UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-Q

(Mark One)

| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
| | ----------------------------------------------------------------------------------------
| |                                                                                         
| | For the quarterly period ended December 31, 2003                                        
| |                                                                                         
| | or                                                                                      
| |                                                                                         
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 000-50351

|GENESIS HEALTHCARE CORPORATION                        
|------------------------------------------------------
|                                                      
|(Exact name of registrant as specified in its charter)

|Pennsylvania                                                   |  |  | 20-0023783                           | 
|-------------------------------------------------------------- |  |  | ------------------------------------ | 
|                                                               |  |  |                                      | 
|(State or other jurisdiction of incorporation or organization) |  |  | (I.R.S. Employer Identification No.) | 
|                                                               |  |  |                                      | 
|101 East State StreetKennett Square, Pennsylvania              |  |  | 19348                                | 
|                                                               |  |  |                                      | 
|(Address of principal executive offices)                       |  |  | (Zip code)                           | 

|(610) 444-6350                                       | 
|---------------------------------------------------- | 
|                                                     | 
|(Registrant's telephone number, including area code) | 

|N/A                                                                               
|----------------------------------------------------------------------------------
|                                                                                  
|(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

|YES |  | NO
|--- |  | --

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

|YES |  | NO
|--- |  | --

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

|YES           (1) |  | NO
|----------------- |  | --

APPLICABLE ONLY TO CORPORATE ISSUERS.

As of February 11, 2004: 20,035,272 shares of the registrant’s common stock were outstanding, including 130,042 shares currently held in escrow to be issued in connection with a joint plan of reorganization confirmed by the Bankruptcy Court on September 20, 2001.

|(1) |  | In 2000, prior to
        the creation of the registrant, a substantial majority of the registrant’s
        subsidiaries filed for relief under Chapter 11 of the Bankruptcy Code
        and emerged from such proceedings in 2001. | 
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|TABLE OF CONTENTS                                         | 
|--------------------------------------------------------- | 
|                                                          | 
|                                                          | 
|CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | 
|                                                          | 
|PART I:  FINANCIAL INFORMATION                            | 
|                                                          | 
|ITEM 1:                                                   | 
|                                                          | 
|ITEM 2:                                                   | 
|                                                          | 
|ITEM 3:                                                   | 
|                                                          | 
|ITEM 4:                                                   | 
|                                                          | 
|PART II:  OTHER INFORMATION                               | 
|                                                          | 
|ITEM 1:                                                   | 
|                                                          | 
|ITEM 2:                                                   | 
|                                                          | 
|ITEM 3:                                                   | 
|                                                          | 
|ITEM 4:                                                   | 
|                                                          | 
|ITEM 5:                                                   | 
|                                                          | 
|ITEM 6:                                                   | 
|                                                          | 
|SIGNATURES                                                | 



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

As used herein, unless the context otherwise requires, all references to GHC, we, our, us, and similar terms in this report refer to Genesis HealthCare Corporation together with its subsidiaries. All references to NCI in this report refer to NeighborCare, Inc.
 together with its subsidiaries, formerly known as Genesis Health Ventures, Inc.


Statements made in this report, and in our other public filings and releases, which are not historical facts contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to
 change at any time. These forward-looking statements may include, but are not limited to:


| |  | statements contained in Managements Discussion and Analysis of Financial Condition and Results of Operations, and the notes to our unaudited condensed financial statements, such as the existence of sufficient broad-based support for the services we provide to ensure
 adequate funding; demographic trends and our ability to take advantage of such demographic trends; the expected impact of recently implemented staffing and retention programs; our ability to meet our working capital requirements, debt service, and future cash needs,
 capital expenditure and lease requirements; the anticipated receipt of less than significant proceeds from future asset sales in fiscal 2004; our potential extension of credit to our joint venture partners; the expected changes in and effects of government legislation and
 regulation on our business; estimates in our pro forma financial data and critical accounting policies, including the adequacy of our allowance for doubtful accounts, any anticipated impact of long-lived asset impairments and our ability to provide for outstanding losses and
 loss expenses for self-insured programs; the incremental costs of being an independent public company; legal proceedings; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | statements contained in Quantitative
          and Qualitative Disclosures About Market Risk.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the future
 may differ materially.


Factors that could cause actual results to differ materially include, but are not limited to, the following, which are discussed more fully in our Report on Form 10-K for the fiscal year ended September 30, 2003:


| |  | the difficulty in evaluating certain of our financial information due to the spin-off;
| | - | --------------------------------------------------------------------------------------

| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of operating history as an independent entity and our inability to rely on NCI to provide business diversification and capital resources;

| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | the availability of financial and other resources to us as a separate company;

| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | the ability to successfully engage in acquisitions and other strategic transactions;

| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | federal income tax liabilities and indemnification obligations related to the spin-off;

| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | conflicts of interest as a result of continuing relationships with NCI;

| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | the ability of NCI, as our single largest supplier of pharmaceutical products and services, to act as a stand-alone entity;

| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the reimbursement rates or methods of payment from Medicare and Medicaid, or the implementation of other measures to reduce the reimbursement for our services;

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| |  | the expiration of enactments providing for additional governmental funding;
| | - | ---------------------------------------------------------------------------

| |   |                                             
| | - | --------------------------------------------
| |  | the impact of federal and state regulations;

| |   |                                                          
| | - | ---------------------------------------------------------
| |  | changes in case mix, payor mix and payment methodologies;

| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | further consolidation of managed care organizations and other third-party payors;

| |   |                               
| | - | ------------------------------
| |  | competition in our businesses;

| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance;

| |   |                                                            
| | - | -----------------------------------------------------------
| |  | competition for qualified staff in the healthcare industry;

| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | our ability to control operating costs and generate sufficient cash flow to meet operational and financial requirements;

| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | our ability, and the ability of our subsidiary guarantors, to fulfill debt obligations;

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | an economic downturn or changes in the laws affecting our business in those markets in which we operate; and

| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other matters beyond our control.

In addition to these factors and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in this report or the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated
 with future results, events or circumstances also identify factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.


We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable
 securities law.


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PART I:     FINANCIAL INFORMATION

ITEM 1:     Financial Statements

GENESIS HEALTHCARE CORPORATION
UNAUDITED CONDENSED BALANCE SHEETS
DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
(IN THOUSANDS)

|                                                                 |  | December 31, 2003 |           | September 30, 2003 |  
|---------------------------------------------------------------- |  | ----------------- | --------- | ------------------ | -
|Assets:                                                          |  |                   |           |                    |  
|Current assets:                                                  |  |                   |           |                    |  
|Cash and equivalents, primarily restricted at September 30, 2003 |  | $                 | 114,347   |                    | $
|Restricted investments in marketable securities                  |  |                   | 29,820    |                    |  
|Accounts receivable, net                                         |  |                   | 187,789   |                    |  
|Prepaid expenses and other current assets                        |  |                   | 35,806    |                    |  
|Assets held for sale                                             |  |                   |          |                    |  
|                                                                 |  |                   |           |                    |  
|Total current assets                                             |  |                   | 367,762   |                    |  
|                                                                 |  |                   |           |                    |  
|Property and equipment, net                                      |  |                   | 688,924   |                    |  
|Assets held for sale                                             |  |                   | 12,757    |                    |  
|Restricted investments in marketable securities                  |  |                   | 63,226    |                    |  
|Other long-term assets                                           |  |                   | 88,260    |                    |  
|Identifiable intangible assets, net                              |  |                   | 1,952     |                    |  
|Goodwill                                                         |  |                   | 2,990     |                    |  
|                                                                 |  |                   |           |                    |  
|Total assets                                                     |  | $                 | 1,225,871 |                    | $
|                                                                 |  |                   |           |                    |  
|                                                                 |  |                   |           |                    |  
|Liabilities and Shareholders Equity:                            |  |                   |           |                    |  
|Current liabilities:                                             |  |                   |           |                    |  
|Current installments of long-term debt                           |  | $                 | 4,495     |                    | $
|Accounts payable and accrued expenses                            |  |                   | 137,435   |                    |  
|Current portion of self-insurance liability reserves             |  |                   | 29,820    |                    |  
|                                                                 |  |                   |           |                    |  
|Total current liabilities                                        |  |                   | 171,750   |                    |  
|                                                                 |  |                   |           |                    |  
|Long-term debt                                                   |  |                   | 457,354   |                    |  
|Deferred income taxes                                            |  |                   | 9,539     |                    |  
|Self-insurance liability reserves                                |  |                   | 40,646    |                    |  
|Other long-term liabilities                                      |  |                   | 25,193    |                    |  
|Total shareholders equity                                       |  |                   | 521,389   |                    |  
|                                                                 |  |                   |           |                    |  
|Total liabilities and shareholders equity                       |  | $                 | 1,225,871 |                    | $
|                                                                 |  |                   |           |                    |  

See accompanying notes to unaudited condensed financial statements

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GENESIS HEALTHCARE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                                                       |  | Three months ended |           
|-------------------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                                       |  |                    |           
|                                                                                       |  | December 31, 2003  |           
|                                                                                       |  |                    |           
|Net revenues                                                                           |  | $                  | 371,212   
|Operating expenses:                                                                    |  |                    |           
|Salaries, wages and benefits                                                           |  |                    | 228,187   
|Other operating expenses                                                               |  |                    | 105,913   
|Loss (gain) on early extinguishment of debt                                            |  |                    | 173       
|Lease expense                                                                          |  |                    | 7,411     
|Depreciation and amortization expense                                                  |  |                    | 11,636    
|Interest expense                                                                       |  |                    | 5,903     
|                                                                                       |  |                    |           
|Income before income tax expense, equity in net                                        |  |                    |           
|income of unconsolidated affiliates and                                                |  |                    |           
|minority interests                                                                     |  |                    | 11,989    
|Income tax expense                                                                     |  |                    | 4,863     
|                                                                                       |  |                    |           
|Income before equity in net income of unconsolidated affiliates and minority interests |  |                    | 7,126     
|Equity in net income of unconsolidated affiliates                                      |  |                    | 558       
|Minority interests                                                                     |  |                    | (75       
|                                                                                       |  |                    |           
|Income from continuing operations                                                      |  |                    | 7,609     
|Loss from discontinued operations, net of taxes                                        |  |                    | (1,603    
|                                                                                       |  |                    |           
|Net income                                                                             |  | $                  | 6,006     
|                                                                                       |  |                    |           
|                                                                                       |  |                    |           
|Pro forma per common share data:                                                       |  |                    |           
|Basic:                                                                                 |  |                    |           
|Income from continuing operations                                                      |  | $                  | 0.38      
|Loss from discontinued operations                                                      |  |                    | (0.08     
|Net income                                                                             |  | $                  | 0.30      
|Weighted average shares                                                                |  |                    | 19,898,150
|                                                                                       |  |                    |           
|Diluted:                                                                               |  |                    |           
|Income from continuing operations                                                      |  | $                  | 0.38      
|Loss from discontinued operations                                                      |  |                    | (0.08     
|Net income                                                                             |  | $                  | 0.30      
|Weighted average shares                                                                |  |                    | 19,910,300

See accompanying notes to unaudited condensed financial statements


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GENESIS HEALTHCARE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS)

|                                                              |  | Three months ended |         
|------------------------------------------------------------- |  | ------------------ | --------
|                                                              |  |                    |         
|                                                              |  | December 31, 2003  |         
|                                                              |  |                    |         
|Cash flows from operating activities:                         |  |                    |         
|Net income                                                    |  | $                  | 6,006   
|Net charges included in operations not requiring funds        |  |                    | 17,721  
|Changes in assets and liabilities:                            |  |                    |         
|Accounts receivable                                           |  |                    | (2,525  
|Accounts payable and accrued expenses                         |  |                    | 14,299  
|Other, net                                                    |  |                    | (3,298  
|                                                              |  |                    |         
|Net cash provided by operating activities                     |  |                    | 32,203  
|                                                              |  |                    |         
|                                                              |  |                    |         
|Cash flows from investing activities:                         |  |                    |         
|Capital expenditures                                          |  |                    | (7,806  
|Net purchases of restricted marketable securities             |  |                    | (2,454  
|Purchase of eldercare centers and lease amendments            |  |                    | (40,589 
|Purchase of rehabilitation therapy services business          |  |                    |        
|Sale of eldercare assets                                      |  |                    | 7,129   
|Other                                                         |  |                    | 568     
|                                                              |  |                    |         
|Net cash used in investing activities                         |  |                    | (43,152 
|                                                              |  |                    |         
|                                                              |  |                    |         
|Cash flows from financing activities:                         |  |                    |         
|Repayment of long-term debt and payment of sinking            |  |                    |         
|fund requirements                                             |  |                    | (228,610
|Proceeds from issuance of long-term debt                      |  |                    | 410,000 
|Debt issuance costs                                           |  |                    | (9,337  
|Net transactions with NCI, prior to the spin-off              |  |                    | (55,548 
|                                                              |  |                    |         
|Net cash provided
          by (used in) financing activities |  |                    | 116,505 
|                                                              |  |                    |         
|                                                              |  |                    |         
|Net
          increase (decrease) in cash and equivalents     |  |                    | 105,556 
|                                                              |  |                    |         
|Cash and equivalents:                                         |  |                    |         
|Beginning of period                                           |  |                    | 8,791   
|                                                              |  |                    |         
|End of period                                                 |  | $                  | 114,347 
|                                                              |  |                    |         
|                                                              |  |                    |         
|Supplemental disclosure of cash flow information:             |  |                    |         
|Interest paid                                                 |  | $                  | 4,823   
|Taxes paid                                                    |  |                    |        

See accompanying notes to unaudited condensed financial statements

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Genesis HealthCare CorporationNotes to Unaudited Condensed Financial Statements

(1)     Basis of Presentation

On December 1, 2003, NeighborCare, Inc. (NCI) completed the distribution (the spin-off) of the common stock of Genesis HealthCare Corporation (GHC or the Company). The spin-off was affected by way of a pro-rata tax free distribution of GHCs common stock
 to holders of NCIs common stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for each share of NCI stock owned as of October 15, 2003. NCI received a private letter ruling from the Internal Revenue Service to the effect that, for United States federal income
 tax purposes, the distribution of GHCs common stock qualified as tax free for its and NCIs shareholders, with the exception of cash received for fractional shares. GHCs common stock began trading publicly on the Nasdaq National Market System on December 2, 2003
 under the symbol GHCI. Prior to the spin-off, NCI was named Genesis Health Ventures, Inc.


In connection with the spin-off, NCI and GHC have agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, NCI and GHC have entered into certain mutually beneficial commercial arrangements.
 Specifically, NCI and GHC entered into a separation and distribution agreement, a tax sharing agreement, a transition services agreement, a group purchasing agreement, an employee benefits agreement, a pharmacy services agreement, a pharmacy benefit management
 agreement and a durable medical equipment agreement. In connection with the spin-off, GHC entered into new financing arrangements. See note 4  Long-Term Debt.


The following unaudited pro forma financial information gives effect to the spin-off as if it occurred on October 1, 2003. The unaudited pro forma data is for informational purposes only and does not purport to represent the results of future periods. The unaudited pro
 forma data reflects adjustments based upon available information and certain assumptions that management of GHC considers reasonable. No changes in operating revenues and expenses have been made to reflect the results of any modifications to operations that might have
 been made had the spin-off been completed on the aforesaid effective date for purposes of the unaudited pro forma results. The following unaudited pro forma information is presented in thousands, except per share information:


|                                                        |  | As reported (Unaudited) |         | Pro forma (Unaudited) |  
|------------------------------------------------------- |  | ----------------------- | ------- | --------------------- | -
|                                                        |  |                         |         |                       |  
|Net revenues                                            |  | $                       | 371,212 |                       | $
|Income from continuing operations                       |  |                         | 7,609   |                       |  
|Diluted earnings per share  from continuing operations |  |                         | 0.38    |                       |  

General


The accompanying unaudited condensed financial statements through November 30, 2003 have been prepared on a basis which reflects the historical financial statements of Genesis HealthCare Corporation assuming that the operations of NCI contributed in the spin-off were organized as a
 separate legal entity, owning certain net assets of NCI. Beginning December 1, 2003, the accompanying unaudited condensed financial statements have been prepared on a basis which reflects the net operation of GHC as a stand-alone entity.


Historically, NCI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources. The cost for these services for the three months ended December 31, 2002 was allocated to GHC based upon
 various allocation percentages dependent upon the type of service provided. For instance, certain costs were allocated based upon GHCs proportionate share of revenue, labor related costs or other operating expenses, as well as other methods which management believes to be
 reasonable. These cost allocations were $10.8 million for the three months ended December 31, 2002. No such costs were allocated to GHC for the three months ended December 31, 2003 because our general and administrative service functions were established to operate
 GHC as an independent organization beginning in October 2003.


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Prior to the spin-off, certain assets and liabilities related to GHC were managed and controlled by NCI on a centralized basis. Such assets and liabilities reflected in the accompanying unaudited condensed balance sheet as of September 30, 2003 were allocated to GHC
 in the manner described in the preceding paragraph for allocating general and administrative service costs. The accompanying unaudited condensed balance sheet as of December 31, 2003 reflects the spin-off of GHCs net assets from NCI.


Prior to the spin-off, substantially all of GHCs cash accounts were linked to NCIs centralized cash management system. Accordingly, substantially all cash generated from or used in GHCs operations had been transferred to and from NCI. For instance, NCI funded
 nearly all routine and capital cash disbursements on behalf of GHC. Likewise, on a daily basis, GHC transferred its cash receipts directly to the concentrated bank account of NCI. The net effect of these cash transfers has been reflected in the shareholders equity section of the
 unaudited condensed balance sheet at September 30, 2003. The net transactions with NCI as reflected in our unaudited condensed statements of cash flows represent cash activities between NCI and GHC as previously described. Prior to the spin-off, the financing activities between NCI and GHC
 were in the form of equity capital advances and there were no formal repayment or interest arrangements, nor any expectation of any such arrangements in the future.


The allocation methodology followed in preparing the unaudited condensed financial statements for the periods prior to the December 1, 2003 spin-off may not necessarily reflect the results of operations, cash flows or financial position of GHC in the future, or what the
 results of operations, cash flows or financial position would have been had GHC been a separate stand-alone public entity for all periods presented.


The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited condensed financial statements for the periods
 presented include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.


Description of Business


GHCs business is comprised of two primary business segments, inpatient services and rehabilitation therapy services. These segments are supported by complementary service capabilities and a general and administrative function.


GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. As of December 2003, the Company had 217 owned, leased, managed and jointly-owned eldercare centers with 26,502 beds, of which three
 centers having 561 beds have been identified as held for sale. Revenues of GHCs owned and leased centers constitute approximately 90% of GHCs revenues, and are presented in GHCs segment information as inpatient services revenues. Management fees earned from
 eldercare centers that are managed and/or jointly-owned by GHC are included in all other services revenues presented in GHCs segment information. See note 8  Segment Information.


GHC provides an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted at
 substantially all of the eldercare centers operated by GHC, as well as by contract to healthcare facilities operated by others and through any one of our 14 certified outpatient rehabilitation agencies. After the elimination of intercompany revenues, the rehabilitation therapy
 services segment constitutes approximately 8% of GHCs revenues.


GHC also provides an array of other specialty medical services, including portable x-ray and other diagnostic services and respiratory therapy services.


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(2)     Certain Significant Risks and Uncertainties

Spin-off


GHC began operations as a stand-alone company on December 1, 2003, and has a new board of directors appointed by NCI. Following the spin-off, GHC has less financial and other resources than the larger pre-spin-off NCI. GHCs ability to satisfy its obligations and
 maintain profitability is solely dependent upon the future performance of its operating businesses, and GHC is not able to rely upon the financial and other resources of those business lines remaining with NCI.


GHC and NCI agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, GHC and NCI agreed to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that
 would be agreed to by parties bargaining at arms-length.


Revenue Sources


GHC receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy services and other service related businesses.


The sources and amounts of GHCs revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of its eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical
 services, including services provided by GHCs rehabilitation therapy services business, vary based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly
 affect GHCs profitability.


It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on GHCs business and the business of GHCs principal customers. Accordingly, there can be no assurance
 that the impact of any future healthcare legislation will not further adversely affect GHCs business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels equivalent to present levels or will, in
 the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. GHCs financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can
 involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.


(3)     Significant Transactions and Events

ElderTrust Transactions


On August 13, 2003, GHC acquired the remaining ownership interest in an unconsolidated joint-venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds. Each of the four eldercare centers had been leased to the
 partnership from ElderTrust, a real estate investment trust from which GHC leased or subleased 18 of its eldercare facilities and eight managed and jointly-owned facilities. GHC purchased its joint venture partners interest in the unconsolidated partnership for $3.1 million and
 subsequently purchased one of the four eldercare properties from ElderTrust for $2.6 million. Additionally, GHC paid ElderTrust $2.5 million to reduce the annual cash basis and accrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2
 million, respectively. The lease terms of the three facilities that will continue to be leased from ElderTrust were extended from 2010 to 2015. On September 11, 2003, GHC entered into additional agreements with ElderTrust, the principal terms of which are as follows:


| |  | GHC agreed to purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. GHC previously leased these properties from ElderTrust at an annual cash basis and
 accrual basis lease cost of $2.4 million and $1.5 million, respectively. By January 2004, GHC purchased all of the aforementioned eldercare facilities;
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| |  | GHC agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties previously subleased to GHC by ElderTrust.
 On October 29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003, GHC paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ElderTrust was paid $5.0 million upon consummation of the spin-off in exchange for ElderTrusts consent to the assignment of all remaining leases and guarantees from NCI to GHC, which was accounted for by NCI as a spin-off related expense in its first fiscal
 quarter of 2004.

(4)     Long-Term Debt

Long-term debt at December 31, 2003 and September 30, 2003 consists of the following (in thousands):


|                                   |  |   | December 31, 2003 |   | September 30, 2003 |        
|---------------------------------- |  | - | ----------------- | - | ------------------ | -------
|                                   |  |   |                   |   |                    |        
|                                   |  |   |                   |   | Total NCI          |        
|                                   |  |   |                   |   |                    |        
|Allocated debt of NCI              |  | $ |                  |   | $                  | 555,213
|Senior credit facility  term loan |  |   | 185,000           |   |                    |        
|Senior subordinated notes          |  |   | 225,000           |   |                    |        
|Mortgages and other secured debt   |  |   | 51,849            |   |                    |        
|                                   |  |   |                   |   |                    |        
|                                   |  |   | 461,849           |   |                    |        
|Less:                              |  |   |                   |   |                    |        
|Current portion of long-term debt  |  |   | (4,495            | ) |                    |        
|                                   |  |   |                   |   |                    |        
|Long-term debt                     |  | $ | 457,354           |   |                    |        

Senior credit facility.     On December 1, 2003, GHC entered into a senior credit facility that provides for a term loan of $185.0 million, which was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million, none of
 which was drawn at the consummation of the spin-off. The term loan has a seven year term and amortizes one percent per year through year six. The revolving credit facility has a five year term. GHCs new senior credit facility includes an excess cash flow recapture
 requirement that may increase the required principal payments above contractual minimum amounts each year depending on a defined formula in the senior credit agreement. The term loan portion of GHCs new senior credit facility has a rate of interest of LIBOR plus 2.75%
 or a base rate plus an applicable margin. The revolving portion of GHCs new senior credit facility has a rate of interest of LIBOR plus 3.00% or a base rate plus an applicable margin on any borrowings thereunder, and a commitment fee on the revolving portion of 0.50% on
 any unused commitment.


Senior subordinated notes.     In October 2003, GHC issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million with a term of ten years.


Mortgages and other secured debts.     At December 31, 2003 and September 30, 2003, GHC had $51.8 million and $46.3 million, respectively, of other secured debt consisting principally of revenue bonds and secured bank loans, including loans insured by the
 Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers and have fixed rates of interest ranging from 3% to 11%, with weighted average rates of 8.5% and 9.1% at December 31, 2003 and
 September 30, 2003, respectively.


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Allocated debt of NCI.     Prior to the spin-off and at September 30, 2003, GHC and NCI jointly and severally guaranteed approximately $555.2 million of NCIs senior debt. The joint and several debt of NCI, including the debt allocated to GHC in the aggregate amount
 of $219.9 million, was repaid subsequent to September 30, 2003 in connection with the spin-off and the recapitalization of GHC and NCI. Following the spin-off, GHC no longer guarantees any of NCIs indebtedness.


(5)     Pro Forma Earnings Per Share

The computation of pro forma basic net income per common share presented for the three month period ended December 31, 2003 is based upon the number of GHC shares distributed by NCI on December 1, 2003 in connection with the spin-off, assuming such
 distribution took place on October 1, 2003. The computation of pro forma diluted net income per common share is calculated by dividing net income by the sum of the pro forma weighted average basic common shares and potentially dilutive securities. Potentially dilutive securities are
 calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all GHC stock options are used to repurchase GHC common stock at the average market price for the period. For the three months ended December 31, 2003, GHCs
 outstanding stock options yielded 12,150 potentially dilutive securities under the treasury stock method. Historical earnings per share, prior to the three months ended December 31, 2003, have not been presented as GHC was wholly-owned by NCI.


(6)     Comprehensive Income

The following table sets forth the computation of comprehensive income for the three month periods ended December 31, 2003 and 2002 (in thousands):


|                                                |  | Three months ended December 31, |      
|----------------------------------------------- |  | ------------------------------- | -----
|                                                |  |                                 |      
|                                                |  | 2003                            |      
|                                                |  |                                 |      
|Net income                                      |  | $                               | 6,006
|Unrealized gain (loss) on marketable securities |  |                                 | 117  
|                                                |  |                                 |      
|Total comprehensive income                      |  | $                               | 6,123
|                                                |  |                                 |      

(7)     Assets Held for Sale and Discontinued Operations

In the normal course of business,
    GHC continually evaluates the performance of its operating units, with an
    emphasis on selling or closing under-performing or non-strategic assets.
    GHC accounts for discontinued operations and assets held for sale under
    the provisions  of Statement of Financial Accounting Standards No. 144, Accounting
    for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
    of (SFAS 144). Under SFAS 144, discontinued businesses, including
    assets held for sale, are removed from the results of  continuing operations.
    The results of operations in the current and prior year periods, along with
    any cost to exit such businesses in the year of discontinuation, are classified
    as discontinued operations in the statements of operations.


The Company has classified several businesses as held for sale or closed. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many
 insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become
 increasingly expensive. This increase in insurance costs prompted GHC to sell its otherwise profitable operations in the state of Florida during fiscal 2003. Since GHCs inception, it has continued to develop its eldercare network in concentrated geographic markets in the
 eastern United States. The geographic location of GHCs eldercare centers in the states of Illinois and Wisconsin relative to its strategic geographic markets, combined with the operating performance of those centers, prompted GHC to identify those assets as held for sale
 during fiscal 2002. In addition to these assets, GHC identified 14 eldercare centers in other states, one rehabilitation therapy services clinic, two physician service practices and its ambulance and diagnostics businesses as held for sale or closed due to under-performance.


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Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets. The amount of after-tax interest expense allocated to discontinued operations in
 the three months ended December 31, 2003 and 2002 was $0.1 million and $0.3 million, respectively.


GHC has separately classified $12.8
    million and $18.3 million of carrying value associated with its assets held
    for sale in its condensed balance sheets at December 31, 2003 and September
    30, 2003, respectively.


The following table sets forth net revenues and the components of loss from discontinued operations for the three months ended December 31, 2003 and 2002 (in thousands):


|                                                |  | Three Months Ended December 31, |       
|----------------------------------------------- |  | ------------------------------- | ------
|                                                |  |                                 |       
|                                                |  | 2003                            |       
|                                                |  |                                 |       
|Net revenues                                    |  | $                               | 9,282 
|                                                |  |                                 |       
|Net operating loss of discontinued businesses   |  | $                               | (2,045
|Loss on discontinuation of businesses           |  |                                 | (583  
|Income tax benefit                              |  |                                 | 1,025 
|                                                |  |                                 |       
|Loss from discontinued operations, net of taxes |  | $                               | (1,603
|                                                |  |                                 |       

The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.


(8)     Segment Information

The Companys principal operating segments are identified by the types of products and services from which revenues are derived and are consistent with the reporting structure of the Companys internal organization.


The Company includes in inpatient services revenues all room and board charges and ancillary service revenue for its eldercare customers at the eldercare centers which the Company owns or leases.


The Company includes in rehabilitation therapy services all revenue earned from the provisions of speech pathology, physical therapy and occupational therapy.


The accounting policies of the segments are the same as those of the consolidated organization. All intersegment sales prices are market based.


Summarized financial information concerning the Companys reportable segments is shown in the following table. The All other services and corporate costs category of revenues and EBITDA represents operating information of business units below the prescribed
 quantitative thresholds that trigger segment reporting requirements, and our corporate support functions. The operating business units in this category derive revenues from the following services: management services, consulting services, homecare services, physician services,
 hospitality services, respiratory health services, staffing services and other healthcare related services. The Other adjustments category consists of certain expenses and gains that have not been allocated to our reportable segments or the All other services and corporate
 costs category. This approach to segment reporting is consistent with the Companys internal financial reporting and the information used by the chief operating decision maker regarding the performance of our reportable and non-reportable segments.


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|(in thousands)                                    |  | Three months ended December 31, 2003 |         | Three months ended December 31, 2002 |  
|------------------------------------------------- |  | ------------------------------------ | ------- | ------------------------------------ | -
|                                                  |  |                                      |         |                                      |  
|Revenues:                                         |  |                                      |         |                                      |  
|Inpatient services  external                     |  | $                                    | 332,708 |                                      | $
|Rehabilitation
          therapy services:        |  |                                      |         |                                      |  
|External                                          |  |                                      | 27,935  |                                      |  
|Intersegment                                      |  |                                      | 17,674  |                                      |  
|All other services:                               |  |                                      |         |                                      |  
|External                                          |  |                                      | 10,569  |                                      |  
|Intersegment                                      |  |                                      | 17,052  |                                      |  
|Elimination of intersegment revenues              |  |                                      | (34,726 | )                                    |  
|                                                  |  |                                      |         |                                      |  
|Total net revenues                                |  |                                      | 371,212 |                                      |  
|                                                  |  |                                      |         |                                      |  
|                                                  |  |                                      |         |                                      |  
|EBITDA (1):                                       |  |                                      |         |                                      |  
|Inpatient services                                |  |                                      | 42,165  |                                      |  
|Rehabilitation
          therapy services         |  |                                      | 2,593   |                                      |  
|All other services and corporate costs            |  |                                      | (15,057 | )                                    |  
|Other adjustments (2)                             |  |                                      | (173    | )                                    |  
|                                                  |  |                                      |         |                                      |  
|Total EBITDA                                      |  |                                      | 29,528  |                                      |  
|                                                  |  |                                      |         |                                      |  
|Capital and other:                                |  |                                      |         |                                      |  
|Depreciation and amortization                     |  |                                      | (11,636 | )                                    |  
|Interest expense                                  |  |                                      | (5,903  | )                                    |  
|Income tax expense                                |  |                                      | (4,863  | )                                    |  
|Equity in net income of unconsolidated affiliates |  |                                      | 558     |                                      |  
|Minority interest                                 |  |                                      | (75     | )                                    |  
|                                                  |  |                                      |         |                                      |  
|Income from continuing operations                 |  |                                      | 7,609   |                                      |  
|Loss from discontinued operations, net of taxes   |  |                                      | (1,603  | )                                    |  
|                                                  |  |                                      |         |                                      |  
|Net income                                        |  | $                                    | 6,006   |                                      | $
|                                                  |  |                                      |         |                                      |  
|                                                  |  |                                      |         |                                      |  

| | 
| | 

|(1) | We define EBITDA as earnings from continuing operations before equity in net income of unconsolidated affiliates, minority interests, interest, taxes, depreciation and amortization. EBITDA can be calculated through our statements of operations by adding back interest
 expense, income taxes, depreciation and amortization, equity in net income of unconsolidated affiliates and minority interests costs to GHCs income from continuing operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Other adjustments in the three months ended December 31, 2003 and 2002 represent gains and (losses) recognized in connection with the early extinguishment of debt.

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Total assets by segment at December 31, 2003 and September 30, 2003 were as follows (in thousands):

|                               |  | December 31, 2003 |           | September 30, 2003 |  
|------------------------------ |  | ----------------- | --------- | ------------------ | -
|                               |  |                   |           |                    |  
|Inpatient services             |  | $                 | 871,443   |                    | $
|Rehabilitation therapy service |  |                   | 36,360    |                    |  
|All other                      |  |                   | 318,068   |                    |  
|                               |  |                   |           |                    |  
|                               |  | $                 | 1,225,871 |                    | $
|                               |  |                   |           |                    |  

(9)     Restricted Investments in Marketable Securities

At December 31, 2003 and September 30, 2003, the Company reported restricted investments in marketable securities of $93.0 million and $90.6 million, respectively, which are held by Liberty Health Corporation, LTD. (LHC), GHCs wholly-owned captive
 insurance subsidiary incorporated under the laws of Bermuda. The investments held by LHC are restricted by statutory capital requirements in Bermuda. In addition, certain of these investments are pledged as security for letters of credit issued by LHC. As a result of such
 restrictions and encumbrances, GHC and LHC are precluded from freely transferring funds through inter-company loans, advances or cash dividends.


The Companys restricted investments in marketable securities are classified in the unaudited condensed balance sheets within both current and non-current assets. The current portion of restricted investments in marketable securities represents an estimate of the level of
 outstanding self-insured losses the Company expects to pay in the succeeding twelve months.


(10)     Preferred Share Purchase Plan

On November 13, 2003, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock, par value $0.01 per share, payable on December 1, 2003 to the shareholders of record on
 that date. The Board of Directors declared these rights to protect shareholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combination approved by the Board of Directors.


Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock (a Preferred Share) for $75.00, once the Rights become exercisable. This portion of a Preferred Share will give the
 shareholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.


The Rights will not be exercisable until ten days after the public announcement of the acquisition by any person or group of beneficial ownership of 20% or more of GHCs outstanding common stock (or ten days after a person or group begins a tender or exchange
 offer that, if consummated, would bestow upon them beneficial ownership of 20% or more of GHCs outstanding common stock). The Rights expire December 1, 2013.


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(11)     Subsequent Event

On January 5, 2004, GHC acquired its joint venture partners interest in two Massachusetts skilled nursing facilities which it previously managed. GHC purchased the remaining 50% interest in one facility and 80% interest in the other for a total combined value of $6 million.
 The partnerships, which together operated 318 beds, had $6 million in working capital and $15.4 million in net property and equipment. Debt of the partnership totaled $20 million, of which $7.5 million was assumed and the remaining $12.5 million was repaid at closing.


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ITEM 2:     Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are one of the largest providers of healthcare and support services to the elderly in the United States. Within our network of geographically concentrated facilities, we offer services focusing on the primary medical, physical and behavioral issues facing the medically
 complex elderly population. We are focused on qualitative and quantitative clinical performance measures in order to enhance and continuously improve the care provided in our facilities. Through our physicians, nurses, therapists and other members of our interdisciplinary
 medical care team, we apply a comprehensive approach to the complex needs facing the elderly, which we believe has resulted in our above-industry average occupancy levels and an enhanced quality payor mix. For the three months ended December 31, 2003, the average
 occupancy level in our inpatient facilities was approximately 91%.


Approximately 90% of our net revenues are generated through inpatient services. Our inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States. Our eldercare centers are
 concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. We currently own, lease, manage or jointly-own 217 eldercare facilities, consisting of 194 skilled nursing facilities and 23 assisted living facilities with 26,502 beds, including three skilled
 nursing facilities with 561 beds that have been identified as held for sale.


Our rehabilitation therapy business provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in our eldercare regional market concentrations. These services are provided by
 approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare facilities we operate, as well as by contract to third-party healthcare facilities operated by other providers and through our 14 outpatient
 rehabilitation agencies. We also provide other complimentary healthcare services, the revenues for which are included in all other services revenues in our segment financial information.


The aging of the population and increased life expectancies are the primary driving forces behind the growth of our businesses. We believe that positive demographic trends imply that there will be a growing demand for the services offered by healthcare providers that
 deliver the most efficient, responsive, cost effective and high quality eldercare services. We are continually engaged in various efforts to improve our profitability by focusing on key operational initiatives, including: improving the quality of our payor mix, increasing our rate
 of occupancy, improving nursing staff scheduling and retention, reducing reliance on overtime compensation and temporary nursing agency services, and capitalizing on best demonstrated practices in various areas of cost control. As a result, we believe we will be well
 positioned to take advantage of the favorable demographic and growth trends in our industry.


Government funded programs, principally
    Medicaid and Medicare, provide approximately 80% of our revenue. Over the
    past five years, changes in funding from these government sources have had
    a significant impact on our cash flows and profitability. Through trade and
     other organizations, we actively participate in partnership with other healthcare
    providers to pursue strategies to minimize any potentially adverse impact
    of government funding proposals. We believe the continuation of government
    funding at levels sufficient to profitably
 operate our business is our greatest financial risk. However, we believe that
    sufficient broad-based support exists for the specific services we provide
    to ensure that adequate funding will continue for the foreseeable future.


Labor costs, including salaries, wages and benefits, account for approximately 74% of our total operating expenses. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. In recent years, we
 and our industry have experienced shortages in qualified professional clinical staff. While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities and sites of services, we have used expensive temporary nursing agency
 services to supplement staffing, particularly in fiscal 2001 and 2002. In fiscal 2003, we implemented programs to improve staff scheduling and retention, and to reduce reliance on overtime compensation and temporary nursing agency services. Our efforts resulted in a 36%
 reduction in the cost of temporary nursing agencies. However, if a shortage of nurses or other health care workers occurred in the geographic areas in which we operate, it could adversely affect our ability to attract and retain qualified personnel and could further increase our
 operating costs, without a corresponding increase in the level of government funded reimbursement.




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For a description of the material challenges and risks of the Company, including an analysis of industry trends and the effect of recent legislation on our operations, see Risk Factors  Risks Related to Our Business included in our annual report on Form 10-K for the
 fiscal year ended September 30, 2003.


Revenue Sources

We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize our rehabilitation therapy services and other service related businesses.


The sources and amounts of our revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of our eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical
 services, including services provided by our rehabilitation therapy services business, vary based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect
 our profitability.


The final fiscal year 2004 prospective payment system rules for skilled nursing facilities became effective on October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update
 factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were
 authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.


The recently enacted Medicare Modernization
    Act suspended application of the therapy caps as of December 8, 2003 through
    calendar year 2005. The therapy caps in place effective September 1, 2003
    imposed payment limits to services provided by independent  therapists as
    well as to those provided by outpatient rehabilitation facilities and other
    forms of rehabilitation agencies. The suspension does not have retroactive
    impact upon Medicare beneficiaries who exceeded their caps between September
    1, 2003 and December 8, 2003.
 Extension of the moratorium removes a significant financial threat to our therapy
    business for the short term. Previously, we estimated that the therapy caps
    would reduce our annual net revenues by approximately $18.9 million and EBITDA
    by approximately $4.9 million. The  new law also assures at least a positive
    1.5% increase in the therapy fee schedule for each of the next two years
    through calendar year 2005. No assurances can be made or given that Congress
    will extend the moratorium on application of the therapy caps beyond 2005.


The recent economic downturn is having a detrimental effect on state revenues in most jurisdictions. Budget shortfalls range from 4% to 5% of outlays upwards to 20% of outlays in a handful of states. Historically, these budget pressures have translated into reductions
 in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate. In each of the major states where we provide
 services, we are working with trade groups, consultants and government officials to responsively address the particular funding issues.


The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda. Earlier this year, Congress passed temporary relief to states providing a 2.9% temporary increase in the Federal Medicaid Assistance Percentage for five quarters.
 This assistance is estimated to provide states $10 billion in Medicaid relief.


Late in November 2003, the General Accounting Office released a study examining how nursing home reimbursement has been affected by the fiscal crisis being experienced by a number of states. The report documents that most states have sustained their
 reimbursement commitments. States have tapped reserves, tobacco settlement monies and other funding strategies including provider assessments to meet their obligations. While the data does not evaluate the adequacy of state Medicaid payments for nursing facility services,
 the analysis does suggest that under current difficult conditions states are honoring their commitments.


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It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business and the business of our principal customers. Accordingly, there can be no assurance that the
 impact of any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future,
 be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy
 delays between the time that revenue is recognized and the time that reimbursement amounts are settled.


While Congress has, through the Medicare Modernization Act, extended the moratorium on payment caps on Medicare Part B rehabilitation therapy services, the federal government and state governments continue to focus on efforts to curb spending on healthcare
 programs such as Medicare and Medicaid. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances,
 greater discounts and more stringent cost controls by government and other payors are expected to continue.


Certain Transactions and Events

ElderTrust Transactions


On August 13, 2003, we acquired the
    remaining ownership interest in an unconsolidated joint-venture partnership
    that operates four skilled nursing facilities with 600 skilled nursing and
    125 assisted living beds. Each of the four eldercare centers had been leased
    to the  partnership from ElderTrust, a real estate investment trust from
    which we leased or subleased 18 of our eldercare facilities and eight managed
    and jointly-owned facilities. We purchased our joint venture partners
    interest in the unconsolidated partnership for $3.1 million and  subsequently
    purchased one of the four eldercare properties from ElderTrust for $2.6 million.
    Additionally, we paid ElderTrust $2.5 million to reduce the annual cash basis
    and accrual basis lease expense of one of the three remaining leased facilities
    by $0.4 million and $0.2
 million, respectively. The lease terms of the three facilities that will continue
    to be leased from ElderTrust were extended from 2010 to 2015. On September
    11, 2003, we entered into additional agreements with ElderTrust, the principal
    terms of which are as follows:


| |  | We agreed to purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. We previously leased these properties from ElderTrust at an annual cash basis and accrual
 basis lease cost of $2.4 million and $1.5 million, respectively. By January 2004, we purchased all of the aforementioned eldercare facilities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties previously subleased to us by ElderTrust. On
 October 29, 2003, we paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003, we paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and

| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ElderTrust was paid $5.0 million upon consummation of the spin-off in exchange for ElderTrusts consent to the assignment of all remaining leases and guarantees from NCI to us, which was accounted for by NCI as a spin-off related expense in its first fiscal
 quarter of 2004.



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Results of Operations

Factors Affecting Comparability of Financial Information

Our statements of operations for the three months ended December 31, 2002 and for the first two (through November 30, 2003) of the three months ended December 31, 2003 have been prepared on a basis which reflects the historical financial statements of Genesis
 HealthCare Corporation assuming that the operations of NCI contributed in the spin-off were organized as a separate legal entity which owned certain net assets of NCI.


The allocation methodology followed in preparing the financial statements prior to the December 1, 2003 spin-off may not necessarily reflect the results of operations, cash flows or financial position of GHC in the future, or what the results of operations, cash flows or
 financial position would have been had GHC been a separate stand-alone public entity for all periods presented.


Management believes that the statement of operations for the three months ended December 31, 2003 is generally comparable to the statement of operations for the three months ended December 31, 2002, with the exception of interest expense, income tax expense and
 depreciation and amortization expense. This lack of comparability is due to the restructuring of our capital structure following the spin-off and the related incremental interest costs and amortization of deferred financing fees in connection with our new financing arrangements.


Reasons for Non-GAAP Financial Disclosure

The following discussion includes EBITDA and Adjusted EBITDA which are non-GAAP financial measures. For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrants historical or future financial performance, financial
 position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance
 sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this
 regard, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.


Management believes that the presentation of EBITDA and Adjusted EBITDA provides useful information to investors regarding our results of operations because they are useful for trending, analyzing and benchmarking the performance and value of our business. We
 use EBITDA and Adjusted EBITDA primarily as performance measures and believe that the GAAP financial measure most directly comparable to EBITDA and Adjusted EBITDA is net income. We use EBITDA and Adjusted EBITDA as a measure to assess the relative
 performance of our eldercare properties and other of our operating businesses, as well as the employees responsible for operating such businesses. EBITDA and Adjusted EBITDA are useful in this regard because they do not include such costs as interest expense, income taxes
 and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state that a business unit operates in. By excluding such
 factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, management is better able to evaluate operating performance of the business unit and the employees responsible for business
 unit performance. Consequently, management uses EBITDA and Adjusted EBITDA to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards. We also use EBITDA and Adjusted
 EBITDA in our annual budget process. We believe EBITDA and Adjusted EBITDA facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors historical operating performance. Although we use EBITDA as a
 financial measure to assess the performance of our business, the use of EBITDA is limited because it does not consider certain material costs necessary to operate our business. These costs include the cost to service our debt, the non-cash depreciation and amortization
 associated with our long-lived assets, the cost of our federal and state tax obligations, our share of the earnings or losses of our less than 100% owned operations and the operating results of our discontinued businesses. Because EBITDA does not consider these important
 elements of our cost structure, a user of our financial information who relies on EBITDA as the only measure of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should
 consider net income an important measure of our financial performance because it provides the most complete measure of our performance.


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We define EBITDA as earnings from continuing operations before equity in net income of unconsolidated affiliates, minority interests, interest, taxes, depreciation and amortization. Other companies may define EBITDA differently and, as a result, our measure of
 EBITDA may not be directly comparable to EBITDA of other companies. EBITDA does not represent net income, as defined by GAAP.


Adjusted EBITDA is presented to exclude certain expenses and gains related to one-time transactional events or settlements. Specifically, in the three months ended December 31, 2002, we excluded a net gain recognized in connection with the early extinguishment of a
 mortgage debt.


Adjusted EBITDA is presented because management uses this information in evaluating the continuing operations of our business and believes that this information provides investors a useful insight into our operating results. Management also believes that excluding
 such expenses and gains properly reflects our ongoing operations and provides better comparability to prior year results.


EBITDA and Adjusted EBITDA should be considered in addition to, not as substitutes for, or superior to, GAAP financial measures or as indicators of operating performance.


The following table reconciles net income to EBITDA and Adjusted EBITDA (in thousands).


|                                                  |  | Three months ended December 31, |       
|------------------------------------------------- |  | ------------------------------- | ------
|                                                  |  |                                 |       
|                                                  |  | 2003                            |       
|                                                  |  |                                 |       
|Net income                                        |  | $                               | 6,006 
|Add back:                                         |  |                                 |       
|Loss from discontinued operations, net of taxes   |  |                                 | 1,603 
|Equity in net income of unconsolidated affiliates |  |                                 | (558  
|Minority interests                                |  |                                 | 75    
|Income tax expense                                |  |                                 | 4,863 
|Interest expense                                  |  |                                 | 5,903 
|Depreciation and amortization expense             |  |                                 | 11,636
|                                                  |  |                                 |       
|EBITDA                                            |  | $                               | 29,528
|Gain on early extinguishment of debt (1)          |  |                                 |      
|                                                  |  |                                 |       
|Adjusted EBITDA                                   |  | $                               | 29,528
|                                                  |  |                                 |       
|                                                  |  |                                 |       

| | 
| | 

|(1) | The gain on early extinguishment of debt is the result of a negotiated discount on a mortgage loan liquidated by us at the request of the mortgage lender. We excluded this gain on early extinguishment of debt from the calculation of Adjusted EBITDA because management does
 not view such a gain as likely to occur in the foreseeable future, nor have we encountered a similar transaction in recent years. While we often may be interested in extinguishing certain of our mortgage loans by refinancing such loans with senior credit facility borrowings at
 more favorable rates of interest, because most of these mortgage loans require expensive prepayment penalties, it often is not economically feasible for us to do so. To have a mortgage lender approach GHC to extinguish mortgage debt so that we are able to negotiate favorable
 extinguishment terms is deemed by management to be an unusual event that is reasonably unlikely to occur within the next two years.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Results of Operations

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

In the current quarter, revenues
    were $371.2 million, an increase of $32.1 million, or 9.5%, over the same
    period in the prior year. Of this growth, inpatient services revenue increased
    by $32.5 million, external rehabilitation therapy services revenue grew $1.7
    million  and other businesses revenue declined $2.1 million. The $32.1 million
    of revenue growth in our inpatient services segment is primarily attributed
    to increased payor rates and acquisitions. $12.2 million of the increase
    in inpatient services revenue is due to step acquisitions of
 six eldercare centers. The balance of the increase in inpatient services revenue
    is primarily due to increased average rates per patient day. Our average
    rate per patient day in the current fiscal year was $196 compared to $185
    for the comparable period in the prior year. This  increase in the average
    rate per patient day is principally driven by increased average Medicaid
    rates ($154 in 2003 versus $145 in 2002) and Medicare rates per patient day
    ($347 in 2003 versus $310 in 2002). The 11.9% increase in our Medicare rate
    per patient day is
 attributed to the October 1, 2003 upward Medicare rate adjustments of 6.3% and
    higher Medicare patient acuity. Our overall occupancy was stable at 91.2%
    for both the current and prior year quarters. The $1.7 million increase in
    our external rehabilitation therapy services  revenue is the net result of
    revenues from new customers, partially offset by an unfavorable shift in
    patient mix and certain contract pricing reductions. Managements decision
    to curtail the operations of our hospitality business led to a $0.9 million
    decline in other business  revenue, with the balance of the decline in other
    business revenue resulting from reduced revenue in our other non-core business
    lines.


For the current quarter, net income
    increased $1.3 million, or 28.1%, to $6.0 million from $4.7 million in the
    same period in the prior year. Revenue increases of $32.1 million, as discussed
    in the
    preceding paragraph, were partially offset by $20.1 million of increased
    salaries,  wages and benefits in support of increased revenue levels. Salaries,
    wages and benefits as a percentage of revenue were stable at 61.5% of revenues
    in the current year quarter versus 61.4% in the prior year quarter. Other operating
    expenses as a percentage of revenue were stable,
 remaining at the prior year quarters level of 28.5% of revenues. Other
 operating expenses included increased general and administrative costs primarily
 due to increased insurance, incentive compensation and consulting costs, as
 well as a reduction in utilization of higher cost  nursing agencies used to
 supplement our employed labor. Increases in interest expense, depreciation and
 amortization expense and loss (gain) on early extinguishment of debt of $1.5
 million, $2.1 million and $1.3 million, respectively, are further discussed
 below. Net income
 increased by $2.8 million due to lower after-tax losses of discontinued operations
 and by $0.9 million due to decreased income tax expense, both of which are further
 discussed below.


For the current quarter, Adjusted EBITDA was $29.5 million compared with $27.6 million in same period of the prior year. Increased Adjusted EBITDA in the current fiscal year reflects a $12.0 million increase in the Adjusted EBITDA of our inpatient services segment
 due to both increased revenues, as discussed above, $2.3 million of reduced utilization of higher cost nursing agencies and $1.9 million of price reductions extended by our rehabilitation therapy services segment to our inpatient services segment. This increase was offset by a
 decrease of $5.3 million in the Adjusted EBITDA of our rehabilitation therapy services segment primarily due to an unfavorable shift in patient mix brought about by the October 1, 2003 implementation of the therapy caps and certain contract pricing reductions, including the
 $1.9 million of price reductions extended to our inpatient services segment. The remaining decrease in Adjusted EBITDA of $4.8 million is principally attributed to a $4.9 million increase in general and administrative costs primarily resulting from increased insurance,
 incentive compensation and consulting costs.


Capital Costs and Other


Depreciation and amortization expense increased $2.1 million to $11.6 million in the current quarter compared to $9.5 million for the same period in the prior year. The increase is attributed to incremental amortization of deferred financing fees following the completion
 of our new financing arrangements and incremental depreciation expense on information systems in the current year quarter following the spin-off due to higher levels of such equipment attributed to GHC from NCI over estimated allocations made in the prior year quarter
 carve-out financial statements.




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Interest expense increased $1.5 million, or 35%, in the current quarter to $5.9 million, compared to $4.4 million for the same period in the prior year, principally due to increased debt levels above those allocated in the prior year carve-out financial statements resulting
 from the issuance of senior subordinated notes in an aggregate principal amount of $225.0 million in October 2003 and our entering into a senior credit facility consisting of a fully drawn $185.0 million term loan in December 2003.


The loss on early extinguishment of debt recognized in the current quarter is the result of the early extinguishment of two mortgage loans and principally consists of the write-off of unamortized deferred financing fees, while the gain on early extinguishment of debt
 recognized in the same period in the prior year is the result of a negotiated discount on a mortgage loan liquidated by us at the request of the mortgage lender.


Income tax expense in current and prior year quarters is estimated using an effective tax rate of approximately 39%.


Loss from discontinued operations, net of taxes, was $1.6 million in the current quarter and $4.4 million in the prior year quarter. The change is due in part to an $0.4 million (after-tax) write-down of assets classified as discontinued in the current quarter compared to
 $2.0 million (after-tax) recorded in the prior year quarter, combined with the relative results of operations of those businesses identified as discontinued operations. The improvement in the operating results of our discontinued businesses is primarily due to our disposition of
 certain discontinued operations since the prior year quarter, including the sale of our discontinued Florida properties in the third quarter of the prior fiscal year.


Liquidity and Capital Resources

Working Capital and Cash Flows

Reference to our condensed balance sheets and condensed statements of cash flows will facilitate understanding of the discussion that follows.


Our operating cash flow is used to
    finance trade accounts receivable, fund capital expenditures, service our
    indebtedness and make selective acquisitions. Financing trade accounts receivable
    is necessary because, on average, the customers and payors for our services
    do  not pay us as quickly as we pay our vendors and employees for their services.
    Capital expenditures consist primarily of betterments and expansion of eldercare
    centers and investments in computer hardware and software. In order to maintain
    our physical properties in a suitable
 condition to conduct our business and meet regulatory requirements, we expect
    for the foreseeable future to incur capital expenditure costs at levels approximating
    $35 million annually. Following the spin-off, we are highly leveraged and,
    consequently, a significant portion of  our operating cash flow will be used
    to meet our debt service requirements. Specifically, on an annualized basis
    in fiscal 2004, we expect to pay approximately $37.9 million to satisfy scheduled
    principal and interest payments under our post spin-off debt obligations,
    not
 including payments that may be required under the excess cash flow recapture
    requirements of our new senior credit facility. See   New Financing
    Arrangements below. Our cash flow from operations in the quarter ended
    December 31, 2003 was $32.2 million, including  $14.3 million of cash generated
    from the timing of payments to vendors and employees, which is subject to
    fluctuations.


We believe that the net cash provided
    by our operating activities, supplemented as necessary with cash reserves
    and borrowings available under our new financing arrangements described below,
    will provide sufficient resources to meet our working capital requirements,
     debt service and other cash needs over the next year.


At December 31, 2003, we had restricted investments in marketable securities of $93.0 million, which are held by Liberty Health Corp., LTD., our wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda. The investments held by Liberty
 Health Corp. are restricted by statutory capital requirements in Bermuda. As a result of such restrictions and encumbrances, we and Liberty Health Corp. are precluded from freely transferring funds through intercompany loans, advances or cash dividends.


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Cash activities from net investing transactions in the quarter ended December 31, 2003 was a use of cash of $43.2 million, attributed to $7.8 million of capital expenditures, a $2.5 million net use of cash to purchase restricted investments in marketable securities to fund
 our self-insured programs and a use of cash of $40.6 million related to the ElderTrust transactions. Also in the quarter ended December 31, 2003, we received cash proceeds of $7.1 million from the sale of three eldercare centers located in the state of Wisconsin. We do not
 expect to receive significant proceeds in fiscal 2004 from asset sales.


Cash from financing activities in the quarter ended December 31, 2003 was a source of cash of $116.5 million, attributed to $400.7 million of net proceeds from our new financing arrangements, offset by the use of $218.5 million to repay indebtedness of NCI, $8.2
 million to repay mortgage debt of three eldercare centers, $1.9 million of scheduled principal payments and $55.5 million of cash transferred to NCI in connection with the spin-off.


New Financing Arrangements

In connection with the spin-off, both we and NCI entered into new financing arrangements in an effort to extinguish all senior secured joint and several debt and to separately provide adequate capital to both organizations.


In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million with a term of ten years. On December 1, 2003, we entered into a senior credit facility that provides for a term loan of  $185.0 million, which
 was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million, none of which was drawn at the consummation of the spin-off. The term loan has a seven year term and amortizes one percent per year through year six. The revolving credit
 facility has a five year term. Our new senior credit facility includes an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts each year depending on a defined formula in the senior credit agreement. The
 term loan portion of our new senior credit facility has a rate of interest of LIBOR plus 2.75% or a base rate plus an applicable margin. The revolving portion of our new senior credit facility has a rate of interest of LIBOR plus 3.00% or a base rate plus an applicable margin
 on any borrowings thereunder, and a commitment fee on the revolving portion of 0.50% on any unused commitment.


The agreements and instruments governing our new financing arrangements contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:


| |  | incur more debt;
| | - | ----------------

| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | pay dividends, purchase company stock or make other distributions;

| |   |                          
| | - | -------------------------
| |  | make certain investments;

| |   |              
| | - | -------------
| |  | create liens;

| |   |                                         
| | - | ----------------------------------------
| |  | enter into transactions with affiliates;

| |   |                   
| | - | ------------------
| |  | make acquisitions;

| |   |                          
| | - | -------------------------
| |  | merge or consolidate; and

| |   |                         
| | - | ------------------------
| |  | transfer or sell assets.

Our new financing arrangements require us to maintain compliance with certain financial and non-financial covenants, including minimum EBITDAR (earnings before interest, tax, depreciation, amortization and rents), limitations on capital expenditures, maximum
 leverage ratios, minimum fixed charge coverage ratios and minimum net worth.


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Under the terms of our senior subordinated notes, the notes are not redeemable until on or after October 15, 2008. We may, however, use the net proceeds from one or more equity offerings to redeem up to 35% of the aggregate principal amount of the notes issued on
 or before October 15, 2006 at 108.0% of the principal amount, plus accrued and unpaid interest to the redemption date, subject to the terms of the notes.


Off-Balance Sheet Commitments

In addition to the contractual obligations and commitments described above, we also have contingent obligations related to outstanding lines of credit, letters of credit and guarantees.


Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these
 reviews are considered in assessing the need for any reserves for possible credit and guarantee loss.


We have extended $3.9 million in working capital lines of credit to certain jointly-owned and managed companies, of which $1.6 million were unused at December 31, 2003. Credit risk represents the accounting loss that would be recognized at the reporting date if the
 affiliate companies were unable to repay any amounts utilized under the working capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.


We have posted $1.9 million of outstanding letters of credit. The letters of credit guarantee performance to third parties of various trade activities. The letters of credit are not recorded as liabilities on our balance sheet unless they are probable of being utilized by the
 third party. The financial risk approximates the amount of outstanding letters of credit.


We are a party to joint venture partnerships
    whereby our ownership interests are 50% or less of the total capital of the
    partnerships. We account for these partnerships using the equity method of
    accounting and, therefore, the assets, liabilities and operating results
    of  these partnerships are not consolidated with ours. The carrying value
    of our investment in joint venture partnerships is $8.7 million at December
    31, 2003. Although we are not contractually obligated to fund operating losses
    of these partnerships, in certain cases we have
 extended credit to such joint venture partnerships in the past and may decide
    to do so in the future in order to realize economic benefits from our joint
    venture relationship. Management assesses the creditworthiness of such partnerships
    in the same manner it does other third-parties. We have provided $18.2
    million of financial guarantees related to loan commitments of four jointly-owned
    and managed companies. The guarantees are not recorded as liabilities on
    our balance sheet unless we are required to perform under the guarantee.
    Credit risk
 represents the accounting loss that would be recognized at the reporting date
    if counter-parties failed to perform completely as contracted. The credit
    risk amounts are equal to the contractual amounts, assuming that the amounts
    are fully advanced and that no amounts could be  recovered from other parties.


Income Taxes

At December 31, 2003, we had net
    deferred tax liabilities, inclusive of tax benefits related to net operating
    loss carry-forwards. Because management believes it is more likely than not
    that the tax benefits related to pre-emergence net operating loss carry-forwards
    will not  be realized, the related deferred tax asset remains subject to
    a 100% valuation allowance. At December 31, 2003, based on our interpretation
    of applicable provisions of the Internal Revenue Code, and our estimate of
    NCIs federal taxable income for its fiscal year ended
 September 30, 2004, we will have approximately $193 million of net operating
    loss carry-forwards, utilization of which are subject to limitation, and
    $19.7 million in NOL carry-forwards not subject to limitation. The ultimate
    net operating loss carry-forwards available to us  will not be determinable
    until the preparation of NCIs federal tax return for its fiscal year
    ended September 30, 2004 is completed. Pursuant to SOP 90-7, future utilization
    of deferred tax assets existing at the October 2, 2001 bankruptcy emergence
    date will be applied first as  a reduction of identifiable intangible assets
    and, then, as an increase to shareholders equity.


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Critical Accounting Policies

We consider an accounting policy to be critical if it is important to our financial condition and results, and requires significant judgment and estimates on the part of management in its application. Our critical accounting estimates and the related assumptions are
 evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of the critical accounting policies requires managements significant judgments, often as the result of the need to
 make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. We believe that the following represents our critical accounting policies, which are described in our
 annual report on Form 10-K for the fiscal year ended September 30, 2003:


| |  | Allowance for Doubtful Accounts;
| | - | --------------------------------

| |   |                                                 
| | - | ------------------------------------------------
| |  | Loss Reserves for Certain Self-Insured Programs;

| |   |                                                  
| | - | -------------------------------------------------
| |  | Revenue Recognition / Contractual Allowances; and

| |   |                              
| | - | -----------------------------
| |  | Long-lived Asset Impairments.

During the current quarter, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies.


Seasonality

Our earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors, which include the timing of Medicaid rate increases and payroll tax obligations, inclement weather, seasonal census cycles, and the number of calendar days
 in a given quarter.


Impact of Inflation

The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, we have offset our increased operating costs by increasing charges for our services and expanding our services. We have
 also implemented cost control measures to limit increases in operating costs and expenses but cannot predict our ability to control such operating cost increases in the future. See Cautionary Statements Regarding Forward-Looking Statements, and Managements Discussion
 and Analysis of Financial Condition and Results of Operations.


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ITEM 3:     Quantitative
      and Qualitative Disclosures About Market Risk

We are exposed to the impact of interest rate changes.


At December 31, 2003, we have $185 million of debt subject to variable rates of interest. A 1% increase in LIBOR would result in an increase to our interest expense of $1.9 million annually.


As of December 31, 2003, we held $16.6 million of investments in marketable securities that are affected by market rates of interest. A 1% change in the rate of interest would result in a change in interest income on those investments of $0.2 million annually.


ITEM 4:     Controls and Procedures

As required by Rule 13a-15(b), our
    management, including our chief executive officer and chief financial officer,
    conducted an evaluation of the effectiveness of our disclosure controls and
    procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
    period covered by this report. Based on that evaluation, our chief executive
    officer and chief financial officer concluded that our disclosure controls
    and procedures were effective in reaching a reasonable level of assurance
    that information required to be disclosed by us in the reports that we file
    or submit under the Securities Exchange Act of 1934, as amended, is recorded,
    processed, summarized and reported within the time period specified in the
    Securities and Exchange Commissions rules and forms.


As required by Rule 13a-15(d), our management, including our chief executive officer and chief financial officer, also conducted an evaluation of our internal control over financial reporting (Internal Control) to determine whether any changes in Internal Control
 occurred during the quarter covered by this report that have materially affected, or which are reasonably likely to materially affect, our Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this report.


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PART II:     OTHER INFORMATION

ITEM 1:     Legal Proceedings None

ITEM 2:     Changes in Securities and Use of Proceeds

On November 13, 2003, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of common stock, par value $0.01 per share, payable on December 1, 2003 to the shareholders of record on
 that date. The Board of Directors declared these rights to protect shareholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combination approved by the Board of Directors.


Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock (a Preferred Share) for $75.00, once the Rights become exercisable. This portion of a Preferred Share will give the
 shareholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.


The Rights will not be exercisable until ten days after the public announcement of the acquisition by any person or group of beneficial ownership of 20% or more of GHCs outstanding common stock (or ten days after a person or group begins a tender or exchange
 offer that, if consummated, would bestow upon them beneficial ownership of 20% or more of GHCs outstanding common stock). The Rights expire December 1, 2013.


We issued an aggregate
    of 644,500 shares of our restricted common stock under our 2003 Stock Incentive
    Plan pursuant to awards approved in December 2003. Of these shares, 392,500
    were issued pursuant to the terms of employment agreements entered into as
    of December 1, 2003 with certain members of our senior management which, among
    other things, provided for the waiver of compensation and awards owing under
    prior employment agreements with NeighborCare, Inc. Such shares of common
    stock were exempt from registration under the Securities Act of 1933, as amended
    (the Act), pursuant to Section 4(2) of the Act and/or as not involving
    a sale under the Act.


ITEM 3:     Defaults Upon Senior Securities None

ITEM 4:     Submission of Matters to a Vote of Security Holders None

ITEM 5:     Other Information None

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ITEM 6:     Exhibits and Reports on Form 8-K

| | (a) | Exhibits
| | --- | --------

| |  |      |                                                                                                                                                                                                                                                                                    
| |  | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 31.1 | Certification of George V. Hager, Jr., Chief Executive Officer of the Company, dated February 13, 2004 pursuant to Rule 13a  14(a)/15d  14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Sections 302 and 404 of the
 Sarbanes-Oxley Act of 2002.

| |  |      |                                                                                                                                                                                                                                                                               
| |  | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 31.2 | Certification of James V. McKeon, Chief Financial Officer of the Company, dated February 13, 2004 pursuant to Rule 13a  14(a)/15d  14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Sections 302 and 404 of the
 Sarbanes-Oxley Act of 2002.

| |  |      |                                                                                                                                                                                                                 
| |  | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 32.1 | Certification of George V. Hager, Jr., Chief Executive Officer of the Company, dated February 13, 2004 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

| |  |      |                                                                                                                                                                                                            
| |  | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 32.2 | Certification of James V. McKeon, Chief Financial Officer of the Company, dated February 13, 2004 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

| |     |                    
| | --- | -------------------
| | (b) | Reports on Form 8-K

| |  |   |                                                                                                                       
| |  | - | ----------------------------------------------------------------------------------------------------------------------
| |  |  | Current Report on Form 8-K filed on December 9, 2003 announcing the completion of our spin-off from NeighborCare, Inc.

| |  |   |                                                                                                                                 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------
| |  |  | Current Report on form 8-K filed on December 8, 2003 announcing a temporary blackout of trading under our employee benefit fund.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


|                         |  |  |  |  | Genesis HealthCare Corporation |  | 
|------------------------ |  |  |  |  | ------------------------------ |  | 
|                         |  |  |  |  |                                |  | 
|                         |  |  |  |  |                                |  | 
|Date:  February 13, 2004 |  |  |  |  | James V. McKeon                |  | 
|                         |  |  |  |  |                                | 
|                         |  |  |  |  | James V. McKeon,               |  | 
|                         |  |  |  |  | Chief Financial Officer        |  | 



|Date:  February 13, 2004 |  |  |  |  | George V. Hager, Jr.                              |  | 
|------------------------ |  |  |  |  | ------------------------------------------------- |  | 
|                         |  |  |  |  |                                                   | 
|                         |  |  |  |  | George V. Hager, Jr.,                             |  | 
|                         |  |  |  |  | Chief Executive Officer and Chairman of the Board |  | 

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