U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, DC 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 September 30, 1996
                                ------------------

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES     
      EXCHANGE ACT OF 1934

      Commission file number 1-12564
                             -------
 
                          Ages Health Services Inc.
-------------------------------------------------------------------------------
               (Name of small business issuer in its charter)


            Massachusetts                            04-3102249
    -------------------------------              -------------------
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)

    800 Hingham Street, Suite 103S
    Rockland, MA                                        02370
----------------------------------------             ----------
(Address of principal executive offices)             (Zip Code)


            617-871-6550
      ---------------------------
      (Issuer's Telephone number,
        including area code)

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

                                                Name of each exchange
         Title of each class                     on which registered
         -------------------                    ---------------------
                None                                    None

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

    Common Stock, without par value
    -------------------------------
          (Title of Class)

Redeemable Common Stock Purchase Warrants
-----------------------------------------
          (Title of Class)
 
Check whether the issuer: (1) filed all reports required to be filed by 
Section 13 or 15 (d) of the 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 is not 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 the Form 10-
KSB or any amendment to this Form 10-KSB.  [ X ] 
 
The issuer's revenues for its most recent fiscal year ending September 30, 
1996 were $7,214,781 
 
At December 23, 1996, the aggregate market value of the Company's voting 
common stock held by non-affiliates, computed by reference to the average 
bid and asked prices of such stock, was approximately $443,621. 
 
 
 
                    DOCUMENTS INCORPORATED BY REFERENCE 
 

               Document                          Parts Into Which Incorporated

    Proxy Statement prepared in connection                  Part III
    with the Company's Annual Meeting of
    Stockholders which will be filed within 
    120 days of the end of the Company's 
    fiscal year 
 
 


Part I
Item 1.  Description of Business 
 
General 
 
Ages Health Services Inc. (the "Company") provides behavioral health 
services delivered by multidisciplinary teams of clinicians through two 
programs:  the Geriatric Services Program and the Outpatient Services 
Program.  In the Geriatric Services Program, teams go into nursing 
facilities and rest homes to provide services to the residents of these 
facilities.  These services assist the facilities in meeting important 
regulatory requirements.  The Company's Geriatric Services Program operates 
in Massachusetts, Connecticut and Rhode Island.  The Outpatient Services 
Program serves primarily non-geriatric Medicaid clients referred by a 
variety of Massachusetts state agencies at the Company's mental health 
clinic and in a variety of home or housing settings.  The services provided 
include diagnostic procedures, individual, group and family therapy, 
medication monitoring and consultations to facility or state agency staff 
and other caregivers.  The clinical teams include masters level therapists, 
social workers, psychologists, nurse practitioners, clinical nurse 
specialists and psychiatrists. 
 
Geriatric Services Program 
 
Nursing Home Mental Health Needs.  The need for mental health services for 
nursing home residents is large and should grow.  A recent report sponsored 
by the Hebrew Rehabilitation Center for Aged's Research and Training 
Institute, Mental Health Policy Research Center, federal agencies and 
private organizations found that eighty to ninety percent of nursing home 
residents in the United States suffer from mental health problems, including 
depression, anxiety, schizophrenia, dementia, delirium and behavioral 
symptoms.  The primary users of the Company's services are persons over 65 
years of age who reside in geriatric care facilities.  The number of persons 
in this age group has been increasing faster than the overall population, 
largely as a result of demographic trends and advances in medical technology 
which have increased life expectancies.  The aging of the U.S. population 
also has resulted in a greater incidence of disease and disability.  
According to a study by Arthur Andersen, almost half of the people over age 
65 will spend some time in a long term care facility. 
 
The Company's Geriatric Services Program currently provides services to 
approximately 4,000 residents in approximately 175 nursing homes, rest 
homes, homes for the aging and other geriatric care facilities in 
Massachusetts, Connecticut and Rhode Island.  The Company believes that it 
provides mental health services to more geriatric care facilities in 
Massachusetts than any other provider of such services.  The Company offers 
the nursing homes and other geriatric care facilities the means to treat 
residents suffering from behavioral problems, cognitive decline, dementia, 
depression, psychosis and other psychological problems common to the 
geriatric population.  The Company enters into non-exclusive agreements with 
such facilities pursuant to which the facilities may, but are not required 
to, refer residents requiring such services to the Company. 
 
Description of Services Provided.  The Geriatric Services Program 
constitutes the largest segment of the Company's current service system.  
The Company provides comprehensive mental health services to older adults in 
nursing homes, rest homes, homes for the aging and other geriatric care 
facilities.  Services are intensive, short-term, and goal-oriented, with a 
focus on maintaining individuals in their facility and avoiding 
hospitalizations. 
 
A list of services follows:

      *  Psychodiagnostic assessments
      *  Individual psychotherapy
      *  Group psychotherapy
      *  Family systems work
      *  Psychopharmacological consultations
      *  24 hour emergency services and crisis intervention
      *  Behavior management and consultation
      *  OBRA compliance
      *  Arrangements for psychiatric hospitalizations
      *  Specialty services for Alzheimer's patients 
 
In addition to direct care, the Company provides education to facility staff 
to support their ongoing management of patients, including crisis 
management.  Facility staff training is multi-tiered, with an initial 
orientation about mental health services and the Company's policies and 
procedures; ongoing assistance with, and training in patient management 
issues; and formal seminars, with continuing education credits available for 
facility staff. 
 
Market Trends.  The trend for Medicare and Medicaid programs to seek to 
contract with managed care organizations to administer care and control 
costs continues.  In Massachusetts, Medicare is moving rapidly to increase 
the percentage of Medicare beneficiaries enrolled in Medicare-risk managed 
care plans.  All of the New England states, including Massachusetts, 
Connecticut and Rhode Island, have announced their intention to each seek 
waivers from the Federal government to manage the care of those with dual 
eligibility for Medicare and Medicaid within the next two years.  The 
Company cannot predict whether these waivers will be granted and, if 
granted, what the impact on mental health services to the elderly would be.  
The Company believes that the demographics showing an aging population, the 
growing need to manage behavioral issues in geriatric care facilities and 
the growing recognition of the cost effectiveness of outpatient mental 
health services for the elderly should lead to growing demand for the 
Company's Geriatric Services Programs.  The challenge will be to work with 
the managed care organizations to realize the value of mental health 
services as a means of holding down overall healthcare costs by lowering 
utilization of other healthcare services and to continue improving the 
management of the delivery of services as management of costs becomes more 
and more important.  The Company continues to evaluate how to obtain the 
management information systems necessary to remain competitive as managed 
care becomes more and more prevalent.  The Company continues to seek out 
affiliations and other relationships across the continuum of mental health 
services to better position it to be part of networks able to accept 
capitated arrangements.  The Company currently has no contracts to provide 
mental health services on a capitated basis.  If managed care organizations 
did not reimburse, reduced reimbursement or otherwise did not encourage mental
health services for the elderly, this could have a material adverse effect on
the Company's Geriatric Services Programs.  The Company cannot predict the
impact of increased managed care on mental health services to Medicare
beneficiaries.
 
Regulation of Psychosocial Needs of Residents at Long-Term Care Facilities.  
The Nursing Home Reform Act, part of the Omnibus Budget Reconciliation Act 
of 1987 ("OBRA"), mandated that any long-term care facility participating in 
the Medicare or Medicaid program meet the psychosocial needs of its 
residents and limit the use of chemical restraints.  Services provided by 
the Company help facilities comply with OBRA.  OBRA applies to long term 
care facilities nationwide.  In 1995, Congress proposed, as part of Medicaid 
block grants, relaxing certain federal standards in OBRA.  The status of 
Medicaid block grant proposals is uncertain at this time.  If nursing 
facilities no longer had to meet OBRA standards, this could have a material 
adverse affect on the Company's geriatric services programs.  The Company 
cannot predict whether these proposals will be adopted or, if adopted, what 
standards states would set. 
 
Competition.  The Company believes that there are many providers of mental 
health services located throughout the United States which deliver mental 
health care to nursing facility and rest home residents, which can be 
considered competitive entities to the Company.  Many providers who serve 
the nursing facility and rest home population are components of larger 
community-based mental health centers whose mission is to provide a wide 
range of mental health services to persons of all ages.  The Company 
believes that many of those providers deliver single dimensional service 
(usually individual counseling) and may not have the capacity to coordinate 
the variety of care components required by residents with complex needs.  
Furthermore, the Company believes that services provided to elderly 
residents are often delivered by therapists with less specialized geriatric 
training. 
 
The Company believes that it provides geriatric services in the mental 
health field to residents in more nursing facilities and rest homes in 
Massachusetts than any of its competitors.  The Company is aware of a number 
of hospitals, hospital chains and one public company that are serving 
nursing facility residents in Massachusetts.  The financial and other 
resources of these entities presently active in Massachusetts are 
significantly larger than those of the Company, although the Company does 
not believe that such entities, respective market share is larger than the 
Company's.  In addition, the Company is also in competition with individual 
practitioners and governmental agencies engaged in providing mental health 
services.  The Company could be adversely affected if other companies with 
substantial resources seek to enter the market for services provided by the 
Company. 
 
Outpatient Services Program 
 
Outpatient Services Program.  The Company's Outpatient Services Program 
provides comprehensive diagnostic and treatment services to outpatient 
clients of all ages.  Clients are seen at the Company's licensed mental 
health clinic in Rockland, Massachusetts and at sites throughout 
Massachusetts.  The Outpatient Services Program serves approximately 1,000 
clients who are referred primarily by state health and social service 
agencies.   
 
Other outpatient referral sources are local physicians and therapists, 
schools and school collaboratives, residential and day programs for the 
disabled, and forensic services for courts and court officers.  Outpatient 
care consists almost exclusively of individual diagnostic evaluations and 
therapy, although emergency response, consultation, group service, family 
support and medication monitoring are also offered.    
 
The Outpatient Services Program operates in a highly competitive market 
dominated by several large freestanding licensed mental health clinics.  The 
Company's competitive position is enhanced by a service referral and 
delivery model that utilizes a modified team approach, which allows referral 
sources to make referral directly to specific, highly trained, licensed 
clinicians. Approximately 75% of Outpatient Services are covered by 
Massachusetts Medicaid's mental health managed care program.  The 
Massachusetts Medicaid mental health managed care contract was rebid and the 
manager changed in June of 1996 from Mental Health Management of America to 
the Massachusetts Behavioral Health Partnership ("MBHP").  The Company 
currently participates in MBHP's network of contracted providers of mental 
health services.  MBHP is currently engaged in a selective procurement 
process whereby it has requested all outpatient providers to submit an 
application to remain a provider.  A decision on all applications, including 
the Company's, is currently expected sometime before April 1997.  If the 
Company were not included in the network utilized by MBHP, it would have a 
material adverse affect on the Outpatient Services Program. 
 
The outpatient marketing efforts focus on increasing the number of clients 
referred to the Company by state agencies (Massachusetts Department of 
Mental Retardation, Department of Youth Services and Department of Social 
Services), managed care companies (MBHP and others) and primary care 
physicians.  Increased referrals are generated by providing information to 
referral sources on the Company's services and by establishing contracts or 
relationships with referral or case managers.  The Company seeks to maintain 
strong relationships with its referral sources by providing regular 
utilization information and updates on patient progress.  
 
Reimbursement 
 
The Company's revenues are primarily derived from government payors.  The 
Company estimates that approximately 88% of its revenues during fiscal 1996 
were derived from Medicaid and Medicare. 
 
Medicare.  Medicare is a federal health insurance program which provides 
health insurance coverage for certain disabled persons, and for persons aged 
65 or older.  There are two parts of the Medicare program:  Part A which 
covers inpatient services, home health care and hospice care and Part B 
which covers physicians, other health care professionals and outpatient 
services.  Medicare is funded by both beneficiary and Federal contributions.  
The Company's mental health services provided to Medicare recipients by 
psychiatrists, clinical psychologists, licensed independent social workers 
and nurse practitioners are covered under Medicare Part B.  Payments are 
based on a published fee schedule which differs by geographic region.  
Medicare beneficiaries, or the beneficiaries' supplemental insurance, if 
available, are required to pay an annual deductible and co-payment for most 
Part B services.   
 
Such co-payments generally equal 20% of the Medicare allowed amount for 
medical, nursing or diagnostic services.  For therapeutic treatment of 
mental disorders, Medicare generally pays 50% of the approved fee amount, 
requiring the beneficiary or the beneficiary's supplemental coverage, if 
available, to cover 50%.  Medicare generally requires that the services be 
provided in accordance with an established plan of treatment.  Certain Part 
B carriers appointed by the government to administer the Medicare Part B 
program require a physician's referral and established plan of treatment to 
qualify for reimbursement for mental health services. 
 
Medicaid.  Medicaid is the state administered and state and federally funded 
program which provides health insurance coverage for certain low income 
individuals.  For qualified Medicare beneficiaries, certain Medicaid 
programs pay the beneficiary's Part B premiums and generally reimburse all 
deductibles and co-payment portions of the approved Medicare fee up to an 
allowable amount established by each Medicaid program.  Medicaid programs in 
several states cover mental health services with certain reimbursement 
limitations.  The Company receives full Medicaid reimbursements in 
Massachusetts.  This includes reimbursements paid through the managed care 
program operated by MBHP.  The Company's participation in this managed care 
program is contingent upon satisfactory participation in MBHP's network of 
contracted providers of mental health services.  MBHP currently manages 
services provided to Massachusetts Medicaid recipients who do not also have 
Medicare or private insurance coverage.  However, the Company receives no 
Medicaid reimbursement in Rhode Island where all mental health care is 
provided by State supported clinics.  Connecticut Medicaid does not 
reimburse the Company for social work services.  There has been an 
increasing trend for Medicaid programs to contract with managed care 
organizations to administer care and control costs.  In these situations, 
the Company and its providers must be approved to participate on provider 
panels in order to service the Medicaid patients. 
 
Government and other third-party payors' health care policies and programs 
have been subject to changes in payment levels and payment methodologies 
during past years.  There can be no assurance that future changes will not 
reduce reimbursement from these sources for mental health services. 
 
Management Information Systems 
 
During fiscal 1994, the Company installed a comprehensive Management 
Information System ("MIS").  In fiscal 1995, the Company completed 
development of billing and accounts receivable management components of the 
MIS.  In fiscal 1996, the Company began evaluating MIS components that were 
commercially available to integrate into the MIS components it had developed 
on its own.  The goal would be to speed up completion of an integrated MIS 
data base and achieve economies in its MIS development costs.  The Company 
believes access to full MIS capabilities are critical if the Company is to 
meet the information demands of managed care systems.   
 
Government Regulation 
 
The Company is subject to various state licensing requirements and federal 
regulations governing the delivery of mental health services and Medicare 
and Medicaid regulations which determine the amount of allowable 
reimbursement for various services.  The Company bills Medicare through 
several group provider numbers issued to the clinical personnel engaged by 
the Company to provide mental health services.  In order to bill 
Massachusetts Medicaid for mental health services, the Company must be 
certified as a provider.  The Company is currently certified as required and 
believes that it is in compliance with applicable regulations at present.  
However, if changes are made to Medicare or Medicaid policies or regulations 
with respect to the provision of mental health services or the level of 
reimbursement for such services, significant delays, increased costs and 
decreased reimbursement to the Company could result which could have a 
materially adverse effect on the Company's business. 
 
The Company has a mental health clinic license from the Massachusetts 
Department of Public Health (DPH) in connection with certain aspects of its 
business.  State and local agencies inspect all healthcare facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participation
in government medical assistance programs.  In addition, all clinics are
subject to various local building codes and other ordinances.  Various state
and Federal laws regulate the relationship between providers of healthcare
services and physicians, including employment of service contracts and
investment relationships.  These laws include the fraud and abuse provisions
of federal Medicare and Medicaid statutes and similar statutes governing
Medicaid and certain private payors (the "Fraud and Abuse Laws"), which
prohibit the payment, receipt, solicitation or offering of any direct or
indirect remuneration with the intent to induce the referral of residents or
for the ordering of or for the providing of covered services, items or
equipment.  Violations of these provisions may result in civil or criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs or various private insurance programs. 
 
Licensing and Certification.  Psychiatrists, clinical psychologists, 
clinical social workers and registered nurse practitioners must be licensed 
in the state or states in which they practice.  Such licensure is controlled 
by state boards as well as other regulatory authorities in each state.  The 
Company has procedures designed to ensure that each of the mental health 
professionals it employs is properly licensed.  The Company anticipates that 
each of its facilities and practitioners will be able to maintain applicable 
licenses, certifications and accreditations, and obtain reasonable 
reimbursement for services.  However, the loss, denial or restriction of any 
such reimbursement, licensure, accreditation, or certification, including 
certification-of-need or exemption through changes in applicable regulatory 
requirements, an enforcement action, or otherwise, could have a material 
adverse effect on the Company.  
 
Governmental Health Care Regulation.  As a health care provider, the Company 
is currently subject to extensive and frequently changing federal, state and 
local regulations governing licensure, conduct of operations at existing 
facilities, purchase or lease of existing businesses, cost containment and 
direct employment of psychiatrists, psychologists and other licensed 
professionals by business corporations.  The various types of regulatory 
activity affect the Company's business either by controlling its growth, 
restricting licensure of the business entity or by controlling the 
reimbursement for services provided. 
 
In order to receive Medicare reimbursement, the Company's local operations 
must be registered with Medicare as a group provider.  In addition, each 
individual provider must be certified as an independently practicing 
provider and be assigned an individual provider number.  The certification 
criteria, which are established by the Department of Health and Human 
Services, are interpreted and administered by each state.  Individual 
certification is based on state licensure, academic preparation and length 
of clinical experience.  In certain locations, the local Part B carrier may 
not require certification of the Company but will only require that 
providers have certification. 
 
The Social Security Act imposes criminal penalties upon persons who make or 
receive kickbacks, bribes or rebates in connection with the Medicare or 
Medicaid  programs.  The anti-fraud and abuse rules prohibit providers and 
others from soliciting, offering, receiving or paying, directly or 
indirectly, any remuneration in return for either making a referral for a 
Medicare or Medicaid-covered service or item or ordering any covered service 
or item.  In addition, the Medicare and Medicaid Patient and Program 
Protection Act of 1987 imposes civil sanctions for violation of these 
prohibitions, punishable by exclusion from the Medicare and Medicaid 
programs; such exclusion, if applied to the Company's operations, could 
result in significant loss of reimbursement.  In order to provide guidance 
with respect to the anti-fraud and abuse rules, the Office of the Inspector 
General issued final regulations outlining certain "safe harbor" practices, 
which although potentially capable of inducing prohibited referrals, would 
not be prohibited if all applicable requirements are met.  A relationship 
which fails to satisfy a safe harbor is not necessarily illegal,  but could 
be scrutinized under a case-by-case analysis.  Because the anti-fraud and 
abuse laws have been broadly interpreted, they limit the manner in which the 
Company can acquire businesses and market its services to, and contract for 
services with physicians, nursing homes and other health care providers.  
Management considers and seeks to comply with these regulations in planning 
and conducting its activities, and believes that its activities do not 
violate the anti-fraud and abuse statute.  However, no assurance can be 
given regarding compliance in any particular factual situation, as there is 
no procedure for advisory opinions from government officials. 
 
Federal and some state laws impose restrictions on physicians, and, in a few 
states, on psychologists and other mental health care professionals' 
referrals for certain designated health services to entities with which they 
have a financial relationship.  The Company believes its operations are 
structured to comply with these restrictions to the extent applicable.  
There can be no assurance that the Federal government or other states in 
which the Company operates will not enact similar or more restrictive 
legislation or restrictions that could under certain circumstances impact 
the Company's operations. 
 
In certain states, the employment of psychiatrists, psychologists and other 
mental health care professionals by business corporations is a permissible 
practice.  However, many states, including some states in which the Company 
operates, have interpreted existing medical practice licensing laws to 
restrict business corporations, such as the Company, from providing mental 
health services through the direct employment of psychiatrists and, in a few 
states, psychologists and other mental health care professionals.  The 
Company believes its operations are structured, or can be restructured, if 
necessary, to comply with applicable laws and regulations.  However, there 
can be no assurance that other states in which the Company operates will not 
enact similar or more restrictive legislation or regulations. 
 
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 1985, Congress has consistently attempted to 
limit the growth of Federal spending under the Medicare and Medicaid 
programs.  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 operating and fixed costs allocable to 
such residents. 
 
The Company believes it is in compliance in all material respects with all 
material statutes, regulations, standards and conditions applicable to its 
business.  However, new laws and/or regulations, standards or conditions may 
be adopted or existing laws, regulations, standards and conditions may be 
interpreted in a manner which could adversely impact the Company's 
operations. 
 
Insurance.  The Company believes that it maintains the types and amounts of 
insurance customary in the mental health services industry, including 
coverage for general liability, property damage, workers' compensation and 
malpractice liability.  The Company considers its insurance coverage to be 
adequate both as to risks and amounts.   
 
Business Development 
 
The Company was organized as a Massachusetts corporation on October 30, 1990 
and acquired the business of a company providing mental health services to 
Massachusetts nursing facilities effective December 1, 1990.  The Company 
focused for several years primarily on managing and growing this 
Massachusetts business.  The Company's services were originally provided by 
teams consisting of psychologists and masters level therapists.  In late 
fiscal 1992, the Company acquired certain assets of a neurology practice in 
order to develop a medical and mental health clinic in Brookline, 
Massachusetts (the "Brookline Facility") to offer neuro-diagnostic services 
to appropriate patients being seen by teams in nursing facilities.  The 
Company expanded the services provided by adding nurse practitioners to 
monitor medications in fiscal 1993.
 
With proceeds of its initial public offering in fiscal 1994, the Company 
sought to diversify further and grow in a number of new directions.  The 
Company began to offer behavioral health services to nursing facilities in 
two new states:  Connecticut and Rhode Island.  The Company also started the 
Outpatient Services Program designed to provide outpatient mental health 
services to non-geriatric populations.  The Company also invested in 
developing a management information system.  The Company initiated the 
development of an Employee Assistance Program (the "EAP Program"), intended 
to serve the substantial number of employees in nursing facilities.   
 
In fiscal 1995, the Company focused on reorganization efforts intended to 
consolidate the growth from new programs while returning the Company to 
profitability.  Steps were taken to expand the mix of clinical services 
delivered to nursing facilities.  Marketing in Massachusetts to grow 
revenues was de-emphasized in favor of focusing on improving the management 
of the model of service delivery.  The programs in Connecticut and Rhode 
Island and the Massachusetts Outpatient Program grew in revenues and began 
to contribute to the Company on an operating basis.  Administrative 
functions were reorganized to develop ways to reduce costs and to improve 
management of accounts receivable and support of clinical services.  Two 
programs that were underperforming were discontinued as part of the 
Company's reorganization efforts.  The Brookline Facility had not yet 
developed enough business to cover its costs and was closed in fiscal 1995.  
The EAP Program had not grown as expected and was sold in fiscal 1995. 
 
In fiscal 1996, the Company achieved revenue growth in its Connecticut and 
Rhode Island Geriatric Services Programs and its Outpatient Services 
Division.  It also achieved improved margins in its Massachusetts and Rhode 
Island Geriatrics Services Programs and the Outpatient Services Program.  It 
also invested in management costs intended to generate profitable growth 
through new customers and better service to current customers.  The 
Company's efforts have not succeeded, however, in restoring profitability.  
The Company expects to implement further steps intended to improve the 
Company's performance in fiscal 1997. 
 
Employees  
 
At December 13, 1996, the Company had 101 full-time employees of whom 50 
were therapists or clinical associates, 11 were nurse practitioners, 2 were 
psychiatrists, and 38 were engaged in management and general administrative 
work.  The Company also had 29 part-time employees of whom 28 were 
therapists or clinical associates and 1 was a nurse practitioner.  The 
Company also has fee-for-service independent contract arrangements with 5 
psychologists, 17 therapists, 14 psychiatrists and 3 nurse practitioners. 
The total number of persons employed by the Company is 169.  None of the 
Company's employees are represented by a collective bargaining agreement and 
the company considers its employee relations to be satisfactory. 
 

Item 2.  Description of Property 
 
The Company leases approximately 5,000 square feet of executive office space 
in an office complex located at 800 Hingham Street in Rockland, 
Massachusetts.  The lease runs for the period from November 1996 through 
October 1999 and provides for a rental cost of approximately $62,000 per annum.
The Company leases approximately 1,000 square feet of office space in
Worcester, Massachusetts.  The lease runs for the period from November 1996 and
ends in September 1997 and provides for a rental cost of $1,000 per month.  The
Company also rents space on a month to month basis in Cheshire, Connecticut for
$200 per month.  The Company believes these facilities are adequate to meet its
present and future requirements, and the Company believes that it can renew
such leases; or lease comparable space, on commercially reasonable terms. 
 

Item 3.  Legal Proceedings. 
 
The Massachusetts Department of the Attorney General has been reviewing 
certain of the Company's Medicaid claims related to diagnostic, consultation 
and medical services performed at nursing homes serviced by the Company.  
The Company believes that the primary focus of such review is to determine 
whether the services performed were qualifying reimbursable services.  The 
Company believes that the services provided were appropriate and that all 
services were billed correctly.  Without admitting liability, the Company 
has made an offer of settlement of $100,000 payable over two years to the 
Attorney General's office in order to resolve this matter without protracted 
legal expenses and disruption to operations.  There can be no assurance, 
however, that this settlement offer will be accepted or that this review can 
be resolved without the need for the Company to pay some other amount.  The 
Company has set up a reserve of $100,000 related to this possible expense.  
The Company is not a party to any other legal proceedings which it believes 
may have a material adverse effect on the Company's financial condition or 
results of operations. 
   

Item 4.  Submission of Matters to a Vote of Security-Holders. 
 
There were no matters submitted during the fourth quarter of the fiscal year 
covered by this report subject to a vote of security-holders through the 
solicitation of proxies or otherwise. 
 

PART II
Item 5.  Market for Common Equity and Related Stockholder Matters. 
 
Market Information 
 
The Company's securities, consisting of Common Stock and Redeemable Common 
Stock Purchase Warrants (Redeemable Warrants), are traded through the 
National Quotation Bureau ("Pink Sheets") and through a NASDAQ sponsored on-
line service, "The Bulletin Board" (202-728-8477).   
 
The high and low closing price (based on bid price) as reported by NASDAQ 
for the last two fiscal years follows: 

<TABLE>
<CAPTION>
                                1995                   1996
                        --------------------     ----------------
Common Stock:           High        Low          High      Low
-------------           ----        ---          ----      ---

<S>                     <C>         <C>          <C>       <C>
First Quarter           $2.375      $1.00        $.1875    $.0625     
Second Quarter          $1.625      $0.50        $.1875    $.125 
Third Quarter           $2.00       $0.625       $.4375    $.125 
Fourth Quarter          $0.50       $0.09375     $.4375    $.1875 

<CAPTION>
                                1995                   1996
                        --------------------     ----------------
Redeemable Warrants:    High        Low          High      Low
--------------------    ----        ---          ----      ---

<S>                     <C>         <C>          <C>       <C>
First Quarter           $0.625      $0.125       $0        $0
Second Quarter          $0.15625    $0.03125     $0        $0     
Third Quarter           $0.375      $0.03125     $0        $0   
Fourth Quarter          $0.03125    $0.03125     $0        $0   
 
</TABLE>

These quotations reflect inter-dealer prices without retail mark-up, mark-
down or commission, and may not represent actual transactions.  Each 
Redeemable Warrant expires on December 12, 1998, five years after the date 
of the Company's initial public offering.  Each Redeemable Warrant entitles 
the holder to purchase one share of Common Stock at an exercise price of 
$4.00, subject to adjustment in certain events.  The Redeemable Warrants are 
redeemable by the Company, at a price of $.10 per Redeemable Warrant, at any 
time commencing one year after the date of the Company's initial public 
offering and prior to their expiration, on 30 days prior written notice to 
the registered holders of the Redeemable Warrants, provided that the closing 
bid price per share of the Common Stock for a period of 20 consecutive 
trading days equals or exceeds 200% of the then current exercise price 
(initially $8.00, subject to adjustment).   
 
Holders 
 
The number of holders of record of the Company's Common Stock as of January 
19, 1996 was approximately 542. 
 
Dividends 
 
The Company has not paid any cash dividends on Common Stock to date and does 
not anticipate or contemplate paying dividends in the foreseeable future.  
It is the present intention of management to utilize all available funds for 
the growth and development of the Company's business. 
 

Item 6.   Management's Discussion and Analysis of Financial Condition and 
          Result of Operations. 
 
Results of Operations 
 
Net Patient Service Revenue.  Net patient service revenues for continuing 
operations for fiscal 1996 were increased 3% over fiscal 1995 at $7,214,781 
versus $7,026,490.  The change in revenues is due to 227% increased revenue
from the Company's Massachusetts Outpatient Services Program, offset by 7%
decreased revenue from the Company's Geriatric Services Program.  The Company's
reorganization efforts in the Massachusetts Geriatric Services Program focused
on increasing the percentage of services delivered by lower cost clinicians.
These changes contributed to higher than average turnover among higher cost
clinicians and the loss of a number of facility accounts, which reduced revenue
for this Program.  Turnover levels and the number of lost accounts returned to
levels comparable to the period prior to reorganization efforts by the last
half of 1996.  Revenue growth in the Outpatient Services Program was primarily
due to successfully recruiting additional clinicians with complementary
practices. 

The Company's net patient service revenues by component are as follows:

<TABLE>
<CAPTION>
                                         1995         1996
                                      ----------   ----------

    <S>                               <C>          <C>
    Geriatric Services Program        $6,527,567   $6,080,742
    MA Outpatient Services Program       498,923   $1,134,039
                                      ----------   ----------
          Total                       $7,026,490   $7,214,781
</TABLE>

 
Cost of Patient Services.  The Company's cost of patient services as a 
percent of net patient service revenues decreased from 78% in fiscal 1995 to 
73% in fiscal 1996.  The decrease in cost of patient service is attributed 
to lower direct personnel costs in both of the Company's operating 
components.  Lower direct personnel costs came from a decrease in the 
percentage of overall services delivered by higher cost clinicians such as 
psychologists and psychiatrists.  The Company's reorganization efforts 
substantially improved operating margins in the Massachusetts and Rhode 
Island Geriatric Services Programs and in the Massachusetts Outpatient 
Services Program.  The operating margins in the Connecticut Geriatric 
Services Program eroded due to the Medicare intermediaries' decision to 
limit the procedures billable by nurses and the determination that Medicaid 
would not reimburse social workers and would only reimburse 20% of the 
Medicare allowable amount for other clinicians. 
 
General and Administrative Expenses.  The Company's general and 
administrative expenses increased from $2,575,896 in fiscal 1995 to 
$2,767,182 in fiscal 1996.  The increase of $191,286 is attributed to a 31% 
increase in the provision for doubtful accounts (see paragraph below), a one 
time $100,000 provision related to a settlement offer proposed to the 
Massachusetts Department of the Attorney General (see Item 3. Legal 
Proceedings) and to a 7% increase in administrative salaries due to 
increased staffing for regional management, marketing, human resources, 
quality assurance and medical records.  The Company intends that these 
increased levels of administrative staff will lead to revenue growth through 
new services and better service to current customers.  An important area of 
offsetting decreases in general and administrative expenses occurred in 
direct program administrative expenses which decreased 52% due to reduction 
in consulting, advertising, printing, telephone and postage. 
 
Provision for Doubtful Accounts.  Bad debt expense increased from $387,511 
or 5% of net revenues in fiscal 1995 to $554,798 or 8% of net revenues in 
fiscal 1996.  In addition, the reserve for doubtful accounts increased 63% 
from $350,000 or 16% of gross accounts receivable at September 30, 1995, to 
$570,000 or 22% of gross accounts receivable at September 30, 1996.  The 
provision for doubtful accounts is estimated based on an ongoing review of 
collectibility of the Company's accounts receivable, by state, by pay 
source.  A major factor in the Company's decision to increase reserves relates
to claims submitted to the Massachusetts Medicaid Program which pays claims on
behalf of its beneficiaries only after all other insurances (Medicare and any
intervening Medicare supplementary insurances) have paid or rejected a claim. 
Massachusetts Medicaid has intensified its efforts to identify intervening 
insurances and to ensure compliance with regulations regarding payment or 
rejection by such intervening insurances.  These intensified efforts have 
increased the proportion of paper claims that must be billed through 
multiple payors.  This process of submitting paper claims substantially 
increases the time and effort involved in securing final payment of unpaid 
Medicare balances from the Massachusetts Medicaid Program and substantially 
increases the number of claims which are not processed by the payor 
resulting in multiple rebilling efforts.  The Company is exploring MIS and 
operational changes which will reduce the proportion of billing that must 
flow through this increasingly complex system of claims management.   
 
Amortization of Acquisition Related Costs.  Amortization of acquisition 
related costs decreased by 57% in fiscal 1996. The decrease related to 
completing the amortization of the value of non-compete and nursing home 
agreements.
 
Interest Expense.  Interest expenses net of interest income increased by 
$52,275.  The increase is attributed to increased borrowings and related 
interest charges from the Company's brokerage and receivables based  
borrowing arrangements. 
 
Taxes on Income (Credit).  The Company had no provision for income taxes 
from continuing operations in either fiscal 1995 or 1996.  The Company had a 
net operating loss carry forward at September 30, 1996 of approximately 
$2,200,000 available to reduce future taxable income. 
 
Discontinued Operations.  In August 1995, the Company's Board of Directors 
authorized the sale of the Company's EAP Program and the disposal of the 
Brookline Facility.  Net patient services revenue applicable to discontinued 
operations of EAP were $98,951 and of the Brookline facility $163,602 for 
fiscal 1995. 
 
Liquidity and Capital Resources.  
 
During fiscal 1995, the Company repaid a $198,000 loan with Grant 
Enterprises, Ltd. (an affiliate).  The Company's investment in marketable 
short term securities is pledged to support a brokerage borrowing 
arrangement.  During fiscal 1996, the brokerage account was moved from 
Prudential Securities to Paine Webber, and in August of 1996, $500,000 of 
these securities matured and were used to pay down the brokerage borrowing 
account.  At September 30, 1996, the market value of the securities was 
$1,480,785 as compared to $1,965,470 at September 30, 1995.  At September 
30, 1996, $1,428,035 was borrowed against these securities bearing interest 
at 8.375% per annum as compared to $1,662,257 at September 30, 1995.  
Additionally, at September 30, 1996, these securities were recorded at an 
unrealized loss due to market fluctuations of $18,199.  In June of 1996, the 
Company secured a $300,000 line of credit based on its accounts receivable.  
The line can be increased to $1,000,000 upon satisfactory completion of the 
review by the Massachusetts Department of the Attorney General of certain of 
the Company's Medicaid claims related to diagnostic, consultation and medical 
services performed at nursing homes serviced by the Company.  At September 
30, 1996, $267,715 was borrowed against the line of credit, bearing interest
at a rate of interest equal to three percent above prime rate, or 11.25% per
annum.

As a result of operating losses during fiscal 1996, the Company's working 
capital decreased from $1,677,129 at September 30, 1995 to $653,146 at 
September 30, 1996.  The Company believes it is adequately capitalized to 
continue current operations.  The Company is negotiating with the 
Massachusetts Department of the Attorney General to resolve any issues 
arising from their review of certain Medicaid claims.  If resolved, the 
line of credit, based on available accounts receivable, will be increased 
from $300,000 to $1,000,000 to provide $700,000 additional financing for 
fiscal 1997.  A  settlement offer has been made to the Attorney General's 
office (see Item 3. Legal Proceedings).  There can be no assurance, however, 
that issues arising from the Attorney General's review can be resolved on 
financially reasonable terms.


Item 7.  Financial Statements. 

See Index to Financial Statements included on F-1 attached hereto. 
 

Item 8.  Changes In and Disagreements With Accountants on Accounting and 
         Financial Disclosure.
 
Not applicable. 
 

PART III 
Item 9.   Directors, Executive Officers, Promoters and Control Persons; 
          Compliance With Section 16 (a) of the Exchange Act. 
 
The information required by this Item 9 is hereby incorporated by reference 
to the Company's definitive proxy statement to be filed by the Company 
within 120 days after the close of the Company's fiscal year. 
 

Item 10.  Executive Compensation. 
 
The information required by this Item 10 is hereby incorporated by reference 
to the Company's definitive proxy statement to be filed by the Company 
within 120 days after the close of the Company's fiscal year. 
 

Item 11.  Security Ownership of Certain Beneficial Owners and Management. 
 
The information required by this Item 11 is hereby incorporated by reference 
to the Company's definitive proxy statement to be filed by the Company 
within 120 days after the close of the Company's fiscal year.  


Item 12.  Certain Relationships and Related Transactions. 
 
The information required by this Item 12 is hereby incorporated by reference 
to the Company's definitive proxy statement to be filed by the Company 
within 120 days after the close of the Company's fiscal year. 
 

Item 13.  Exhibits and Reports on Form 8-K 
Exhibits 
 

<TABLE>
<CAPTION>
Exhibit
Number        Description
-------       -----------
 
<C>           <S>
1.3           Form of Financial Advisory and Investment Banking Agreement (1) 

3.1           Articles of Organization as amended (1) 
 
3.1 (a)       Amendment of the Articles of Organization (1) 
 
3.1 (b)       Amendment to the Registrant's Articles of Incorporation (2) 
 
3.2           By-Laws (1) 
 
4.1           Specimen Common Stock Certificate (1) 
 
4.2           Specimen Redeemable Common Stock Purchase Warrant (1) 
 
4.3           Form of Warrant Agreement (1) 
 
4.4           Form of Underwriters' Warrant Agreement (1) 
 
10.1          Employment Agreement with Vernon Mark, M.D. dated July 1, 1992 (1) * 
 
10.2          Employment Agreement with Thomas Sabin M.D. dated July 1, 1992 (1) * 
 
10.3          Management Agreement with Drs. Mark and Sabin dated July 1, 1992 (1) * 
 
10.4          Form of Agreement with nursing homes (1) 
 
10.5          Settlement Agreement with the Federal Deposit Insurance Company
              dated April 1, 1993 (1) 
 
10.6          Settlement Agreement by and between the Company and Alpha 
              Geriatric Services Inc. dated April 14, 1993 (1) 
 
10.7          Company's Promissory Notes in favor of Grant Enterprise Ltd. (3) 
 
10.8          Form of Promissory Note issued to bridge investors in June
              1993 (1) 
 
10.9          Form of Warrant issued to bridge investors in June 1993 (1) 
 
10.10         Settlement Agreement by and between the company and the 
              Massachusetts Department of Welfare (1)
 
10.11         1993 Employee Incentive Stock Option Plan (1) * 
 
10.12         1993 Non-Employee Directors' Stock Option Plan (1) * 
 
10.13         Operating Agreement, dated as of October 11,1991, by and between 
              Sentry Phila Corp. and the Company (1) 
 
10.14         Asset Purchase Agreement, dated August 23, 1991, by and amount 
              Trans-Med Ambulance Service Inc., Allan Grota and Sentry Phila
              Corp., as amended (1) 
 
10.15         Asset Purchase Agreement, dated May 28, 1992, by and among Sentry
              Phila Corp., the Company, George Brewster and Brewster Ambulance
              Services Inc.(1)  
 
10.16         Employment Agreement with Anders Laren dated January 1, 1994 (3) * 
 
10.17         Employment Agreement with Dr. Jonathan Lieff dated December 27, 
              1993 (3)* 
 
11.0          Calculation of Net Income (Loss) per Share of Common Stock for 
              Fiscal 1994 (3)
 
<F1>  Incorporated herein by reference to the Company's Registration 
      Statement on Form SB-2 (Registration No. 33-65106-B) filed with the SEC
      on June 25, 1993 and as amended on August 30, 1993, November 12, 1993
      and December 3, 1993, which Registration Statement became effective
      December 13, 1993.  The number set forth herein is the number of the
      Exhibit in said Registration Statement. 
<F2>  Incorporated herein by reference to current Report on Form 8-K filed 
      with the SEC on April 14, 1994.  
<F3>  Incorporated herein by reference to Annual Report on Form 10-KSB filed 
      with the SEC on December 27, 1994. 
<F*>  Management Contract or Compensatory Plan or Agreement. 
</TABLE>

 

Reports on Form 8-K. 
 
No reports on Form 8-K were filed by the Company during the last quarter of 
the period covered by this report. 
 
 
                                 SIGNATURES
 
 
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant 
caused this report to be signed on its behalf by the undersigned, thereunto 
duly authorized. 
 
Ages Health Services Inc. 
 
 
By:  /s/ Anders Laren
-------------------------------------          Dated:  December 24, 1996
     Anders Laren, President, Chief
     Executive Officer and Director 
 
In accordance with the Exchange Act, this report has been signed below by 
the following persons on behalf of the registrant and in the capacities and 
on the dates indicated. 
 
Signatures:                            Dated: 
 
/s/ Anders Laren 
---------------------------------
Anders Laren, President, Chief 
Executive Officer (Principal 
Executive Officer),  Director          December 24, 1996 
 
 
/s/ Kuno Laren 
---------------------------------
Kuno Laren, Director                   December 24,  1996 
 
 
/s/ Peter W. Clegg   
---------------------------------
Peter W. Clegg, Director               December 24, 1996 
 
 
/s/ Henry Goodhue   
--------------------------------- 
Henry Goodhue, Controller              December 24, 1996 
(Principal Financial Officer) 
 


                            Ages Health Services Inc.

                          Index to Financial Statements



<TABLE>
<CAPTION>
                                                                                   Page
                                                                               ------------

<S>                                                                            <C>
Report of independent certified public accountants                             F-2


Financial statements:

  Balance sheet as of September 30, 1996                                       F-3 to F-4

  Statements of operations for the years ended September 30, 1996 and 1995     F-5

  Statements of stockholders' equity for the years ended September 30, 1996
   and 1995                                                                    F-6

  Statements of cash flows for the years ended September 30, 1996 and 1995     F-7

  Summary of accounting policies                                               F-8 to F-10

  Notes to financial statements                                                F-11 to F-20
</TABLE>



Report of Independent Certified Public Accountants



To the Board of Directors and Stockholders of
Ages Health Services Inc.
Rockland, Massachusetts



We have audited the  accompanying  balance sheet of Ages Health Services Inc. as
of September 30, 1996, and the related  statements of operations,  stockholders'
equity and cash flows for the years ended  September  30,  1996 and 1995.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Ages Health Services Inc. at
September 30, 1996, and the results of its operations and its cash flows for the
years ended September 30, 1996 and 1995, in conformity  with generally  accepted
accounting principles.


                                         BDO Seidman, LLP


Boston, Massachusetts
December 23, 1996



                            Ages Health Services Inc.


                                  Balance Sheet



<TABLE>
<CAPTION>

September 30,                                                                    1996
-----------------------------------------------------------------------------------------

<S>                                                                           <C>
Assets (Note 4)

Current:
  Cash and cash equivalents                                                   $    25 548
  U.S. Treasury Notes (Note 2)                                                  1 480 785
  Accounts receivable, less allowance for uncollectible accounts 
   of $570,000 (Note 3)                                                         2 018 537
  Prepaid expenses                                                                 49 013
  Current portion of long-term note receivable related to discontinued
   operations (Note 1)                                                              5 000
  Deferred income taxes (Note 7)                                                   15 000
-----------------------------------------------------------------------------------------


      Total current assets                                                      3 593 883
-----------------------------------------------------------------------------------------


Property and equipment, net of accumulated depreciation of $231,541               193 472
-----------------------------------------------------------------------------------------


Deferred financing costs, net of accumulated amortization of $1,030                 7 207
-----------------------------------------------------------------------------------------


Long-term note receivable related to discontinued operations, less 
 current portion (Note 1)                                                          14 726
-----------------------------------------------------------------------------------------


      Total assets                                                            $ 3 809 288
=========================================================================================
</TABLE>


See accompanying summary of accounting policies and notes to financial
 statements.



                           Ages Health Services Inc.


                                  Balance Sheet
                                   (Concluded)


<TABLE>
<CAPTION>

September 30,                                                                     1996
-----------------------------------------------------------------------------------------

<S>                                                                           <C>
Liabilities and Stockholders' Equity

Current liabilities:
  Short-term borrowings (Note 4)                                              $ 1 695 750
  Accounts payable                                                                210 237
  Dividends payable                                                                10 000
  Accrued expenses (Note 5)                                                       832 375
  Current portion of long-term debt and notes payable (Note 6)                    192 375
-----------------------------------------------------------------------------------------


      Total current liabilities                                                 2 940 737

Long-term debt and notes payable, less current portion (Note 6)                   328 077

Deferred income taxes (Note 7)                                                     15 000
-----------------------------------------------------------------------------------------


      Total liabilities                                                         3 283 814
-----------------------------------------------------------------------------------------


Commitments and contingencies (Notes 8, 10, 11 and 12)

Stockholders' equity (Notes 2, 11 and 12):
  Preferred stock, 12% cumulative, nonparticipating, $1,000 per share
   liquidation value, without par value; 100,000 shares authorized; 
   250 shares issued and outstanding                                              250 000
  Common stock, without par value; 4,500,000 shares authorized; 
   2,580,100 shares issued and outstanding                                      3 375 897
  Accumulated deficit                                                          (3 082 224)
  Unrealized loss on marketable securities                                        (18 199)
-----------------------------------------------------------------------------------------


      Total stockholders' equity                                                  525 474
-----------------------------------------------------------------------------------------


      Total liabilities and stockholders' equity                              $ 3 809 288
=========================================================================================
</TABLE>


See accompanying summary of accounting policies and notes to financial
 statements.



                            Ages Health Services Inc.


                            Statements of Operations



<TABLE>
<CAPTION>

Years ended September 30,                                                        1996              1995
-----------------------------------------------------------------------------------------------------------

<S>                                                                           <C>               <C>
Net patient service revenue (Note 3)                                          $ 7 214 781       $ 7 026 490

Cost of patient services                                                        5 295 567         5 467 207
-----------------------------------------------------------------------------------------------------------


      Gross profit on patient services                                          1 919 214         1 559 283
-----------------------------------------------------------------------------------------------------------


General and administrative expenses                                             2 767 182         2 575 896

Amortization of acquisition-related costs                                          45 902           106 330
-----------------------------------------------------------------------------------------------------------


      Operating expenses                                                        2 813 084         2 682 226
-----------------------------------------------------------------------------------------------------------


Operating loss                                                                   (893 870)       (1 122 943)

Interest expense, net of interest income of $92,449 and $93,835 (Note 9)          110 034            57 759
-----------------------------------------------------------------------------------------------------------


Loss from continuing operations                                                (1 003 904)       (1 180 702)
-----------------------------------------------------------------------------------------------------------


Discontinued operations (Note 1):
  Loss from operations                                                                  -          (270 878)
  Loss on disposal                                                                      -           (18 904)
-----------------------------------------------------------------------------------------------------------


      Loss from discontinued operations                                                 -          (289 782)
-----------------------------------------------------------------------------------------------------------


Net loss                                                                       (1 003 904)       (1 470 484)

Preferred stock dividends (Note 12)                                               (30 000)          (30 000)
-----------------------------------------------------------------------------------------------------------


Net loss applicable to common stock                                           $(1 033 904)      $(1 500 484)
===========================================================================================================


Loss per share of common stock:
  Loss from continuing operations                                             $      (.40)      $      (.47)
  Loss from discontinued operations                                                     -              (.11)
===========================================================================================================


Net loss per share of common stock                                            $      (.40)      $      (.58)
===========================================================================================================


Weighted average number of shares of common stock outstanding                   2 580 100         2 580 100
===========================================================================================================
</TABLE>


See accompanying summary of accounting policies and notes to financial
 statements.



                            Ages Health Services Inc.


                       Statements of Stockholders' Equity



<TABLE>
<CAPTION>

                                                                                                 Unrealized
                                     Preferred Stock         Common Stock                       Gain (Loss) on       Total
Years ended                         -----------------   ----------------------   Accumulated      Marketable     Stockholders'
September 30, 1995 and 1996         Shares    Amount     Shares       Amount       Deficit        Securities        Equity
---------------------------         ------   --------   ---------   ----------   ------------   --------------   -------------


<S>                                  <C>     <C>        <C>         <C>          <C>              <C>             <C>
Balance, September 30, 1994          250     $250 000   2 580 100   $3 375 897   $   (547 836)    $(104 497)      $ 2 973 564

  Dividends on preferred stock         -            -           -            -        (30 000)            -           (30 000)

  Net loss                             -            -           -            -     (1 470 484)            -        (1 470 484)

  Unrealized gain on marketable
   securities                          -            -           -            -              -        70 045            70 045
-----------------------------------------------------------------------------------------------------------------------------


Balance, September 30, 1995          250      250 000   2 580 100    3 375 897     (2 048 320)      (34 452)        1 543 125

  Dividends on preferred stock         -            -           -            -        (30 000)            -           (30 000)

  Net loss                             -            -           -            -     (1 003 904)            -        (1 003 904)

  Unrealized gain on marketable
   securities                          -            -           -            -              -        16 253            16 253
-----------------------------------------------------------------------------------------------------------------------------


Balance, September 30, 1996          250     $250 000   2 580 100   $3 375 897   $ (3 082 224)    $ (18 199)      $   525 474
=============================================================================================================================
</TABLE>


See accompanying summary of accounting policies and notes to financial 
statements.



                            Ages Health Services Inc.


                            Statements of Cash Flows
                                    (Note 13)



<TABLE>
<CAPTION>

Years ended September 30,                                                   1996             1995
-------------------------                                               ------------     ------------


<S>                                                                     <C>              <C>
Cash flows from operating activities:
  Net loss                                                              $ (1 003 904)    $ (1 470 484)
  Adjustments to reconcile net loss to net cash used by
   operating activities:
    Depreciation and amortization                                            110 601          178 130
    Provision for losses on accounts receivable                              554 798          387 511
    Gain on disposal of discontinued operations                                    -          (10 319)
    Changes in operating assets and liabilities:
      Accounts receivable                                                   (688 210)        (599 029)
      Refundable income taxes                                                      -           93 845
      Prepaid expenses                                                        33 669           73 131
      Accounts payable                                                        99 422           (2 416)
      Accrued expenses                                                       324 826          377 407
-----------------------------------------------------------------------------------------------------

        Net cash used by operating activities                               (568 798)        (972 224)
-----------------------------------------------------------------------------------------------------


Cash flows from investing activities:
  Proceeds from sale of U.S Treasury Notes                                   500 938                -
  Proceeds from sale of property and equipment                                     -              375
  Purchase of property and equipment                                         (34 649)        (108 703)
  Organization costs capitalized                                                   -           (6 933)
  Proceeds received from sale of discontinued operations                           -           20 000
  Proceeds from notes receivable                                               5 274                -
-----------------------------------------------------------------------------------------------------

        Net cash provided (used) by investing activities                     471 563          (95 261)
-----------------------------------------------------------------------------------------------------


Cash flows from financing activities:
  Deferred financing costs capitalized                                        (8 237)               -
  Deferred consulting costs                                                        -           24 000
  Net borrowings under short-term borrowings                                  33 493        1 343 009
  Payments on notes to affiliate                                                   -         (198 000)
  Payments on notes payable                                                   (9 351)         (26 151)
  Dividends paid on preferred stock                                          (20 000)         (30 000)
-----------------------------------------------------------------------------------------------------

        Net cash provided (used) by financing activities                      (4 095)       1 112 858
-----------------------------------------------------------------------------------------------------


Net increase (decrease) in cash and cash equivalents                        (101 330)          45 373

Cash and cash equivalents, beginning of year                                 126 878           81 505
-----------------------------------------------------------------------------------------------------


Cash and cash equivalents, end of year                                  $     25 548     $    126 878
=====================================================================================================
</TABLE>


See accompanying summary of accounting policies and notes to financial
 statements.



                            Ages Health Services Inc.


                         Summary of Accounting Policies
================================================================================


Business and Operations

      Ages Health Services Inc. (the "Company")  primarily  provides  behavioral
health  services,  including  diagnostic  services,  therapy,  consultation  and
management of medications.


Use of Estimates

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


Cash Equivalents

      The Company  considers all highly liquid debt  instruments with a maturity
of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk

      The Company performs ongoing reviews of the collectibility of its 
accounts receivable by pay source, and adjusts its reserve for doubtful 
accounts based on its determination of the amounts deemed collectible 
(see Notes 3 and 14).

Financial Instruments

      The estimated  fair value of the Company's  financial  instruments,  which
include account receivable,  accounts payable,  notes payable and long-term debt
approximate their carrying value.


U.S. Treasury Notes

      The Company  accounts for investments in debt and equity  securities under
the  provisions  of  Statement  of  Financial   Accounting   Standard  No.  115,
"Accounting for Certain  Investments in Debt and Equity Securities." The Company
considers  the  U.S.  Treasury  Notes  as  available-for-sale   securities,  and
therefore are accounted for at fair market value.

      The cost of securities sold is based on the first-in,  first-out method in
the  determination of realized gains or losses.  Unrealized gains and losses are
recorded as a component of stockholders'  equity.  Realized gains and losses are
recognized in the results of operations.


Property, Equipment and Depreciation

      Property  and  equipment  are  recorded at cost and consist of  equipment,
furniture and vehicles.  These assets are being depreciated over their estimated
useful lives,  ranging from three to five years, using the straight-line  method
of depreciation. Maintenance and repairs are expensed as incurred.


Other Assets

Intangible Assets

      In fiscal 1991, the Company  entered into an  acquisition.  All intangible
assets related to the acquisition  were amortized on a  straight-line  basis and
were fully amortized at September 30, 1996.

Deferred Consulting Costs

      Deferred  consulting  costs  consist of costs  paid at the  closing of the
initial  public  offering  for future  financial,  investment  banking and other
services. At September 30, 1996 deferred consulting costs were fully amortized.

Deferred Financing Costs

      Deferred  financing  costs consist of amounts paid in connection  with the
establishment  of a line of  credit.  These  costs are being  amortized  over 24
months.


Income Taxes

      Income  taxes are  calculated  using the  liability  method  specified  by
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes."


Net Patient Service Revenue

      Net  patient  service  revenue  is  recognized  at  established  rates  as
allowable by Medicaid,  Medicare and commercial  insurance companies on the date
such services are provided.


Net Loss Per Share of Common Stock

      Net loss per  share of  common  stock is  computed  by  dividing  net loss
applicable to common  stockholders by the weighted  average number of common and
common equivalent shares outstanding during each period presented. Common shares
issuable upon exercise of outstanding warrants and options,  when dilutive,  are
included in the computation of shares outstanding.

New Accounting Pronouncements

      Effective  October 1, 1995,  the Company  adopted  Statement  of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived  Assets to be Disposed Of" ("SFAS No. 121"). The new standard
establishes  new  guidelines  regarding  when  impairment  losses on  long-lived
assets, which include property and equipment,  certain  identifiable  intangible
assets and goodwill,  should be recognized and how  impairment  losses should be
measured.  The effect of the  implementation of SFAS No. 121 was not material to
the Company's financial statements.

      In October 1995, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standard  No. 123 ("SFAS No.  123"),  "Accounting  for
Stock-Based  Compensation."  SFAS No. 123 allows the  Company to account for its
stock-based employee compensation plans based upon either a fair value method or
the intrinsic  value method  currently  followed by the Company.  If the current
method  is  retained,  SFAS No.  123  requires  certain  additional  disclosures
regarding  the impact  which the fair value  method would have on the results of
the Company's  operations.  The Company  expects to retain its current method of
accounting for stock-based  compensation  plans, and therefore,  the adoption of
SFAS No. 123 will have no impact on the Company's  financial position or results
of operations.  Adoption of SFAS No. 123 is required for financial statements of
fiscal years  beginning  after December 15, 1995. The Company will implement the
disclosure requirements of SFAS No. 123 as required in fiscal 1997.



                            Ages Health Services Inc.


                          Notes to Financial Statements
================================================================================


1.    Discontinued Operations

      In August 1995,  the Company's  Board of Directors  authorized the sale of
the Company's Employee Assistance Program ("EAP") and the disposal of the Center
for Neuro-Diagnostics ("Neurology").

      The total selling price for EAP was $45,000 of which $25,000 was due under
a promissory note in equal monthly  installments  through  September,  1999. The
note is secured by  substantially  all of the assets of the buyer.  In addition,
the buyer assumed the facility lease used by EAP which continues  through fiscal
1997.

      Upon the disposal of Neurology,  the Company  wrote-off the net book value
of related  property  and  equipment,  and  intangibles  for $20,204 and $8,644,
respectively.

      Assets of  discontinued  operations at September  30, 1996  consisted of a
note  receivable of $19,726.  There were no liabilities  related to discontinued
operations at September 30, 1996.

      Net patient service revenue  applicable to discontinued  operations of EAP
and Neurology were $98,951 and $163,602, respectively, for fiscal 1995.


2.    U.S Treasury Notes

      As of September 30, 1996, gross unrealized  losses  pertaining to the U.S.
Treasury Notes were $18,199.  The U.S. Treasury Notes bear annual interest rates
ranging  between 4.375% and 5.125% and mature between  November 1996 and October
1998. The change in the net unrealized loss on marketable  securities,  included
in a separate component of stockholders' equity, during the year ended September
30, 1996 was $16,253.


3.    Accounts Receivable

      Accounts receivable consist of the following:

<TABLE>
<CAPTION>

            September 30,                                               1996
            --------------------------------------------------------------------

            <S>                                                      <C>
            Medicaid                                                 $ 1 386 727
            Medicare                                                     681 208
            Commercial insurance                                         482 659
            Other                                                         37 943
            --------------------------------------------------------------------
                                                                       2 588 537

            Less allowance for uncollectible accounts                   (570 000)
            --------------------------------------------------------------------

            Net accounts receivable                                  $ 2 018 537
            ====================================================================
</TABLE>


      During   fiscal  1996  and  fiscal  1995,   approximately   88%  and  91%,
respectively,  of the Company's revenues were derived from Medicaid and Medicare
reimbursements.  At September 30, 1996 approximately 80% of accounts  receivable
were due from Medicaid and Medicare.


4.    Short-Term Borrowings

      The  Company has a line of credit  with a  financial  institution  that is
collateralized by the Company's U.S. Treasury Notes.  Interest is charged at the
lenders  base  rate plus a range of .5% to 2.5%  based on the total  outstanding
borrowings  (8.375% at September 30, 1996). The U.S.  Treasury Notes are subject
to a lien  for  the  discharge  of the  borrowings.  Outstanding  borrowings  at
September 30, 1996 were $1,428,035

      In addition,  the Company entered into a $300,000 line of credit agreement
with a financial  institution  that expires in June 1998.  Borrowings  under the
line bear  interest at the prime rate plus 3.0% (11.25% at  September  30, 1996)
and is secured by substantially all assets.  Outstanding borrowings at September
30, 1996 were $267,715.


5.    Accrued Expenses

      Accrued expenses consist of the following:

<TABLE>
<CAPTION>

            September 30,                                                 1996
            --------------------------------------------------------------------

            <S>                                                        <C>
            Salaries and wages                                         $ 147 696
            Payroll taxes and withholdings                               284 062
            Vacation                                                     151 290
            Interest                                                     134 233
            Other                                                        115 094
            --------------------------------------------------------------------

            Total accrued expenses                                     $ 832 375
            ====================================================================
</TABLE>


6.    Long-Term Debt and Notes Payable

      Long-term debt and notes payable consist of the following:

<TABLE>
<CAPTION>

            September 30,                                                 1996
            --------------------------------------------------------------------

            <S>                                                        <C>
            Obligation under noncompete agreement                      $ 495 000
            Notes payable                                                 25 452
            --------------------------------------------------------------------
                                                                         520 452

            Less current portion                                         192 375
            --------------------------------------------------------------------

            Long-term portion                                          $ 328 077
            ====================================================================
</TABLE>


      Amounts  due  under  the  noncompete  agreement  are  payable  in  monthly
installments  of $4,000  through  April  1997  escalating  to $4,500 in May 1997
through April 2000,  and a balloon  payment of $182,000 on May 15, 2000. In July
1993,  the holder of the note  requested  the Company to suspend  making  future
payments.  As of September 30, 1996,  amounts previously due and unpaid totalled
$123,000.   Interest  on  the  outstanding  balance  is  payable  monthly  at  a
fluctuating  annual  interest  rate based upon the  underpayment  interest  rate
established by the Internal Revenue Service (8% at September 30, 1996)

      Annual maturities of long-term debt and notes payable are as follows:

<TABLE>
<CAPTION>

            Year ending September 30,
            ----------------------------------------------

            <C>                                  <C>  
            1997                                 $ 192 375
            1998                                    60 577
            1999                                    54 000
            2000                                   213 500
            ----------------------------------------------

            Total                                $ 520 452
            ==============================================
</TABLE>


7.    Income Taxes

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes.

      The  Company's  deferred  tax asset and  liability  are  comprised  of the
following components:

<TABLE>
<CAPTION>

            September 30,                                               1996
            --------------------------------------------------------------------

            <S>                                                      <C>
            Deferred tax asset:
              Allowance for accounts receivable                      $   230 000
              Accrued expenses                                            40 000
              Contribution carryforward                                    3 000
              Net operating loss carryforward                            885 000
            --------------------------------------------------------------------

                  Gross deferred tax asset                             1 158 000

            Valuation allowance                                       (1 143 000)
            --------------------------------------------------------------------

                  Net tax deferred asset                             $    15 000
            ====================================================================

            Deferred tax liability:
              Basis difference of property and equipment
               and other assets                                      $    15 000
            ====================================================================
</TABLE>


      In recognition of the uncertainty  regarding the ultimate amount of income
tax benefits to be derived from the Company's net  operating  loss  carryforward
and other  deferred  tax assets,  the Company has  provided a deferred tax asset
valuation  allowance  at September  30, 1996 equal to 100% of the net  operating
loss  carryforward and a portion of the other deferred tax assets.  The increase
in the deferred tax asset valuation allowance of $503,000 in fiscal 1996 relates
primarily to the increase in the net operating loss carryforward.

      As  of  September  30,  1996,   the  Company  has  a  net  operating  loss
carryforward  of  approximately  $2,200,000,  subject to review by the  Internal
Revenue  Service,  available to offset future  taxable income for Federal income
tax purposes, expiring through 2011.

      A  reconciliation  of the  statutory  federal  income  tax  rate  and  the
effective tax rate is as follows:

<TABLE>
<CAPTION>

            Year ended September 30,                              1996       1995
            -----------------------------------------------------------------------

            <S>                                                  <C>        <C>
            Statutory rate                                       (34.0)%    (34.0)%
            Operating loss generating no current
             tax benefit                                          34.0       34.0
            -----------------------------------------------------------------------
            Effective tax rate                                       - %        - %
            =======================================================================
</TABLE>


8.    Commitments and Contingencies

      Employment and Management Agreements

      The Company has an employment  agreement  with an executive  officer which
expires on December 31, 1997. The agreement provides for a base salary and bonus
at a rate of 30% of profits before  interest and taxes,  as defined in excess of
$700,000,  and 10% of such excess over  $800,000.  In addition,  the Company has
employment  agreements with other key employee which provides for a base salary.
The compensation  expensed in connection with these agreements was approximately
$451,100 and $301,100  during fiscal 1996 and 1995,  respectively.  No bonus was
earned in fiscal 1996 or 1995 under the executive officer's agreement.

      In conjunction  with Neurology,  the Company had two part-time  employment
agreements.  The employment agreements provided for future compensation over the
term of the  agreements.  The  compensation  expensed in  connection  with these
agreements was approximately  $181,200 during fiscal 1995. The contracts expired
on July,  1995 and the Neurology  operations were  discontinued in August,  1995
(Note 1).

      Aggregate  minimum  future  compensation  under the  Company's  employment
agreements is approximately as follows:

<TABLE>
<CAPTION>

            Year ending September 30,
            -----------------------------------------------

            <S>                                   <C>
            1997                                  $ 316 000
            1998                                    180 000
            1999                                    150 000
            2000                                     38 000
            -----------------------------------------------

            Total                                 $ 684 000
            ===============================================
</TABLE>


      Lease Commitments

      The Company leases office space and certain equipment under noncancellable
operating  leases which expire at various  dates  through  October  1999.  Total
rental expense was approximately  $69,000 and $115,000 for fiscal 1996 and 1995,
respectively. Future minimum lease payments are approximately as follows:


<TABLE>
<CAPTION>

            Year ending September 30,
            --------------------------------------------

            <S>                                <C>
            1997                               $  78 000
            1998                                  67 000
            1999                                  67 000
            2000                                   7 000
            --------------------------------------------

            Total                              $ 219 000
            ============================================
</TABLE>


      Legal Proceedings

      The  Massachusetts  Department of the Attorney  General has been reviewing
certain of the Company's Medicaid claims related to diagnostic, consultation and
medical services performed at nursing homes serviced by the Company. The Company
believes  that the  primary  focus of such  review is to  determine  whether the
services performed were qualifying  reimbursable  services. The Company believes
that the services  provided were  appropriate  and that all services were billed
correctly.  Without  admitting  liability,  the  Company  has  made an  offer of
settlement of $100,000  payable over two years to the Attorney  General's office
in order to resolve this matter without protracted legal expenses and disruption
to operations.  There can be no assurance,  however,  that this settlement offer
will be accepted  or that this  review can be resolved  without the need for the
Company to pay some other  amount.  The Company has set up a reserve of $100,000
related to this possible expense.  The Company is not a party to any other legal
proceedings  which  it  believes  may  have a  material  adverse  effect  on the
Company's financial condition or results of operations.


9.    Related-Party Transactions

      During  Fiscal 1995,  the Company  repaid the  outstanding  balance on the
promissory note payable to Grant  Enterprises Ltd.  ("Grant"),  a stockholder of
the  Company  . The  note  bore  interest  at the  rate of 1% per  month  on the
outstanding  balance.  Interest  expense  related to the Grant debt  amounted to
$5,940 for fiscal 1995 .


10.   Savings and Security

      Plan The Company has a 401(k) employee  retirement plan for the benefit of
all employees.  Company matching contributions are made at the discretion of the
Company's  Board of Directors  and amounted to $14,198 and $8,247  during fiscal
1996 and 1995, respectively.


11.   Stock Option Plans

      In June 1993, the Board of Directors and stockholders adopted and approved
the 1993 Employee Incentive Stock Option Plan (the "Employee Plan") and the 1993
Non-Employee  Directors' Stock Option Plan (the "Directors'  Plan," and with the
Employee Plan are collectively referred to herein as the "Plans"). The Plans are
administered by the Board of Directors or by a committee appointed by the Board.
Pursuant  to the Plans,  options to acquire an  aggregate  of 241,000  shares of
common stock may be granted  (181,000  shares  pursuant to the Employee Plan and
60,000 shares pursuant to the Directors  Plan).  The Plans provide for grants to
employees, consultants and directors of the Company.

      The Employee Plan  authorizes the Board to issue  incentive  stock options
("ISOs"), as defined in Section 422A of the Internal Revenue Code. The Directors
Plan  authorizes  only stock options that do not conform to the  requirements of
the  Code  section  ("Non-ISOs").  Consultants  and  directors  who are not also
employees of the Company may be granted  only  Non-ISOs.  The exercise  price of
each ISO may not be less than 100% of the fair market  value of the common stock
at the time of grant, except that in the case of a grant to an employee who owns
10% or more of the outstanding stock of the Company or a subsidiary or parent of
the Company (a "10%  Stockholder"),  the  exercise  price shall not be less than
110% of the fair market value on the date of grant.  The exercise  price of each
Non-ISO  granted under the Directors Plan shall be as determined by the Board of
Directors  in its  discretion  and may be less than the fair market value of the
common stock on the date of the grant.

      The Company has granted stock options under the plans.  Options  generally
expire up to six and one half years from the date of grant.  No options shall be
exercisable unless at the time of such exercise (i) the fair market value of the
common  stock  equals or  exceeds  $3.50 per  share and (ii) the  individual  is
employed by the Company.  No shares were exercisable  under the Employee Plan in
fiscal 1996 and 1995. Stock options granted and cancelled are as follows:


<TABLE>
<CAPTION>

                                                                   Option
                                                                    price
                                                   Shares         Per share
            -----------------------------------------------------------------

            <S>                                    <C>          <C>
            Balance, September 30, 1994            25 000       $1.32
            Granted                                 5 000         .94
            Cancelled                             (12 500)       1.32
            -----------------------------------------------------------------

            Balance, September 30, 1995            17 500         .94 -  1.32
            Cancelled                              (2 500)       1.32
            -----------------------------------------------------------------

            Balance, September 30, 1996            15 000       $ .94 - $1.32
            =================================================================
</TABLE>


12.   Stockholders' Equity

      Redeemable Warrants

      The redeemable  warrants,  issued in connection with the Company's initial
stock offering,  expire on December 12, 1998. Each redeemable  warrant  entitles
the holder to purchase one share of common stock at an exercise  price of $4.00,
subject to adjustment in certain events. The redeemable  warrants are redeemable
by the  Company,  at a  price  of  $.10  per  redeemable  warrant,  at any  time
commencing one year after the date of the Company's  initial public offering and
prior to their  expiration,  on 30 days prior written  notice to the  registered
holders of the  redeemable  warrants,  provided  that the  closing bid price per
share of the common stock for a period of 20 consecutive  trading days equals or
exceeds 200% of the then current  exercise price  (initially  $8.00,  subject to
adjustment). The redeemable warrants shall be exercisable until the close of the
business day preceding the date fixed for redemption.

      In connection  with certain  bridge  financing and legal services prior to
the Company's  initial public  offering,  the Company  issued 57,500  redeemable
warrants. Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $4.00 per share. The warrants expire in December,  1998.
As of September 30, 1996, no warrants have been executed.

      Preferred Stock

      All  of the  Company's  outstanding  preferred  stock  is  held  by  Grant
Enterprises,  Inc..  The  preferred  stock  entitles  the  holder to  cumulative
dividends,  before  any  distribution  to  common  stockholders,  at 1%  of  the
liquidation  value of $1,000 per share per month,  payable upon  liquidation  or
redemption.  The preferred  stock is  redeemable  at face value plus  cumulative
dividends at the option of the Company.

      Common Stock Reserved

      In connection  with the stock option plans and  redeemable  warrants,  the
Company has reserved 1,232,500 shares of common stock as of September 30, 1996.


13.   Supplemental Disclosure of Cash Flow Information


      Payments for income  taxes  amounted to $4,470 and $900 in fiscal 1996 and
1995,  respectively.  Payments for interest amounted to $151,673 and $116,440 in
fiscal 1996 and 1995, respectively.

      Unrealized gains on marketable  securities amounted to $16,253 and $70,045
in fiscal 1996 and 1995, respectively.


14.   Fourth Quarter Adjustments

      The Company  completed an analysis of its estimated  reserves  established
for  uncollectible  accounts  receivable  and  recorded  additional  reserves of
approximately  $320,000 and $125,000  during the fourth  quarters of fiscal 1996
and 1995, respectively.