UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A (RULE 14a-101) SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [ X ] Filed by a party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary proxy statement [ ] Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ X ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to ss. 240.14a-12 PHC, Inc. (Name of Registrant as specified in its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ X ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)1) and 0-11 1. Title of each class of securities to which transaction applies: 2. Aggregate number of securities to which transaction applies: 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-ll (set forth the amount on which the filing fee is calculated and site how it was determined): 4. Proposed maximum aggregate value of transaction 5. Total fee paid [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. 1. Amount Previously Paid: 2. Form, Schedule or Registration Statement No.: 3. Filing Party: 4. Date filed: -- 1 -- PHC, INC. 200 Lake Street Suite 102 Peabody, Massachusetts 01960 November 10, 2006 Dear Fellow Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of PHC, Inc., which will be held on Wednesday, December 20, 2006, at 1:00 PM, at the corporate offices of PHC, Inc., 200 Lake Street, Suite 102, Peabody, Massachusetts 01960. The following Notice of Annual Meeting of Stockholders and Proxy Statement describes the items to be considered by the stockholders and contains certain information about PHC, Inc.'s officers and directors. Please sign and return the enclosed proxy card as soon as possible in the envelope provided so that your shares can be voted at the meeting in accordance with your instructions. Even if you plan to attend the meeting, we urge you to sign and promptly return the enclosed proxy. You can revoke it at any time prior to the meeting, or vote your shares personally if you attend the meeting. We look forward to seeing you. Sincerely, Bruce A. Shear President -- 2 -- PHC, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 20, 2006 The Annual Meeting of Stockholders of PHC, Inc. (the "Company") will be held at our corporate offices at 200 Lake Street, Suite 102, Peabody, Massachusetts, on Wednesday, December 20, 2006, at 1:00 PM, for the following purposes: 1. To elect five directors (two to be elected by the holders of the Company's Class A Common Stock and three to be elected by the holders of the Company's Class B Common Stock) to hold office until the annual meeting next following their election and until their successors are duly elected and qualified; 2. To ratify the selection by the Board of Directors of Eisner LLP as the Company's independent auditors; and 3. To transact such other business as may properly come before the meeting or any adjournment thereof. The Board of Directors has fixed the close of business on October 30, 2006 as the record date for determination of stockholders entitled to notice of, and to vote at the annual meeting and at any adjournment thereof. All stockholders are cordially invited to attend the meeting. By order of the Board of Directors Paula C. Wurts, Clerk Peabody, Massachusetts November 10, 2006 WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. -- 3 -- PHC, INC. 200 Lake Street Suite 102 Peabody, Massachusetts 01960 (978) 536-2777 PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of PHC, Inc. (the "Company") for use at the Annual Meeting of Stockholders to be held at the corporate offices of the Company at 200 Lake Street, Suite 102, Peabody, Massachusetts on December 20, 2006 at 1:00 PM (Boston time), and at any adjournment of that meeting (the "Annual Meeting"). Each proxy will be voted in accordance with the instructions specified, and if no instruction is specified, the proxy will be voted in favor of the proposals set forth in the Notice of Annual Meeting. A stockholder may revoke any proxy at any time before it is exercised by filing a later dated proxy or written notice of revocation with Paula C. Wurts, Clerk of the Company, or by voting in person at the Annual Meeting. The Company's Annual Report on Form 10-K for the year ended June 30, 2006 is being mailed to stockholders together with this Proxy Statement. The Company will furnish any exhibit to the Company's Annual Report on Form 10-K upon the payment of a processing fee of ten cents per page plus mailing costs. The date of mailing of this Proxy Statement is expected to be on or about November 10, 2006. The Board of Directors has fixed October 30, 2006 as the record date for the determination of stockholders entitled to vote at the Annual Meeting (the "Record Date"). On that date, there were outstanding and entitled to vote 17,814,365 shares of Class A Common Stock and 775,760 shares of Class B Common Stock of the Company (the shares of Class A Common Stock and Class B Common Stock are referred to collectively herein as the "Shares"). Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to five votes. The holders of the Company's Class A Common Stock are entitled to elect two members of the Company's Board of Directors (the "Class A Directors") and holders of the Company's Class B Common Stock are entitled to elect all the remaining members of the Company's Board of Directors (the "Class B Directors"). Holders of Class A Common Stock will receive proxy cards, which will be different from those received by the holders of Class B Common Stock. The proxy cards received by the holders of Class A Common Stock will contain a proposal relating to the election of the two members of the Board of Directors to be elected by the holders of the Class A Common Stock, in addition to any other proposals to be voted upon during the General Session. Holders of Class B Common Stock will receive proxy cards, which will contain a proposal relating to the election of the three members of the Board of Directors to be elected by the holders of the Class B Common Stock, in addition to any other proposals to be voted upon during the General Session. Except for the election of directors, the holders of Class A Common Stock and Class B Common Stock vote as one class. The Annual Meeting will be composed of three related but separate sessions: (i) a special session of the holders of Class A Common Stock, during which session only holders of Class A Common Stock are entitled to vote, for the separate election by such holders of two directors, and no other business may properly come before the meeting; (ii) a special session of the holders of Class B Common Stock, during which session only holders of Class B Common Stock are entitled to vote, for the separate election by such holders of three directors, and no other business may properly come before the meeting; and (iii) a general session of the holders of the Class A Common Stock and the Class B Common Stock to transact such other business as may properly come before the meeting or any adjournment thereof ("General Session"). The presence in person or by proxy of holders of shares of Class A Common Stock and Class B Common Stock outstanding as of the Record Date which, combined, have the right to cast a majority of the votes which may be cast with respect to matters arising during the General Session will constitute a quorum for the conduct of business at the General Session. The presence in person or by proxy of holders of shares of Class A Common Stock and Class B Common Stock outstanding as of the Record Date which have the right to cast a majority of the votes which may be cast with respect to matters arising during the Class A Session and the Class B Session, respectively, will constitute a quorum for purposes of the Class A Session and the Class B Session, respectively. -- 4 -- The affirmative vote of the holders of a plurality of the shares of each of Class A Common Stock and Class B Common Stock represented at the meeting is required for the election of the Class A Directors and the Class B Directors, respectively. Approval of each of the other matters that is before the meeting will require the affirmative vote of the holders of a majority of the shares represented at the meeting and voting thereon. No votes may be taken at the meeting, other than a vote to adjourn, unless the appropriate quorum (as set forth in the preceding paragraph) has been constituted. Shares voted to abstain or to withhold as to a particular matter, or as to which a nominee (such as a broker holding shares in street name for a beneficial owner) has no voting authority in respect of a particular matter, shall be deemed represented for quorum purposes. Such shares, however, shall not be deemed to be voting on such matters, and therefore will not be the equivalent of negative votes as to such matters. Votes will be tabulated by the Company's transfer agent subject to the supervision of persons designated by the Board of Directors as inspectors. -- 5 -- 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 October 30, 2006 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. Shares of common stock subject to stock options vesting on or before October 30, 2006 are deemed to be outstanding and beneficially owned for purposes of computing the percentage ownership of such person but are not treated as outstanding for purposes of computing the percentage ownership of others. 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 (11) Class _______________ _____________________ ________________________ ___________ Class A Common Bruce A. Shear 683,745(1) 3.8% Stock c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 Robert H. Boswell 253,754(2) 1.4% c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 Paula C. Wurts 207,106(3) 1.2% c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 Howard W. Phillips 178,750(4) 1.0% c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 Donald E. Robar 137,232(5) * c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 William F. Grieco 142,750(6) * c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 David E. Dangerfield 55,000(7) * c/o PHC, Inc. 200 Lake Street Peabody, MA 01960 All Directors and Officers as 1,658,337(8) 9.0% a Group (7 persons) Marathon Capital Mgmt, LLC 1,302,750 7.3% P. O. Box 771 Hunt Valley, MD 21030 -- 6 -- Class B Common Bruce A. Shear Stock (9) c/o PHC, Inc. 721,259(10) 93.0% 200 Lake Street Peabody, MA 01960 All Directors and Officers as a 721,259 93.0% Group (7 persons) * Less than 1% 1. Includes 168,750 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $.55 to $2.68 per share. 2. Includes 87,188 shares of Class A Common Stock issuable pursuant to currently exercisable stock options at an exercise price range of $.45 to $2.73 per share. 3. Includes 86,875 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $.45 to $2.73 per share. 4. Includes 75,500 shares of Class A Common Stock issuable pursuant to currently exercisable stock options having an exercise price range of $.35 to $2.11 per share. 5. Includes 82,500 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. 6. Includes 82,500 shares of Class A Common Stock issuable pursuant to curretly exercisable stock options, having an exercise price range of $.22 to $3.50 per share. 7. Includes 50,000 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $ .55 to $2.11 per share. 8. Includes an aggregate of 638,313 shares of Class A Common Stock issuable pursuant to currently exercisable stock options. Of those options, 4,000 have an exercise price of $3.50 per share, 20,000 have an exercise price of $2.73 per share, 45,000 have an exercise price of $2.68 per share, 15,000 have an exercise price of $2.38 per share, 7,500 have an exercise price of $2.20, 20,000 have an exercise price of $2.11 per share, 4,000 have an exercise price of $2.06 per share, 313 have an exercise price of $1.25 per share, 40,000 have an exercise price of $1.48 per share, 50,000 have an exercise price of $1.41 per share, 15,000 have an exercise price of $1.37 per share, 40,000 have an exercise price of $1.33 per share, 15,000 have an exercise price of $1.21, 4,000 have an exercise price of $1.03 per share, 4,000 have an exercise price of $.81 per share, 130,000 have an exercise price of $.75 per share, 40,000 have an exercise price of $.74 per share, 15,000 have an exercise price of $.69 per share, 120,500 have an exercise price of $.55 per share, 15,000 have an exercise price of $.45 per share, 30,000 have an exercise price of $.35 per share and 4,000 have an exercise price of $.22 per share. 9. 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. 10. 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. 11. "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). -- 7 -- By virtue of the fact that Mr. Shear owns 93% 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 October 30, 2006: Bruce A. Shear ......................................19.62% All Directors and Officers as a Group (7 persons).........................................23.57% -- 8 -- ELECTION OF DIRECTORS The members of the Board of Directors elected at the Annual Meeting will be classified into two classes of directors. Two directors will be elected by the holders of the Company's Class A Common Stock and the balance of the directors will be elected by the holders of the Company's Class B Common Stock. The terms of the present directors expire at the Annual Meeting or when the successors are chosen and qualified, if later. The Board of Directors has fixed at five the number of directors to be elected at the Annual Meeting. The nominees for Class A Directors for election at the Annual Meeting are Donald E. Robar and Howard Phillips. The nominees for Class B Directors for election at the Annual Meeting are Bruce A. Shear, William F. Grieco and David E. Dangerfield. The proxy for holders of Class A Common Stock will be voted to elect as Class A Directors the two nominees (Donald E. Robar and Howard Phillips), unless authority to vote for the election of directors is withheld by marking the proxy to that effect or the proxy is marked with the names of directors as to whom authority to vote is withheld. The proxy for holders of Class B Common Stock will be voted to elect as Class B Directors the three nominees (Bruce A. Shear, William F. Grieco and David E. Dangerfield), unless authority to vote for the election of directors is withheld by marking the proxy to that effect. Donald E. Robar, Howard W. Phillips, Bruce A. Shear, William F. Grieco and David E. Dangerfield are presently directors of the Company and have consented to serve if reelected. Name Age Position _____________________________ ___ _____________________________ Bruce A. Shear 51 Director, President and Chief Executive Officer Donald E. Robar (1)(2) (3) 69 Director Howard W. Phillips 76 Director William F. Grieco (1)(2) (3) 52 Director David E. Dangerfield (1) (3) 65 Director (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Nominating/Governance 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 of Vaso Active Pharmaceuticals, Inc., a public company marketing and selling over-the-counter pharmaceutical products that incorporate Vaso's transdermal drug delivery technology. DONALD E. ROBAR has served as a Director of the Company since 1985 and as the Treasurer from February 1996 until April 2000. He served as the Clerk of the Company from 1992 to 1996. Dr. Robar has been a professor of Psychology at Colby-Sawyer College in New London, New Hampshire from 1967 to 1997 and is now Professor Emeritus. Dr. Robar received an Ed.D. (Counseling) from the University of Massachusetts in 1978, an M.A. in Clinical Psychology from Boston College in 1968 and a B.A. from the University of Massachusetts in 1960. -- 9 -- HOWARD W. PHILLIPS has served as a Director of the Company since August 1996 and has been employed by the Company as a public relations specialist since August 1995. From 1982 until 1995, Mr. Phillips was the Director of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr. Phillips was associated with Oppenheimer & Co. where he was a partner and Director of Corporate Finance. WILLIAM F. GRIECO has served as a Director of the Company since February 1997. Mr. Grieco is the Vice President and General Counsel of American Science and Engineering, Inc., an X-Ray inspection technology company. Prior to that, from 1999 to 2005, he was Managing Director of Arcadia Strategies, LLC, a legal and business consulting organization servicing science and technology companies. From 2001 to 2002, he also served as Senior Vice President and General Counsel of IDX Systems Corporation, a healthcare information technology Company. From 1995 to 1999 he was Senior Vice President and General Counsel for Fresenius Medical Care North America. Prior to that, Mr. Grieco was a partner at Choate, Hall & Stewart, a general service law firm. Mr. Grieco received a B.S. from Boston College in 1975, an M.S. in Health Policy and Management from Harvard University in 1978 and a J.D. from Boston College Law School in 1981. DAVID E. DANGERFIELD has served as a Director of the Company since December 2001. 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 trade organization in Utah. Mr. Dangerfield graduated from the University of Utah in 1972 with a Doctorate of Social Work after receiving his Masters of Social Work from the University in 1967. THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR. NON-DIRECTOR EXECUTIVE OFFICERS Name Age Position _____________________________ ___ _____________________________ Robert H. Boswell 58 Senior Vice President Paula C. Wurts 57 Chief Financial Officer, Treasurer and Clerk Information with respect to the business experience and affiliations of the non-director executive officers of the Company is set forth below. 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 from January 1996 until February 2006, when she became Clerk, as Assistant Treasurer from 1993 until April 2000 when she became Treasurer. Ms. Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms. Wurts received an Associate's degree in Accounting from the University of South Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and passed the examination for Certified Public Accountants. She received a Master's Degree in Accounting from Western New England College in 1996. -- 10 -- MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Board held four meetings during the fiscal year 2006 and took action by written consent five times. During fiscal year 2006, each director attended 100% of the total number of meetings of the Board and the total number of meetings held by all Board committees on which such director served. The Board has a standing audit committee (the "Audit Committee"), compensation committee and a nominating and corporate governance committee. Communications with the Board of Directors Stockholders may communicate with the Board of Directors by writing to the Board in care of the Company's Clerk, PHC, Inc., 200 Lake Street, Suite 102, Peabody, Massachusetts 01960. The Board of Directors has delegated responsibility for initial review of stockholder communications to the Clerk. In accordance with the Board's instructions, the Clerk will forward the communication to the director or directors to whom it is addressed, except for communications that are (1) advertisements or promotional communications, (2) solely related to complaints with respect to ordinary course of business customer service and satisfaction issues or (3) clearly unrelated to the Company's business, industry, management or Board or committee matters. In addition, the Clerk will make all such communications available to each member of the Board at the Board's next regularly scheduled meeting. Audit Committee The Board of Directors has appointed an audit committee to assist the Board in the oversight of the financial reports, internal controls, accounting policies and procedures. The primary responsibilities of the Audit Committee are as follows: o Hire, evaluate and, when appropriate, replace the Company's independent registered public accounting firm, whose duty it is to audit the books and accounts of the Company and its subsidiaries for the fiscal year in which it is appointed. o Approve all audit fees in advance of work performed. o Approve any accounting firm and fees to be charged for taxes or any other non-audit accounting fees. o Review internal controls over financial reporting with the independent accountant and a designated accounting staff member. o Review with management and the registered public accounting firm: o The independent accountant's audit of and report on the financial statements. o The auditor's qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and financial disclosures and how aggressive (or conservative) the accounting principles and underlying estimates are. o Any serious difficulties or disputes with management encountered during the course of the audit. o Anything else about the audit procedures or findings that GAAS requires the auditors to discuss with the committee. o Consider and review with management and a designated accounting staff member: o Any significant findings during the year and management's responses to them. o Any difficulties an accounting staff member encountered while conducting audits, including any restrictions on the scope of their work or access to required information. o Any changes to the planned scope of management's internal audit plan that the committee thinks advisable. o Review the annual filings with the SEC and other published documents containing the company's financial statements and consider whether the information in the filings is consistent with the information in the financial statements. -- 11 -- o Review the interim financial reports with management, the independent registered public accounting firm and an accounting staff member. o Prepare a letter for inclusion in the annual report that describes the committee's composition and responsibilities and how the responsibilities were fulfilled. o Review the audit committee charter at least annually and modify as needed. During fiscal 2006 the Audit Committee consisted of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco. As required by the SEC, all members of the audit committee are "independent" as such term is defined pursuant to applicable SEC rules and regulations. Dr. Dangerfield serves as the chairman and is the audit committee financial expert. The Audit Committee met five times during fiscal 2006. All of the committee members attended the meetings. Compensation Committee The Board of Directors has appointed the members of the Compensation Committee to review and approve officer's compensation, formulate bonuses for management and administer the Company's equity compensation plans. During fiscal 2006 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco. The Compensation Committee met once during fiscal 2006. Mr. Shear does not participate in discussions concerning, or vote to approve, his salary. All members of the compensation committee are independent under Rule 4200(a)(15) of the NASD Manual. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee was established in October, 2005. This committee is appointed by the Board of Directors for the purpose of identifying individuals qualified to become Board members and to recommend that the Board select these individuals as nominees for election to the Board at the next annual meeting of the Company's stockholders, and developing and recommending to the Board a set of effective corporate governance policies and procedures applicable to the Company. The Nominating and Corporate Governance Committee consists of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco. All members of this committee are independent. Nomination of Directors The Company will consider all director candidates recommended to the Nominating and Corporate Governance Committee by stockholders at all times during the year preceding the date on which the recommendation is made that meet the qualifications established by the Board as required by the Company's by laws. Each director nominee is evaluated in the context of the full Board's qualifications as a whole, with the objective of establishing a Board that can best perpetuate the success of the Company's business and represent stockholder interests through the exercise of sound judgment. Each director nominee will be evaluated considering the relevance to the Company of the director nominee's respective skills and experience, which must be complimentary to the skills and experience of the other members of the Board. In addition, the director nominees must possess a general understanding of marketing, finance and other elements relevant to the success of a publicly-traded company in today's business environment, and an understanding of the Company's business on an operational level as well as demonstrate a willingness to devote the appropriate time to fulfilling Board duties. Procedures for Consideration of Stockholder Nominations. Specifically, the Company did not receive any nominations for directors from shareholders for consideration at the 2006 Annual Meeting. However, any recommendations received from shareholders will be evaluated in the same manner that potential nominees recommended by members of the Board of Directors, the -- 12 -- Nominating and Governance Committee, management or other parties are evaluated. Any shareholder nominations must be made in accordance with the Company by-laws, which currently require written notice to the chairman of the Nominating and Governance Committee buy-out of certified mail or overnight delivery to 200 Lake Street, Suite 102, Peabody, Massachusetts 01960 no less than 120 calendar days before the one-year anniversary of the date that the Company's proxy statement was released to stockholders in connection with the previous year's annual meeting. Nominations for election to the Board of Directors at the 2007 Annual Meeting of Shareholders must be received no later than July 23, 2007. The notice must set forth at a minimum: 1. A complete biography, including full employment history of the nominee; 2. A signed consent form and waiver from the nominee authorizing the Company to perform full background checks of the director nominee, including criminal and credit history, from a firm acceptable to the Company in its sole discretion; 3. Documentation of educational levels attained, complete with official transcripts issued directly by the educational institution and sent directly from the educational institution to the Company's Secretary or Clerk; 4. Disclosure of all special interests and all political and organizational affiliations; 5. A signed, written statement from the director nominee the reasons that the director nominee wants to serve on the Company's Board, the reasons that the director nominee believes that he or she is qualified to serve; and 6. A description of all litigation to which he or any of his affiliates have been a party within the past seven years. In addition, the stockholder must submit any additional information required to be included in the Company's proxy statement for director nominees which determination will be made by the Company in its sole and absolute discretion (including, without limitation, information regarding business experience, involvement in legal proceedings, security ownership and transactions with the Company or management). The information submitted by the stockholder must include complete contact information for the submitting stockholder and the director nominee. Charters for all committees of the Board of Directors were included as Appendix to the Company's 2005 proxy statement filed with the Securities and Exchange Commission on November 18, 2005 and are available for review on the Company website at www.phc-inc.com. -- 13 -- Audit Committee Report The Audit Committee has reviewed and discussed the Company's audited financial statements for the fiscal year ended June 30, 2006 with the Company's independent registered public accounting firm, Eisner LLP and management. The Audit Committee approved the financial statements for inclusion in the Company's annual report. The Audit Committee has discussed with Eisner LLP, the matters required to be discussed by Statement on Auditing Standards No. 61. The Audit Committee has received the written disclosures and the letter from Eisner LLP, required by the Securities Acts adminstered by the Securities and Exchange Commission, including rules of the Pubic Company Accounting Oversight Board and has discussed with Eisner LLP its independence. The discussions that the Audit Committee had with Eisner LLP regarding the matters described above occurred before the filing with the SEC of the Company's Annual Report on Form 10-K for fiscal 2006. AUDIT COMMITTEE David E. Dangerfield Donald E. Robar William F. Grieco -- 14 -- COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Employment agreements The Company has not entered into any employment agreements with its executive officers. The Company owns and is the beneficiary on a $1,000,000 key man life insurance policy on the life of Bruce A. Shear. Executive Compensation Three executive officers of the Company received compensation in the 2006 fiscal year, which exceeded $100,000. The following table sets forth the compensation paid or accrued by the Company for services rendered to these executives in fiscal year 2006, 2005 and 2004: Summary Compensation Table Long Term Compensation Annual Compensation Awards ___________________ _____________ (a) (b) (c) (d) (e) (g) (i) Securities Name and Other Annual Underlying All Other Principal Year Salary Bonus Compensation Options/SARs Compensation Position ($) ($) ($) (#) ($) __________________ ____ ________ _______ ___________ ___________ ___________ Bruce A. Shear 2006 $393,515 $70,000 $27,458 (1) 105,000 $124,800 President and 2005 $383,965 $45,000 $62,498 (2) 60,000 $ 37,050 Chief Executive 2004 $345,416 $25,147 $15,395 (3) -- $ -- Officer Robert H. Boswell 2006 $176,878 $40,000 $14,701 (4) 28,750 $ 33,488 Senior Vice 2005 $164,590 $10,000 $29,016 (5) 25,000 $ 15,750 President 2004 $155,417 $32,794 $15,582 (6) -- $ -- Paula C. Wurts 2006 $152,878 $35,000 $15,029 (7) 27,500 $ 32,300 Chief Financial 2005 $140,586 $10,000 $35,009 (8) 25,000 $ 15,750 Officer, 2004 $129,125 $17,647 $13,901 (9) -- $ -- Treasurer and Clerk (1) This amount represents $8,910 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Shear, $13,648 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear, $864 in club membership dues paid by the Company for the benefit of Mr. Shear, and $4,036 personal use of a Company car held by Mr. Shear. (2) This amount represents $7,789 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Shear, $7,541 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear, $2,805 in club membership dues paid by the Company for the benefit of Mr. Shear, $4,027 personal use of a Company car held by Mr. Shear and $40,336 based on the intrinsic value of the repricing of options held by Mr. Shear. (3) 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. -- 15 -- (4) This amount represents a $6,000 automobile allowance, $8,172 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Boswell and $529 in benefit derived from the purchase of shares through the employee stock purchase plan. (5) This amount represents a $6,000 automobile allowance, $6,656 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Boswell, $1,020 in benefit derived from the purchase of shares through the employee stock purchase plan, and $15,340 based on the intrinsic value of the repricing of options held by Mr. Boswell. (6) 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. (7) This amount represents a $4,800 automobile allowance, $10,053 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Ms. Wurts and $176 in benefit derived from the purchase of shares through the employee stock purchase plan. (8) This amount represents a $4,800 automobile allowance, $8,392 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Ms. Wurts, $340 in benefit derived from the purchase of shares through the employee stock purchase plan and $21,477 based on the intrinsic value of the repricing of options held by Ms. Wurts. (9) 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. 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 358,000 shares remain outstanding under the plan. On September 22, 2003 the Board of Directors adopted the Company's current stock option plan and the stockholders of the Company approved the plan on December 31, 2003. The Stock Plan provides for the issuance of a maximum of 1,300,000 shares of the Class A Common Stock of the Company pursuant to the grant of incentive stock options to employees and the grant of nonqualified stock options or restricted stock to employees, directors, consultants and others whose efforts are important to the success of the Company. The Board of Directors administers the Stock Plan. Subject to the provisions of the Stock Plan, the Board of Directors has the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the Class A Common Stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a period of one year following such termination. -- 16 -- Non-Employee Director Stock Plan The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 2006, options for 145,500 shares were granted under the 1995 plan. This plan expired in August 2005 and, in January 2005, the shareholders voted to approve a new non-employee directors' stock plan. The new plan is identical to the plan it replaced. Under the new plan a maximum of 350,000 shares may be issued. A total of 40,000 options were issued under the plan on January 6, 2005. On January 31, 2006, this plan was amended to increase the number of options issued to each outside director each year from 10,000 options to 20,000 options. Each outside director is granted an option to purchase 20,000 shares of Class A Common Stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date. The new plan will expire in January 2015, ten years from the date of shareholder approval. 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 Stock Option Grants During the fiscal year ended June 30, 2006, the Company issued additional options to purchase 408,750 shares of Class A Common Stock under the 2003 Stock Plan at a price per share ranging from $1.45 to $2.73. Generally, options are exercisable upon grant for 25% of the shares covered with an additional 25% becoming exercisable on each of the first three anniversaries of the date of grant. The following table provides information about options granted to the officers and directors during fiscal 2006 under the Company's Stock Option Plans. Individual Grants (a) (b) (c) (d) (e) (h) Number of % of Total Securities Options/SARs Exercise Alternative Underlying Granted to or Base to (f) and (g) Options/SARs Employees Price Expiration Grant Date Name Granted (#) in Fiscal Year ($/Share)* Date Value ________________ ____________ ______________ __________ ____________ ___________ Bruce A. Shear 15,000 3.67% 2.68 09/20/2010 18,300 75,000 18.35% 2.68 09/20/2010 91,500 15,000 3.67% 2.20 05/22/2011 15,000 Robert H. Boswell 20,000 4.89% 2.73 09/22/2010 24,800 1,250 0.31% 1.95 02/16/2011 1,188 7,500 1.83% 2.20 05/22/2011 7,500 Paula C. Wurts 20,000 4.89% 2.73 09/22/2010 24,800 7,500 1.83% 2.20 05/22/2011 7,500 * Exercise Price of options at issue date was equal to or greater than the fair market value. -- 17 -- The Company utilized the Black-Scholes valuation model for estimating the Grant Date Value with no adjustments for non-transferability or risk of forfeiture. The assumptions used are as follows: Risk free interest rate 4.5% Expected dividend yield 0.0% Expected lives 5 Expected volatility 5.0% The following table provides information about options exercised by the named executive officers during fiscal 2006 and the number and value of options held at the end of fiscal 2006. (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Shares Options/SARs at Options/SARs at Acquired on Value FY-End (#) FY-End ($) Name Exercise Realized Exercisable/ Exercisable/ (#) ($) Unexercisable Unexercisable Bruce A. Shear 67,000 $ 127,300 146,250/ 78,750 $140,950/$199,238 Robert H. Boswell 36,000 $ 68,400 82,188/ 21,562 $ 98,078/$ 54,533 Paula C. Wurts 36,000 $ 68,400 81,875/ 20,625 $ 98,000/$ 52,181 On June 30, 2005, the Company accelerated the vesting on the 326,250 of outstanding unvested options held by employees. This resulted in a non-cash charge to compensation of $9,875 and $27,025 in the fiscal years ended June 30, 2006 and 2005, respectively. 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. On January 31, 2006 the stockholders approved a replacement Employee Stock Purchase Plan to replace the 1995 plan which expired on October 18, 2005. The new plan is identical to the old plan and expires on January 31, 2016. As of June 30, 2006, a total of 157,034 shares of Class A Common Stock have been issued under the 1995 plan. Fourteen employees are participating in the current offering period under the new plan, which began on February 1, 2006 and will end on January 31, 2007. COMPENSATION OF DIRECTORS Directors who are employees of the Company receive no compensation for services as members of the Board. Directors who are not employees of the Company receive $10,000 stipend per year and $2,500 for each Board meeting they attend. The Audit Committee Chairperson receives an annual stipend of $5,000, members of the audit committee receive an annual stipend of $3,000 and compensation committee -- 18 -- and nominating/governance committee receive an annual stipend of $2,000. In addition, Directors of the Company are entitled to receive certain stock option grants under the Company's Non-Employee Director Stock Option Plan (the "Director Plan"). Compensation Committee Interlocks and Insider Participation During fiscal 2006 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco, neither of which was an officer or employee of the Company during the 2006 fiscal year. Mr. Robar served as the Company's Treasurer from February 1996 until April 2000. During the 2006 fiscal year, none of our executive officers served on our Compensation Committee (or equivalent), or board of directors, of another entity whose executive officer(s) served on our Compensation Committee or Board of Directors. STOCK PERFORMANCE GRAPH The following table depicts the cumulative total return on the Company's common stock compared to the cumulative total return for the Nasdaq Composite-US Index and the Nasdaq Health Services Index (which includes both U.S. and foreign companies), an index published by the University of Chicago's Center for Research in Security Prices. The table assumes the investment of $100 on June 30, 2001. -- 19 -- Comparison of Five-Year Cumulative Total Returns Performance Report for PHC, Inc. Prepared by the Center for Research in Security Prices Produced on 10/04/2006 including data to 06/30/2006 Company Index: CUSIP Ticker Class Sic Exchange 69331510 PIHC A 8060 Fiscal Year-end is 06/30/2006 Market Index: Nasdaq Stock Market (US Companies) Peer Index: Nasdaq Health Services Stocks SIC 8000-8099 US & Foreign Date Company Index Market Index Peer Index 06/29/2001 100.000 100.000 100.000 07/31/2001 91.176 93.648 99.285 08/31/2001 147.059 83.452 100.213 09/28/2001 105.882 69.389 95.575 10/31/2001 147.059 78.297 86.831 11/30/2001 105.882 89.444 91.217 12/31/2001 108.824 90.194 98.003 01/31/2002 111.765 89.508 95.807 02/28/2002 108.824 80.201 93.279 03/28/2002 108.824 85.460 102.316 04/30/2002 164.706 78.360 111.584 05/31/2002 191.176 74.904 102.338 06/28/2002 232.353 68.119 98.180 07/31/2002 194.118 61.899 88.975 08/30/2002 223.529 61.241 86.624 09/30/2002 220.588 54.655 86.379 10/31/2002 220.588 62.121 87.852 11/29/2002 202.941 69.046 88.229 12/31/2002 241.176 62.352 84.426 01/31/2003 235.294 61.678 87.185 02/28/2003 232.353 62.544 80.875 03/31/2003 273.529 62.725 83.800 04/30/2003 247.059 68.426 85.731 05/30/2003 220.588 74.434 96.551 06/30/2003 226.471 75.628 103.355 07/31/2003 247.059 80.839 110.637 08/29/2003 238.235 84.365 112.714 09/30/2003 252.941 83.268 116.003 10/31/2003 258.824 89.972 122.730 11/28/2003 364.706 91.305 129.159 12/31/2003 408.824 93.229 129.104 01/30/2004 450.000 95.994 139.298 02/27/2004 367.647 94.187 144.302 03/31/2004 397.059 92.583 143.559 04/30/2004 338.235 89.515 147.557 05/28/2004 302.941 92.488 147.757 06/30/2004 326.471 95.329 153.466 07/30/2004 341.176 88.053 139.433 08/31/2004 308.824 85.897 134.207 09/30/2004 355.882 88.460 135.604 10/29/2004 400.000 92.046 138.689 11/30/2004 447.059 97.717 154.082 12/31/2004 423.529 101.459 162.705 01/31/2005 479.412 96.180 159.990 02/28/2005 541.176 95.633 167.111 03/31/2005 591.176 93.201 177.355 04/29/2005 588.235 89.811 177.801 05/31/2005 585.294 96.755 183.133 06/30/2005 744.118 96.362 193.931 07/29/2005 852.941 102.511 198.379 08/31/2005 711.765 100.885 203.103 09/30/2005 838.235 100.965 205.278 10/31/2005 750.000 99.668 208.605 11/30/2005 702.941 105.105 226.640 12/30/2005 611.765 103.616 223.715 01/31/2006 647.059 108.191 237.917 02/28/2006 632.353 107.115 231.055 03/31/2006 676.471 109.939 234.596 04/28/2006 641.176 109.074 225.237 05/31/2006 647.059 102.493 223.581 06/30/2006 647.059 102.494 222.448 The index level for all series was set to 100.0 on 06/29/2001 The comparisons in the table and in the graph above are required by the SEC rules and are not intended to forecast or be indicative of possible future performance of the Company's common stock. The stock performance graph shown above is not deemed to be part of any document filed with the SEC pursuant to the Securities Act or the Exchange Act and is not to be deemed incorporated by reference in any documents filed under the Securities Act or the Exchange Act without the express written consent of the Company." -- 20 -- APPROVAL OF AUDITORS During the fiscal year ended June 30, 2006, the Company changed independent registered public accounting firms from BDO Seidman, LLP, to Eisner LLP. This change was not made as a result of any disagreements between the accountants and the management of the Company. See the Company's report on form 8-K and 8-K/A filed with the Securities and Exchange Commission on March 10, 2006 and March 23, 2006, respectively. The Board has selected the firm of Eisner LLP, independent registered public accountants, as auditors of the Company for the fiscal year ending June 30, 2007 and is submitting the selection to stockholders for approval. The Board recommends a vote "FOR" this proposal. Unless the proxy indicates otherwise, the shares represented by the enclosed proxy will be voted to approve such selection. Although there is no legal requirement that this matter be submitted to a vote of stockholders, the Board believes that the selection of independent auditors is of sufficient importance to seek stockholder ratification. In the event Eisner LLP is not ratified by the affirmative vote of the holders of shares representing a majority of the votes cast at the Annual Meeting, the Board may reconsider its selection. A representative of Eisner LLP is expected to attend the Annual Meeting. Such representative will have an opportunity to make a statement and will be available to respond to appropriate questions from stockholders. INDEPENDENT AUDITOR FEES The Company changed independent registered public accounting firms during the fiscal year ended June 30, 2006. The following table presents fees for professional audit services rendered by BDO Seidman, LLP and Eisner LLP for the Company's annual financial statements and quarterly review services and other related services for the fiscal years ended June 30, 2006 and 2005: 2006 2005 _________ _________ Audit and audit related fees $ 186,600 $ 125,500 Tax Services * -- -- All other fees 5,000 -- _________ _________ Total fees $ 191,600 $ 125,500 ========= ========= * Firms other than BDO Seidman, LLP, and Eisner LLP, provide tax and other accounting services. In fiscal 2006, BDO Seidman, LLP, billed the Company an additional $5,000 in connection with the review of the company's S-8. This amount is listed as "All other fees" in the above table and relate to services traditionally provided by auditors, which are compatible with BDO Seidman, LLP's independence. The Company's Audit Committee considered the non-audit services rendered by BDO Seidman, LLP during fiscal 2006 and determined that such services were compatible with BDO Seidman, LLP's independence. Neither BDO Seidman, LLP nor Eisner LLP directly or indirectly, operate, or supervise the operation of, the Company's information systems or manage the Company's local area network, nor did they design or implement a hardware or software system that aggregates source data underlying the financial statements of the Company or generates information that is significant to the Company's financial statements taken as a whole. The charter of the Audit Committee provides that the Audit Committee must pre-approve all auditing and non-auditing services to be provided by the auditor. In addition, any services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee. All services shown in the table above were pre-approved by the Audit Committee. THE BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE ABOVE SELECTION -- 21 -- Compliance with Section 16(A) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock, to file with the SEC reports of ownership and reports of changes in ownership of Common Stock. SEC rules also require the reporting persons and entities to furnish the Company with a copy of the reports they file. The Company is required to report any failure to file these reports. During a review of these filings the Company found that Robert H. Boswell failed to file a Form 4 reporting the sale of 7,000 shares on May 25, 2006. These shares were reported on an amended Form 5 filed on July 27, 2006 when the oversight was discovered. Based on the review of the filings and written representations from the Company's directors and executive officers, except as noted, the Company believes that all reports required to be filed with the SEC by Section 16(a) during the most recent fiscal year have been filed on a timely basis. STOCKHOLDER PROPOSALS FOR 2007 MEETING Proposals of stockholders intended to be presented and director nominations intended to be made at the 2007 Annual Meeting of Stockholders must be received by the Company at its principal office, 200 Lake Street, Suite 102, Peabody, Massachusetts 01960, Attention: Paula C. Wurts, Clerk, not later than July 23, 2007 for inclusion in the proxy statement for that meeting. Any proposal of a stockholder to be presented at the Company's annual meeting of stockholders in 2006, which has not been included in the Company's proxy material, must have been received not later than September 15, 2006 to be considered timely. -- 22 -- OTHER MATTERS The Board does not know of any other matters that may come before the Annual Meeting. However, if any other matters are properly presented to the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote, or otherwise to act, in accordance with their judgment on such matters. All costs of solicitation of proxies by management will be borne by the Company. In addition to solicitations by mail, the Company's directors, officers and regular employees, without additional remuneration, may solicit proxies by telephone or personal interviews. Brokers, custodians and fiduciaries will be requested to forward proxy soliciting materials to the beneficial owners of the Company's stock held in the names of such brokers, custodians and fiduciaries, and the Company will reimburse them for their out-of-pocket expenses in this connection. By order of the Board of Directors Paula C. Wurts, Clerk November 10, 2006 The Board hopes that stockholders will attend the meeting. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A prompt response will greatly facilitate arrangements for the meeting, and your cooperation will be appreciated. Stockholders who attend the meeting may vote their stock personally even though they have sent in their proxies. -- 23 -- REVOCABLE PROXY - CLASS A COMMON STOCK PHC, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS 2006 ANNUAL MEETING OF STOCKHOLDERS The undersigned stockholder of PHC, Inc., a Massachusetts corporation, (the "Company") hereby acknowledges receipt of the Notice of 2006. Annual Meeting of Stockholders and Annual Report on Form 10-K for fiscal year ended June 30, 2006 and hereby appoints Bruce A. Shear and Paula C. Wurts, and both of them, as proxies, with full power to each of substitution, and hereby authorizes either of them to represent and to vote, as designated on the reverse side, all the shares of Class A Common Stock of the Company held of record by the undersigned on October 30, 2006 at the Annual Meeting of Stockholders to be held at 1:00 p.m. (Boston time), on December 20, 2006 at the Corporate offices of PHC, Inc., 200 Lake Street, Suite 102, Peabody, Massachusetts 01960, and at any adjournments or postponements thereof. The undersigned stockholder hereby revokes any proxy or proxies heretofore given. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED, OR IF NO DIRECTION IS MADE, FOR SUCH PROPOSALS, AND IN ACCORDANCE WITH THE DETERMINATION OF THE PROXY HOLDERS AS TO OTHER MATTERS. THE UNDERSIGNED STOCKHOLDER HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND PROXY STATEMENT. (Continued And To Be Signed And Dated On Reverse Side) (BACK) -- 24 -- FORM OF PROXY FOR CLASS A COMMON STOCK STOCKHOLDERS [X} Please mark your votes as in this example. Nominees: Donald E. Robar Howard W. Phillips WITHHOLD FOR ABSTAIN FOR AUTHORITY AGAINST 1. To elect Donald E. Robar [ ] [ ] 2. To ratify the [ ] [ ] [ ] and Howard W. Phillips [ ] [ ] selection by the as the Class A Directors of the company, Board of Directors each to hold the office until the annual of Eisner LLP as the meeting next following his election: Company's independent auditors for the 2007 fiscal year. For all nominees except as noted below: 3. In their discretion, the Proxies __________________________________________ are authorized to vote upon such other matters as may properly come before the meeting or any adjournment or postponement thereof. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD USING THE ENCLOSED ENVELOPE. SIGNATURE DATE DATE (SIGNATURE IF HELD JOINTLY) _______________________________________________________________________________ Note: Please sign exactly as name appears on this proxy. All joint owners should sign. When signing as attorney, executor, administrator, trustee, guardian or custodian for a minor, please give your full title as such. If a corporation, please sign full corporate name and indicate signer's office. If a partner sign in the partnership name. (FRONT) -- 25 -- REVOCABLE PROXY - CLASS B COMMON STOCK PHC, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS 2006 ANNUAL MEETING OF STOCKHOLDERS The undersigned stockholder of PHC, Inc., a Massachusetts corporation, (the "Company") hereby acknowledges receipt of the Notice of 2006 Annual Meeting of Stockholders and Annual Report on Form 10-K for fiscal year ended June 30, 2006 and hereby appoints Bruce A. Shear and Paula C. Wurts, and both of them, as proxies, with full power to each of substitution, and hereby authorizes either of them to represent and to vote, as designated on the reverse side, all the shares of Class B Common Stock of the Company held of record by the undersigned on October 30, 2006 at the Annual Meeting of Stockholders to be held at 1:00 p.m. (Boston time), on December 20, 2006 at the Corporate offices of PHC, Inc., 200 Lake Street, Suite 102, Peabody, Massachusetts 01960, and at any adjournments or postponements thereof. The undersigned stockholder hereby revokes any proxy or proxies heretofore given. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED, OR IF NO DIRECTION IS MADE, FOR SUCH PROPOSALS, AND IN ACCORDANCE WITH THE DETERMINATION OF THE PROXY HOLDERS AS TO OTHER MATTERS. THE UNDERSIGNED STOCKHOLDER HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND PROXY STATEMENT. (Continued And To Be Signed And Dated On Reverse Side) (BACK) -- 26 -- FORM OF PROXY FOR CLASS B COMMON STOCK STOCKHOLDERS [X} Please mark your votes as in this example. Nominees: Bruce A. Shear William F. Grieco David E. Dangerfield WITHHOLD FOR ABSTAIN FOR AUTHORITY AGAINST 1. To elect Bruce A. Shear, [ ] [ ] 2. To ratify the [ ] [ ] [ ] William F. Grieco and [ ] [ ] selection by the David E. Dangerfield as the Class B Board of Directors Directors of the company, each to hold of Eisner LLP as the the office until the annual meeting next Company's independent auditors following his election: for the 2007 fiscal year. For all nominees except as noted below: 3. In their discretion, the Proxies __________________________________________ are authorized to vote upon such other matters as may properly come before the meeting or any adjournment or postponement thereof. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD USING THE ENCLOSED ENVELOPE. SIGNATURE DATE DATE (SIGNATURE IF HELD JOINTLY) _______________________________________________________________________________ Note: Please sign exactly as name appears on this proxy. All joint owners should sign. When signing as attorney, executor, administrator, trustee, guardian or custodian for a minor, please give your full title as such. If a corporation, please sign full corporate name and indicate signer's office. If a partner sign in the partnership name. (FRONT) -- 27 --