Operating
      June 30,                   Notes      Leases       Leases       Total
                              __________   ________    __________    __________
      2005                    $1,713,395    $20,540    $1,495,087   $3,229,022
      2006                        55,899     14,532     1,322,882    1,393,313
      2007                        40,913      9,495     1,008,456    1,058,864
      2008                        44,353      2,072       823,136      869,561
      2009                       192,237         --       810,463    1,002,700
      Thereafter                 195,976         --       275,215      471,191
                              __________   ________    __________    __________
    Total minimum payments    $2,242,773    $46,639    $5,735,239    $8,024,651
                              ==========   ========    ==========    ==========

     In  addition  to the above term notes,  the  Company  also has  $250,000 in
outstanding convertible debentures, which include the provision that the holders
of the debentures may put all or any portion of the debentures to the Company at
the original  purchase price plus unpaid  interest upon 30 days written  notice.
These debentures  mature in December 2004 and will,  unless the holders agree to
extend the maturity date, be paid through our operating line of credit  limiting
available funds for operations.  The Company is also subject to three contingent
notes with a total face value of $2,500,000 as part of the Pivotal  acquisition.
Of these notes,  two totaling  $1,500,000  bear interest at 6% per annum.  These
notes  are  subject  to  adjustment  based  on  the  earnings  of  the  acquired
operations. Since adjustment can be positive or negative based on earnings, with
no ceiling or floor,  no liability for these notes, or interest on the notes has
been  recorded.  This  treatment is in accordance  with SFAS No. 141,  "Business
Combinations",  which states that contingent  consideration should be recognized
only when determinable  beyond a reasonable doubt.  Payments on these two notes,
if  required,  are  scheduled  to begin  January  1,  2005.  The final  note for
$1,000,000  does not bear  interest,  is also  subject  to  adjustment  based on
earnings  but has a minimum  value of $200,000 to be paid in PHC,  Inc.  class A
common stock on March 31, 2009.  This minimum  liability  has been recorded with
imputed interest of 6% and is included in the schedule above.

     The Company's current debt includes  $1,500,000 due on the term loan, which
is scheduled  for  repayment  in November  2004.  The Company  plans to renew or
replace this debt or  extinguish it through an equity  placement.  Subsequent to
year end,  the Company  entered  into an  agreement  to sell  526,316  shares of
preferred  stock for  $1,500,000  as an  alternate  financing  plan  should more
favorable  financing  not be  available.  The Company  believes  that,  with its
revolving  credit  facility  through  its  primary  lender  and cash  flow  from
operations,  it will have  sufficient  cash and financing  available to fund its
growing  operations for the foreseeable  future. The Company plans to expand its
core  business  through  increased  capacity at its current  facilities  and the
current  expansion plans to add a leased facility in Detroit  Michigan for up to
114 acute and long term psychiatric  beds. The Company expects to open the first
30-bed unit when the build out has been  completed  and  employees are in place,
which is expected to be in the first  quarter of the current  fiscal  year.  The
Company  expanded  its  pharmaceutical  research  operations  on April 30,  2004
through the acquisition of Pivotal Research Centers,  LLC. Additional  expansion
in this area will be through opening additional locations and signing additional
contracts.  Any  additional  acquisitions  will be  funded  through  acquisition
specific financing instruments.

                                     - 24 -
<PAGE>
     The  Company  has  operated  ongoing  operations  profitably  for  fourteen
consecutive quarters with the exception of the litigation settlement and related
legal  costs  incurred  in the third  quarter of fiscal  year 2004.  While it is
difficult to project whether the current positive business  environment  towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.

Operating Risks

     Negative cash flow could arise as a result of slow government payments. The
concentration of accounts  receivable due from government  payors could create a
severe cash flow problem should these agencies fail to make timely  payment.  We
had  substantial   receivables  from  Medicaid  and  Medicare  of  approximately
$1,135,000 at June 30, 2004 and $1,078,000 at June 30, 2003,  which would create
a cash flow problem should these  agencies  defer or fail to make  reimbursement
payments as due,  which would require us to borrow at  unfavorable  rates or pay
additional  interest as overline  fees on current debt  instruments.  This would
result in lower net income for the same services provided and lower earnings per
share.

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

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

     Aging of accounts  receivables  could  result in our  inability  to collect
receivalbes.  As our accounts  receivable age and become  uncollectable our cash
flow is negatively impacted.  Our accounts receivable from patient accounts (net
of  allowance  for bad debts) were  $5,261,201  at June 30, 2004  compared  with
$4,945,301 at June 30, 2003.  As we expand,  we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase.  We have  focused on better  accounts  receivable  management  through
increased staff,  standardization of some procedures for collecting  receivables
and a more  aggressive  collection  policy  in  order  to  keep  the  change  in
receivables  consistent with the change in revenue.  We have also  established a
more aggressive reserve policy, allowing greater amounts of reserves as accounts
age from the date of billing.  If the amount of  receivables,  which  eventually
become  uncollectible,  exceeds such reserves,  we could be materially adversely
affected.  The following chart represents our Accounts Receivable,  Allowance of
Doubtful  Accounts at June 30, 2004 and 2003,  respectively and Bad Debt Expense
for the years ended June 30, 2004 and 2003:

                    Accounts Receivable    Allowance for doubtful    Bad Debt
                                                  accounts           Expense

  June 30, 2004         $7,287,090              $2,025,888           $1,355,770
  June 30, 2003          7,293,746               2,348,445            1,108,498

                                     - 25 -
<PAGE>
     Due to the Company's  current  negative  working  capital and recent losses
from operations as a result of a medical malpractice  litigation  settlement and
related legal fees of approximately  $1,030,000, if the Company needs additional
financing,  it may require borrowing at unfavorable rates. We are utilizing,  to
the maximum  extent,  our accounts  receivable  funding  facilities,  which bear
interest at the prime rate plus 2.25%, to meet our current cash needs. Should we
require additional funds to meet our cash flow requirements or to fund growth or
new  investments,  we may be  required  to meet  these  needs  with more  costly
financing. Our current financing relationship is scheduled to terminate or renew
as of November 2004. If we are unable to obtain needed financing,  it could have
a material  adverse effect on our financial  condition,  operations and business
prospects.

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

Recent accounting pronouncements

     In December 2003, the Securities and Exchange  Commission ("SEC") published
SAB No. 104, "Revenue Recognition." SAB No. 104 was effective upon issuance. The
adoption  of SAB  No.  104 did  not  have a  material  effect  on the  Company's
financial position, results of operations, or cash flows.


     In November 2002, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple  Deliverables".  Revenue
arrangements with multiple  deliverables  include arrangements which provide for
the delivery or performance of multiple products,  services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time.  EITF Issue No.  00-21 is  effective  for revenue  arrangements
entered into in fiscal  periods  beginning  after June 15, 2003. The adoption of
the  guidance  under  this  consensus  did not have an impact  on the  Company's
financial position, results of operations or cash flows.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150  provides  guidance on how an entity  classifies  and  measures  certain
financial  instruments with  characteristics of both liabilities and equity. For
publicly held  companies,  SFAS No. 150 is effective  for financial  instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires  companies to
record the cumulative effect of financial  instruments  existing at the adoption
date.  The  adoption  of SFAS  150  did not  have  an  effect  on the  Company's
operations, financial position or cash flows.

     In December 2003, the FASB issued a revision to FIN No. 46,  "Consolidation
of Variable  Interest  Entities."  The revised FIN No. 46,  which  replaces  the
original  FIN No.  46 issued in  January  2003,  clarifies  the  application  of
Accounting Research Bulletin No. 51,  "Consolidated  Financial  Statements",  to


                                     - 26 -
<PAGE>
certain entities in which equity investors do not have the  characteristics of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support.   While  this   interpretation   exempts  certain   entities  from  its
requirements,  it also  expands the  definition  of a variable  interest  entity
("VIE")  to a  broader  group  of  entities  than  those  previously  considered
special-purpose  entities ("SPE's") and specifies the criteria under which it is
appropriate for an investor to consolidate VIE's. Application of the revised FIN
No. 46 is required in financial statements of public entities that have interest
in structures  that are commonly  referred to as SPE's for periods  ending after
December 15, 2003. For all other types of VIE's,  application of the revised FIN
No. 46 by public  entities is required for periods  ending after March 15, 2004.
The application of this  interpretation  did not have an impact on the Company's
financial position, results of operations, or cash flows.




                                     - 27 -
<PAGE>
ITEM 7.           FINANCIAL STATEMENTS.                       PAGE

Index                                                          F-1
Report of Independent Registered Public Accounting Firm        F-2
Consolidated balance sheets                                    F-3
Consolidated statements of operations                          F-4
Consolidated statements of changes in stockholders' equity     F-5
Consolidated statements of cash flows                          F-6,
Notes to consolidated financial statements                     F-8 - F-27



                                                                            F-1

                                     - 28 -
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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,  2004  and  2003,  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  auditing  standards of the Public
Company  Accounting  Oversight Board.  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,  2004 and 2003,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.





                                                   /s/ BDO Seidman, LLP

Boston, Massachusetts
August 12, 2004 (except with respect to the matter
discussed in Note M as to which the date is September 20, 2004)
















                                                                            F-2

                                     - 29 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Balance Sheets
                                                             June 30,
                                                       2004            2003
                                                  _____________     ___________
ASSETS (Note C)
 Current assets: (Note A)
     Cash and cash equivalents (Note A)            $  594,823       $   494,991
    Accounts receivable, net of allowance for
          doubtful accounts of $2,025,888
          and $2,348,445 at June 30, 2004
          and 2003, respectively  (Note A)           5,165,150        4,345,301
    Pharmaceutical research receivables                549,974          157,454
    Prepaid expenses                                   168,542           69,541
    Other receivables and advances                     310,221           97,552
    Deferred tax assets (Note F)                       842,806          808,607
    Other receivables, third party (Note A)                 --          172,043
                                                  _____________     ___________
         Total current assets                        7,631,516        6,145,489

Accounts receivable, non-current (Note A)               96,052          600,000
Other receivables (Note A)                              94,469          111,976
Property and equipment, net (Notes A, B, C, D
   and L)                                            1,353,975        1,295,113
Deferred financing costs, net of amortization
  of $134,109 and $130,109 at June 30, 2004
  and 2003, respectively                                    --            4,000
Customer relationships, net of amortization of
  $20,000 at June 30, 2004 (Notes A & L)             2,380,000               --
Goodwill (Notes A and L)                             1,416,119          969,099
Other assets (Note A)                                  339,438          286,046
                                                  _____________     ___________
         Total assets                              $13,311,569       $9,411,723
                                                  =============     ===========
LIABILITIES
Current liabilities:
    Accounts payable                               $ 1,668,509        $ 860,952
    Notes payable - related parties (Note E)                --          100,000
    Current maturities of long-term debt (Note C)    1,713,395          883,659
    Revolving credit note (Note C)                   1,714,380        1,103,561
    Deferred revenue                                    38,151          160,720
    Current portion of obligations under capital
      leases (Note D)                                   18,169           50,805
    Accrued payroll, payroll taxes and benefits      1,305,490        1,016,088
    Accrued expenses and other liabilities (Note K)    682,567          958,527
    Convertible debentures (Notes C)                   250,000          275,000
                                                  _____________     ___________
         Total current liabilities                   7,390,661        5,409,312

Long-term debt, less current maturities  (Note C)      529,378        2,030,285
Obligations under capital leases (Note D)               24,493           36,869
                                                  _____________     ___________
         Total liabilities                           7,944,532        7,476,466
                                                  _____________     ___________
Commitments and contingent liabilities
  (Notes D, G, H, I and L)

STOCKHOLDERS' EQUITY (Notes A, E, G, H, I and L)
Preferred stock, 1,000,000 shares authorized,
  none issued and outstanding                               --               --
Class A common stock, $.01 par value;
  20,000,000 shares authorized, 16,744,848
    and 13,437,067 shares issued at June 30,
    2004 and 2003, respectively.                       167,448          134,371
Class  B common stock, $.01 par value;
  2,000,000 shares authorized, 776,991 and
  726,991 issued and outstanding at June 30, 2004
  and 2003, respectively, each convertible into
  one share of class A common stock                      7,770            7,270
Additional paid-in capital                          22,791,637       19,147,604
Treasury stock, 168,136 and 97,804 class A
  common shares at cost at June 30, 2004 and
      2003, respectively.                             (141,207)         (72,380)
Notes receivable - common stock                             --          (80,000)
Accumulated deficit                                (17,458,611)     (17,201,608)
                                                  _____________     ___________

         Total stockholders' equity                  5,367,037        1,935,257
                                                  _____________     ___________
         Total liabilities and stockholders'
           equity                                  $13,311,569      $ 9,411,723
                                                  ============      ===========


See accompanying notes to consolidated financial statements.                F-3
                                     - 30 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Operations
                                                For the Year Ended June 30,
                                                2004                   2003
                                             ___________            ___________
Revenues: (Note A)
     Patient care, net                       $22,418,355            $21,243,177
     Pharmaceutical study                      1,246,013                940,772
     Contract support services                 2,984,477              1,649,374
                                             ___________            ___________
         Total revenues                       26,648,845             23,833,323
                                             ___________            ___________
Operating expenses:
     Patient care expenses                    12,422,627             11,829,799
     Cost of contract support services         2,391,660              1,398,602
     Provision for doubtful accounts           1,355,770              1,108,498
     Website expenses                            293,200                216,827
     Administrative expenses                  10,040,052              7,833,908
                                             ___________            ___________
         Total operating expenses             26,503,309             22,387,634
                                             ___________            ___________
Income from operations                           145,536              1,445,689
                                             ___________            ___________

Other income (expense):
     Interest income                              44,731                 13,133
     Interest expense                           (531,564)              (542,269)
     Other income, net                            95,588                115,423
                                             ___________            ___________

         Total other expense, net               (391,245)              (413,713)
                                             ___________            ___________

Income (loss) before income taxes               (245,709)             1,031,976
Provision for income taxes (Notes A and F)        11,294                 54,234
                                             ___________            ___________

         Net income (loss)                    $(257,003)            $   977,742
                                             ===========            ===========

Basic income (loss) per common share (Note A) $    (.02)            $       .07
                                             ===========            ===========

Basic weighted average number of shares
  outstanding (Note A)                       14,731,395              13,944,047
                                             ===========            ===========

Fully diluted income (loss) per common share
  (Note A)                                    $    (.02)            $       .07
                                             ===========            ===========

Fully diluted weighted average number of
  shares outstanding (Note A)                14,731,395              14,564,078
                                            ============            ===========

See accompanying notes to consolidated financial statements.                F-4

                                     - 31 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, E, G,
H, I and L)
<TABLE>
<S>                             <C>         <C>         <C>     <C>    <C>

                                        Class A             Class B      Additional
                                      Common Stock        Common Stock     Paid-in
                                    Shares      Amount   Shares   Amount   Capital
                                _____________________________________________________
Balance - June 30, 2002            12,919,042  $129,190  726,991  $7,270  $18,769,863

Costs related to private
placements                                                                     (7,212)
Issuance of shares for options
   exercised                          408,025     4,081                       346,060
Issuance of warrants for services                                               3,185
Shares issued for employee
bonuses                                28,623       286                        18,726
Issuance of shares for warrants
   exercised                           62,363       624                         9,376
Issuance of employee stock
   purchase    plan shares             19,014       190                         7,606
Purchase of shares from former
   employee
Net income-year ended June 30,
   2003
                                    _____________________________________________________
Balance - June 30, 2003            13,437,067   134,371  726,991   7,270   19,147,604

Costs related to private
  placements                                                                  (46,578)
Issuance of shares for options
   exercised                           46,165       461                        50,169
Issuance of warrants for services                                              76,664
Shares issued for employee
bonuses                                11,016       110                        10,279
Issuance of shares for warrants
   exercised                          155,000     1,550                        95,050
Issuance of employee stock
   purchase    plan shares              8,238        83                         6,383
Purchase of shares from former
   employee
Net value of repriced options                                                   5,425
Forgiveness of stock purchase
   debt
Private placement                   2,660,012    26,600                     2,899,414
Shares issued in acquisition          427,350     4,273                       495,727
Conversion of debt into Class B
   common stock                                           50,000     500       51,500
Net loss year ended June 30, 2004____________________________________________________
Balance - June 30, 2004            16,744,848  $167,448  776,991  $7,770  $22,791,637
                                 ====================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                     - 32 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, E, G,
H, I and L)
<TABLE>
<S>                           <C>         <C>        <C>         <C>          <C>
                                                         Notes
                                                       Receivable
                                  Treasury Stock      Common Stock  Accumulated
                                 Shares    Amount       Purchase      Deficit       Total
                                ___________________________________________________________

Balance - June 30, 2002           38,126   $(30,988)    $(80,000)   $(18,179,350)   $615,985

Costs related to private
   placements                                                                         (7,212)
Issuance of shares for
   options exercised                                                                 350,141
Issuance of warrants for
   services                                                                            3,185
Shares issued for
   employee bonuses                                                                   19,012
Issuance of shares for
warrants exercised                                                                    10,000

Issuance of employee stock
   purchase plan shares                                                                7,796
Purchase of shares from
   former employee                59,678    (41,392)                                 (41,392)
Net income-year ended June
   30, 2003                                                              977,742     977,742
                               __________  __________   __________   ____________  __________

Balance - June 30, 2003           97,804    (72,380)     (80,000)    (17,201,608)  1,935,257

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

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

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

                                     - 33 -
<PAGE>

PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows
                                                         For the Year
                                                        Ended June 30,
                                                       2004             2003
                                                    __________________________

Cash flows from operating activities:
  Net income (loss)                                     $(257,003)    $ 977,742
  Adjustments to reconcile net income (loss)
        to net cash provided by (used in) operating
        activities:
     Depreciation and amortization                        321,835       198,695
     Deferred income taxes                                (34,199)      (41,814)
     Non-cash compensation                                 74,142        22,686
     Fair value of warrants issued                         25,356         3,185
     Changes in operating assets and liabilities:
       Accounts receivable                               (731,540)      513,193
       Prepaid expenses and other current assets          (99,001)       (2,889)
       Other assets                                      (135,904)      (96,766)
       Accounts payable                                   813,077      (422,437)
       Accrued expenses and other liabilities            (126,507)      255,099
                                                       ___________    __________

     Net cash provided by (used in) operating
         activities                                      (149,744)    1,406,694
                                                       ___________    __________
  Cash flows from investing activities:
      Acquisition of property and equipment              (193,185)     (226,100)
      Costs related to business acquisition (Note L)   (2,191,697)           --
                                                       ___________    __________

           Net cash used in investing activities       (2,384,882)     (226,100)

Cash flows from financing activities:
      Repayment revolving debt, net                       610,819      (365,083)
          Proceeds from borrowings                         49,633       810,081
          Principal payments on long-term debt           (987,832)   (1,359,983)
      Deferred financing costs                              4,000         8,000
      Purchase of treasury stock                          (68,827)      (41,392)
      Proceeds from issuance of common stock, net       3,026,665        58,210
                                                       ___________    __________

          Net cash provided by (used in) financing
            activities                                  2,634,458      (890,167)
                                                      ___________    __________

Net increase in cash and cash equivalents                  99,832       290,427
Cash and cash equivalents, beginning of year              494,991       204,564
                                                      ___________    __________
Cash and cash equivalents, end of year                  $ 594,823     $ 494,991
                                                      ===========    ===========

Supplemental cash flow information:
  Cash paid during the period for:
          Interest                                      $ 452,454     $ 506,909
                                                      ===========    ===========
           Income taxes                                 $ 35,986      $ 121,323
                                                      ===========    ==========


See accompanying notes to consolidated financial statements.                F-6

                                     - 34 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)

                                                   For the Year Ended June 30,
                                                          2004         2003
                                                   ____________________________

Supplemental disclosures of non-cash investing and
  financing activities:
  Conversion of debt into common stock                 $  52,000      $     --
  Issuance of common stock in cashless exercise
    of options                                            15,000       134,866
  Issuance of common stock in cashless exercise
    of warrants                                               --           424


Acquisition disclosure

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

   Property and equipment                  $   85,000
   Intangible assets                        2,847,020
   Accrued expenses                           (40,000)
   Accrued acquisition costs                 (149,016)
   Warrants issued in lieu of cash
      payment for acquisition costs           (51,307)
   Cash paid for purchase                  (2,191,697)
                                            __________

 Fair value of common stock issued         $  500,000
                                           ===========



See accompanying notes to consolidated financial statements.                F-7

                                     - 35 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and business segments:

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

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

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

(3)  Call  center  and help  line  services,  including  two call  centers,  one
     operating  in  Midvale,  Utah and one in  Detroit,  Michigan.  The  Company
     provides help line  services  through  contracts  with major  railroads,  a
     smoking  cessation  contract  with the  state of Kansas  and a call  center
     contract  with the state of  Michigan.  The call  centers  both  operate as
     Wellplace; and

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


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.



                                                                            F-8
                                     - 36 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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.
Activity and cost report  expense  differences  are reviewed on an interim basis
and adjustments are made to the net expected  collectable  revenue  accordingly.
The Company  believes  that  adequate  provision  has been made in the financial
statements  for any  adjustments  that might result from the outcome of Medicare
audits. Approximately 22% and 16% of the Company's total revenue is derived from
Medicare  and  Medicaid  payors  for the  years  ended  June 30,  2004 and 2003,
respectively.   Differences   between  the  amounts   provided  and   subsequent
settlements are recorded in operations in the year of the  settlement.  To date,
settlement adjustments have not been material.

     Patient care revenue is recognized as services are provided, provided there
exists persuasive  evidence of an arrangement,  the fee is fixed or determinable
and  collectability  of  the  related  receivable  is  reasonably  assured.  Pre
-admission  screening of  financial  responsibility  of the  patient,  insurance
carrier or other  contractually  obligated  payor,  provides the Company the net
expected  collectable  patient  revenue  to be  recorded  based  on  contractual
arrangements  with  the  payor or  pre-admission  agreements  with the  patient.
Revenue is not  recognized  for  emergency  provision  of services  for indigent
patients.  As of June 30, 2004, the Company has no outstanding  balance in other
receivables, third party, due as a result of cost report settlements.

     Pharmaceutical  study  revenue is  recognized  only after a  pharmaceutical
study  contract has been awarded and the patient has been  selected and accepted
based on study  criteria  and  billable  units of service  are  provided.  Where
contracts  require  completion  of the  study  by the  patient,  no  revenue  is
recognized until the patient completes the study program.

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

     Long-term assets include accounts receivable non-current, other receivables
and other assets. Accounts receivable,  non-current consists of amounts due from
former  patients  for  service.   This  amount   represents   estimated  amounts
collectable under supplemental  payment  agreements,  arranged by the Company or
its collection agencies,  entered into because of the patients' inability to pay
under normal payment terms.  All of these  receivables have been extended beyond
their  original due date.  Accounts of former  patients  that do not comply with
these supplemental payment agreements are written off when deemed unrecoverable.
Other receivables  included as long-term assets include the non-current  portion
of loans provided to employees and amounts due on a contractual agreement.

     Charity care amounted to  approximately  $147,096 and $54,263 for the years
ended June 30, 2004 and June 30,  2003,  respectively.  Patient  care revenue is
stated  net of  charity  care in the  accompanying  consolidated  statements  of
operations.

     Additionally,  the  Company  had  accounts  receivable  from  Medicaid  and
Medicare of approximately $1,136,000 at June 30, 2004 and $1,078,000 at June 30,
2003.


                                                                            F-9

                                     - 37 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Estimates and assumptions:

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

Reliance on key clients

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

Cash equivalents:

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

Property and equipment:

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

                                        Estimated
               Assets                   Useful Life
            ______________________________________________________

            Buildings                   39 years
            Furniture and equipment      3 through 10 years
            Motor vehicles               5 years
            Leasehold improvements       Lesser of useful life or term of lease

Other assets:

     Other assets consists of deposits, advances and web development costs.

Long-lived assets:

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144,  "Accounting  for the  Impairment  or Disposal of Long-Lived  Assets",  the
Company  reviews  the  carrying  values of its  long-lived  assets for  possible
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amounts of the assets


                                                                           F-10

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Long-lived assets (continued):

may not be recoverable.  Any long-lived assets held for disposal are reported at
the lower of their  carrying  amounts  or fair  value  less  costs to sell.  The
Company  believes  that the  carrying  value of its  long-lived  assets is fully
realizable at June 30, 2004.

Goodwill and other intangible assets:

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

     Customer relationships, acquired as a part of the of the assets acquired in
the membership interest purchase of Pivotal Research Centers,  LLC, (Note L) are
being amortized,  using the straight-line  method, over an estimated useful life
of twenty years.  Amortization  expense of intangible assets,  which amounted to
$20,000 for the fiscal year ended June 30, 2004,  is included in  administrative
expenses in the accompanying consolidated statement of operations. The following
is a summary of  amortization  expense of intangible  assets for the  succeeding
fiscal years as of June 30, 2004:

                     Year Ending
                     June 30,        Amount

                     2005         $  120,000
                     2006            120,000
                     2007            120,000
                     2008            120,000
                     2009            120,000
                     thereafter    1,780,000
                                  __________
                                  $2,380,000
                                  ==========
Goodwill:

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

                                                                           F-11

                                     - 39 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Goodwill and other intangible assets: (continued):

     The  Company's  goodwill of $969,099  relating  to the  treatment  services
reporting  unit of the  Company  and  $447,020  related  to the  research  study
services  reporting unit of the Company were evaluated  under SFAS No. 142 as of
June 30, 2004. As a result of the  evaluation,  the Company  determined  that no
impairment  exists. The Company will continue to test goodwill for impairment at
least annually in accordance with the guidelines of SFAS No. 142.

Fair value of financial instruments:

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

Basic and diluted income per share:

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

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

                                                       Years Ended June 30,
                                                        2004             2003
     Denominator for basic earnings per share-
       weighted  average shares                        14,731,395    13,944,047

     Effect of dilutive securities:
       Employee stock options                                  --       377,741
       Warrants                                                --       242,290
       Convertible debentures                                  --            --
                                                       ___________   __________

     Denominator for diluted earnings per share-
       adjusted weighted average shares and
       assumed conversions                             14,731,395    14,564,078
                                                       ===========  ===========


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



                                                                           F-12
                                     - 40 -
<PAGE>
PHC, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Basic and diluted income per share (continued):

                                                      Years Ended June 30,
                                                     2004            2003
                                                _______________________________

          Employee stock options                   945,000          29,500
          Warrants                               1,415,357         327,500
          Convertible debentures                   125,000         125,000
                                                 ____________     __________
                        Total                    2,485,357         482,000
                                                 ============     ==========

Income taxes:

     The Company follows the liability method of accounting for income taxes, as
set  forth in SFAS  No.  109,  "Accounting  for  Income  Taxes".  SFAS  No.  109
prescribes an asset and liability  approach,  which requires the  recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between  the  carrying  amounts and the tax bases of the
assets and liabilities.  The Company's policy is to record a valuation allowance
against  deferred tax assets  unless it is more likely than not that such assets
will be  realized in future  periods.  The Company  considers  estimated  future
taxable income or loss and other available  evidence when assessing the need for
its deferred tax valuation allowance.

Comprehensive income:

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

Stock-based compensation:

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

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



                                                                           F-13

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Stock-based compensation (continued):
                                                              Year Ended
                                                               June 30,
                                                          2004          2003
                                                     __________________________

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

  Add:  Stock-based employee compensation
    expense included in reported net income
    (loss), net of related tax effects                    74,142        22,686

  Deduct:  Total stock-based employee compensation
    expense determined under fair value based
    method for all awards, net of related taxes         (134,630)      (78,575)
                                                      ____________   ___________
  Pro forma net income (loss)                         $ (317,491)    $ 921,853
                                                      ============   ===========
  Earnings (loss) per share:
    Basic - as reported                               $    (0.02)    $    0.07
                                                      ============   ===========
    Basic - pro forma                                 $    (0.02)    $    0.07
                                                      ============   ===========
    Diluted - as reported                             $    (0.02)    $    0.07
                                                      ============   ===========
    Diluted - pro forma                               $    (0.02)    $    0.06
                                                      ============   ===========

     The  Company  has  computed  the pro forma  disclosures  for stock  options
granted to employees using the Black-Scholes  option pricing model prescribed by
SFAS No. 123. The  assumptions  used and certain  results during each of the two
years ended June 30, 2004 were as follows:
                                                                June 30,
                                                         2004            2003
                                                      __________     __________
    Risk free interest rate                                4.00%          6.00%
    Expected dividend yield                                   --             --
    Expected lives                                    5-10 years     5-10 years
    Expected volatility                                      30%            30%
    Weighted average value of grants per share              $.46           $.29
    Weighted average remaining contractual life of
      options outstanding (years)                           4.05           3.76

Reclassifications:

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

Recent accounting pronouncements:

     In December 2003, the Securities and Exchange  Commission ("SEC") published
SAB No. 104, Revenue Recognition.  SAB No. 104 was effective upon issuance.  The
adoption  of SAB  No.  104 did  not  have a  material  effect  on the  Company's
financial position, results of operations, or cash flows.

                                                                           F-14

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

Recent accounting pronouncements (continued):

     In November 2002, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple  Deliverables".  Revenue
arrangements with multiple  deliverables  include arrangements which provide for
the delivery or performance of multiple products,  services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time.  EITF Issue No.  00-21 is  effective  for revenue  arrangements
entered into in fiscal  periods  beginning  after June 15, 2003. The adoption of
the  guidance  under  this  consensus  did not have an impact  on the  Company's
financial position, results of operations or cash flows.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150  provides  guidance on how an entity  classifies  and  measures  certain
financial  instruments with  characteristics of both liabilities and equity. For
publicly held  companies,  SFAS No. 150 is effective  for financial  instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires  companies to
record the cumulative effect of financial  instruments  existing at the adoption
date.  The  adoption  of SFAS  150  did not  have  an  effect  on the  Company's
operations, financial position or cash flows.

     In December 2003, the FASB issued a revision to FIN No. 46,  "Consolidation
of Variable  Interest  Entities."  The revised FIN No. 46,  which  replaces  the
original  FIN No.  46 issued in  January  2003,  clarifies  the  application  of
Accounting Research Bulletin No. 51,  "Consolidated  Financial  Statements",  to
certain entities in which equity investors do not have the  characteristics of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support.   While  this   interpretation   exempts  certain   entities  from  its
requirements,  it also  expands the  definition  of a variable  interest  entity
("VIE")  to a  broader  group  of  entities  than  those  previously  considered
special-purpose  entities ("SPE's") and specifies the criteria under which it is
appropriate for an investor to consolidate VIE's. Application of the revised FIN
No. 46 is required in financial statements of public entities that have interest
in structures  that are commonly  referred to as SPE's for periods  ending after
December 15, 2003. For all other types of VIE's,  application of the revised FIN
No. 46 by public  entities is required for periods  ending after March 15, 2004.
The application of this  interpretation  did not have an impact on the Company's
financial position, results of operations, or cash flows.

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:
                                                             June 30,
                                                       2004            2003
                                                  ____________________________

  Land                                            $   69,259       $   69,259
  Buildings                                        1,136,963        1,136,963
  Furniture and equipment                          1,446,005        1,284,646
  Motor vehicles                                     134,995           92,871
  Leasehold improvements                             570,291          508,441
                                                  ___________      ___________
                                                   3,357,513        3,092,180

  Less accumulated depreciation and amortization   2,003,538        1,797,067
                                                  ___________      ___________
  Property and equipment, net                     $1,353,975       $1,295,113
                                                  ===========      ===========



                                                                           F-15
                                     - 43 -
<PAGE>

PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE C - NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt is summarized as follows:
                                                                 June 30,
                                                          2004          2003
                                                      ___________   __________
9% mortgage note due in monthly installments of
   $4,850 including interest through July 1, 2012,
   when the remaining principal balance is payable,
   collateralized by a first mortgage on the PHC
   of Virginia, Inc, Mount Regis Center facility.       $358,811      $383,498
Note payable issued in conjunction with the final
   earn-out on the BSC-NY, Inc. acquisition due
   in monthly installments of $11,567 including
   interest at 11% through July 2005.                    141,148       257,384
Note payable issued in conjunction with the final
   earn-out on the BSC-NY, Inc. acquisition due in
   monthly installments of $3,653 including interest
   at 11% through July 2005.                              44,573        81,279
Note payable due in monthly installments of $429
   including  interest at 8.69% through May
     2004.                                                    --         4,536
Note payable due in monthly installments of $665
   including interest at 10.8% through November 2005.     10,211        16,705
Term mortgage note payable with principal installments
  of $45,000 beginning  December 2001 through November
  2002 and increasing annually by $5,000 through November
  2004 at which time the remaining balance becomes due.
  The note bears interest at prime (4.0% at June 30,
  2004) plus 3.5% and is collateralized by all assets
  of PHC of Michigan, Inc., guaranteed by PHC, Inc. and
  may be renewed at maturity at the lender's discretion.
  In May 2003, $500,000 was paid on the revolving credit
  note through an increase in this note. At that time,
  the payments were increased by $5,000 each month but
  all other terms and conditions of the original note
  remain in effect.                                    1,500,542     2,170,542

Note payable  due in monthly installments of $775
  including interest at 3.9% through October 2008.        36,978           --
Note payable in conjunction with the earn out of
  the Pivotal Research Centers, LLC acquisition.
  Minimum payment amount $200,000 in class A common
  stock due March 2009 interested imputed at 6%.
  (Note L)                                               150,510           --
                                                       ___________  ___________
                            Total                      2,242,773     2,913,944
Less current maturities                                1,713,395       883,659
                                                       ___________  ___________
Long-term portion                                     $  529,378   $ 2,030,285
                                                      ============ ============

Maturities of long-term debt are as follows as of June 30, 2004:

      Year Ending
      June 30,                                Amount
      _______________________________________________

      2005                               $ 1,713,395
      2006                                    55,899
      2007                                    40,913
      2008                                    44,353
      2009                                   192,237
      Thereafter                             195,976
                                         ___________
                                          $2,242,773

                                                                           F-16

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

     The Company has a revolving credit note under which a maximum of $3,000,000
may be  outstanding  at any time.  At June 30,  2004 and 2003,  the  outstanding
balance was  $1,714,380  and  $1,103,561,  respectively.  Advances are available
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  (4.0% at June 30,  2004)  plus  2.25%.  The  agreement  is  automatically
renewable  for  one-year  periods  unless   terminated  by  either  party.  Upon
expiration,  all remaining  principal and interest are due. The revolving credit
note is  collateralized  by  substantially  all of the  assets of the  Company's
subsidiaries 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 class A common stock.  The
traded market price of the Company's common stock at the date of issuance of the
convertible  debentures  was  $1.188  per  share  and  accordingly  there was no
beneficial  conversion feature.  The holders of the debentures have the right to
put all or any portion of the debentures to the Company at the original purchase
price plus unpaid  interest upon 30 days written  notice  beginning  December 3,
2001.  Accordingly,  the  debt  is  classified  as a  current  liability  on the
accompanying  consolidated balance sheets. 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.  In July
2002, the holders of the debentures exercised the put provision in the agreement
as to 50% of the  outstanding  debentures,  which was paid as  stipulated in the
agreement. The current outstanding balance of the debentures is $250,000.

NOTE D - CAPITAL LEASE OBLIGATION

     At June 30, 2004,  the Company was obligated  under various  capital leases
for equipment providing for monthly payments of approximately  $4,100 and $4,500
for  fiscal  2004 and  2003,  respectively,  and terms  expiring  from July 2004
through July 2007.

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

                                                              June 30,
                                                        2004          2003
                                                     _________________________

       Equipment and improvements                      $116,185     $ 141,998
       Less accumulated amortization                    (65,007)      (69,322)
                                                     ___________    __________
                                                       $ 51,178      $ 72,676
                                                     ===========    ==========

Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2004:

           Year Ending June 30,
           2005                                                  $20,540
           2006                                                   14,532
           2007                                                    9,495
           2008                                                    2,072
                                                                 ________
           Total future minimum lease payments                    46,639
           Less amount representing interest                       3,977
                                                                ________
           Present value of future minimum lease payments         42,662
           Less current portion                                   18,169
                                                               _________

           Long-term obligations under capital leases            $24,493
                                                               =========
                                                                           F-17

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE E - NOTES PAYABLE - RELATED PARTIES

Related party debt is summarized as follows:                      June 30,
                                                              2004         2003
                                                          __________  _________
Notes payable,  Tot Care, Inc., a company owned by the
President and principal stockholder,  interest at 12%
and payable on demand.  During fiscal 2004, this debt
was extinquished by the issuance of fifty thousand
shares of class B common stock issued, at market,
$52,000, and cash payment for the balance of $48,000
and accrued interest.                                      $    --     $100,000

NOTE F - INCOME TAXES

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

                                                             Year Ended
                                                               June 30,
                                                          2004           2003
                                                      ________________________
      Temporary differences attributable to:
        Allowance for doubtful accounts               $  811,000    $  939,000

        Depreciation                                     109,000        68,000

        Reserves not currently deductible and other      759,000       201,000

        Operating loss carryforward                    3,800,000     3,628,000
                                                      __________      _________
                   Total deferred tax asset            5,479.000     4,836,000
                                                      __________      _________
      Less:
        Valuation allowance                           (4,636,194)   (4,027,393)
                                                      __________      _________
      Subtotal                                           842,806       808,607
                                                      __________      _________
        Current portion                                 (842,806)     (808,607)
                                                      __________     __________
                   Long-term portion                 $        --    $       --
                                                     ===========     ==========

     Although the Company  experienced a loss for the current fiscal year due to
a legal settlement and related legal expenses,  the Company  anticipates that it
will have  sufficient  taxable  income in future fiscal years to realize its net
deferred tax asset.  The Company closed three  facilities that  contributed most
significantly  to its past  losses,  the  Franvale  Nursing  and  Rehabilitation
Center, the Good Hope Center and the Pioneer Counseling of Virginia clinics. The
Company  also  closed  its  practice  management  business  and has  implemented
procedures to improve the operating efficiency of its remaining centers.

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

                                             2004             2003
                                          __________________________

      Current
        Federal                           $      --         $     --
        State                                45,493           96,048
                                          __________        __________
                                             45,493           96,048
                                          __________        __________
      Deferred
        Federal                                  --          (35,542)
        State                               (34,199)          (6,272)
                                          __________        __________
                                            (34,199)         (41,814)
         Income tax provision              $  11,294        $  54,234
                                          ==========        ==========
                                                                           F-18

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE F - INCOME TAXES (CONTINUED)

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

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

     At June 30, 2004 the Company had a federal net operating loss  carryforward
amounting to approximately $10,000,000. The Company's Federal net operating loss
carryforwards  are subject to review and  possible  adjustment  by the  Internal
Revenue  Service  and  are  subject  to  certain  limitations  in the  event  of
cumulative changes in the ownership interest of significant  stockholders over a
three-year period in excess of 50%. The Federal  carryforward  expires beginning
in 2011 through 2024.

     The Company has  provided a  significant  valuation  allowance  against its
deferred tax asset at June 30, 2004 and 2003 due to the  uncertainty of its full
recoverability given the Company's history of operating losses.

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES

Operating leases:

     The Company leases office and treatment facilities, furniture and equipment
under operating  leases  expiring on various dates through  September 2009. Rent
expense for the years ended June 30, 2004 and 2003 was approximately  $1,035,000
and $899,000,  respectively.  Rent expense includes certain short-term  rentals.
Minimum future rental payments under  non-cancelable  operating  leases,  having
remaining terms in excess of one year as of June 30, 2004 are as follows:

                   Year Ending
                     June 30,                Amount

                     2005                 $ 1,495,087
                     2006                   1,322,882
                     2007                   1,008,456
                     2008                     823,136
                     2009                     810,463
                     Thereafter               275,215
                                          ___________
                                           $5,735,239

Notes Receivable:

     In August 2000, the Company  entered into agreements with nine officers and
directors  to provide  each  officer and  director  with  $10,000  with which to
purchase  stock.  One  individual  left the  Company on  February  28,  2001 and
forfeited all rights.  The agreement called for the parties to sign notes, which
would provide the purchased shares as security,  with the Company  releasing the
shares,  and canceling the officers' and directors'  obligations under the Notes
based on  specific  PHC stock price  targets.  In the event that the stock price
targets  were  not  met,


                                                                           F-19


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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):

the agreement  called for the  cancellation of the obligation and release of the
shares on the third  anniversary  of the  agreement.  The notes  were  cancelled
pursuant to these  provisions in August 2003,  which  resulted in a compensation
charge of $80,000 during the quarter ended September 30, 2003. Under FIN 44, the
shares  underlying  the notes were  subject to variable  accounting  but did not
result in any material change in value during any period presented.

Litigation:

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

     A  medical  malpractice  claim was filed by a former  patient  against  the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former  clinician  that first  manifested  itself prior to the
Company's  acquisition  of the  subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fees for conduct.  The
clinician  declared  bankruptcy  and was not a party  to the  proceeding.  After
numerous  successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.

     The  Company's  subsidiary,  North  Point-Pioneer,   Inc.,  is  covered  by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company,  which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver  acknowledged to the Company,  Frontier's
obligations  under the policy and the Company has  recovered a small  portion of
the legal fees expended to date on this matter.

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

     The financial impact of this settlement and related legal fees is reflected
in the  operating  results of the year ended June 30,  2004.  The  Company  will
continue to seek  reimbursement  from all  sources for amounts  expended on this
case.

     In fiscal  2004 the State of  Nebraska  asked the  Company to  provide  the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract.  In the
fourth  quarter of fiscal 2004,  the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the  investigating  agencies on this matter and to date has  expended
approximately $120,000 in legal fees.

Contingent Notes Payable:

     In conjunction with the acquisition of Pivotal Research Centers,  LLC (Note
L), the Company signed three notes,  with face amounts of  $1,000,000,  $500,000
and  $1,000,000.  The ultimate  amount payable under these notes is based on the
future earnings of the acquired entity.  Since all but $200,000 is contingent on
future  earnings  only  $200,000  less imputed  interest has been  recorded as a
liability as of June 30, 2004 as stipulated in SFAS No. 141.


                                                                           F-20

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE H - STOCK AND STOCK PLANS

Common Stock

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

Class A Common Stock

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

     The Class A common stock is non-redeemable and  non-convertible  and has no
pre-emptive  rights.  The shares of Class A common stock offered  hereby and the
shares  issued  on  the  exercise  of  the  warrants  will  be  fully  paid  and
non-assessable.

Class B Common Stock

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

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

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

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

Preferred Stock

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

                                                                           F-21

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

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 1,300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock  options  to  employees  or  nonqualified   stock  options  to  employees,
directors,  consultants and others whose efforts are important to the success of
the Company.  Subject to the provisions of this plan, the compensation committee
of the  Board of  Directors  has the  authority  to  select  the  optionees  and
determine  the terms of the options  including:  (i) the number of shares,  (ii)
option exercise  terms,  (iii) the exercise or purchase price (which in the case
of an incentive stock option will not be less than the market price of the Class
A common  stock as of the date of grant),  (iv) type and duration of transfer or
other  restrictions  and (v) the time and form of payment for  restricted  stock
upon exercise of options.

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

     The  non-employee  directors'  stock option plan  provides for the grant of
nonstatutory  stock options  automatically at the time of each annual meeting of
the Board.  Through June 30, 2004, options for 145,500 shares were granted under
this  plan.  A maximum of 350,000  shares  may be issued  under this plan.  Each
outside  director  is granted  an option to  purchase  10,000  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 and expiring ten
years from the grant date.

     Under the above plans,  at June 30, 2004,  1,775,063  shares were available
for future grant or purchase.

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

     Balance - June 30, 2002                1,275,000             $0.37
     Granted                                  297,500             $0.73
     Exercised                               (555,000)            $0.25
     Expired                                  (15,500)            $0.52
                                           ____________         ________
     Balance - June 30, 2003                1,002,000             $0.54
     Granted                                  130,000             $1.17
     Exercised                                (68,500)            $0.41
     Expired                                 (118,500)            $0.49
                                           ____________         ________
     Balance - June 30, 2004                  945,000             $0.64
                                           ============         ========

     The following tables summarize  information about stock options outstanding
and exercisable at June 30, 2004:

                                                                           F-22

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE H - STOCK AND STOCK PLANS (CONTINUED)

                                   Weighted-Average
                 Number            Remaining Contractual
 Exercise      Outstanding           Life of Options        Number Exercisable
  Price      At June 30,2004        Outstanding (years)     At June 30, 2004
_______________________________________________________________________________

  $ .19              5,000                1.6                    5,000
    .22              8,000                2.8                    8,000
    .25             50,000                5.1                    5,000
    .30            286,500                2.7                  286,500
    .35             40,000                6.0                   30,000
    .45             33,000                2.5                   24,750
    .55            138,000               4.25                  103,500
    .69             25,000                3.5                   12,500
    .74             50,000                7.5                   15,000
    .75            150,000                3.2                   77,500
    .76             20,000                4.5                    5,000
    .81              6,000                5.5                    6,000
    .87             10,000                4.5                    2,500
    .97             15,000                4.9                    3,750
   1.03              6,000                4.5                    6,000
   1.07             10,000                4.9                    2,500
   1.33             50,000                8.5                   12,500
   1.45             25,000                4.6                    6,250
   2.06              6,000                3.5                    6,000
   3.50              6,000                2.6                    6,000
   6.63              5,500                1.5                    5,500
  _____           ________            ________                _________
  $ .64            945,000               4.05                  629,750
  =====            ========              =====                 ========

     The Company  re-priced options to purchase 791,500 shares of class A common
stock in January 2001. During the fiscal year ended June 30, 2004, 43,500 of the
repriced  options  were  exercised  and  10,000  expired.  As a  result  of this
modification,  50,000 of the options  remaining  at June 30, 2004 are subject to
variable accounting from the date of the modification as they become vested. The
compensation  expense related to the vested re-priced  options was approximately
$16,435 and $2,505 for the years ended June 30, 2004 and 2003, respectively.

NOTE I - CERTAIN CAPITAL TRANSACTIONS

     In addition to the  outstanding  options  under the  Company's  stock plans
(Note H), the Company has the following warrants outstanding at June 30, 2004:
<TABLE>
<S>         <C>                                  <C>              <C>          <C>

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

12/31/1998  Warrants issued with convertible
             debenture $9,240 value charged to
             professional fees over term of
             debentures                           43,694 shares   $ .57 per share  Dec 2004
07/01/1999  Warrants issued for convertible
             debentures finders fee
             $5,745 value charged to professional
             fees over term of debentures          17,281 shares  $ .58 per share  July 2004
08/01/1999  Warrants issued for convertible
             debentures finders fee $4,187 value
             charged to professional fees over term
             of debentures                         17,362 shares  $ .58 per share  Aug 2004
                                                                           F-23

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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE I - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)

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

07/05/1999  Warrants for investment banker services
             $12,944 value charged to professional
             fees over service period               68,744 shares $ .79 per share  July 2004
10/05/1999  Warrants for investment banker services
             $6,042 value charged to professional
             fees over service period               68,744 shares $ .79 per share  Oct 2004
03/31/2000  Warrants issued for services $10,000
             value charged to website development and
             $1,247 charged to professional fees when
             extended                               16,483 shares $ .91 per share  Mar 2005
05/26/2000  Warrants issued as additional interest
             on debt $33,264 value charged to interest
             expense                                60,000 shares $1.50 per share  May 2005
12/20/2000  Warrants issued for investment banker
             services $1,938 value charged to
             professiona fees                       28,573 shares $ .15 per share  Dec 2005
04/15/2001  Warrants issued for investor relations
             consulting services $1,136 value charged
             to professional fees                   10,000 shares $ .25 per share  Apr 2006
05/15/2001  Warrants issued for investor relations
             consulting services $2,577 value charged
             to professional fees                   10,000 shares $ .25 per share  May 2006
06/15/2001  Warrants issued for investor relations
             consulting services $2,577 value charged
             to professional fees                   10,000 shares $ .25 per share  June 2006
07/20/2001  Warrants issued for investor relations
             consulting services $1,786 value charged
             to professional fees                   12,000 shared $ .35 per share  July 2006
02/08/2002  Warrants issued for investor relations
             consulting services $391 value charged
             to professional fees                    3,000 shares $ .50 per share  Feb 2007
03/01/2002  Warrants issued for investor relations
             consulting services $1,476 charged to
             professional fees                      34,874 shares $ .36 per share  Mar 2007
03/01/2002  Warrants issued for investor relations
             consulting services $398 charged to
             professional fees                      23,709 shares $ .63 per share  Mar 2007
03/01/2002  Warrants issued for investor relations
             consulting services $310 charged to
             professional fees                       3,000 shares $ .50 per share  Mar 2007
04/01/2002  Warrants issued for investor relations
             consulting services $310 value charged
             to professional fees                    3,000 shares $ .50 per share  Apr 2007
05/01/2002  Warrants issued for investor relations
             consulting services $790 charged to
             professional fees                       3,000 shares $ .50 per share  May 2007
05/07/2002  Warrants issued as a finders fee in
             connection  with preferred stock
             conversion                            151,783 shares $ .45 per share  May 2005
05/07/2002  Warrants issued as a  finders fee in
             connection with preferred stock
             conversion.                            50,594 shares $ .50 per share  May 2005
04/01/2003  Warrants issued for consulting services
             $3,185 charged to professional fees.   10,000 shares $1.00 per share  April 2008
07/03/2003  Warrants issued for conslting services
             $4,430 charged to professional fees    20,000 shares $ .84 per share  July 2008
09/22/2003  Warrants issued for consulting services
             $6,261 charged to professional fees    20,000 shares $ .90 per share  Sept 2008
10/20/2003  Warrants issued for invester relations
             consulting services $6,842 charged to
             professional fees                      30,000 shares $ .86 per share  Oct 2006
10/20/2003  Warrants issued for invester relations
             consulting services $6,578 charged to
             professional fees                      30,000 shares $ .84 per share  Oct 2006
03/02/2004  Warrants issued in a private placement
             of class A common stock               114,431 shares $1.10 per share  Mar 2007
04/29/2004  Warrants issued in a private placement
             of class A common stock               479,549 shares $1.10 per share  Apr 2007
04/30/2004  Warrants issued as a finders fee in
             connection with the acquisition of
             Pivotal, $51,307 recorded  as
             acquisition costs.                    200,000 shares  $1.24 per share Apr 2007
</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 were $25,358 and $3,185
in fiscal 2004 and 2003,  respectively.  These warrants were all fully vested at
grant date.

                                                                           F-24

                                     - 52 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE I- CERTAIN CAPITAL TRANSACTIONS  (CONTINUED)

     Under existing dilution agreements with other stockholders, the issuance of
common stock under  agreements other than the employee stock purchase and option
plans will  increase  the number of shares  issuable  and  decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then  current  market  price and the price at which the new common  stock is
being issued.  The dilutive  effects of  transactions  through June 30, 2004 are
reflected in the table above.  The value of the additional  shares issuable as a
result of these dilution provisions was not material.

NOTE J - BUSINESS SEGMENT INFORMATION

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

                                    - 53 -
<PAGE>

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


                        Treatment   Pharmaceutical     Contract    Administrative
                        Services    Study Services     Services       Services    Eliminations  Total
                        _______________________________________________________________________________

  For the Year ended
   June 30, 2004
Revenues-external
   customers            $22,418,355   $1,246,013    $2,984,477     $       --   $      --   $26,648,845

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

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

</TABLE>

                                                                           F-25



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

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

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

                                                             June 30
                                                     2004             2003
                                               _______________________________
                Accrued professional fees        $  468,035        $ 683,277
                Accrued operating expenses          203,068          263,294
                Income tax payable                   11,464           11,956
                                                ____________       __________
                               Total              $ 682,567        $ 958,527
                                                ============       ==========

NOTE L - ACQUISITIONS

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

     Pivotal performs all phases of clinical research for Phase I-IV drugs under
development  through  two  dedicated  research  sites.   Pivotal  currently  has
approximately  22 enrolling  studies and an additional  31 ongoing  studies with
approximately  75-80 percent of Pivotal's  research  activity in central nervous
system (CNS) research.

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

     Note A is a secured  promissory note with a face value of $1,000,000,  with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly  installments beginning January 2005. The outstanding principal
will be  adjusted  in the first and second  years of the note based on  adjusted
EBITDA as defined in the agreement of $780,000. Where adjusted EBITDA of greater
then  $780,000 for each period  increases the note value by the  difference  and
adjusted  EBITDA of less  than  $780,000  will  decrease  the note  value by the
difference.  Quarterly payments are then made based on the adjusted value of the
notes.

     Note B is a secured promissory note with a face value of $500,000,  with an
annual  interest  rate of 6%, a maturity  date of December 31, 2008 and payments
due in quarterly  installments beginning January 2007. The outstanding principal
will be adjusted on February 1, 2006 based on annual  adjusted EBITDA as defined
in the  agreement  of  $780,000  for the  adjustment  period of  January 1, 2005
through  December 31, 2006.  Where adjusted EBITDA greater then $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment  period will decrease the note value by
the difference.  Quarterly payments are then made based on the adjusted value of
the notes.

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

                                                                           F-26




                                    - 55 -
<PAGE>
PHC, INC.  AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004 and 2003

NOTE L - ACQUISITIONS (CONTINUED)

         The purchase price was allocated as follows:
                  Furniture and equipment             $   85,000
                  Customer relationships               2,400,000
                  Goodwill                               447,020
                  Accrued Expenses                        40,000
                                                   ______________
                                                      $2,892,020

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

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

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

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

                                                      Year Ended June 30,
                                                     (In thousands except
                                                        per share data)
                                                      2003              2004
                                                  ___________     ___________


     Revenues                                     $  27,774         $  30,231

     Net income                                       1,389               191

     Basic income per common share                      .09               .01

     Fully diluted income per common share              .08               .01

NOTE M -SUBSEQUENT EVENTS

     Subsequent  to year end,  the Company  entered  into an  agreement  to sell
526,316  shares of  Preferred  Stock for  $1,500,000  as an  alternative  to the
Company's  term loan  refinancing  should the Company be unable or  unwilling to
refinance when the loan becomes due in November 2004. As  consideration  for the
binding obligation of the investor under this agreement the Company paid $10,000
in cash to the investor.  This agreement was entered into to provide part of the
documentation  required by  Company's  auditor's in their  consideration  of the
Company's ability to continue as a going concern.



                                                                           F-27



                                    - 56 -
<PAGE>
ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     The  preparation of this annual report on form 10-KSB did not result in any
disagreement  with  our  accountants  on  accounting  and  financial  disclosure
requirements.

ITEM 8A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Change in Internal Controls

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





                                    - 57 -
<PAGE>
PART III

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

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors and officers of the Company as of June 30, 2004 are as
follows:

     Name                 Age                Position
______________________________________________________________________________

Bruce A. Shear             49   Director, President and Chief Executive Officer
Robert H. Boswell          56   Senior Vice President
Paula C. Wurts             55   Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D.     66   Director and Clerk
Donald E. Robar (1)(2)     67   Director
Howard W. Phillips         74   Director
William F. Grieco (1)(2)   50   Director
David E. Dangerfield (1)   63   Director

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

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

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

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

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

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



                                    - 58 -
<PAGE>
     GERALD M. PERLOW,  M.D.  has served as a Director of the Company  since May
1993 and as Clerk since February 1996. Dr. Perlow is a retired  cardiologist who
practiced  medicine  in Lynn,  Massachusetts,  and has been  Associate  Clinical
Professor of Cardiology at the Tufts  University  School of Medicine since 1972.
Dr.  Perlow is a Diplomat of the  National  Board of Medical  Examiners  and the
American  Board of Internal  Medicine  (with a  subspecialty  in  cardiovascular
disease) and a Fellow of the American Heart Association, the American College of
Cardiology and the American College of Physicians. From 1987 to 1990, Dr. Perlow
served as the Director, Division of Cardiology, at AtlantiCare Medical Center in
Lynn,  Massachusetts.  Dr.  Perlow  served  as a  consultant  to  Wellplace.com,
formerly  Behavioralhealthonline.com,  in  fiscal  year  2000  and  has  been  a
contributing  journalist to Wellplace.com since 1999. Dr. Perlow received a B.A.
from  Harvard  College  in 1959 and an M.D.  from  Tufts  University  School  of
Medicine in 1963.

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

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

     WILLIAM F. GRIECO has served as a Director of the  Company  since  February
18, 1997. Mr. Grieco has been a Managing Director of Arcadia Strategies,  LLC, a
legal and business  consulting  organization  servicing  science and  technology
companies,  since  1999.  From  2001 to 2002,  he also  served  as  Senior  Vice
President  and  General  Counsel  of  IDX  Systems  Corporation,   a  healthcare
information  technology Company.  From 1995 to 1999 he was Senior Vice President
and General Counsel for Fresenius Medical Care North America. Prior to that, Mr.
Grieco was a partner at Choate,  Hall & Stewart, a general service law firm. Mr.
Grieco  received a BS from Boston  College in 1975,  an MS in Health  Policy and
Management  from  Harvard  University  in 1978 and a JD from Boston  College Law
School in 1981.

     DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has served as the Chief Executive Officer for Valley Mental
Health in Salt Lake City, Utah.  Since 1974, Mr.  Dangerfield has been a partner
for  Professional  Training  Associates  (PTA).  In 1989, he became a consultant
across the nation for managed  mental health care and the  enhancement of mental
health  delivery  services.  David  Dangerfield  serves as a Board member of the
Mental  Health Risk  Retention  Group and Utah Alliance for the Mentally Ill, an
advocacy  organization  of family and  friends of the  mentally  ill,  which are
privately held corporations, and the Utah Hospital Association, which is a state
organization. Mr. Dangerfield graduated from the University of Utah in 1972 with
a Doctorate of Social Work after  receiving  his Masters of Social Work from the
University in 1967.

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


ITEM 10.    Executive Compensation

Employment agreements

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




                                    - 59 -
<PAGE>
Executive Compensation

     Three executive  officers of the Company received  compensation in the 2004
fiscal  year  which  exceeded  $100,000.  The  following  table  sets  forth the
compensation  paid or accrued by the  Company  for  services  rendered  to these
executives in fiscal year 2004, 2003 and 2002:
<TABLE>
<S>                  <C>   <C>    <C>        <C>          <C>              <C>

                           Summary Compensation Table
                                                               Long Term
                                                               Compensation
                               Annual Compensation             Awards
                               ___________________             _____________
 (a)                    (b)    (c)      (d)      (e)           (g)             (i)
                                                                Securities
Name and                                         Other Annual   Underlying      All Other
Principal               Year   Salary   Bonus    Compensation   Options/SARs   Compensation
Position                        ($)      ($)         ($)            (#)             ($)
___________________________________________________________________________________________
Bruce A. Shear          2004  $345,416  $25,147   $15,395 (1)        --       $    --
 President and Chief    2003  $306,771  $25,000   $15,730 (2)    40,000       $11,200
 Executive Officer      2002  $310,000  $37,500   $71,390 (3)    20,000       $ 3,400

Robert H. Boswell       2004  $155,417  $32,794   $15,582 (4)        --       $   --
 Senior Vice President  2003  $152,937  $40,147   $12,820 (5)    25,000       $ 7,000
                        2002  $137,000  $ 7,000   $67,301 (6)    25,000       $ 3,725

Paula C. Wurts          2004  $129,125  $17,647   $13,901 (7)        --       $    --
 Controller, Treasurer  2003  $116,981  $22,000   $11,270 (8)    25,000       $ 7,000
 And Assistant Clerk    2002  $111,800  $ 2,000   $36,825 (9)    25,000       $ 3,725
</TABLE>

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

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

(3)  This amount represents  $3,983  contributed by the Company to the Company's
     Executive Employee Benefit Plan on behalf of Mr. Shear,  $4,768 in premiums
     paid by the Company with respect to life  insurance  for the benefit of Mr.
     Shear,  $336 in club membership dues paid by the Company for the benefit of
     Mr.  Shear,  $2,678  personal  use of a Company  car held by Mr.  Shear and
     $59,625  based on the  intrinsic  value of the repricing of options held by
     Mr. Shear.

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



                                    - 60 -
<PAGE>
(5)  This amount represents a $6,000 automobile allowance, $3,212 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
     Mr.  Boswell,  $617 in benefit  derived from the purchase of shares through
     the employee stock purchase plan,  $401 in club membership dues paid by the
     Company for the benefit of Mr.  Boswell and $1,950  based on the  intrinsic
     value of the repricing of options held by Mr. Boswell

(6)  This amount represents a $6,000 automobile allowance, $2,323 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
     Mr.  Boswell,  $363 in benefit  derived from the purchase of shares through
     the employee stock purchase plan, and $57,975 based on the intrinsic  value
     of the repricing of options held by Mr. Boswell.

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

(8)  This amount represents a $4,800 automobile allowance, $4,211 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $309 in benefit derived from the purchase of shares through the
     employee stock purchase plan and $1,950 based on the intrinsic value of the
     repricing of options held by Ms. Wurts.

(9)  This amount represents a $4,800 automobile allowance, $4,319 contributed by
     the Company to the Company's  Executive  Employee Benefit Plan on behalf of
     Ms. Wurts,  $181 in benefit derived from the purchase of shares through the
     employee  stock  purchase plan and $27,525 based on the intrinsic  value of
     the repricing of options held by Ms. Wurts.

COMPENSATION OF DIRECTORS

     Directors  who are  employees of the Company  receive no  compensation  for
services as members of the Board. Directors who are not employees of the Company
receive  $5,000  stipend per year and $1,250 for each Board meeting they attend.
In  addition,  Directors of the Company are  entitled to receive  certain  stock
option grants under the Company's  Non-Employee  Director Stock Option Plan (the
"Director Plan").



                                   - 61 -
<PAGE>
COMPENSATION COMMITTEE

     During fiscal 2004 the Compensation Committee consisted of Mr. Donald Robar
and Mr. William Grieco. The Compensation Committee met twice during fiscal 2004.
Mr. Shear does not  participate in discussions  concerning,  or vote to approve,
his salary.  As required by the SEC, all members of the  compensation  committee
are independent.

AUDIT COMMITTEE

     During fiscal 2004 the Audit Committee  consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco.  As required by the SEC, all members of
the committee are independent and Dr.  Dangerfield serves as the chairmen and is
the financial expert on the committee. The Audit Committee met five times during
fiscal  2004.  Two  committee  members  attended  all of the  meetings  and  one
committee member missed two of the meetings.

OPTION PLANS

Stock Plan

     The Board of  Directors  adopted the  Company's  first stock option plan on
August 26, 1993. This stock option plan has expired however, options to purchase
709,000  shares  remain  outstanding  under the plan.  On September 22, 2003 the
Board of  Directors  adopted the  Company's  current  stock  option plan and the
stockholders  of the Company  approved the plan on December 31, 2003.  The Stock
Plan  provides for the issuance of a maximum of 1,300,000  shares of the Class A
Common Stock of the Company  pursuant to the grant of incentive stock options to
employees and the grant of  nonqualified  stock  options or restricted  stock to
employees, directors,  consultants and others whose efforts are important to the
success of the Company.

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

     During the fiscal year ended June 30, 2004, the Company  issued  additional
options to purchase  90,000  shares of Class A Common Stock under the 2003 Stock
Plan at a price per share  ranging  from $.79 to $1.45.  Generally,  options are
exercisable  upon grant for 25% of the shares  covered  with an  additional  25%
becoming  exercisable  on each of the first three  anniversaries  of the date of
grant.




                                    - 62 -
<PAGE>
     A total of 68,500 options were exercised in a cashless  exercise during the
fiscal year ended June 30, 2004, of which 43,500  options were exercised at $.25
and 25,000 were exercised at $.70.

Employee Stock Purchase Plan

     On October 18, 1995, the Board of Directors voted to provide  employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to  participate  in an Employee  Stock  Purchase Plan (the "Plan"),  which
became  effective  February 1, 1996.  The price per share shall be the lesser of
85% of the  average of the bid and ask price on the first day of the plan period
or the last day of the plan  period.  The plan was amended on December  19, 2001
and December  19, 2002 to allow for a total of 500,000  shares of class A common
stock to be issued under the plan.

     As of June 30, 2004 a total of 139,437 shares of class A common stock have
been issued under the plan. Eleven employees are participating in the current
offering period under the plan, which began on February 1, 2004 and will end on
January 31, 2005.

Non-Employee Director Stock Plan

     The Board of Directors  adopted the Company's  Non-Employee  Director Stock
Plan (the "Director  Plan") on October 18, 1995. The Stockholders of the Company
approved  the plan on December  15,  1995 and  amended the plan on December  26,
1997, December 19, 2001 and December 19, 2002. Non-qualified options to purchase
a total of 350,000  shares of Class A Common  Stock are  available  for issuance
under the Director Plan.

     The Board of Directors or a committee of the Board administers the Director
Plan.  Under the Director Plan,  each director of the Company who was a director
at the time of adoption of the Director Plan and who was not a current or former
employee of the Company  received an option to purchase that number of shares of
Class A Common  Stock as equals 500  multiplied  by the years of service of such
director  as of the date of the  grant.  At the  first  meeting  of the Board of
Directors  subsequent to each annual meeting of stockholders,  each non-employee
director is granted under the Director  Plan an option to purchase  2,000 shares
of the Class A Common  Stock of the Company.  The plan was amended  December 19,
2001 to increase the number of options  issued each year from 2,000 per director
to 10,000 per director.  The option  exercise  price is the fair market value of
the  shares of the  Company's  Class A Common  Stock on the date of  grant.  The
options are  non-transferable and become exercisable as follows: 25% immediately
and 25% on each of the first,  second and third anniversaries of the grant date.
If an optionee  ceases to be a member of the Board of  Directors  other than for
death or permanent  disability,  the unexercised  portion of the options, to the
extent  unvested,  immediately  terminate,  and the  unexercised  portion of the
options  which have vested lapse 180 days after the date the optionee  ceases to
serve  on the  Board.  In the  event  of  death  or  permanent  disability,  all
unexercised options vest and the optionee or his or her legal representative has
the  right  to  exercise  the  option  for a period  of 180  days or  until  the
expiration of the option, if sooner.

     On February 18, 1997,  the Company  issued options to purchase 6,000 shares
of Class A Common  Stock under the Director  Plan at an exercise  price of $3.50
per share.  On January 22, 1998,  the Company  issued  options to purchase 6,000
shares of Class A Common Stock under the Director  Plan at an exercise  price of
$2.06. On February 23, 1999, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director  Plan at an exercise  price of $1.03.
On December 28, 1999,  the Company  issued  options to purchase  6,000 shares of




                                    - 63 -
<PAGE>
class A common stock under the Director  Plan at an exercise  price of $.81.  On
January 11, 2001 the Company  issued options to purchase 6,000 shares of class A
common stock under the Director  Plan at an exercise  price of $.22. On December
19, 2001 the Company issued options to purchase  30,000 shares of class A common
stock under the Director  Plan at an exercise  price of $.35. On January 8, 2003
the Company  issued  options to purchase  40,000  shares of class A common stock
under the  Director  Plan at an exercise  price of $.74.  On January  9,2004 the
Company issued  options to purchase  40,000 shares of class A common stock under
the Director Plan at an exercise  price of $1.33.  As of June 30, 2004,  none of
the options issued had been exercised.

     The following table provides information about options granted to the named
executive  officers during fiscal 2004 under the Company's Stock Plan,  Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.

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

Bruce A. Shear                  0
Robert H. Boswell               0
Paula C. Wurts                  0

All Directors and Officers
 as a group (8 Persons)    50,000      38.4%     $1.33     01/09/2009-01/08/2014

     The following  table provides  information  about options  exercised by the
named executive  officers during fiscal 2004 and the number and value of options
held at the end of fiscal 2004.


(a)                   (b)        (c)           (d)                      (e)
                                               Number of
                                               Securities         Value of
                                               Underlying         Unexercised
                                               Unexercised        In-the-Money
                                               Options/SARs       Options/SARs
                     Shares                    at FY-End (#)      at FY-End ($)
                     Acquired on  Value        Exercisable/       Exercisable/
Name                 Exercise (#) Realized ($) Unexercisable ($)  Unexercisable
________________________________________________________________________________
Bruce A. Shear              0     $     0       102,000/50,000   $69,870/$31,500
Robert H. Boswell       3,750       3,750        67,250/27,083   $44,723/$15,354
Paula C. Wurts          3,750       3,750        67,250/30,417   $44,723/$18,221

All Directors and
 Officers as a group
 (8 persons)           17,375     $16,380      510,250/235,750 $315,040/$106,245


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




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<PAGE>
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding the ownership
of shares of the  Company's  Class A Common  Stock and Class B Common Stock (the
only classes of common stock of the Company  currently  outstanding)  as of July
30, 2004 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named  executive  officers  as  defined in 17 CFR  228.402(a)(2)  and all
directors  and officers of the Company as a group.  Unless  otherwise  indicated
below,  to the  knowledge  of the  Company,  all persons  listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent  authority is shared by spouses under applicable law. In preparing
the following table, the Company has relied on the information  furnished by the
persons listed below:

                         Name and Address    Amount and Nature        Percent of
Title of Class         of Beneficial Owner   of Beneficial Owner (12)   Class
_______________________________________________________________________________
Class A Common Stock    Bruce A. Shear                518,995(1)         3.1%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        Robert H. Boswell             188,802(2)         1.1%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        Paula C. Wurts                135,988(3)          *
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        Howard W. Phillips            138,625(4)          *
                        P. O. Box 2047
                        East Hampton, NY 11937
                        Gerald M. Perlow              106,250(5)          *
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        Donald E. Robar               105,852(6)          *
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        William F. Grieco             100,875(7)          *
                        115 Marlborough Street
                        Boston, MA   02116
                        David E. Dangerfield           17,500(8)          *
                        5965 South 900 East
                        Salt Lake City, UT 84121
                        All  Directors and Officers
                        as a Group (8 persons)      1,312,887(9)         7.7%




                                    - 65 -
<PAGE>
                         Name and Address    Amount and Nature        Percent of
Title of Class         of Beneficial Owner   of Beneficial Owner (12)   Class
_______________________________________________________________________________

Class A Common Stock    Marathon Capital Mgmt, LLC    853,900            5.1%
(continued)             P. O. Box 771
                        Hunt Valley, MD  21030
                        Peter S. Lynch                668,681            4.0%
                        82 Devonshire Street, S8A
                        Boston, MA  02109
Class B Common Stock
(10)                    Bruce A. Shear                721,259(11)       92.8%
                        c/o PHC, Inc.
                        200 Lake Street
                        Peabody, MA   01960
                        All Directors and Officers    721,259           92.8%
                        as a Group (8 persons)

*    Less than 1%

1.   Includes  102,000  shares  of Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.25
     to $.75 per share.
2.   Includes  67,250  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options at an exercise price range of $.25 to
     $.75 per share.
3.   Includes  67,250  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.25
     to $.75 per share.
4.   Includes 73,375 shares  issuable  pursuant to currently  exercisable  stock
     options having an exercise price range of $.22 to $1.33 per share.
5.   Includes 60,125 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
6.   Includes 63,625 shares  issuable  pursuant to currently  exercisable  stock
     options or stock options which will become  exercisable  within sixty days,
     having an exercise price range of $.22 to $6.63 per share.
7.   Includes  59,125  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently exercisable stock options, having an exercise price range of $.22
     to $3.50 per share.
8.   Includes  17,500  shares  of  Class A Common  Stock  issuable  pursuant  to
     currently  exercisable  stock options,  having an exercise price range of $
     .55 to $1.33 per share.
9.   Includes an  aggregate  of 510,250  shares  issuable  pursuant to currently
     exercisable stock options.  Of those options,  5,500 have an exercise price
     of $6.63 per share,  6,000 have an exercise price of $3.50 per share, 6,000
     have an exercise price of $2.06 per share, 12,500 have an exercise price of
     $1.33 per share,  6,000 have an  exercise  price of $1.03 per share,  6,000
     have an exercise price of $.81 per share,  70,000 have an exercise price of
     $.75 per share,  15,000 have an exercise  price of $.74 per share,  103,500
     have an exercise price of $.55 per share,  11,250 have an exercise price of
     $.45 per share,  30,000 have an exercise  price of $.35 per share,  230,500
     have an exercise  price of $.30 per share and 8,000 have an exercise  price
     of $.22 per share.
10.  Each share of class B common stock is convertible into one share of class A
     common stock  automatically upon any sale or transfer or at any time at the
     option of the holder.
11.  Includes  56,369  shares of class B common stock pledged to Steven J. Shear
     of 2 Addison Avenue,  Lynn,  Massachusetts 01902, Bruce A. Shear's brother,
     to secure the purchase  price  obligation  of Bruce A. Shear in  connection
     with his purchase of his brother's  stock in the Company in December  1988.
     In the absence of any default under this obligation, Bruce A. Shear retains
     full voting power with respect to these shares.




                                    - 66 -
<PAGE>
12.  "Amount and Nature of Beneficial  Ownership".  Each share of Class A Common
     Stock is  entitled  to one vote per share and each  share of Class B Common
     Stock  is  entitled  to five  votes  per  share  on all  matters  on  which
     stockholders  may vote (except that the holders of the Class A Common Stock
     are entitled to elect two members of the  Company's  Board of Directors and
     holders of the Class B Common Stock are entitled to elect all the remaining
     members of the Company's Board of Directors).

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

     Based on the number of shares  listed under the column  headed  "Amount and
Nature of  Beneficial  Ownership,"  the  following  persons  or groups  held the
following  percentages  of voting rights for all shares of common stock combined
as of July 30, 2004:

                  Bruce A. Shear .......................................20.08%
                  All Directors and Officers as a Group
                    (8 persons).........................................23.48%

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Related Party Indebtedness

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

     During the period  ended June 30,  2004,  the  Company  paid Mr.  Shear and
affiliates  approximately  $62,515 in principal and accrued  interest  under the
related party notes. The remaining balance of this debt, $52,000,  was converted
into 50,000 shares of class B common stock at the then current  market price for
class A common stock. As of June 30, 2004 all outstanding related party debt has
been eliminated.




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

(a) EXHIBITS

   Exhibit No.                        Description

     3.1  Restated  Articles  of  Organization  of the  Registrant,  as amended.
          (Filed as exhibit 3.1 to the Company's Registration Statement on March
          2, 1994. Commission file number 333-71418).
    3.1.1 Articles of Amendment filed with the  Commonwealth  of  Massachusetts.
          (Filed  with  the  10-QSB  dated  May  1997.  Commission  file  number
          0-22916).
    3.1.2 Restated  Articles  of  Organization  of the  Registrant,  as amended.
          (Filed as exhibit 3.1.2 to the  Company's  report on Form 10-QSB dated
          May 14, 2001. Commission file number 0-22916).
     3.2  By-laws of the  Registrant,  as amended.  (Filed as exhibit 3.2 to the
          Company's  Post-Effective  Amendment No. 2 on Form S-3 to Registration
          Statement on Form SB-2 under the Securities Act of 1933 dated November
          13, 1995. Commission file number 333-71418).
     4.1  Warrant Guaranty Agreement for Common Stock Purchase Warrants issuable
          by PHC,  Inc.  dated  August 14,  1998 for  Warrants  No. 2 and No. 3.
          (Filed as exhibit 4.19 to the Company's  report on Form 10-KSB,  filed
          with the  Securities  and  Exchange  Commission  on October 14,  1997.
          Commission file number 0-22916).
     4.2  12%  Convertible  Debenture by and between PHC,  Inc., and Dean & Co.,
          dated  December 3, 1998 in the amount of  $500,000.  (Filed as exhibit
          4.20 to the Company's  report on Form 10-QSB dated  February 12, 1999.
          Commission file number 0-22916).
     4.3  Securities  Purchase  Agreement for 12%  Convertible  Debenture by and
          between PHC, Inc. and Dean & Co., a Wisconsin nominee  partnership for
          Common Stock.  (Filed as exhibit 4.21 to the Company's  report on Form
          10-QSB dated February 12, 1999. Commission file number 0-22916).
     4.4  Warrant  Agreement  to purchase up to 25,000  shares of Class A Common
          Stock by and between  PHC,  Inc.,  and Dean & Co.,  dated  December 3,
          1998.  (Filed as exhibit 4.22 to the  Company's  report on Form 10-QSB
          dated February 12, 1999. Commission file number 0-22916).
     4.5  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000  shares of Class A Common  Stock dated July 1, 1999.  (Filed as
          exhibit 4.29 to the Company's  report on Form 10-KSB dated October 13,
          1999. Commission file number 0-22916).
     4.6  Warrant  Agreements by and between PHC, Inc., and George H. Gordon for
          10,000 shares of Class A Common Stock dated August 1, 1999.  (Filed as
          exhibit 4.30 to the Company's  report on Form 10-KSB dated October 13,
          1999. Commission file number 0-22916).
     4.7  Warrant to purchase up to 37,500 shares of Class A Common Stock by and
          between PHC, Inc., and National Securities  Corporation dated April 5,
          1999.  (Filed as exhibit 4.31 to the  Company's  report on Form 10-KSB
          dated October 13, 1999. Commission file number 0-22916).
     4.8  Warrant to purchase up to 37,500 shares of Class A Common Stock by and
          between PHC, Inc., and National  Securities  Corporation dated July 5,
          1999.  (Filed as exhibit 4.32 to the  Company's  report on Form 10-KSB
          dated October 13, 1999. Commission file number 0-22916).
     4.9  Common  Stock  Purchase  Warrant by and between  PHC,  Inc. and Heller
          Healthcare  Finance,  Inc. for 60,000  shares of Class A Common Stock.
          (Filed as exhibit 4.37 to the Company's  report on Form 10-KSB,  filed
          with the  Securities  and Exchange  Commission  on September 29, 2000.
          Commission file number 0-22916).
     4.10 Equity  Purchase  Warrant to purchase 1% equity in  Behavioral  Health
          Online by and between PHC, Inc., and Heller  Healthcare  Finance dated
          March 16,  1998.  (Filed as exhibit  4.38 to the  Company's  quarterly
          report  on  Form  10-QSB,  filed  with  the  Securities  and  Exchange
          Commission on November 14, 2000. Commission file number 0-22916).
     4.11 Warrant  Agreement issued to Marshall Sterman to purchase 10,000 Class
          A Common  shares dated April 15,  2001.  (Filed as exhibit 4.41 to the
          Company's  report on Form 10-QSB dated May 14, 2001.  Commission  file
          number 0-22916).
     4.12 Equity  Purchase  Warrant to purchase 1% equity in  Behavioral  Health
          Online by and between PHC,  Inc., and Heller  Healthcare Finance dated
          December 18, 2000.  (Filed as exhibit 4.36 to the Company's  report on
          Form 10-KSB dated September 25, 2001. Commission file number 0-22916).



                                    - 68 -
<PAGE>
   Exhibit No.                           Description

     4.13 Form of Subscription Agreement and Warrant.  (Filed as exhibit 4.22 to
          the Company's report on Form 8-K filed with th Securities and Exchange
          commission on May 13, 2004. Commission file number 0-22916).
     5.1  Opinion  of Arent Fox PLLC.  (Filed as  exhibit  5.1 to the  Company's
          report on Form S-3 filed with the Securities  and Exchange  Commission
          on July 6, 2004. Commission file number 333-117146).
    10.1  Deed of Trust Note of Mount Regis Center Limited  Partnership in favor
          of Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000,
          guaranteed by PHC,  Inc.,  with Deed of Trust  executed by Mount Regis
          Center,  Limited  Partnership of even date. (Filed as exhibit 10.33 to
          Form SB-2 dated March 2, 1994. Commission file number 333-71418).
    10.2  Assignment  and  Assumption of Limited  Partnership  Interest,  by and
          between PHC of Virginia  Inc. and each  assignor  dated as of June 30,
          1994.  (Filed as exhibit  10.57 to Form 10-KSB on September  28, 1994.
          Commission file number 0-22916).
    10.3  Copy of Note of Bruce A.  Shear in favor of  Steven  J.  Shear,  dated
          December  1988,  in the amount of  $195,695;  Pledge  Agreement by and
          between Bruce A. Shear and Steven J. Shear,  dated  December 15, 1988;
          Stock  Purchase  Agreement by and between Steven J. Shear and Bruce A.
          Shear,  dated  December  1,  1988.  (Filed  as  exhibit  10.52  to the
          Company's  Registration  Statement  on Form SB-2 dated  March 2, 1994.
          Commission file number 333-71418).
    10.4  Unconditional  Guaranty of Payment and performance by and between PHC,
          Inc.  in favor of HCFP.  (Filed as  exhibit  10.112  to the  Company's
          quarterly  report  on Form  10-QSB,  filed  with  the  Securities  and
          Exchange  Commission  on February  25,  1997.  Commission  file number
          0-22916).
    10.5  Agreement between Family  Independence Agency and Harbor Oaks Hospital
          effective  January 1, 1997.  (Filed as exhibit 10.122 to the Company's
          report on Form 10-KSB,  with the Securities and Exchange Commission on
          October 14, 1997. Commission file number 0-22916).
    10.6  Master Contract by and between Family  Independence  Agency and Harbor
          Oaks Hospital  effective  January 1, 1997. (Filed as exhibit 10.123 to
          the Company's  report on Form 10-KSB,  filed with the  Securities  and
          Exchange  Commission  on October  14,  1997.  Commission  file  number
          0-22916).
    10.7  Financial Advisory Agreement, Indemnification Agreement and Warrant by
          and between  Brean  Murray & Company  and PHC,  Inc.  dated  06/01/97.
          (Filed as exhibit 10.125 to the Company's report on Form 10-KSB, filed
          with the  Securities  and  Exchange  Commission  on October 14,  1997.
          Commission file number 0-22916).
    10.8  Loan and Security  Agreement by and among HCFP Funding,  Inc., and PHC
          of Michigan,  Inc., PHC of Utah,  Inc., PHC of Virginia,  Inc., PHC of
          Rhode Island, Inc., and Pioneer Counseling of Virginia,  Inc. dated as
          of  February  18,  1998.  (Filed as  exhibit  10.139 to the  Company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).
    10.9  Credit Line Deed of Trust by and between PHC of  Virginia,  Inc.,  and
          HCFP Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the
          Company's  Registration  Statement  on Form SB-2 dated July 24,  1998.
          Commission file number 333-59927).
    10.10 Promissory  Note for $50,000  dated May 18,  1998 by and between  PHC,
          Inc.  and Tot Care,  Inc.  (Filed as exhibit  10.142 to the  Company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).
    10.11 Promissory  Note for $50,000  dated June 9, 1998 by and  between  PHC,
          Inc.  and Tot Care,  Inc.  (Filed as exhibit  10.143 to the  Company's
          Registration  Statement on Form SB-2 dated July 24,  1998.  Commission
          file number 333-59927).
    10.12 Amendment  No. 1 to Loan  and  Security  Agreement  in the  amount  of
          $4,000,000 by and among HCFP Funding, Inc., and PHC of Michigan, Inc.,
          PHC of Utah, Inc., PHC of Virginia,  Inc., PHC of Rhode Island,  Inc.,
          and Pioneer  Counseling  of  Virginia,  Inc.  dated as of February 18,
          1998.  (Filed as exhibit 10.57 to the Company's  report on Form 10-KSB
          dated October 13, 1998. Commission file number 0-22916).



                                    - 69 -
<PAGE>
  Exhibit No.                        Description


    10.14 Amendment  number 1 to Loan and Security  Agreement dated February 17,
          2000 by and between PHC of Michigan,  Inc., PHC, of Utah, Inc., PHC of
          Virginia,  Inc., PHC of Rhode Island,  Inc. and Pioneer  Counseling of
          Virginia, Inc. and Heller Healthcare Finance, Inc., f/k/a HCFP Funding
          in the amount of $2,500,000.  (Filed as exhibit 10.70 to the Company's
          report  on  Form  10-QSB  filed  with  the   Securities  and  Exchange
          Commission on May 11, 2000. Commission file 0-22916).
    10.15 Promissory  Note for  $532,000  dated May 30, 2000 by and between PHC,
          Inc.  and Irwin J.  Mansdorf,  Ph.D.  (Filed as  exhibit  10.76 to the
          Company's  report  on Form  10-KSB,  filed  with  the  Securities  and
          Exchange  Commission  on September  29, 2000.  Commission  file number
          0-22916).
    10.16 Promissory  Note for  $168,000  dated May 30, 2000 by and between PHC,
          Inc.  and  Yakov  Burstein,  Ph.D.  (Filed  as  exhibit  10.77  to the
          Company's  report  on Form  10-KSB,  filed  with  the  Securities  and
          Exchange  Commission  on September  29, 2000.  Commission  file number
          0-22916).
    10.17 Settlement  Agreement and Mutual Releases by and between PHC, Inc. and
          Yakov Burstein, Ph.D. and Irwin J. Mansdorf, Ph.D. dated May 30, 2000.
          (Filed as exhibit 10.78 to the Company's report on Form 10-KSB,  filed
          with the  Securities  and Exchange  Commission  on September 29, 2000.
          Commission file number 0-22916).
    10.18 Amendment  number 2 to Loan and Security  Agreement  originally  dated
          February  18, 1998 by and among PHC of Utah,  Inc.,  PHC of  Virginia,
          Inc. and PHC of Michigan,  Inc. and Heller Healthcare Finance, Inc. in
          the amount of $3,000,000 amended as of May 24, 2001. (Filed as exhibit
          10.46 to the Company's report on Form 10-KSB dated September 25, 2001.
          Commission file number 0-22916).
    10.19 Amendment  Number  3 dated  December  6,  2001 to  Loan  and  Security
          Agreement  dated  February  18, 1998 by and  between PHC of  Michigan,
          Inc.,  PHC of  Utah,  Inc.,  and  PHC of  Virginia,  Inc.  and  Heller
          Healthcare  Finance,  Inc.  providing  collateral  for  the  Loan  and
          Security  Agreement  in the  amount of  $3,000,000.  (Filed as exhibit
          10.50 to the Company's quarterly report on Form 10-QSB, filed with the
          Securities  and Exchange  Commission on February 12, 2002.  Commission
          file number 0-22916).
    10.20 Consolidating  Amended and Restated Secured Term Note in the amount of
          $2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc.
          and Heller  Healthcare  Finance,  Inc.  (Filed as exhibit 10.51 to the
          Company's  quarterly report on Form 10-QSB,  filed with the Securities
          and Exchange  Commission on February 12, 2002.  Commission file number
          0-22916).
    10.21 Amended  and  Restated   Revolving   Credit  Note  in  the  amount  of
          $3,000,000  dated  December 6, 2001 by and  between  PHC of  Michigan,
          Inc.,  PHC  of  Utah,  Inc.  and  PHC of  Virginia,  Inc.  and  Heller
          Healthcare  Finance,  Inc.  (Filed as exhibit  10.52 to the  Company's
          quarterly  report  on Form  10-QSB,  filed  with  the  Securities  and
          Exchange  Commission  on February  12,  2002.  Commission  file number
          0-22916).
    10.22 Amended  and  Restated  Consolidated  Mortgage  Note in the  amount of
          $5,688,598 dated December 6, 2001 by and between PHC of Michigan, Inc.
          and Heller  Healthcare  Finance,  Inc.  (Filed as exhibit 10.53 to the
          Company's  quarterly report on Form 10-QSB,  filed with the Securities
          and Exchange  Commission on February 12, 2002.  Commission file number
          0-22916).
    10.23 Third Amended and Restated  Cross-Collateralization  and Cross-Default
          Agreement  dated  December 6, 2001 by and between  PHC,  Inc.,  PHC of
          Michigan, Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and Heller
          Healthcare  Finance,  Inc.  (Filed as exhibit  10.54 to the  Company's
          quarterly  report  on Form  10-QSB,  filed  with  the  Securities  and
          Exchange  Commission  on February  12,  2002.  Commission  file number
          0-22916).
    10.24 The  Company's  1993  Stock  Purchase  and  Option  Plan,  as  amended
          December 2002. (Filed as exhibit 10.34 to the Company's report on Form
          S-8 dated January 8, 2003. Commission file number 333-102402).
    10.25 The  Company's  1995  Non-Employee  Director  Stock  Option  Plan,  as
          amended December 2002. (Filed as exhibit 10.35 to the Company's report
          on Form S-8 dated January 8, 2003. Commission file number 333-102402).




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<PAGE>
 Exhibit No.                      Description

    10.26 The Company's 1995 Employee  Stock Purchase Plan, as amended  December
          2002.  (Filed as  exhibit  10.36 to the  Company's  report on Form S-8
          dated January 8, 2003. Commission file number 333-102402).
    10.27 First Amended  Consolidating Amended and Restated Secured Term Note by
          and between PHC of Michigan,  Inc. and Heller Healthcare Finance, Inc.
          (Filed as exhibit 10.26 on form 10-KSB,  filed with the Securities and
          Exchange  Commission  on September  19, 2003.  Commission  file number
          0-22916).
    10.28 Membership  Purchase  Agreement between PHC, Inc. and Pivotal Research
          Centers,  LLC and its  Sellers  Louis C. Kirby,  Carol A.  Colombo and
          Anthony A. Bonacci  dated April 30, 2004.  (Filed as exhibit  10.27 to
          the  Company's  report  on Form  8-K  filed  with the  Securities  and
          Exchange Commission on May 13, 2004. Commission file number 0-22916).
    10.29 Pledge Agreement  entered into April 30, 2004 by and between PHC, Inc.
          and Louis C. Kirby, Carol A. Colombo and Anthony A. Bonacci. (Filed as
          exhibit  10.28 to the  Company's  report  on Form 8-K  filed  with the
          Securities and Exchange  Commission on May 13, 2004.  Commission  file
          number 0-22916).
    10.30 Security  Agreement  entered  into April 30, 2004 by and between  PHC,
          Inc.  and Louis C. Kirby,  Carol A.  Colombo  and Anthony A.  Bonacci.
          (Filed as exhibit 10.29 to the Company's report on Form 8-K filed with
          the  Securities  and Exchange  Commission on May 13, 2004.  Commission
          file number 0-22916).
    10.31 Secured  Promissory  Note  dated  April  30,  2004  in the  amount  of
          $1,000,000 by PHC,  Inc. in favor of Louis C. Kirby,  Carol A. Colombo
          and  Anthony  A.  Bonacci  (Note A).  (Filed as  exhibit  10.30 to the
          Company's  report on Form 8-K filed with the  Securities  and Exchange
          Commission on May 13, 2004. Commission file number 0-22916).
    10.32 Secured  Promissory  Note  dated  April  30,  2004  in the  amount  of
          $500,000 by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo and
          Anthony A. Bonacci  (Note B). (Filed as exhibit 10.31 to the Company's
          report on Form 8-K filed with the Securities  and Exchange  Commission
          on May 13, 2004. Commission file number 0-22916).
    10.33 Secured  Promissory  Note  dated  April  30,  2004  in the  amount  of
          $1,000,000 by PHC,  Inc. in favor of Louis C. Kirby,  Carol A. Colombo
          and  Anthony  A.  Bonacci  (Note C).  (Filed as  exhibit  10.32 to the
          Company's  report on Form 8-K filed with the  Securities  and Exchange
          Commission on May 13, 2004. Commission file number 0-22916).
    10.34 Kirby  Employment and Non-Compete  Agreement.  (Filed as exhibit 10.33
          to the  Company's  report on Form 8-K filed  with the  Securities  and
          Exchange Commission on May 13, 2004. Commission file number 0-22916).
    10.35 Colombo Employment and Non-Compete Agreement.  (Filed as exhibit 10.34
          to the  Company's  report on Form 8-K filed  with the  Securities  and
          Exchange Commission on May 13, 2004. Commission file number 0-22916).
    10.36 First   Amendment  to  Membership   Purchase   Agreement  and  Colombo
          Employment Agreement and Note C. (Filed as exhibit 10.35 the Company's
          report on Form 8-K filed with the Securities  and Exchange  Commission
          on May 13, 2004. Commission file number 0-22916).
    10.37 Subscription  Agreement entered into September 20, 2004 by and between
          PHC,  Inc. and Sandor  Capital  Master  Fund,  LP,  together  with the
          registration   rights   agreement  and  the  form  of  certificate  of
          designation.  (Filed as exhibit 10.37 the Company's report on Form 8-K
          filed with the  Securities  and Exchange  Commission  on September 23,
          2004. Commission file number 0-22916).
   * 21.1 List of Subsidiaries.
   * 23.1 Consent of BDO Seidman, LLP (independent  registered public accounting
          firm).
   * 31.1 Certification  of Chief Executive  Officer  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002.
   * 31.2 Certification  of the Chief Financial  Officer Pursuant to Section 302
          of the Sarbanes-Oxley Act of 2002.
   * 32.1 Certification  of the Chief  Executive  Officer  and  Chief  Financial
          Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002.

         * Indicates exhibits filed with this registration statement



                                    - 71 -
<PAGE>
(b) REPORTS ON FORM 8-K.

     The Company filed two reports on form 8-K during the quarter ended June 30,
2004. One report  provided the same earnings  information to the public as shown
in  the  Company's  quarterly  press  release  as  required  by  Item  12 of the
instructions for form 8-K. The second report provided information  regarding the
Company's  acquisition of 100% membership  interest in Pivotal Research Centers,
LLC. The second report was also amended  during the quarter to report  pro-forma
financial  information  for the  acquisition,  which was not available  when the
first report was filed.



                                    - 72 -
<PAGE>
                                   SIGNATURES

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



                                        PHC, INC.


Date: September 24, 2004                By: /S/ BRUCE A. SHEAR
                                                Bruce A. Shear, President
                                                and Chief Executive Officer


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


          SIGNATURE                TITLE(S)                         DATE


/s/ BRUCE A. SHEAR             President, Chief              September 24, 2004
_________________________      Executive Officer and
    Bruce A. Shear             Director  (principal
                               executive officer)


/s/ PAULA C. WURTS             Controller and Treasurer      September 24, 2004
_________________________      (principal  financial
    Paula C. Wurts             and accounting officer)


/s/ GERALD M. PERLOW           Director                      September 24, 2004
_________________________
    Gerald M. Perlow


/s/ DONALD E. ROBAR            Director                      September 24, 2004
_________________________
    Donald E. Robar


                               Director                      September 24, 2004
_________________________
    Howard Phillips


 /s/ WILLIAM F. GRIECO         Director                      September 24, 2004
_________________________
     William F. Grieco


/S/ DAVID E. DANGERFIELD       Director                      September 24, 2004
_________________________
    David E. Dangerfield




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